UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File Number 0-12958
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
Maine 01-0395131
----- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
66 Main Street, Ellsworth, Maine 04605
(Address of principal executive offices) (Zip Code)
(207) 667-2504
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $12.50 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [x]
The aggregate market closing value of the voting stock held by non-
affiliates of the registrant as of June 30, 2004, was approximately
$51,778,600.
1,116,330 shares of the Company's Common Stock, $12.50 par value, were
issued and outstanding as of March 21, 2005.
Documents incorporated by reference in this report:
Portions of the definitive proxy statement, to be dated April 18, 2005, for
the 2005 Annual Meeting of Shareholders are incorporated by reference into
Part III of this report on Form 10-K.
TABLE OF CONTENTS
-----------------
PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Registrant's Common Stock, Related
Shareholder Matters and Issuer Purchases of
Equity Securities 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 49
Item 9A. Controls and Procedures 49
Item 9B. Other Information 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters 50
Item 13. Certain Relationships and Related Transactions 50
Item 14. Principal Accountant Fees and Services 50
PART IV
Item 15. Exhibits and Financial Statement Schedules 51
Signatures 52
i
PART I
This Form 10-K 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
Company 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.
Item 1. Business
Union Bankshares Company (the "Company") is a state-chartered,
federally registered bank holding company headquartered in Ellsworth, Maine
incorporated in 1984. The Company is the sole stockholder of Union Trust
Company ("Union Trust" or the "Bank"), a Maine chartered commercial bank
established in 1887. On August 31, 2000, the Company completed its
acquisition of Mid-Coast Bancorp, Inc., and its principal subsidiary, The
Waldoboro Bank, FSB. On September 29, 2000,The Waldoboro Bank, FSB was
merged with Union Trust.
The Bank is a community-oriented commercial bank with thirteen
offices located along Maine's coast, stretching from Waldoboro to
Jonesport. The Bank conducts its operations out of its main office in
Ellsworth, Maine. It also operates through branch offices located in
Ellsworth, Blue Hill, Stonington, Milbridge, Jonesport, Somesville,
Castine, Bar Harbor, Waldoboro, Rockland, Belfast and Camden, Maine. Its
deposits are gathered from the general public in these towns and
surrounding communities, and its lending activities are concentrated
primarily in Hancock, Washington, Knox, Lincoln and Waldo Counties of the
State of Maine.
The Company serves the financial needs of individuals, businesses,
municipalities and organizations with a full range of community banking
services. The community banking business derives its revenues from
interest and fees earned in connection with its lending activities,
interest and dividends on investment securities, service charges and fees
on deposit accounts, and fees and commissions from trust accounts and
investment advisory services. As of December 31, 2004, the Company had
total assets of $488.4 million, total deposits of $305.0 million and
shareholders' equity of $41.1 million.
Competition
The Company contends with considerable competition both in generating
loans and attracting deposits. The Company's competition for loans is
primarily from other commercial banks, savings banks, credit unions,
mortgage banking companies, insurance companies, finance companies, and
other institutional lenders. Competitive factors considered for loan
generation include interest rates offered, loan fees charged, loan products
offered, service provided, and geographic locations.
In attracting deposits, the Company's primary competitors are savings
banks, commercial banks, credit unions, as well as other non-bank
institutions that offer financial alternatives such as brokerage firms and
insurance companies. Competitive factors considered in attracting and
retaining deposits include deposit and investment products and their
respective rate of return, liquidity, and risk among other factors,
convenient branch location and hours of operation, personalized customer
service, online access to accounts, and automated teller machines.
Liberal interstate banking laws have resulted in an increase in
acquisitions of locally-owned Maine-based banks by non-local entities.
Management believes that these acquisitions often result in customer
dissatisfaction as the decision-making on loans, marketing, and other
aspects of the acquired banks' businesses is shifted from local bank
management possessing independent decision-making power to management
operating under policies and guidelines from corporate headquarters in
other states. Thus, we believe that there will continue to be a need for a
bank in our primary market area with local management having decision-
making power and emphasizing loans to small and medium sized businesses and
to individuals.
The Company has worked and will continue to work to position itself
to be competitive in its market area. Our ability to make decisions close
to the marketplace, management's commitment to providing quality banking
products, the caliber of the professional staff, and the community
involvement of the Bank's employees are all factors affecting our ability
to be competitive. If the Company and the Bank are unable to compete
successfully, however, the business and operations could be adversely
affected.
1
Lending Activities
The Bank's loan portfolio consists primarily of one- to four-family
residential real estate loans. To a lesser extent, the Bank's loan
portfolio includes commercial real estate loans, commercial and industrial
loans, consumer loans and municipal loans. The Bank's borrowers consist of
small-to-medium sized businesses and retail customers located primarily in
Maine.
Residential Real Estate Loans. The Bank's primary lending activity
is the origination of conventional mortgage loans to enable borrowers to
purchase or refinance existing homes or to construct new residential
dwellings in the Bank's market area. The Bank offers fixed-rate and
adjustable-rate mortgage loans with terms up to 30 years. Borrower demand
for adjustable-rate loans versus fixed-rate loans is a function of the
level of interest rates, the expectations of changes in the level of
interest rates, the difference between the interest rates and loan fees
offered for fixed-rate mortgage loans and the initial period of interest
rates and loan fees for adjustable-rate loans. The loan fees charged, as
well as interest rates and other provisions of mortgage loans are
determined by the Bank on the basis of its own pricing criteria and
competitive market conditions.
Commercial Real Estate Loans. The Bank also offers fixed-rate and
adjustable-rate mortgage loans secured by commercial real estate. Loans
secured by commercial real estate generally have larger balances and
involve a greater degree of risk than one- to four-family residential real
estate loans. Of primary concern in commercial real estate lending is the
borrower's creditworthiness and the feasibility and cash flow potential of
the project. Payments on loans secured by income properties often depend
on successful operation and management of the properties. As a result,
repayment of such loans may be subject to adverse conditions in the real
estate market or the economy, more so than residential real estate loans.
In reaching a decision on whether to make a commercial real estate loan,
the Bank considers the net operating income of the property, the borrower's
expertise, credit history and profitability and the value of the underlying
property.
Commercial and Industrial Loans. The Bank makes commercial and
industrial loan products and services available to a variety of
professionals, sole proprietorships and small-to-medium sized businesses
primarily in our market area. These products and services are designed to
give business owners borrowing opportunities to support working capital
needs, inventory and equipment purchases, facility construction,
consolidation, real estate acquisition and vehicle purchases. Although
the Bank does originate fixed-rate term loans, substantially all of its
commercial loans have variable interest rates indexed to the prime rate as
published in The Wall Street Journal.
Consumer Loans. The Bank makes loans for a wide variety of personal
and consumer needs. Consumer loans primarily consist of installment loans,
home equity loans and cash reserve loans. Unsecured loans generally have a
maximum borrowing limit of $15,000 and a maximum term of 3 years. Home
equity lines of credit have adjustable rates of interest that are indexed
to the prime rate as published in The Wall Street Journal for terms of up
to 20 years. Consumer loans may entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly.
Municipal Loans. The Bank, as a member of the communities it serves,
also actively participates in the local bidding process to obtain municipal
loans throughout its market area. Through the bidding process, the
municipality is able to receive a competitive rate on short- and longer-
term loans providing funds for operating or capital project needs. The
Bank also provides a wide array of municipal banking services to enhance
the relationship. Interest earned on a municipal loan is tax exempt for
federal tax purposes which enhances the overall yield on each loan.
Municipal loan balances are somewhat seasonal typically reaching a high in
August and low in December.
Loan Originations, Purchases and Sales. Loan applications are
obtained through existing customers, solicitation by the Bank's
relationship managers, referrals from current or past customers, or walk-in
customers. The Bank will also occasionally purchase participation shares
in other Maine community bank loans.
The Bank sells a portion of its fixed-rate residential real estate
loans with terms in excess of 15 years in the secondary market based on
prevailing market interest rate conditions, an analysis of the composition
and risk of the loan portfolio, liquidity needs and interest rate risk
management goals. Generally, loans are sold without recourse and with
servicing retained. During 2004, the Bank sold $27.5 million of these
loans to Freddie Mac. The Bank also occasionally sells participation
interests of its larger commercial loans with other community banks in
Maine.
Investment Activities
The Bank's investment portfolio consists primarily of mortgage-backed
securities, U.S. Treasury notes and other U.S. Government Agency
obligations, corporate debt securities, obligations of states and political
subdivisions within the State of Maine and out-of-state municipalities, and
other securities. The Bank's investment objectives are to provide and
maintain liquidity, to maintain a balance of high quality, diversified
investments to minimize risk, to provide collateral for pledging
requirements, to establish an acceptable level of interest rate risk, to
provide an alternate source of low-risk investments when demand for loans
is weak, and to generate a favorable return.
2
Sources of Funds
Deposits. The Bank offers a range of demand deposits, interest
checking, money market accounts, savings accounts and time certificates of
deposit. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the
interest rate, among other factors. The majority of the Bank's depositors
are residents of Maine.
Borrowings. The Bank borrows from the Federal Home Loan Bank of
Boston (the "FHLB") to supplement its supply of funds available for lending
and to meet deposit withdrawal requirements. The FHLB functions as a
central reserve bank providing credit for member financial institutions.
As a member of the FHLB, the Bank is required to own capital stock in the
FHLB and is authorized to apply for advances on the security of such stock
and qualifying mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States), provided
certain standards related to creditworthiness have been met. Advances are
made under several different programs, each having its own interest rate
and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of the Bank's net
worth or on the FHLB's assessment of the Bank's creditworthiness.
Supervision and Regulation
General
The Company, as a financial holding company under the Bank Holding
Company Act (the "BHCA"), is subject to the rules and regulations of the
Federal Reserve Board (the "FRB"). The Company is also subject to the
rules and regulations of the SEC and the National Association of Security
Dealers ("NASD"), to the extent that the NASD rules apply to companies
listed on the OTC Bulletin Board. The Bank is a Maine-chartered community bank
whose deposit accounts are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is subject to extensive
regulation, examination and supervision by the Maine Bureau of Financial
Institutions (the "Bureau") as its primary state regulator, the FRB as its
primary federal regulator and by the FDIC as its deposit insurer. Both the
Company and the Bank are subject to the provisions of the Maine Revised
Statues applicable to financial institutions, and the rules and regulations
of the Bureau.
The following references to the laws and regulations under which the
Bank and the Company are regulated are brief summaries thereof, do not
purport to be complete, and are qualified in their entirety by reference to
such laws and regulations. These laws and regulations have been
established primarily for the protection of depositors and the deposit
insurance funds, not Company shareholders.
Maine Banking Laws and Supervision
The Company and the Bank are subject to Maine law and the rules and
regulations of the Bureau. The approval of the Bureau is required to
establish or close branches, to merge with another bank, to form a bank
holding company, to issue stock or to undertake many other activities. Any
Maine bank that does not operate in accordance with the regulations,
policies and directives of the Bureau is subject to sanctions. The Bureau
may, under certain circumstances, suspend or remove directors or officers
of a bank who have violated the law, conducted a bank's business in a
manner which is unsafe, unsound or contrary to the depositors' interests,
or breached their fiduciary duties.
Loans-to-One-Borrower Limitations. With certain exceptions, the
total obligations of a single borrower to the Bank may not exceed 20% of
the Bank's equity. The Bank currently complies with applicable loans-to-
one-borrower limitations.
Dividends. Under Maine law, the Company may declare and pay a
dividend on its capital stock provided that adequate levels of capital are
maintained. The Bureau's minimum capital requirements are the same as
those set forth by federal banking regulations. See " - Federal Banking
Regulations - Capital Requirements." In addition, federal law also may
limit the amount of dividends that may be paid by the Bank.
Examination and Enforcement. The Bureau is required to regularly
examine each state-chartered bank at least once every 36 months.
Federal Banking Regulations
Capital Requirements. Under federal banking regulations, the Bank is
required to maintain minimum levels of capital. The regulations define two
classes of capital known as Tier 1 and Tier 2 capital. For an institution
with a rating of 1 (the highest examination rating for banks) under the
Uniform Financial Institutions Rating System, the minimum capital leverage
requirement is a ratio of Tier 1 capital to total assets of 3%. For all
other banks, the minimum leverage capital requirement is 4%, unless the
particular circumstances or risk profile of the depository institution
warrants a higher leverage capital ratio.
3
The regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and
Tier 2 capital) to risk-weighted assets of at least 8% and a ratio of Tier
1 capital to risk-weighted assets of at least 4%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
items, are multiplied by a risk-weight of 0% to 100%, based on the risks
the regulators believe are inherent in the type of asset or item.
The federal banking agencies, including the FRB, have also adopted
regulations to require an assessment of an institution's exposure to
declines in the economic value of a bank's capital due to changes in
interest rates when assessing the Bank's capital adequacy. Under such a
risk assessment, examiners will evaluate a bank's capital for interest rate
risk on a case-by-case basis, with consideration of both quantitative and
qualitative factors.
Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion
of the critical factors affecting the agencies' evaluation of interest rate
risk in connection with capital adequacy. The Bank was considered "well-
capitalized" under these guidelines at December 31, 2004.
Enforcement. The FRB has extensive enforcement authority over
insured state-chartered commercial bank and trust companies, including the
Bank. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers. In general, these enforcement actions may
be initiated in response to violations of laws and regulations and to
unsafe or unsound practices.
The FRB is required, with certain exceptions, to appoint a receiver
or conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means
having a ratio of tangible capital to total assets of less than 2%. The
FRB may also appoint a conservator or receiver for a state bank on the
basis of the institution's financial condition or upon the occurrence of
certain events.
Deposit Insurance. The FDIC has adopted a risk-based deposit
insurance assessment system. Under the risk-based deposit insurance
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the most
recent quarterly report filed with the applicable bank regulatory agency
prior to the assessment period. The three capital categories are: (1) well
capitalized, (2) adequately capitalized and (3) undercapitalized, using
capital ratios that are substantially similar to the prompt corrective
action capital ratios discussed below. See "-Federal Banking Regulation -
Prompt Corrective Action" below. The FDIC also assigns an institution to a
supervisory subgroup based on a supervisory evaluation provided to the FDIC
by the institution's primary federal regulator and information that the
FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if
applicable, information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Any increase in insurance
assessments could have an adverse effect on the earnings of insured
institutions, including the Bank.
Under the Federal Deposit Insurance Act (the "FDIA"), the FDIC may
terminate the insurance of an institution's deposits upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable
law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Transactions with Affiliates of the Bank. Transactions between an
insured bank, such as the Bank, and any of its affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An affiliate
of a bank is any company or entity that controls, is controlled by or is
under common control with the Bank. A subsidiary of a bank that is not
also a depository institution is not treated as an affiliate of the Bank
for purposes of Sections 23A and 23B.
Section 23A limits the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount
equal to 10% of such bank's capital stock and retained earnings, and limit
on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and retained earnings; and requires that all such
transactions be on terms that are consistent with safe and sound banking
practices.
The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts.
In addition, any covered transaction by a bank with an affiliate and any
purchase of assets or services by a bank from an affiliate must be on terms
that are substantially the same, or at least as favorable to the Bank, as
those that would be provided to a non-affiliate.
Effective April 1, 2003, the FRB rescinded its interpretations of
Sections 23A and 23B of the FRA and replaced these interpretations with
Regulation W. In addition, Regulation W makes various changes to existing
law regarding Sections 23A and 23B, including expanding the definition of
what constitutes an affiliate subject to Sections 23A and 23B and exempting
certain subsidiaries
4
of state-chartered banks from the restrictions of Sections 23A and 23B. We
do not expect that the changes made by Regulation W will have a material
adverse effect on our business.
The Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the FRB. Among other things, these
provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve
more than the normal risk of repayment or present other unfavorable
features and (b) not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the Bank's capital. The regulations
allow small discounts on fees on residential mortgages for directors,
officers and employees. In addition, extensions for credit in excess of
certain limits must be approved by the Bank's Board of Directors.
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension
of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
loans advanced by an insured depository institution, such as the Bank, that
are subject to the insider lending restrictions of Section 22(h) of the
FRA.
Safety and Soundness Standards. Pursuant to the requirements of the
FDIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FRB,
has adopted guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify
and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound
practice and describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal shareholder. In addition, the
FRB adopted regulations to require a bank that is given notice by the FRB
that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the FRB. If, after being so notified, a bank
fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FRB may issue an
order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of the FDICIA. If a bank fails to comply
with such an order, the FRB may seek to enforce such an order in judicial
proceedings and to impose civil monetary penalties.
Prompt Corrective Action. The FDIA also established a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. The FRB, as well as the other federal banking regulators,
adopted regulations governing the supervisory actions that may be taken
against undercapitalized institutions. The regulations establish five
categories, consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The severity of the action authorized or required to be
taken under the prompt corrective action regulations increases as a bank's
capital decreases within the three undercapitalized categories. The Bank
is prohibited from paying dividends or other capital distributions or
paying management fees to any controlling person if, following such
distribution, the Bank would be undercapitalized.
Community Reinvestment. Under the Community Reinvestment Act
("CRA"), any insured depository institution, including the Bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community. The
CRA requires the FRB to assess the depository institution's record of
meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution,
including applications for additional branches and acquisitions. The CRA
requires the FRB to provide a written evaluation of an institution's CRA
performance utilizing a four-tiered descriptive rating system, and the
institution is required to publicly disclose its CRA rating. The Bank
received a "satisfactory" rating on its last CRA exam on August 2, 2004.
Federal Reserve System. Under FRB regulations, the Bank is required
to maintain non-interest-earning reserves against its transaction accounts.
Current Federal Reserve Board regulations generally require that reserves
of 3% must be maintained against aggregate transaction accounts of $47.6
million or less, subject to adjustment by the FRB. Total transaction
accounts in excess of $47.6 million are required to have a reserve of 10%
held against them, which are also subject to adjustment by the FRB. The
first $7.0 million of otherwise reservable balances, subject to adjustments
by the FRB, are exempted from the reserve requirements. The Bank is in
compliance with these requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the FRB,
the effect of this reserve requirement is to reduce the Bank's interest-
earning assets.
Federal Home Loan Bank System. The Bank is a member of the Federal
Home Loan Bank system (the "FHLB"), which consists of 12 regional Federal
Home Loan Banks. The FHLB provides a central credit facility primarily for
member institutions. The Bank, as a member of the FHLB, is required to
acquire and hold shares of capital stock in the FHLB in an amount equal to
at least 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or
1/20
5
of its borrowings from the FHLB, whichever is greater. The Bank was in
compliance with this requirement with an investment in FHLB stock at
December 31, 2004 of $7.0 million. The FHLB is required to provide funds
for certain purposes including contributing funds for affordable housing
programs. These requirements could reduce the amount of dividends that the
FHLB pays to its members and result in the FHLB imposing a higher rate of
interest on borrowings to its members.
Financial Holding Company Regulation. As a bank holding company, the
Company is subject to examination, regulation and periodic reporting under
the BHCA, as administered by the FRB. The FRB has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those for the Bank. As of December 31, 2004, the Company's
total capital and Tier 1 capital ratios exceeded these minimum capital
requirements.
In 2003, the Company elected to be treated as a financial holding
company under the BHCA. As a financial holding company, the Company may
conduct activities that are considered "financial in nature" under the
BHCA. Such activities include:
* Activities permissible for bank holding companies prior to the
enactment of the Act;
* Lending, exchanging, transferring, investing for others, or
safeguarding money or securities;
* Underwriting and selling insurance;
* Providing financial, investment, or advisory services;
* Selling pools of assets;
* Underwriting, dealing in, or making a market in securities; and
* Merchant banking.
In order to commence a new activity, the Bank must have received a
"satisfactory" on its latest CRA exam.
Employees
As of December 31, 2004, the Bank had 158 full-time employees and 9
part-time employees. The Bank enjoys good relations with its employees. A
variety of employee benefits, including health, life and disability income
replacement insurance, a funded, noncontributory pension plan, and a
defined contribution plan are available to qualifying employees.
Seasonal Information
In the Bank's market area, deposit balances generally increase during
the summer and autumn months of each year due to an influx of tourists and
seasonal residents returning to the area. In 2004, the maximum amount of
deposits at any month end was $317.7 million in October. The deposit
fluctuation is predictable and does not have a material adverse effect on
the Bank and its operations.
Financial Information About Industry Segments
The information set forth under this item is incorporated by
reference to the financial statements set forth below in Part II, Item 8 of
this report on Form 10-K.
Company Website
The Company maintains a website at www.uniontrust.com. The Company's
reports filed with, or furnished to, the Securities and Exchange Commission
("SEC") are available at the SEC's website at www.sec.gov.
6
Item 2. Properties
The Company's headquarters and the Bank's main branch are located at
66 Main Street, Ellsworth, Maine, in a three-story building owned by the
Bank. The building contains approximately 44,000 square feet. As of
December 31, 2004, the Company's properties and leasehold improvements had
an aggregate net book value of $4.7 million.
Location Ownership Year Opened Lease Expiration
- -------- --------- ----------- ----------------
<s> <c> <c> <c>
Corporate Headquarters of the
Bank and the Company
66 Main Street Owned 1887 ---
Ellsworth, Maine 04605
Branch Offices:
51 Main Street Owned 1974 ---
Jonesport, Maine 04649
9 Tenney Hill Owned 1974 ---
Blue Hill, Maine 04614
3 Atlantic Avenue Owned 1922 ---
Stonington, Maine 04681
35 Main Street (1) Owned 1914 ---
Cherryfield, Maine 04622
29 Main Street Owned 1956 ---
Milbridge, Maine 04658
1768 Atlantic Highway Owned 1988 ---
Waldoboro, Maine 04572
73 Camden Street Owned 1995 ---
Rockland, Maine 04841
175 High Street Leased 1963 2006
Ellsworth, Maine 04605
1055 Main Street Leased 1985 2005
Somesville, Maine 04660
Dublin Street (1) Leased 1976 2004
Machias, Maine 04654
21 Main Street Leased 1991 2007
Castine, Maine 04421
43 Cottage Street Leased 1997 2007
Bar Harbor, Maine 04609
17 Belmont Avenue Leased 1997 2018
Belfast, Maine 04915
75 Elm Street Leased 2001 2008
Camden, Maine 04843
<FN>
<F1> As of the close of business on December 31, 2004, the Company closed
its branch offices located in Machias and Cherryfield, consolidating the
Cherryfield location with the Milbridge office.
</FN>
7
Item 3. Legal Proceedings
There are no material legal proceedings pending to which the Company
or the Bank is a party, or of which any of their property is the subject,
other than ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
Item 5. Market for Registrant's Common Stock, Related Shareholder Matters
and Issuer Purchases of Equity Securities
The Company's common stock has been listed on the OTC Bulletin Board
under the symbol "UNBH" since October 28, 2003. Prior to that date, the
Company's common stock was not listed on any stock exchange or actively
traded. The high and low sales prices reported for the period from January
1 through October 28, 2003 are as reported by the Pink Sheets. The Company
declared quarterly cash dividends totaling $1.275 per share during 2004 and
$1.175 per share in 2003.
The following table sets forth the high and low sales prices of our
common stock as reported on the OTC Bulletin Board or the Pink Sheets and
the dividends declared per share of common stock for the periods indicated.
The information below has been adjusted to reflect the Company's 2-
for-1 stock split, in the form of a 100% stock dividend, paid on March 21,
2005.
High Low Dividend
---- --- --------
<s> <c> <c> <c>
2004
4th Quarter $54.50 $52.50 $0.325
3rd Quarter $49.50 $47.00 $0.325
2nd Quarter $49.50 $45.75 $0.325
1st Quarter $45.25 $44.00 $0.300
2003
4th Quarter $44.75 $43.20 $0.300
3rd Quarter $43.50 $42.50 $0.300
2nd Quarter $43.50 $41.00 $0.300
1st Quarter $43.00 $41.25 $0.275
As of March 21, 2005, there were approximately 745 holders of record
of the Company's common stock.
Payment of dividends by the Company on its common stock is subject to
various regulatory restrictions and guidelines. Because substantially all
of the funds available for the payment of dividends are derived from the
Bank, future dividends will depend on the earnings of the Bank, its
financial condition, its need for funds, applicable governmental policies
and regulations, and other such matters as the Board of Directors deem
appropriate. Management believes that the Bank will continue to generate
adequate earnings to continue to pay dividends on a quarterly basis.
On April 14, 2002, the Board of Directors voted to authorize the
Company to purchase up to 57,700 shares or approximately 5% of its
outstanding common stock. On October 27, 2004, the Bank's stock repurchase
plan was amended to allow the Company to purchase up to 86,550 shares or
approximately 7.5% of its outstanding common stock. The authority may be
exercised from time to time and in such amounts as market conditions
warrant. As of December 31, 2004, a total of 56,332 shares have been
repurchased since the plan's inception on April 14, 2002. The Company
repurchased 38,146 shares as part of this plan during 2004 at an average
price of $48.99.
The following table summarizes the Company's purchases of its common
stock during the quarter ended December 31, 2004.
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet Be
Total Number of Average Price Paid Publicly Announced Purchased Under the
Period Shares Purchased per Share Plans or Programs Plans or Programs
<s> <c> <c> <c> <c>
October 1 - 31, 2004 4,000 $52.50 4,000 55,418
November 1 - 30, 2004 25,200 $50.94 25,200 30,218
December 1 - 31, 2004 -- N/A -- 30,218
------ ------ ------ ------
TOTAL 29,200 $51.15 29,200 30,218
====== ====== ====== ======
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, which reduced the value of its
authorized but unissued common stock by $288,000, surplus by $80,000 and
retained earnings by $616,000.
9
Item 6. Selected Financial Data
The selected consolidated financial and other data of the Company set
forth below does not purport to be complete and should be read in
conjunction with the consolidated financial statements and related notes in
Part II, Item 8 of this report on Form 10-K.
Certain ratios have been recalculated to conform with current year
calculation methods. All share amounts have been restated to reflect the
Company's 2-for-1 stock split, in the form of a 100% stock dividend, paid
on March 21, 2005.
As of or For the Year Ended December 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<s> <c> <c> <c> <c> <c>
SUMMARY OF OPERATIONS
Net income $ 4,829 $ 4,278 $ 4,315 $ 3,226 $ 3,000
Net interest income 15,932 14,131 14,001 13,058 11,192
Non-interest income 5,754 6,167 5,875 4,857 3,629
Non-interest expense 14,590 13,840 13,461 13,039 10,373
Provision for loan losses 222 420 360 300 371
PER COMMON SHARE DATA
Earnings per share (in dollars) $ 4.24 $ 3.73 $ 3.75 $ 2.79 $ 2.60
Dividends declared per share (in dollars) 1.275 1.175 1.100 1.050 1.000
Book value per share (in dollars) (1) 36.06 34.19 31.57 29.10 27.34
FINANCIAL RATIOS
Return on average equity 11.63% 10.75% 11.82% 9.92% 11.13%
Return on average assets 1.03 1.06 1.15 0.93 1.06
Average equity to average assets 8.84 9.87 9.76 9.34 9.55
Net interest margin (2) 3.77 3.95 4.30 4.33 4.55
Allowance for loan losses to total loans 1.45 1.52 1.63 1.63 1.65
Non performing loans to total loans 0.47 0.61 0.81 0.90 1.66
Efficiency ratio (3) 65.95 66.62 65.96 70.38 67.43
Dividend payout ratio (declared) 30.18 31.46 29.34 37.60 38.51
AT YEAR END
Total assets $488,355 $464,194 $381,029 $362,003 $348,242
Loans, gross (4) 309,951 286,333 226,226 211,568 204,931
Total investment securities 144,139 138,155 109,569 102,970 109,958
Total deposits 304,982 298,454 275,765 267,907 245,581
Total borrowed funds 134,414 117,729 59,284 54,366 66,203
Total shareholders' equity 41,092 40,752 38,318 34,136 31,120
<FN>
<F1> Calculated by dividing total shareholders' equity less other
comprehensive income by the weighted average common shares
outstanding for each period.
<F2> Adjusted to tax-equivalent basis.
<F3> Calculated by dividing the Company's operating expenses by the total
of net interest income on a tax-equivalent basis before the provision
for loan losses, plus other income.
<F4> Excludes loans held for sale.
</FN>
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis reviews the consolidated
financial condition of the Company at December 31, 2004 and 2003 and the
consolidated results of operations for 2004, 2003 and 2002. This
discussion should be read in conjunction with the consolidated financial
statements and related notes in Part II, Item 8 of this report on Form 10-
K.
Certain information discussed below is presented on a fully taxable
equivalent basis. Management believes the disclosure of tax-equivalent net
interest income information improves the clarity of financial analysis, and
is particularly useful to investors in understanding and evaluating the
changes and trends in the Company's results of operations.
Executive Overview
The Company achieved record earnings for the year ended December 31,
2004. Net income for 2004, was $4.8 million, an increase of $551,000 or
13% over the $4.3 million recorded in the prior year. Earnings per share
for 2004 were $4.24 compared to $3.73 for 2003. Return on average equity
was 11.63% compared to 10.75% in 2003 and return on average assets was
1.03% compared to 1.06% in 2003.
The Company's results in 2004, versus 2003, reflected an increase in
net interest income of $1.8 million or 13% over the prior year, ending the
year at $15.9 million. This increase was largely driven by strong asset
growth during the year, offset in part, by continued margin compression
resulting from a decline in the net interest margin to 3.77% for the year
2004 from 3.95% for 2003. Non-interest income decreased by $413,000, or
7%, due primarily to a considerable slowdown in mortgage origination
activity, as rising rates dramatically slowed the refinance business.
Increases in deposit fees and charges and financial service income
partially offset this decline. Non-interest expenses ended the year at
$14.6 million, a 5% increase over the prior year. This increase was
primarily due to increased personnel costs resulting from normal annual
salary increases, additional business development staff to support growth
and market expansion, and a continued increase in health insurance costs.
Comparing December 31, 2004 balances to December 31, 2003, total
assets increased 5% to $488.4 million. Total deposits increased by $6.5
million or 2%, while total loans grew to $310.0 million from $286.3
million, an 8% increase over the prior year. Borrowings from the Federal
Home Loan Bank of Boston ("FHLB") increased by $15.1 million or 14% during
2004 and were used to fund growth in assets in excess of the growth in
retail deposits. During the same period, shareholders' equity increased to
$41.1 million or 8% of total assets.
Asset quality, as measured by the following ratios, continued to be
favorable. Nonperforming assets represented 0.30% of total assets at the
end of 2004, versus 0.38% at the end of 2003. The ratio of net charge-offs
to average loans was 0.02% in 2004, as compared to (0.10)% for the prior
year.
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 and the evaluation of mortgage servicing rights.
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 for 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.
Allowance for Loan Losses. 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 probable losses. The use of different estimates or
assumptions could produce different provisions for loan losses.
Mortgage Servicing Rights. The valuation of mortgage servicing
rights is also a critical accounting policy which requires significant
estimates and assumptions. Servicing assets are recognized as separate
assets when servicing rights are acquired through the sale of residential
mortgage loans. Capitalized servicing rights are reported in other assets
and are amortized into non-interest income in proportion to, and over the
period of, the estimated future net servicing income of the underlying
financial assets. Management uses, on a quarterly basis, an independent
firm which specializes in the valuation of mortgage servicing rights to
determine the fair value which is recorded on the balance sheet. This
includes an evaluation for impairment based upon the fair value of the
rights, which can
11
vary depending upon current interest rates and prepayment expectations, as
compared to amortized cost. When the book value exceeds the fair value, a
valuation allowance is recorded against these servicing assets.
Results of Operations
Comparison of 2004 to 2003
Net Income. Net income for the year ended December 31, 2004 was $4.8
million, the highest level of income ever reported by the Company, and a
13% or $551,000 increase from net income of $4.3 million posted in 2003.
The increase in net income during the year was the result of an increase in
net interest income of $1.8 million and a decrease in the provision for
loan losses of $198,000 offset by a decrease in non-interest income of
$413,000 and an increase in non-interest expense of $750,000. Earnings per
share were $4.24 and $3.73 for the years ended 2004 and 2003, respectively.
Return on average equity was 11.63% in 2004 compared to 10.75% in 2003 and
return on average assets was 1.03% in 2004 compared to 1.06% in 2003.
Net Interest Income. The amount of net interest income is affected
by changes in interest rates and by the volume, mix, and interest rate
sensitivity of interest-earning assets and interest-bearing liabilities.
Net interest income accounted for 74% of total revenues for the Company in
2004 and continues to be the primary source of operating income.
For 2004, net interest income increased $1.8 million or 13% to $15.9
million from $14.1 million in 2003. On a fully tax-equivalent basis, net
interest income was $16.4 million in 2004, a 12% increase from 2003 net
interest income of $14.6 million. The increase in net interest income in
2004 compared with that of 2003 was primarily the result of growth in
average interest earning assets of $63.7 million, or 17%, from $370.6
million in 2003 to $434.3 million in 2004. This increase was offset in
part by a decline in the Company's net interest margin to 3.77% for 2004
compared to 3.95% for 2003.
The yield on interest-earning assets was 5.19% in 2004, compared to
5.55% in 2003. The average balance of securities increased by $20.5
million, or 17%, as compared with the prior year. The average balance of
loans increased $44.2 million, or 18%, and the yield on loans decreased by
52 basis points to 5.62% in 2004, compared to 6.14% in 2003. This decrease
in loan yield was primarily due to a continued downward repricing of the
loan portfolio and a change in the overall portfolio mix, where growth in
lower yielding real estate loans, primarily adjustable-rate mortgages,
outpaced growth in other higher yielding loan categories such as commercial
and industrial loans.
The cost of interest-bearing liabilities, or cost of funds, decreased
to 1.63% in 2004, compared to 1.85% in 2003. The decrease in cost of funds
is primarily attributable to a 93 basis points decline in the cost of
borrowings to 2.64% in 2004, compared to 3.57% in 2003, and a lower cost of
funding mix. Increases in demand deposits and other relatively lower
yielding deposit categories allowed the Bank to manage down its level of
more expensive time deposits.
During 2004, the average balance of interest-bearing liabilities
increased by $56 million, or 17%, over 2003 average balances. The increase
in average interest-bearing liabilities was due to increases in savings
deposits and in borrowings from the FHLB.
12
The following table sets forth, for the years indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average costs; (iii) net interest income; (iv) net interest rate
spread; and (v) net interest margin. For purposes of this table and the
following discussion, income from interest earning assets and net interest
income are presented on a fully taxable equivalent basis and nonaccrual
loans have been included in average balances only.
Average Balance Sheets and Analysis of Net Interest Income
(On a Tax Equivalent Basis)
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Assets
- ------
Interest Earning Assets:
Federal funds sold $ - $ - 0.00% $ 981 $ 14 1.43% $ 5,711 $ 96 1.68%
Investment securities (1) 139,453 5,939 4.26% 118,954 5,179 4.35% 110,120 5,563 5.05%
Loans, gross (excludes
loans held for sale ) (1) 294,870 16,585 5.62% 250,675 15,390 6.14% 222,107 15,944 7.18%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning assets 434,323 $22,524 5.19% 370,610 $20,583 5.55% 337,938 $21,603 6.39%
======= ==== ======= ==== ======= ====
Nonearning assets:
Cash and due from banks 10,608 10,289 10,442
Other assets 17,916 18,533 18,636
-------- -------- --------
$462,847 $399,432 $367,016
======== ======== ========
Liabilities
- -----------
Interest Bearing Liabilities:
NOW deposits $ 64,715 $ 161 0.25% $ 57,786 $ 124 0.21% $ 53,295 $ 177 0.33%
Money market accounts 33,885 281 0.83% 37,283 406 1.09% 33,273 677 2.03%
Savings deposits 60,061 334 0.56% 52,214 356 0.68% 47,485 600 1.26%
Time deposits 93,871 2,057 2.19% 100,804 2,421 2.40% 99,666 3,101 3.11%
Borrowings 125,832 3,322 2.64% 74,340 2,655 3.57% 64,158 2,529 3.94%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing liabilities 378,364 $ 6,155 1.63% 322,427 $ 5,962 1.85% 297,877 $ 7,084 2.38%
======= ==== ======= ==== ======= ====
Non-interest bearing liabilities &
shareholders' equity:
Demand deposits 42,786 37,134 34,003
Other liabilities 6,866 7,416 6,139
Shareholders' equity 34,831 32,455 28,997
-------- -------- --------
$462,847 $399,432 $367,016
======== ======== ========
Net interest income (1) $16,369 $14,621 $14,519
======= ======= =======
Net interest rate spread (2) 3.56% 3.70% 4.01%
==== ==== ====
Net interest margin (2) 3.77% 3.95% 4.30%
==== ==== ====
<FN>
<F1> The total amount of adjustment to present interest income and yield
on a fully tax-equivalent basis is $437,000, $522,000 and $531,000 in
2004, 2003 and 2002, respectively.
<F2> Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average
costs of interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest-
earning assets.
</FN>
13
The following table presents certain information on a fully-taxable
equivalent basis regarding changes in interest income and interest expense
of the Bank for the periods indicated. For each category of interest-
earning assets and interest-bearing liabilities, information is provided
with respect to changes attributable to (i) changes in volume (change in
volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) changes in rate/volume (change
in rate multiplied by change in volume).
Analysis of Changes in Interest Income and Expense
Year Ended December 31, 2004 vs 2003 Year Ended December 31, 2003 vs 2002
---------------------------------------- -------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Interest Earning Assets
- -----------------------
Federal funds sold $ (14) $ (14) $ 14 $ (14) $ (80) $ (15) $ 13 $ (82)
Investment securities (1) 892 (113) (19) 760 446 (768) (62) (384)
Loans, gross (excludes
loans held for sale ) (1) (2) 2,713 (1,290) (228) 1,195 2,051 (2,308) (297) (554)
------ ------- ----- ------ ------ ------- ------- -------
Total interest earning assets $3,591 $(1,417) $(233) $1,941 $2,417 $(3,091) $ (346) $(1,020)
====== ======= ===== ====== ====== ======= ======= =======
Interest Bearing Liabilities
- ----------------------------
NOW deposits $ 15 $ 20 $ 2 $ 37 $ 15 $ (63) $ (5) $ (53)
Money market accounts (37) (97) 9 (125) 82 (315) (38) (271)
Savings deposits 53 (65) (10) (22) 60 (276) (28) (244)
Time deposits (167) (212) 15 (364) 35 (707) (8) (680)
Borrowings 1,839 (692) (480) 667 401 (238) (37) 126
------ ------- ----- ------ ------ ------- ------- -------
Total interest bearing liabilities $1,703 $(1,046) $(464) $ 193 $ 593 $(1,599) $ (116) $(1,122)
====== ======= ===== ====== ====== ======= ======= =======
Net change in net interest income $1,888 $ (371) $ 231 $1,748 $1,824 $(1,492) $ (230) $ 102
====== ======= ===== ====== ====== ======= ======= =======
<FN>
<F1> The total amount of adjustment to present interest income and yield
on a fully tax-equivalent basis is $437,000, $522,000, and $531,000
in 2004, 2003 and 2002, respectively.
<F2> Loans include portfolio loans and nonaccrual loans, but unpaid
interest on nonperforming loans has not been included for purposes of
determining interest income.
</FN>
Non-Interest Income. Non-interest income was $5.7 million and $6.2
million for the years ended December 31, 2004 and 2003, respectively. The
$413,000 or 7% decrease in non-interest income during 2004 was primarily
due to a considerable slowdown in mortgage origination activity resulting
in a 41% or $608,000 decline in loan fees during 2004 as compared to the
prior year. Securities gains were $237,000 in 2004, a decrease of $321,000
or 58% from 2003. Offsetting this decline was a $540,000 or 43% increase
in deposit fees and charges, primarily due to the successful launch of a
new overdraft privilege product during 2004 and a $141,000 or 8% increase
in financial service fees and commissions.
The following table summarizes information relating to the Company's
non-interest income:
Non-Interest Income
Year Ended December 31,
-------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Net gains on sale of investment securities $ 237 $ 558 $ 23
Financial services fees and commissions 1,953 1,812 1,580
Service charges and fees on deposit accounts 1,792 1,252 1,253
Bankcard fees 227 385 866
Loan fees 888 1,496 1,314
Income from cash surrender value of life insurance 372 318 331
Other income 285 346 508
------ ------ ------
Total non-interest income $5,754 $6,167 $5,875
====== ====== ======
14
Non-Interest Expense. Total non-interest expense, which consists
primarily of employee compensation and benefits, net occupancy and
equipment and data processing costs increased $750,000 or 5% to $14.6
million for the year ended December 31, 2004 from $13.8 in 2003. The
increase in non-interest expenses in 2004 was primarily attributable to a
$739,000 increase in salaries and employee benefits due to normal salary
increases, additional business development staff to support growth and
market expansion, and a 3% increase in health insurance costs, offset in
part by savings in some of the Company's other operating areas.
The following table summarizes information relating to the Company's
non-interest expense:
Non-Interest Expense
Year Ended December 31,
-----------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Salaries and employee benefits $ 8,913 $ 8,174 $ 7,330
Net occupancy 1,530 1,527 1,304
Equipment and data processing 1,238 1,301 1,849
Other 2,909 2,838 2,978
------- ------- -------
Total non-interest expense $14,590 $13,840 $13,461
======= ======= =======
Provision for Income Taxes. Income tax expense amounted to $2.0
million in 2004 compared with $1.8 million in 2003. The resulting
effective tax rates were 29.8% for 2004, and 29.1% for 2003. The increase
in effective tax rate for 2004 was mainly the result of a decline in the
percentage of non-taxable income on obligations of states and political
subdivisions.
Comparison of 2003 to 2002
Net Income. Net income for 2003 was $4.3 million or $3.73 earnings
per share compared with net income of $4.3 million, or $3.75 earnings per
share, reported for 2002. The decrease in net income during the year was
the result of an increase in non-interest expense of $379,000 and an
increase in the provision for loan losses of $60,000, offset in part by an
increase in net interest income of $130,000 and an increase in non-interest
income of $292,000. Return on average equity was 10.75% in 2003, compared
to 11.82% in 2002, and return on average assets was 1.06% in 2003 compared
to 1.15% in 2002.
Net Interest Income. Net interest income increased $130,000 or 0.9%
to $14.1 million in 2003 from $14.0 million in 2002. On a fully tax-
equivalent basis, net interest income totaled $14.6 million in 2003, as
compared with $14.5 million in 2002. The growth in net interest income in
2003 compared with that of 2002 was primarily the result of a $32.7
million, or 10%, increase in average earning assets and a 53 basis point
decrease in the average cost of interest bearing liabilities. During 2003,
the Company experienced downward pressure on net interest margin as the
yield on earning assets declined faster than the cost of funding. The
yield on earning assets was 5.55% in 2003 compared with 6.39% in 2002,
resulting in a net interest margin of 3.95%, a 35 basis point decrease from
2002.
Provision for Loan Losses. The Company reported $420,000 of
provision for loan losses in 2003 compared to $360,000 in 2002. The
allowance for loan losses to total loans decreased from 1.63% at the end of
2002 to 1.52% at the end of 2003. Nonperforming loans represented 0.61% of
total loans at December 31, 2003 compared to 0.81% at December 31, 2002.
Non-Interest Income. Non-interest income increased $292,000, or 5%,
from $5.9 million in 2002 to $6.2 million in 2003. The increase was
primarily attributable to increases in financial service income and income
from mortgage origination and servicing activities due to a higher volume
of loan sales during 2003 as well as an increase in net securities gains
resulting from the sale of various securities. These increases were
offset, in part, by reduced bankcard income as a result of the sale of the
credit card portfolio during 2003.
Non-Interest Expense. Non-interest expenses increased $379,000, or
3%, to $13.8 million as compared to the same period in 2002. The increase
was primarily attributable to an increase in salaries and employee benefits
due to additional staffing, offset in part by a decrease in bankcard
expense and other operating categories.
Provision for Income Taxes. For the years ending December 31, 2003
and 2002, income tax expense was $1.8 million and $1.7 million,
respectively. The resulting effective tax rates were 29.1% for 2003 and
28.7% for 2002.
15
Balance Sheet Review
Loan Portfolio. The Company offers a wide variety of loan products
to serve the financial needs of individuals, businesses, municipalities,
and nonprofit organizations. At December 31, 2004, total loans (excluding
loans held for sale) reached a record high of $310.0 million, an increase
of $23.6 million or 8% over 2003.
The Company's primary lending activity continues to be the
origination of loans secured by real estate primarily in our market area.
During 2004, residential real estate loans, comprised of residential
construction and permanent residential mortgages, most of which are one- to
four-family, increased by $13.4 million or 7% to $201.7 million from $188.3
million at December 31, 2003.
Commercial real estate loans increased by $5.4 million, or 10% in
2004. Commercial and industrial loans decreased by 8% or $1.9 million from
2003 as new originations did not keep pace with the amortization and pay-
down of the existing portfolio.
Consumer loans, primarily consisting of home equity lines of credit,
automobile, boat and recreational vehicle, loans secured by certificate
account, and unsecured loans increased $5.8 million, or 33%, in 2004. This
increase is primarily attributable to the home equity lines of credit,
which totaled $13.5 million at December 31, 2004 compared with $8.1 million
at the end of 2003.
Municipal loans increased slightly during 2004, ending the year at
$4.2 million, an increase of $926,000, or 28%, over 2003.
The follow table summarizes the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
Loan Portfolio Composition
At December 31,
--------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Real estate
Residential $201,669 $188,286 $131,615 $122,671 $109,900
Commercial 58,834 53,436 51,253 47,549 50,340
Commercial and industrial 21,906 23,837 19,461 20,476 21,002
Consumer 23,340 17,498 18,323 17,788 19,971
Municipal 4,202 3,276 5,574 3,084 3,718
-------- -------- -------- -------- --------
Total $309,951 $286,333 $226,226 $211,568 $204,931
======== ======== ======== ======== ========
The following table sets forth the scheduled contractual amortization
of the Bank's loan portfolio at December 31, 2004. The amounts shown below
exclude student loans, applicable loans in process, and net deferred loan
fees.
Loan Maturity Schedule
At December 31,
----------------------------------------------------
Due 1 Year or Less Due 1- 5 Years Due 5 Years+
------------------ -------------- ------------
(Dollars in thousands)
<s> <c> <c> <c>
Real estate
Residential $ 33 $ 2,632 $198,453
Commercial 1,609 4,244 52,940
Commercial and industrial 8,605 6,823 6,494
Consumer 1,198 1,260 14,695
Municipal 2,391 1,544 267
------- ------- --------
Total $13,836 $16,503 $272,849
======= ======= ========
16
The following table sets forth the dollar amount of all loans at
December 31, 2004 that are due after December 31, 2005 and have either
fixed interest rates or floating or adjustable interest rates. The amounts
shown below exclude student loans, applicable loans in process, and net
deferred loan fees.
Summary of Fixed-Rate and Adjustable-Rate Loans
Floating or
Adjustable-
Fixed-Rates Rates Total
----------- ----------- -----
(Dollars in thousands)
<s> <c> <c> <c>
Real estate
Residential $125,964 $ 75,121 $201,085
Commercial 6,617 50,567 57,184
Commercial and industrial 6,711 6,606 13,317
Consumer 2,772 13,183 15,955
Municipal 1,811 - 1,811
-------- -------- --------
Total $143,875 $145,477 $289,352
======== ======== ========
Loan Concentrations. The Bank grants residential, commercial and
consumer loans to customers principally located in Hancock, Washington,
Knox, Lincoln and Waldo Counties of the State of Maine. Although the loan
portfolio is diversified, a substantial portion of our debtors' ability to
honor their contracts is dependent upon the economic conditions in the
area, especially in the real estate sector. As of December 31, 2004 and
2003, the Company did not have any concentration of loans in one particular
industry that exceeded 10% of its total loan portfolio.
Sale of Loans. The Bank's residential real estate loans are
generally originated in compliance with terms, conditions and
documentation, which permit the sale of such loans on the secondary market.
Secondary market sales of mortgage loans totaled $27.5 million in 2004,
compared to $53.0 million in 2003. Residential mortgages originated during
2004 totaled $96.8 million, compared to $173.5 million during 2003. The
decline in loan originations during 2004 was due to lower volumes of fixed
rate residential loans caused by lower levels of refinancing activity as a
result of increasing market rates during 2004.
The following schedule is a summary of loans with principal and/or
interest payments over 30 days past due and still accruing:
Summary of Delinquent Loans
2004 2003 2002 2001 2000
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Total Total Total Total Total
Amt. Loans Amt. Loans Amt. Loans Amt. Loans Amt. Loans
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real estate $3,406 1.10% $4,017 1.40% $5,324 2.35% $4,918 2.32% $1,054 0.50%
Commercial and
industrial (1) 83 0.03% 59 0.02% 302 0.13% 543 0.26% 391 0.20%
Consumer (1) 59 0.02% 71 0.02% 315 0.14% 71 0.03% - 0.00%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $3,548 1.15% $4,147 1.44% $5,941 2.62% $5,532 2.61% $1,445 0.70%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
<FN>
<F1> Commercial and industrial loans in 2000 include installment and all
other loans, which include amounts applicable to consumer.
</FN>
Loans, other than credit card loans, are placed on nonaccrual status
when, in the opinion of management, there are doubts as to the
collectibility of interest or principal, or when principal or interest is
past due 90 days or more, and the loan is not well secured and in the
process of collection. Interest previously accrued but not collected is
reversed and charged against interest income at the time the related loan
is placed on nonaccrual status. Principal and accrued interest on credit
card loans are charged to the allowance for credit losses when 180 days
past due.
Payments received on nonaccrual loans are recorded as reductions of
principal if principal payment is doubtful. The principal amount of loans
which have been placed on nonaccrual status were comprised primarily of
certain real estate loans. For each of these loans, management has
evaluated the collectibility of the principal based on its best estimate of
the realizable collateral value of the loans and does not anticipate that
any losses from liquidation of these loans will have a material effect on
future operations.
Loans are considered to be restructured when the yield on the
restructured assets is reduced below the current market rates by an
agreement with the borrower. Generally this occurs when the cash flow of
the borrower is insufficient to service the loan under its original terms.
17
The following table sets forth information regarding nonperforming
assets at the dates indicated.
Nonperforming Assets
Year Ended December 31,
----------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Loans accounted for on a nonaccrual basis $1,145 $1,387 $1,473 $1,823 $3,390
Accruing loans contractually past due 90 days or more 318 360 351 75 21
------ ------ ------ ------ ------
Total nonperforming loans 1,463 1,747 1,824 1,898 3,411
Other real estate owned - - - - -
Nonperforming securities - - - - -
------ ------ ------ ------ ------
Total nonperforming assets $1,463 $1,747 $1,824 $1,898 $3,411
====== ====== ====== ====== ======
Ratio of nonperforming assets to total assets 0.30% 0.38% 0.48% 0.52% 0.98%
====== ====== ====== ====== ======
Ratio of nonperforming loans to total loans 0.47% 0.61% 0.81% 0.90% 1.66%
====== ====== ====== ====== ======
In accordance with the SEC's Industry Guide 3 Item III. C (1), the
gross interest income that would have been recorded in 2004, 2003, and 2002
if nonaccrual and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or
since origination approximates $35,000, $111,000, and $243,000
respectively.
Allowance for Loan Losses. The Company maintains an allowance for
possible loan losses through a provision that is charged to income. 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. These methods, which are generally quantitative measures, are
employed to help ensure that all relevant matters affecting loan
collectibility will be consistently identified. Such methods at December
31, 2004 included a loan-by-loan analysis of all impaired loans and loans
under close monitoring by management for potential problems, a risk rating
analysis for all commercial and commercial real estate loans and a
quantitative analysis of residential real estate and consumer loans. Other
factors included in the evaluation of the adequacy of the allowance for
loan losses involve overall loan growth; the character and mix of the loan
portfolio; current trends in nonperforming loans, delinquent loans and net
charge-offs; new loan origination; local economic conditions; regulatory
changes and other quality considerations.
The Company has a semi-annual independent loan review program that
supports the Company's lending strategies, monitors compliance with
established loan policies and procedures and identifies credit trends. The
review included all criticized and classified assets over $100,000, all
loans delinquent over 30 days and over $100,000, new (closed) and renewed
loans over $100,000, a sampling of remaining commercial loans.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
increases in nonperforming loans, changes in economic conditions, or for
other reasons that would adversely affect the Company's results of
operations. The allowance for loan losses is maintained at a level that
management considers adequate to provide for probable loan losses based
upon evaluation of known and inherent risks in the loan portfolio. The
allowance is increased by provisions for loan losses and by recoveries of
loans previously charged-off and reduced by loans charged-off.
For the year ended December 31, 2004, the Company increased the
allowance for loan losses to $4.5 million through a $222,000 provision for
loan losses, compared to $420,000 in 2003 and $360,000 in 2002. The
Company believes that the current allowance for loan losses accurately
reflects the level of risk in the loan portfolio.
The following table sets forth the breakdown of the allowance for
loan losses by loan category for the periods indicated. The allocation of
an allowance to each category is not necessarily indicative of future
losses and does not restrict the use of the allowance to absorb losses in
any other category. The unallocated portion of the allowance for loan
losses is a general reserve that is not allocated to a specific portion of
the loan portfolio.
18
The following table summarizes changes in the allowance for loan
losses:
Analysis of Allowance for Loan Losses
Year Ended December 31,
--------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Total loans outstanding at the end of year (1) $309,951 $286,333 $226,226 $211,568 $204,931
======== ======== ======== ======== ========
Average loans outstanding during the year (1) $294,753 $250,639 $222,088 $210,561 $151,924
======== ======== ======== ======== ========
Allowance for loan losses, beginning of year $ 4,339 $ 3,679 $ 3,453 $ 3,376 $ 2,629
Loans charged off during the period:
Real estate 61 117 113 98 9
Commercial and industrial 64 - 43 132 55
Consumer 144 71 123 95 116
-------- -------- -------- -------- --------
Total 269 188 279 325 180
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Real estate 51 370 16 19 10
Commercial and industrial 68 15 87 38 -
Consumer 93 43 42 45 26
-------- -------- -------- -------- --------
Total 212 428 145 102 36
-------- -------- -------- -------- --------
Net loans (charged off) recovered during the year (57) 240 (134) (223) (144)
Provisions charged to income statement 222 420 360 300 371
Allowance on acquired loans - - - - 520
-------- -------- -------- -------- --------
Allowance for loan losses, end of year $ 4,504 $ 4,339 $ 3,679 $ 3,453 $ 3,376
======== ======== ======== ======== ========
Ratios:
Net charge-offs to average loans outstanding 0.02% (0.10%) 0.06% 0.11% 0.09%
Net charge-offs to loans, end of period 0.02% (0.08%) 0.06% 0.11% 0.07%
Allowance for loan losses to average loans outstanding 1.53% 1.73% 1.66% 1.64% 2.22%
Allowance for loan losses to loans, end of year 1.45% 1.52% 1.63% 1.63% 1.65%
Allowance for loan losses to nonperforming loans 307.86% 248.37% 201.70% 181.93% 98.97%
<FN>
<F1> Excludes loans held for sale.
</FN>
19
The following table summarizes the allocation of the allowance for
loan losses for the years indicated.
Allocation of Allowance for Loan Losses
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real estate
Residential $1,202 65.0% $1,248 65.8% $ 641 58.1% $1,289 58.0% $ 647 53.5%
Commercial 1,048 19.0% 1,186 18.7% 925 22.7% 2,348 22.4% 2,202 24.6%
Commercial and
industrial 480 7.1% 487 8.3% 400 8.6% 526 9.7% 527 10.3%
Consumer 43 7.5% 25 6.1% 74 8.1% - 8.4% - 9.8%
Municipal - 1.4% - 1.1% - 2.5% 31 1.5% 37 1.8%
Identified 992 0.0% 824 0.0% 552 0.0% 295 0.0% 257 0.0%
Contingent
liabilities 308 0.0% 456 0.0% 653 0.0% 323 0.0% - 0.0%
Unallocated 431 0.0% 113 0.0% 341 0.0% 319 0.0% 103 0.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $4,504 100.0% $4,339 100.0% $3,679 100.0% $3,453 100.0% $3,376 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Investment Portfolio. During 2004, the Company's total investment
portfolio increased $6.0 million or 4.3% to end the year at $144.1 million,
compared to $138.2 million on December 31, 2003.
The Company's securities portfolio consists of securities available
for sale, securities which management intends to hold until maturity and
Federal Home Loan Bank ("FHLB") stock. Securities available for sale
consist of certain mortgage-backed securities, including collateralized
mortgage obligations, U.S. Government Agency obligations, state and county
municipal securities and corporate debt securities. These securities are
carried at fair value and unrealized gains and losses, net of applicable
income taxes, are recognized as a separate component of shareholders'
equity. The fair value of securities available for sale at December 31,
2004 totaled $134.2 million with pre-tax net unrealized gains of $692,000.
At the end of 2003, securities available for sale were $129.4 million with
pre-tax net unrealized gains of $2.4 million.
Securities which management intends to hold until maturity consist
primarily of in-state municipals securities. Securities held to maturity
as of December 31, 2004 are carried at their amortized cost of $2.3 million
and exclude gross unrealized gains of $129,000 and gross unrealized losses
of $0. At the end of 2003, securities held to maturity totaled $2.9
million excluding gross unrealized gains of $174,000 and gross unrealized
losses of $0.
The following table shows the book value of the Company's held to
maturity securities at the end of each of the last three years.
Book Value of Held to Maturity Securities
At December 31,
--------------------------
2004 2003 2002
---- ---- -----
(Dollars in thousands)
<s> <c> <c> <c>
Obligations of states and political subdivisions $2,255 $2,870 $3,317
====== ====== ======
20
The table below shows the relative maturities of held to maturity
securities as of December 31, 2004.
Amortized Cost of Securities Held to Maturity
At December 31,
-----------------------------------------------------
Due 1 Year Due 1 - 5 Due 5 - 10 Due After 10
or less Years Years Years
---------- --------- ---------- ------------
(Dollars in thousands)
<s> <c> <c> <c> <c>
Security Category
Obligations of state and political subdivisions $170 $399 $1,581 $105
==== ==== ====== ====
Weighted average yield (1) 5.48% 6.46% 3.95% 5.60%
==== ===== ===== ====
Percent of total portfolio 7.56% 17.69% 70.11% 4.64%
==== ===== ===== ====
<FN>
<F1> Weighted average yields on tax exempt obligations have been computed
on a tax equivalent basis.
</FN>
The following table shows the book value of the Company's available
for sale securities and other investment securities at the end of each of
the last three years.
Book Value of Available for Sale Securities
At December 31,
--------------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Mortgage-backed securities $ 87,037 $ 67,958 $ 34,957
U.S. Treasury notes and other U.S. Government agencies 28,870 39,434 47,392
Obligations of states and political subdivisions 12,406 12,579 12,415
Other securities 5,844 9,456 6,448
-------- -------- --------
Total $134,157 $129,427 $101,212
======== ======== ========
The table below shows the relative maturities and carrying value of
available for sale debt securities as of December 31, 2004. The table
excludes stock investments.
Book Value of Available for Sale Securities
At December 31,
-----------------------------------------------------
Due 1 Year Due 1 - 5 Due 5 - 10 Due After 10
or less Years Years Years
---------- --------- ---------- ------------
(Dollars in thousands)
<s> <c> <c> <c> <c>
Security Category
Mortgage-backed securities $ - $ 4,515 $25,047 $57,475
U.S. Treasury notes and other U.S. Government agencies 8,630 20,240 - -
Obligations of state and political subdivisions 518 3,571 7,431 886
Other securities 1,006 4,426 - 412
------- ------- ------- -------
Total $10,154 $32,752 $32,478 $58,773
======= ======= ======= =======
Weighted average yield 5.46% 4.42% 4.25% 4.51%
==== ===== ===== =====
Percent of total portfolio 7.57% 24.41% 24.21% 43.81%
==== ===== ===== =====
The Company's net unrealized gain on available for sale securities
(net of tax) of $457,000 at December 31, 2004 is largely attributable to
the current interest rate environment. The unrealized gain has no effect
on regulatory capital or current earnings of the Company. The Company
would sell these securities only if it was consistent with the Bank's
asset/liability management strategies.
Deposit Activities. The Company offers a wide array of deposit
products in its market area, including checking accounts, money market
accounts, savings accounts, certificates of deposit and retirement savings
accounts. At December 31, 2004, deposits of
21
$305.0 million were $6.5 million, or 2%, higher than at the end of 2003.
The growth during 2004 was experienced in the core deposit categories,
which are typically added at a favorable cost relative to borrowed funds
and certificates of deposit. Core deposits ended 2004 at $215.0 million,
an increase of $14.4 million, or 7%, from the end of 2003.
In the Bank's market area, the banking business is somewhat seasonal
due to an influx of tourists and seasonal residents returning to the area
each spring and summer. As a result, deposits fluctuate from a relative
high point in mid October to a low point in May. This deposit fluctuation
is predictable and does not have a material adverse effect on the Bank.
The Bank's average cost of deposits was 0.96% for the year ended
December 31, 2004, compared to 1.16% for the year ended 2003, and 1.70% for
the year ended 2002.
The following table sets forth the average deposit balances and costs
for the years ended December 31, 2004, 2003, and 2002:
Average Deposit Balances and Rates
Year Ended December 31,
--------------------------------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
Average Average Average Average Average Average Percentage Growth
Balance Rate Balance Rate Balance Rate 2004 vs. 2003
------- ------- ------- ------- ------- ------- -----------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c>
Demand deposits $ 42,644 0.00% $ 37,134 0.00% $ 34,003 0.00% 14.84%
NOW accounts 64,715 0.25% 57,786 0.21% 53,294 0.33% 11.99%
Money market accounts 33,885 0.83% 37,283 1.09% 33,273 2.03% (9.11%)
Savings deposits 60,061 0.56% 52,214 0.68% 47,485 1.26% 15.03%
Certificates of deposit 93,871 2.19% 100,804 2.40% 99,666 3.11% (6.88%)
-------- -------- -------- -----
Total deposits $295,176 $285,221 $267,721 3.49%
======== ======== ======== =====
The following table sets forth scheduled maturities of time deposits
of $100,000 or more as of December 31, 2004.
Maturities of Time Deposits Over $100,000
(Dollars in thousands)
<s> <c>
Three months or less $ 4,980
Over three months to six months 3,858
Over six months to twelve months 4,050
Over twelve months 5,680
-------
Total $18,568
=======
Borrowings. The Bank's borrowings amounted to $134.4 million at
December 31, 2004, an increase of $16.7 million from the end of 2003. At
December 31, 2004, the Bank's borrowings consisted primarily of FHLB
borrowings totaling $120.2 million, an increase of $15.1 million over the
prior year-end. The remaining borrowings consisted primarily of assets
sold under repurchase agreements. These borrowings totaled $14.3 million
at December 31, 2004, an increase of $1.6 million over December 31, 2003.
See Notes 11 and 12 of the consolidated financial statements included in
Part II, Item 8 hereof for a schedule of borrowings outstanding and their
interest rates and other information related to the Company's borrowings.
Liquidity and Capital Resources
Liquidity. The Company's primary sources of funds consist of
deposits, borrowings, and the amortization, prepayment and maturities of
loans and securities. While scheduled repayment 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. Liquidity resources are used
primarily to fund existing and future loan commitments, to fund net deposit
flows, to invest in other interest-earning assets, to maintain liquidity
and to meet operating expenses.
The Company actively manages its liquidity position under the
direction of the Asset/Liability Management Committee. Periodic review
under prescribed policies and procedures is intended to ensure that the
Company will maintain adequate levels of available funds. At December 31,
2004, the Company's liquidity position was well within policy guidelines.
Management believes that the Company has adequate liquidity available to
respond to current and anticipated liquidity demands.
22
Capital Resources. The Federal Reserve Board ("FRB"), the Federal
Deposit Insurance Corporation ("FDIC"), and other regulatory agencies have
established capital guidelines for banks and bank holding companies. Risk-
based capital guidelines issued by the federal regulatory agencies require
banks to meet a minimum Tier 1 leverage capital ratio of 4.0%, a Tier 1
risk-based capital ratio of 4.0% and a total risk-based capital ratio of
8.0%. At December 31, 2004, the Company and the Bank exceeded all of
their regulatory capital requirements. For further information regarding
the Company's and Bank's regulatory capital at December 31, 2004, see the
consolidated financial statements, and related notes in Part II, Item 8 of
this report on Form 10-K.
Off-Balance Sheet Risks and Commitments
As of December 31, 2004 and 2003, the total of approved loan
commitments outstanding, commitments under unused lines of credit and
unadvanced portions of loans amounted to $61.0 million and $47.4 million,
respectively. See Note 16 to the consolidated financial statements in Part
II Item 8 hereof for further discussion of our off-balance sheet risk.
Contractual Obligations
The following table is a summary of the Company's contractual
obligations as of December 31, 2004 to extend credit, commitments under
contractual leases as well as the Company's contractual obligations,
consisting of operating lease obligations and FHLB borrowings by
contractual maturity date for the next five years.
Contractual Obligations, Commitments, and Off-Balance Sheet
Financial Instruments by Maturity
Payment due by period
--------------------------------------------------------------------
Less than
Total 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
----- --------- ----------- ----------- -------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Contractual Obligations
Operating lease obligations $ 1,627 $ 246 $ 325 $ 178 $ 878
FHLB borrowings 120,160 71,659 28,936 12,627 6,938
-------- ------- ------- ------- ------
Total $121,787 $71,905 $29,261 $12,805 $7,816
======== ======= ======= ======= ======
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes presented in
this report have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position
and operating results generally in terms of historical dollars without
consideration of changes in the relative purchasing power of money over
time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As
a result, interest rates have a more significant impact on the Company's
performance than has the general level of inflation. Over short periods of
time, interest rates may not necessarily move in the same direction or in
the same magnitude as inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income to changes in interest
rates, foreign exchange rates, commodity prices, equity prices and other
market-driven rates or prices. The Company has no trading operations, and
therefore is only exposed to non-trading market risk. The Company's
primary market risk exposure is interest rate risk. The ongoing monitoring
and management of this risk is an important component of the Company's
asset/liability management process, which is governed by policies
established by its Board of Directors that are reviewed and approved
annually. The Board of Directors delegates responsibility for carrying out
the asset/liability management policies to the Asset/Liability Committee
("ALCO"), whose members are comprised of the Bank's senior management.
In this capacity ALCO develops guidelines and strategies, consistent with
policies established by the Board of Directors, which monitor and
coordinate the Bank's interest rate sensitivity and the sources, uses and
pricing of funds.
Net interest income sensitivity to movements in interest rates is
measured through the use of a simulation model that analyzes resulting net
interest income under various interest rate scenarios established by
regulators. Projected net interest income (NII) is modeled, based on a
gradual shift in market interest rates ("ramped") over a 12-month period.
The model is based on the actual maturity and repricing characteristics of
interest rate sensitive assets and liabilities and factors in projections
for activity levels by product lines of the Company. Assumptions are made
as to the changing relationship between different interest rates as
interest rates increase/decrease (basis risk) and the customer's ability to
prepay loans and withdraw deposit balances or transfer them to a higher
yielding account (option risk). The sensitivity analysis is compared to
ALCO policy limits, which specify a maximum tolerance level for NII
exposure over a one-year horizon, assuming no balance sheet growth, given
both a 200 basis point (bp) upward and a 100 basis point downward shift in
interest rates.
23
The following table sets forth the estimated effects on the Company's
net interest income for the periods indicated and reflects such change as a
percentage of projected net interest income for the subsequent 12-month
period. The estimated percentage change in simulated net interest income
as of December 31, 2003 has been adjusted to reflect a change in
assumptions during that period.
Interest Rate Sensitivity
200 Basis Point 100 Basis Point
Rate Increase Rate Decrease
--------------- ---------------
<s> <c> <c>
December 31, 2004 (1.94%) (0.28%)
December 31, 2003 (2.77%) 0.86%
The results implied in the above table indicate estimated changes in
simulated net interest income for the subsequent 12 months assuming a
gradual shift in market rates up of 200 or down of 100 basis points across
the entire yield curve. This sensitivity analysis does not represent a
Company forecast and should not be relied upon as being indicative of
expected operating results. These hypothetical estimates are based upon
numerous assumptions including: the nature and timing of interest rate
levels including yield curve shape; prepayments on loans and securities;
deposit decay rates; pricing decisions on loans and deposits;
reinvestment/replacement of asset and liability cash flows, and others.
While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions, including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing
levels likely deviating from those assumed; the potential effect of
changing debt service levels on customers with adjustable rate loans;
depositor early withdrawals and product preference changes, and other
internal/external variables. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
Impact of Recently Issued Accounting Standards
In 2003, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to SFAS No.
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to existing contracts
as well as new contracts entered into after June 30, 2003. SFAS No. 149
does not have a material impact on the Company's consolidated financial
statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances).
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. This
Statement does not impact the Company's consolidated financial statements
as the Company does not have any financial instruments with characteristics
of both liabilities and equity.
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-1"), that
prescribes guidance to be used to determine when an investment in debt and
equity securities is considered impaired, whether the impairment is other
than temporary and the measurement of an impairment loss. The guidance also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment. In September 2004, the effective date for
the impairment measurement and recognition guidance of EITF 03-1 was
delayed until the issuance of a FASB Staff Position expected to provide
additional implementation guidance. The Company will continue to monitor
changes to Issue 03-01, but does not consider it, or related Financial
Accounting Standards Board Staff Positions ("FSPs") to have a material
impact on the Company's financial position or results of operations.
In December 2003, The Financial Accounting Standard Board ("FASB")
issued a revised version of SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The Statement retains all of
the previous requirements and introduces additional disclosure requirements
and interim reporting requirements. SFAS 132 (revised 2003) is effective for
years ending after December 15, 2003.
24
In December 2003, the President signed the federal 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
* The opportunity for a retiree to obtain a prescription drug
benefit under Medicare
During 2004, the FASB Staff issued FASB Staff Position (FSP)
FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003."
The FSP addresses employers' accounting for the effects of the Act and is
effective for the Company beginning in 2005. The accounting for the Act will
depend on the Company's assessment as to whether the prescription drug
benefits available under its plan are actuarially equivalent to Medicare
Part D, among other factors. Currently, due to the lack of clarifying
regulations related to the Act, the Company cannot determine if the benefit
it provides would be considered actuarially equivalent to the benefit provided
under the Act and, accordingly, the potential impact of applying the FSP is
not known.
Quarterly Information
The following table provides unaudited financial information by
quarter for each of the past two years. Certain balances from the prior
quarters have been reclassified to conform with the fourth quarter 2004
presentation. Basic earnings per share have been restated to reflect the
Company's 2-for-1 stock split, in the form of a 100% stock dividend, paid
on March 21, 2005.
2004 2003
----------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance Sheets
Cash $ 8,788 $ 10,879 $ 11,589 $ 10,112 $ 9,510 $ 11,357 $ 11,995 $ 14,702
Investments 129,640 140,696 145,678 144,139 124,720 120,096 115,439 138,155
Net loans 274,686 293,044 300,256 305,447 224,598 242,384 271,229 281,994
Other assets 28,933 29,319 29,017 28,657 29,593 30,562 27,080 29,343
-------- -------- -------- -------- -------- -------- -------- --------
Total assets $442,047 $473,938 $486,540 $488,355 $388,421 $404,399 $425,743 $464,194
======== ======== ======== ======== ======== ======== ======== ========
Deposits $281,334 $284,412 $309,325 $304,982 $271,713 $278,180 $302,295 $298,454
Borrowed funds 110,465 142,938 127,474 134,414 69,465 77,762 75,915 117,729
Other liabilities 7,918 6,693 7,180 7,867 7,814 8,026 7,491 7,259
Shareholders' equity 42,330 39,895 42,561 41,092 39,429 40,431 40,042 40,752
-------- -------- -------- -------- -------- -------- -------- --------
Total liabilities & equity $442,047 $473,938 $486,540 $488,355 $388,421 $404,399 $425,743 $464,194
======== ======== ======== ======== ======== ======== ======== ========
Income Statements
Interest income $ 5,363 $ 5,350 $ 5,644 $ 5,734 $ 4,867 $ 4,921 $ 4,971 $ 5,338
Interest expense 1,400 1,458 1,579 1,722 1,492 1,510 1,430 1,534
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 3,963 3,892 4,065 4,012 3,375 3,411 3,541 3,804
Provision for loan losses 69 90 38 25 105 105 105 105
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after provision 3,894 3,802 4,027 3,987 3,270 3,306 3,436 3,699
Non-interest income 1,553 1,463 1,409 1,329 1,674 1,823 1,420 1,250
Non-interest expense 3,565 3,603 3,636 3,786 3,251 3,711 3,205 3,673
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes 1,882 1,662 1,800 1,530 1,693 1,418 1,651 1,276
Income taxes 605 468 549 423 480 415 547 318
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,277 $ 1,194 $ 1,251 $ 1,107 $ 1,213 $ 1,003 $ 1,104 $ 958
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share $ 1.12 $ 1.04 $ 1.09 $ 0.99 $ 1.05 $ 0.88 $ 0.96 $ 0.84
25
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Union Bankshares Company:
We have audited the accompanying consolidated balance sheets of Union
Bankshares Company and Subsidiary as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above represent
fairly, in all material respects, the consolidated financial position of
Union Bankshares Company and Subsidiary as of December 31, 2004 and 2003,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
2004 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Berry, Dunn, McNeil & Parker
Portland, Maine
January 21, 2005
26
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
Dollars in thousands, except number of shares and per share data
2004 2003
---- ----
<s> <c> <c>
ASSETS
Cash and cash equivalents (note 2) $ 10,112 $ 14,702
Securities, available for sale, at market (note 3) 134,157 129,427
Securities, held to maturity, at cost (note 4)
(market value $2,384 and $3,041 at December 31,
2004 and 2003, respectively) 2,255 2,870
Other investment securities, at cost
which approximates market value 7,727 5,858
Loans held for sale 246 937
Loans (note 5) 309,951 286,333
Less allowance for loan losses (note 6) 4,504 4,339
-------- --------
Net loans 305,447 281,994
-------- --------
Premises, furniture and equipment, net (note 8) 5,672 5,819
Goodwill 6,305 6,305
Bank owned life insurance 8,413 8,041
Other assets (notes 7, 9 and 14) 8,021 8,241
-------- --------
Total assets $488,355 $464,194
======== ========
LIABILITIES
Demand deposits $ 46,314 $ 41,209
NOW deposits 66,913 65,657
Money market accounts 30,858 38,359
Savings deposits 70,921 55,396
Certificates of deposit (note 10) 89,976 97,833
-------- --------
Total deposits 304,982 298,454
-------- --------
Borrowings from Federal Home Loan Bank (note 11) 120,160 105,027
Other borrowed funds (note 12) 14,254 12,702
Other liabilities (notes 13 and 14) 7,867 7,259
-------- --------
Total liabilities 447,263 423,442
-------- --------
Contingent liabilities and commitments
(notes 8, 15, 16 and 17)
SHAREHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized
1,200,000 shares, issued 1,114,938 shares
in 2004 and 1,164,788 shares in 2003 13,937 14,560
Surplus 2,973 4,056
Retained earnings (note 15) 24,152 21,396
Accumulated other comprehensive income (loss)
Net unrealized gain on securities available for sale,
net of deferred tax liability of $235 and $795 at
December 31, 2004 and 2003, respectively 457 1,543
Minimum pension liability adjustment, net of deferred
tax asset of $220 at December 31, 2004 (note 13) (427) -
Treasury stock, at cost (0 shares in
2004 and 19,228 shares in 2003) - (803)
-------- --------
Total shareholders' equity 41,092 40,752
-------- --------
Total liabilities and shareholders' equity $488,355 $464,194
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Dollars in thousands, except number of shares and per share data
2004 2003 2002
---- ---- ----
<s> <c> <c> <c>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 16,521 $ 15,311 $ 15,856
Interest and dividends on investments
(includes tax exempt income of $686 in 2004,
$709 in 2003, and $827 in 2002) 5,570 4,786 5,233
--------- --------- ---------
Total interest and dividend income 22,091 20,097 21,089
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits 2,838 3,312 4,559
Interest on borrowed funds 3,321 2,654 2,529
--------- --------- ---------
Total interest expense 6,159 5,966 7,088
--------- --------- ---------
Net interest income 15,932 14,131 14,001
Provision for loan losses (note 6) 222 420 360
--------- --------- ---------
Net interest income after provision for loan losses 15,710 13,711 13,641
--------- --------- ---------
NON-INTEREST INCOME
Net gains on sales of investment securities (note 3) 237 558 23
Financial services fees and commissions 1,953 1,812 1,580
Service charges and fees on deposit accounts 1,792 1,252 1,253
Bankcard fees 227 385 866
Loan fees 888 1,496 1,314
Income from cash surrender value of life insurance 372 318 331
Other income 285 346 508
--------- --------- ---------
Total non-interest income 5,754 6,167 5,875
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 8,913 8,174 7,330
Net occupancy 1,530 1,527 1,304
Equipment and data processing 1,238 1,301 1,849
Other 2,909 2,838 2,978
--------- --------- ---------
Total non-interest expense 14,590 13,840 13,461
--------- --------- ---------
Income before income taxes 6,874 6,038 6,055
Income taxes (note 14) 2,045 1,760 1,740
--------- --------- ---------
Net income $ 4,829 $ 4,278 $ 4,315
========= ========= =========
Net income per common share $ 4.24 $ 3.73 $ 3.75
========= ========= =========
Cash dividends declared per common share $ 1.275 $ 1.175 $ 1.100
========= ========= =========
Weighted average common shares outstanding 1,138,701 1,146,765 1,151,777
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
Dollars in thousands, except number of shares and per share data
ACCUMULATED TOTAL
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
------ ------- -------- -------- ------------- --------
<s> <c> <c> <c> <c> <c> <c>
Balance at December 31, 2001 $14,560 $ 3,963 $(332) $15,415 $ 530 $34,136
Net income, 2002 - - - 4,315 - 4,315
Change in net unrealized gain on available
for sale securities, net of tax of $886 - - - - 1,721 1,721
Minimum pension liability adjustment, net of tax of $(168) - - - - (326) (326)
------- ------- ----- ------- ------- -------
Total comprehensive income - - - 4,315 1,395 5,710
Sale of 5,464 shares treasury stock - 61 131 - - 192
Repurchase of 12,178 shares treasury stock - - (454) - - (454)
Cash dividends declared - - - (1,266) - (1,266)
------- ------- ----- ------- ------- -------
Balance at December 31, 2002 $14,560 $ 4,024 $(655) $18,464 $ 1,925 $38,318
------- ------- ----- ------- ------- -------
Net income, 2003 - - - 4,278 - 4,278
Change in net unrealized gain on available
for sale securities, net of tax of $(365) - - - - (708) (708)
Minimum pension liability adjustment, net of tax of $168 - - - - 326 326
------- ------- ----- ------- ------- -------
Total comprehensive income - - - 4,278 (382) 3,896
Sale of 6,552 shares treasury stock - 32 246 - - 278
Repurchase of 9,266 shares treasury stock - - (394) - - (394)
Cash dividends declared - - - (1,346) - (1,346)
------- ------- ----- ------- ------- -------
Balance at December 31, 2003 $14,560 $ 4,056 $(803) $21,396 $ 1,543 $40,752
------- ------- ----- ------- ------- -------
Net income, 2004 - - - 4,829 - 4,829
Change in net unrealized gain on available
for sale securities, net of tax of $(559) - - - - (1,086) (1,086)
Minimum pension liability adjustment, net of tax of $(220) - - - - (427) (427)
------- ------- ----- ------- ------- -------
Total comprehensive income - - - 4,829 (1,513) 3,316
Sale of 4,158 shares treasury stock - 1 185 - - 186
Repurchase of 7,946 shares treasury stock - - (366) - - (366)
Retirement of treasury stock (288) (80) 984 (616) - -
Sale of 3,364 shares of common stock 42 122 - - - 164
Repurchase of 30,200 shares of common stock (377) (1,126) - - - (1,503)
Cash dividends declared - - - (1,457) - (1,457)
------- ------- ----- ------- ------- -------
Balance at December 31, 2004 $13,937 $ 2,973 $ - $24,152 $ 30 $41,092
======= ======= ===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
29
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
Dollars in thousands, except number of shares and per share data
2004 2003 2002
---- ---- ----
<s> <c> <c> <c>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income $ 4,829 $ 4,278 $ 4,315
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Amortization of intangible assets 47 47 47
Depreciation 637 696 768
Net amortization of premium (accretion of discount)
on investments 511 850 673
Deferred income taxes (260) (168) (202)
Provision for loan losses 222 420 360
Net gains on sales of available for sale securities (237) (558) (23)
Net gain on sale of equipment - - (1)
Originations of loans held for sale (8,680) (47,748) (54,209)
Proceeds from sale of loans 9,371 52,232 51,563
Net change in other assets 4 (1,877) (1,185)
Net change in other liabilities 1,171 595 1,762
Net change in deferred loan origination fees (155) 15 13
-------- -------- --------
Net cash provided by operating activities 7,460 8,782 3,881
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available for sale securities 20,857 7,548 8,538
Purchase of available for sale securities (49,885) (77,508) (35,144)
Proceeds from maturities and principal payments
on available for sale securities 22,388 40,392 21,765
Purchase of held to maturity securities - - (102)
Proceeds from maturities and principal payments
on held to maturity securities 605 435 300
Increase in other investments (1,869) (818) -
Net increase in loans to customers (23,521) (59,881) (14,805)
Proceeds from sale of equipment - - 1
Capital expenditures (491) (387) (525)
Net increase in cash surrender value of life
insurance (372) (208) (390)
-------- -------- --------
Net cash (used) by investing activities (32,288) (90,427) (20,362)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 6,528 22,689 7,858
Proceeds from long-term borrowings 29,685 14,000 16,500
Repayment of long-term borrowings (14,139) (10,443) (3,498)
Net change in short-term borrowings from
Federal Home Loan Bank (412) 55,509 (9,000)
Net change in other borrowed funds 1,552 (621) 928
Purchase of common and treasury stock (1,869) (394) (454)
Sale of treasury stock 186 278 192
Proceeds from stock issuance 164 - -
Dividends paid (1,457) (1,318) (1,264)
-------- -------- --------
Net cash provided by financing activities 20,238 79,700 11,262
-------- -------- --------
Net (decrease) in cash and cash equivalents (4,590) (1,945) (5,219)
Cash and cash equivalents at beginning of year 14,702 16,647 21,866
-------- -------- --------
Cash and cash equivalents at end of year $ 10,112 $ 14,702 $ 16,647
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
Dollars in thousands 2004 2003 2002
---- ---- ----
<s> <c> <c> <c>
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 6,125 $ 6,002 $ 7,362
Income taxes paid $ 1,950 $ 1,887 $ 2,008
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Changes in other comprehensive income:
Net increase (decrease) required by Statement
of Financial Accounting Standards No. 115
"Accounting for Certain Investments in
Debt and Equity Securities" $ (1,645) $ (1,073) $ 2,607
Deferred income tax receivable (liability) thereon $ 559 $ 365 $ (886)
Increase (decrease) required by Statement of
Financial Accounting Standards No. 87
"Employers' Accounting for Pension" $ (647) $ 494 $ (494)
Change in deferred income tax asset thereon $ 220 $ (168) $ 168
The accompanying notes are an integral part of these consolidated financial
statements.
31
UNION BANKSHARES COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Union Bankshares Company (the Company) provides a full range of
banking services to individual and corporate customers through its
subsidiary and branches in Maine. It is subject to regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Union Trust
Company (the Bank). All significant intercompany balances and transactions
have been eliminated in the accompanying financial statements.
Operating Segments
Operations are managed and financial performance is evaluated on a
corporate-wide basis. Accordingly, all the Company's banking operations
are considered by management to be aggregated in one reportable operating
segment.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change in the future relate to the determination of the allowance for loan
losses and the valuation of mortgage servicing rights.
Earnings and Cash Dividends per Share
Earnings per share is based upon the weighted average number of
common shares outstanding during each year. In April 2004, the Company
increased its cash dividend by 8% and in April 2003, the Company increased
its cash dividend by 9%.
Investments
Available for Sale Securities
Available for sale securities consist of marketable securities that
the Company anticipates could be made available for sale in response to
changes in market interest rates, liquidity needs, changes in funding
sources and similar factors. These assets are specifically identified and
are carried at fair value. Amortization of premiums and accretion of
discounts are recorded as an adjustment to yield. Unrealized holding gains
and losses for these assets, net of related income taxes, are excluded from
earnings and are reported as a net amount in a separate component of
shareholders' equity. When a decline in market value is considered other
than temporary, the loss is recognized in the consolidated statements of
income, resulting in the establishment of a new cost basis. Gains and
losses on the sale of available for sale securities are determined using
the specific identification method.
Held to Maturity Securities
Held to maturity securities consist of debt securities that the
Company has the positive intent and ability to hold until maturity. Debt
securities classified as held to maturity are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts. When a
decline in market value is considered other than temporary, the loss is
recognized in the consolidated statements of income, resulting in the
establishment of a new cost basis for the security.
Other Investment Securities
Other investment securities consist of Federal Home Loan Bank (FHLB)
stock and Federal Reserve Bank stock. These securities are carried at
cost, which approximates market value at December 31, 2004 and 2003.
Loans Held for Sale
Loans held for sale are loans originated for the purpose of potential
subsequent sale. These loans are carried at the lower of aggregate cost or
market value as determined by current investor yield requirements. Gains
and losses on the sale of these loans are computed on the basis of specific
identification.
32
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff generally are reported at
their outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balances. Loan
commitments are recorded when funded.
Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying balance sheets. The Bank recognizes a loan servicing fee for
the difference between the principal and interest payment collected on the
loan and the payment remitted to the investor.
The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the following risk characteristics of the
underlying loans: interest rate, fixed versus variable rate, and period of
origination. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceed their fair
value.
Premises, Furniture and Equipment
Premises, furniture and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed by accelerated and
straight-line methods over the estimated useful life of each type of asset.
Leasehold improvements are amortized over the lesser of the terms of the
respective leases or the service lives of the improvements. Maintenance and
repairs are charged to expense as incurred; betterments are capitalized.
Intangible Assets
The core deposit intangible is amortized on a straight-line basis
over 7 years. The core deposit intangible is reviewed for possible
impairment when it is determined that events or changed circumstances may
affect the underlying basis of the asset.
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 asset is
evaluated for impairment annually, or more frequently upon the occurrence
of certain events. Prior to the adoption of SFAS No. 142, goodwill was
amortized on a straight-line basis over 15 years.
Allowance for Loan Losses
The allowance for loan losses is established by management to absorb
charge-offs of loans deemed uncollectible. This allowance is increased by
provisions charged to operating expense and by recoveries on loans
previously charged off. The amount of the provision is based on
management's evaluation of the loan portfolio. Considerations include past
and anticipated loan loss experience, current economic conditions, the
character and size of the loan portfolio and the need to maintain the
allowance at a level adequate to absorb probable losses.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If
these allocations cause the allowance to increase, the increase is reported
as loan loss provision.
Other Real Estate Owned
Other real estate owned, which is included in other assets, is
recorded at the lower of cost or fair value less estimated costs to sell at
the time the Company takes possession of the property. Losses arising from
the acquisition of such properties are charged against the allowance for
loan losses. Operating expenses and any subsequent provisions to reduce
the carrying value are charged to operations. Gains and losses upon
disposition are reflected in earnings as realized.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income
using methods that relate the income earned to the balances of loans
outstanding and investment securities. Interest expense on liabilities is
derived by applying applicable interest rates to principal amounts
outstanding. The recording of interest income on problem loan accounts
ceases when collectibility within a reasonable period of time becomes
doubtful. Interest income accruals are resumed only when they are brought
fully current with
33
respect to principal and interest, and when management expects the loan to be
fully collectible. Loans 30 days or more past due are considered delinquent.
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows and increases
in the present value of expected cash flows due to the passage of time.
Cash payments representing interest income are reported as such. Other
cash payments are reported as reductions in carrying value, while increases
or decreases due to changes in estimates of future payments and due to the
passage of time are reflected in the loan loss provision.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
recognized over the life of the related loan as an adjustment to, or
reduction of, the loan's yield.
Advertising Costs
The Company expenses advertising costs as they are incurred.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Comprehensive Income
Comprehensive income includes both net income and other comprehensive
income. The only components of other comprehensive income are net
unrealized gains and losses on available for sale securities and minimum
pension liability adjustment, net of deferred taxes. The required
disclosures for all periods presented are included in the consolidated
statement of changes in shareholders' equity.
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 23,014 shares so retired are
available for reissuance as authorized, but unissued shares.
Reclassifications
Certain 2002 and 2003 balances have been reclassified to conform with
the 2004 presentation.
2. CASH AND DUE FROM BANKS
The Federal Reserve Board requires the Bank to maintain a reserve
balance. The amount of this reserve balance as of December 31, 2004 was
$601,000. In the normal course of business, the Bank has funds on deposit
at other financial institutions in amounts in excess of the $100,000
insured by the Federal Deposit Insurance Corporation.
3. AVAILABLE FOR SALE SECURITIES
The Company carries available for sale securities at fair value. A
summary of the cost and fair values of available for sale securities at
December 31, 2004 and 2003 is as follows:
December 31,
---------------------------------------------------------------------------------------------
2004 2003
--------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Carrying & Amortized Unrealized Unrealized Carrying &
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Mortgage-backed securities $ 87,131 $ 351 $(445) $ 87,037 $ 67,637 $ 553 $(232) $ 67,958
U.S. Treasury securities and
other U.S. Government agencies 28,689 321 (140) 28,870 38,317 1,117 - 39,434
Obligations of states and
political subdivisions 11,758 648 - 12,406 11,772 807 - 12,579
Other securities 5,887 24 (67) 5,844 9,364 144 (52) 9,456
-------- ------ ----- -------- -------- ------ ----- --------
Totals $133,465 $1,344 $(652) $134,157 $127,090 $2,621 $(284) $129,427
======== ====== ===== ======== ======== ====== ===== ========
34
The amortized cost and fair value of available for sale debt
securities at December 31, 2004, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized Fair
Cost Value
--------- -----
(Dollars in thousands)
<s> <c> <c>
Due in one year or less $ 10,048 $ 10,154
Due after one year through five years 32,467 32,752
Due after five years through ten years 32,064 32,478
Due after ten years 58,886 58,773
-------- --------
Totals $133,465 $134,157
======== ========
Mortgage-backed securities are allocated among the above maturity
groupings based on their final maturity dates.
Proceeds from the sale of securities were $20.9 million, $7.5
million, and $8.5 million in 2004, 2003 and 2002, respectively. Gross
realized gains were $237,000, $558,000, and $45,000 in 2004, 2003 and 2002,
respectively. Gross realized losses were $0, $0, and $22,000 in 2004, 2003
and 2002, respectively.
The fair value and unrealized losses on available for sale securities
that have been in a continuous unrealized loss position for less than 12
months and for 12 months or longer as of December 31, 2004 are as follows:
December 31, 2004
--------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
Description of Securities (Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Mortgage-backed securities $42,008 $(340) $4,450 $(105) $46,458 $(445)
U.S. Treasury securities and other
U.S. Government agencies 15,525 (140) - - 15,525 (140)
Other securities 2,085 (5) 411 (62) 2,496 (67)
------- ----- ------ ----- ------- -----
Total $59,618 $(485) $4,861 $(167) $64,479 $(652)
======= ===== ====== ===== ======= =====
Available for sale securities consist of marketable securities that
the Company anticipates could be made available for sale in response to
changes in the market, interest rates, liquidity needs, and changes in
funding sources. As of December 31, 2004, there were 34 securities with a
fair value of $59.6 million and an unrealized loss of $485,000 that have
been in a continuous unrealized loss position for less than 12 months.
There were also 4 securities with a 12 month or more continuous unrealized
loss position that had a fair value of $4.9 million and unrealized loss of
$167,000. On a monthly basis, management reviews the unrealized loss
position for the Company's portfolio, in addition to industry analyst
reports, sector credit ratings and interest rate risk profiles, and has
concluded that the impairment was not other than temporary and was
primarily due to the volatility of the security's market price.
4. HELD TO MATURITY SECURITIES
The carrying amounts of held to maturity securities for 2004 and 2003
as shown in the Company's consolidated balance sheets, and their
approximate fair values at December 31, are as follows:
December 31,
--------------------------------------------------------------------------------------------
2004 2003
------------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Book Unrealized Unrealized Fair Book Unrealized Unrealized Fair
Value Gains Losses Value Value Gains Losses Value
----- ---------- ---------- ----- ----- ---------- ---------- -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Obligations of states and
political subdivisions $2,255 $129 $ - $2,384 $2,870 $171 $ - $3,041
35
The amortized cost and fair value of held to maturity securities at
December 31, 2004, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
--------- -----
(Dollars in thousands)
<s> <c> <c>
Due in one year or less $ 170 $ 173
Due after one year through five years 399 422
Due after five years through ten years 1,581 1,677
Due after ten years 105 112
------ ------
Totals $2,255 $2,384
====== ======
Nontaxable interest income on municipal investments was $686,000,
$709,000, and $827,000 for 2004, 2003 and 2002, respectively.
5. LOANS
At December 31, 2004 and 2003, loans on nonaccrual status totaled
approximately $1.1 million and $1.4 million, respectively. If interest had
been accrued on such loans, interest income on loans would have been
approximately $35,000, $111,000, and $243,000 higher in 2004, 2003 and
2002, respectively. Loans delinquent by 90 days or more that were still on
accrual status at December 31, 2004 and 2003 totaled approximately $318,000
and $360,000, respectively.
In the ordinary course of business, the Company's subsidiary granted
loans to the executive officers and directors of the Company and its
subsidiary, and to affiliates of directors. These loans were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and did not involve more than normal risk of uncollectibility or present
other unfavorable features.
The balance of loans to related parties amounted to $3.5 million at
December 31, 2004 and 2003. New loans granted to related parties in 2004 and
2003 totaled $1.8 million and $2.9 million, respectively; payments and
reductions amounted to $1.8 million and $2.9 million in 2004 and 2003,
respectively.
The following table summarizes the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
Loan Portfolio Composition
December 31,
----------------------
2004 2003
---- ----
(Dollars in thousands)
<s> <c> <c>
Real estate
Residential $201,669 $188,286
Commercial 58,834 53,436
Commercial and industrial 21,906 23,837
Consumer 23,340 17,498
Municipal 4,202 3,276
-------- --------
Total $309,951 $286,333
======== ========
36
6. ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses is as follows for the years
ended December 31, 2004, 2003 and 2002:
Years Ended December 31,
--------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Balance, beginning of year $4,339 $3,679 $3,453
Provision for loan losses 222 420 360
------ ------ ------
Balance before loan charge-offs 4,561 4,099 3,813
------ ------ ------
Loans charged-off 269 188 279
Less recoveries on loans charged-off 212 428 145
------ ------ ------
Net loan charge-offs (recoveries) 57 (240) 134
------ ------ ------
Balance, end of year $4,504 $4,339 $3,679
====== ====== ======
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance might be necessary based on changes in
economic conditions, particularly in northern New England. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance. These agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.
Impairment of loans having recorded investments of $1.1 million at
December 31, 2004, $1.4 million at December 31, 2003 and $1.5 million at
December 31, 2002 have been recognized in conformity with SFAS No. 114, as
amended by SFAS No. 118. The average recorded investment in impaired loans
during 2004, 2003 and 2002 was $1.1 million, $1.7 million and $1.5 million,
respectively. All impaired loans have a related allowance for loan losses.
The total allowance for loan losses related to these loans was $165,000,
$148,000 and $313,000 at December 31, 2004, 2003 and 2002, respectively.
There was $36,000, $21,000, and $47,000 interest income
recognized on impaired loans in 2004, 2003 and 2002, respectively.
7. LOAN SERVICING
The Bank services loans sold to others amounting to $110.2 million
and $102.7 million at December 31, 2004 and 2003, respectively. Mortgage
servicing rights of $403,000 and $557,000 were capitalized in 2004 and
2003, respectively. Mortgage servicing rights have been written down to
their fair value of $806,000 and $590,000 through a valuation allowance at
December 31, 2004 and 2003, and are included in other assets. Amortization
of mortgage servicing rights was $375,000, $477,000, and $290,000 in 2004,
2003 and 2002, respectively. Gain on loans sold was $164,000, $546,000,
and $359,000 in 2004, 2003 and 2002, respectively.
8. PREMISES, FURNITURE AND EQUIPMENT
Detail of bank premises, furniture and equipment is as follows:
December 31,
----------------------
2004 2003
---- ----
(Dollars in thousands)
<s> <c> <c>
Land $ 463 $ 429
Buildings and improvements 6,791 6,771
Furniture and equipment 6,170 5,733
Leasehold improvements 767 767
------- -------
14,191 13,700
Less accumulated depreciation 8,519 7,881
------- -------
Premises, furniture and equipment, net $ 5,672 $ 5,819
======= =======
At December 31, 2004, the Bank was obligated under a number of
noncancellable leases for premises and equipment that are accounted for as
operating leases. Leases for real property contain original terms from 2
to 20 years with renewal options up to 20
37
years. Management expects that, in the normal course of business, most
leases will be renewed or replaced by other leases, or, when available,
purchase options may be exercised.
Rental expense was $257,000 in 2004, $207,000 in 2003, and $202,000
in 2002.
The minimum annual lease commitments under noncancellable leases in
effect at December 31, 2004 are as follows:
Years Ending December 31,
-------------------------
(Dollars in thousands)
<s> <c>
2005 $ 246
2006 209
2007 116
2008 86
2009 92
Thereafter 878
------
Total $1,627
======
9. INTANGIBLE ASSETS
On August 31, 2000, the Company acquired the outstanding stock of
Mid-Coast Bancorp, Inc. and its subsidiary, The Waldoboro Bank, FSB. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The Company has an intangible asset subject to
amortization related to the acquisition. 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:
December 31,
----------------------
2004 2003
---- ----
(Dollars in thousands)
<s> <c> <c>
Core deposit intangible, cost $323 $323
Accumulated amortization 202 156
---- ----
Core deposit intangible, net $121 $167
==== ====
Amortization expense related to the core deposit intangible for each of
the years ended December 31, 2004, 2003 and 2002 amounted to $47,000. The
expected amortization expense is estimated to be $47,000 each year through
December 31, 2006 and $27,000 in 2007.
10. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was $18.6 million and $18.9 million in
2004 and 2003, respectively.
At December 31, 2004, the scheduled maturities of time deposits were
as follows:
Years Ending December 31,
-------------------------
(Dollars in thousands)
<s> <c>
2005 $65,805
2006 11,218
2007 8,109
2008 3,268
2009 1,576
-------
Total $89,976
=======
38
11. BORROWINGS FROM FEDERAL HOME LOAN BANK
Borrowings from the Federal Home Loan Bank are summarized as follows:
December 31,
Range of Final Interest Rates at ----------------------
Maturity Dates December 31, 2004 2004 2003
-------------- ----------------- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c>
Fixed borrowings 2005 to 2011 2.11% to 6.09% $118,494 $103,361
Variable borrowings 2005 to 2013 2.00% to 7.23% 1,666 1,666
-------- --------
$120,160 $105,027
======== ========
Pursuant to the collateral agreements with the Federal Home Loan Bank
(FHLB), borrowings are collateralized by stock in the FHLB, qualifying
first mortgage loans and available for sale securities. The Bank has an
available line of credit with the FHLB of $5.0 million. The amount of
borrowings with a call option totaled $28.5 million at December 31, 2004.
Borrowings at December 31, 2004 mature as follows:
Years Ending December 31,
(Dollars in thousands)
<s> <c>
2005 $ 71,659
2006 9,500
2007 19,436
2008 8,810
2009 2,317
Thereafter 8,438
--------
Total $120,160
========
12. OTHER BORROWED FUNDS
Securities sold under agreements to repurchase generally mature
within one day from the transaction date. The Bank provides collateral
based upon the par value of the underlying securities. At December 31,
2004, securities with a fair value of $22.7 million were pledged to
collateralize other borrowed funds. Information concerning securities sold
under agreements to repurchase for 2004 is summarized as follows:
Year Ended December 31, 2004
----------------------------
(Dollars in thousands)
<s> <c>
Average balance during the year $11,376
Average interest rate during the year 1.71%
Maximum month-end balance during the year $14,932
13. EMPLOYEE BENEFITS
Pension Plan
The Company's subsidiary has a noncontributory defined benefit
pension plan covering substantially all permanent full-time employees. The
benefits are based on employees' years of service and the average of their
three highest consecutive rates of annual salary preceding retirement.
It is the subsidiary's policy to fund the plan sufficiently to meet
the minimum requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time.
The accumulated benefit obligation at December 31, 2004, 2003 and
2002 was $6.5 million, $5.9 million, and $4.9 million, respectively. At
December 31, 2004 and 2002, the accumulated benefit obligation exceeded the
fair value of plan assets. The Company recognized an additional minimum
liability equal to the unfunded accumulated benefit obligation of $648,000
and $494,000
39
for the years ended December 31, 2004 and 2002, respectively. At December 31,
2004 and 2002, the minimum pension liability adjustment was recorded as a
separate component of equity, net of a deferred tax asset of $220,000 and
$168,000, respectively. The minimum pension liability adjustment as of
December 31, 2002 was reversed in 2003 upon additional funding of the plan.
Pension expense amounted to $565,000, $487,000, and $276,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
The measurement dates for the pension plan were January 1, 2004 for
purposes of determining the net periodic pension cost and December 31, 2004
for purposes of funded status disclosure.
Plan Assets
- -----------
The Company's pension plan weighted-average asset allocations at
December 31, 2004 and 2003, by asset category are as follows:
December 31,
----------------------
2004 2003
---- ----
(Dollars in thousands)
<s> <c> <c>
Asset Category
--------------
Cash and cash equivalents 3% 23%
Fixed income 36% 27%
Domestic equities 61% 47%
International equities 0% 3%
--- ---
Total 100% 100%
=== ===
Investment Policies
- -------------------
The Retirement Plan for the Employees of Union Trust Company (the
"Plan") was established in 1959 to provide for the payment of benefits to
employees of Union Trust Company. The Plan is overseen by a Pension Plan
Committee who meets annually to review asset performance and compliance to
investment guidelines and to set the investment policy guidelines. A
complete review is presented annually to the Board of Directors'
Compensation Committee.
The Bank utilizes the investment management services of Union Trust
Company's Trust Department. The goal of the Union Trust Pension Fund is to
provide sufficient funds to pay the pension obligations, which the Bank has
incurred for current and future retirees. As such, it should be
conservatively managed with the appropriate mix of fixed income and equity
securities. On an annual basis, the Fund should obtain sufficient cash to
pay all obligations from either income, the Bank's contribution or
appreciation in the value of the equity portion of the portfolio. Growth in
the total value of the Fund will come from excess growth or Bank
contribution.
The asset allocation shall be as follows:
- Fixed Income:
-------------
At least 40% - 50% of the portfolio should be invested in high
quality fixed income securities. A preference exists for U.S.
Treasury and Agency securities. As much as 30% of the fixed
income portfolio may be invested in corporate bonds rated A or
better, and with final maturities of no greater than 15 years.
The Treasury and Agency portion of the portfolio should be a
balanced portfolio with maturities ranging from 2 - 15 years upon
purchase.
- Common Stocks:
--------------
Up to 50% - 60% of the portfolio may be invested in a
diversified group of high quality common stocks or common stock
equivalents. (1) The portfolio should consist of no more than
thirty individual companies spread across at least eight
industries. (2) At the time of purchase, there shall be a maximum
of ten percent of the portfolio in any one equity. (3) After
appreciation, there shall be no more than 15% of the total
portfolio value in any one equity. (4) There shall be no more
than 25% of the equity portfolio in any one industry.
- Expected Long Term Rate of Return
---------------------------------
Basis for the expected long term rate of return assumption:
the 8% expected long term rate of return assumption was derived
from historical rates of return on stocks, government bonds and 30
day T-Bills, assuming a portfolio comprised of 55% stocks, 45%
bonds and 5% cash equivalents.
The expected contribution for 2005 is $0 for the pension plan.
40
The following table sets forth the estimated future benefit payments
for the years indicated for the Company's noncontributory defined benefit
pension plan:
Years Ending December 31,
(Dollars in thousands)
<s> <c>
2005 $ 278
2006 275
2007 303
2008 318
2009 394
2010 through 2014 2,543
Subsequent to December 31, 2004, the Board of Directors of the
Company adopted a resolution to "freeze" all future benefit accruals under
the Retirement Plan for the Employees of Union Trust Company (the "Plan"),
effective May 15, 2005. The freezing of the Plan is not expected to have a
material effect on the Company's financial condition.
Postretirement Benefits Other Than Pensions
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.
During 2004, the Financial Accounting Standards Board (FASB) Staff
issued FASB Staff Position (FSP) FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." The FSP addresses employers' accounting for the
effects of the Act and is effective for the Company beginning in 2005. The
accounting for the Act will depend on the Company's assessment as to
whether the prescription drug benefits available under its plan are
actuarially equivalent to Medicare Part D, among other factors. Currently,
due to the lack of clarifying regulations related to the Act, the Company
cannot determine if the benefit it provides would be considered actuarially
equivalent to the benefit provided under the Act and, accordingly, the
potential impact of applying the FSP is not known.
The measurement dates for postretirement benefits were January 1,
2004 for the purpose of determining the net periodic postretirement benefit
cost and December 31, 2004 for the purpose of funded status disclosure.
The expected benefit cost for 2005 is $60,000 for postretirement benefits.
The following table sets forth the estimated future benefit payments
for the years indicated for the Company's postretirement health and life
insurance program:
Years Ending December 31,
(Dollars in thousands)
<s> <c>
2005 $ 60
2006 62
2007 66
2008 69
2009 74
2010 through 2014 390
41
The following table sets forth the benefit obligations, fair value of
plan assets and funded status for the Company's pension and other
postretirement benefit plans at December 31, 2004, 2003 and 2002.
2004 2003 2002
--------------------- -------------------- --------------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c>
Change in Benefit Obligations (Dollars in thousands)
- -----------------------------
Benefit obligations at beginning
of year $ 7,540 $ 1,564 $ 6,284 $ 1,476 $ 5,558 $ 1,298
Service cost 469 68 349 73 293 54
Interest cost 456 89 411 97 385 85
Actuarial (gain) loss 201 (168) 760 (20) 310 98
Benefits paid (282) (60) (264) (62) (262) (59)
------- ------- ------- ------- ------- -------
Benefit obligations at end of year $ 8,384 $ 1,493 $ 7,540 $ 1,564 $ 6,284 $ 1,476
======= ======= ======= ======= ======= =======
Change in Plan Assets
- ---------------------
Fair value of plan assets at beginning
of year $ 5,911 $ - $ 4,280 $ - $ 4,961 $ -
Actual return (loss) on plan assets 319 - 624 - (582) -
Employer contributions - 60 1,271 62 163 59
Benefits paid (282) (60) (264) (62) (262) (59)
------- ------- ------- ------- ------- -------
Fair value of plan assets at end of year $ 5,948 $ - $ 5,911 $ - $ 4,280 $ -
======= ======= ======= ======= ======= =======
Funded status $(2,436) $(1,493) $(1,629) $(1,564) $(2,004) $(1,476)
Unrecognized net actuarial (gain) loss 2,554 (327) 2,314 (163) 1,921 (144)
Unamortized prior service cost (16) - (18) - (21) -
Recognized minimum liability (648) - - - (494) -
Unrecognized transition (net asset) net
obligation - 366 - 412 (13) 457
------- ------- ------- ------- ------- -------
Net amount recognized $ (546) $(1,454) $ 667 $(1,315) $ (611) $(1,163)
======= ======= ======= ======= ======= =======
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid (accrued) benefit cost before
minimum liability $ 101 $(1,454) $ 667 $(1,315) $ (117) $(1,163)
Minimum pension liability adjustment (647) - - - (494) -
------- ------- ------- ------- ------- -------
Net prepaid (accrued) benefit cost $ (546) $(1,454) $ 667 $(1,315) $ (611) $(1,163)
======= ======= ======= ======= ======= =======
Net periodic benefit cost includes the following components:
2004 2003 2002
-------------------- -------------------- --------------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Service cost $ 469 $ 68 $ 349 $ 73 $ 293 $ 54
Interest cost 456 89 411 97 385 85
Expected return on plan assets (461) - (331) - (386) -
Recognized net actuarial (gain) loss 104 (4) 73 (2) 10 (12)
Amortization (accretion) of unrecognized
transition (asset) obligation - 46 (13) 46 (24) 46
Amortization of prior service cost (3) - (2) - (2) -
----- ---- ----- ---- ----- ----
Net periodic benefit cost $ 565 $199 $ 487 $214 $ 276 $173
===== ==== ===== ==== ===== ====
42
Weighted-average assumptions as of December 31 are as follows:
Year Ended December 31,
--------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c>
Discount rate
For determining benefit obligation 6.00% 5.75% 6.00% 6.00% 6.75% 6.75%
For determining benefit cost 6.00% 6.00% 6.75% 6.75% 7.00% 6.75%
Expected return on plan assets 8.00% - 8.00% - 8.00% -
Rate of compensation increase 4.00% - 4.00% - 4.00% -
For measurement purposes, the annual rates of increase in the per
capita health care cost of covered benefits were 12% for 2004. The annual
rate of increase in per capita health care costs is assumed to decrease
annually by .5% to an ultimate rate of 6% per year in 2016.
The effects of a one-percentage-point change in the assumed health
care cost trend rate on the aggregate service and interest cost components
of the net periodic postretirement health care benefit cost and on the
postretirement benefit obligation would be:
Year Ended December 31,
-------------------------------------------------------------
1 Percentage Point Increase 1 Percentage Point Decrease
--------------------------- -----------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Effect on total service and interest components $ 41 $ 34 $ 27 $( 31) $ (26) $ (21)
Effect on postretirement benefit obligation $279 $254 $214 $(217) $(200) $(170)
401(k) Plan
The Company has a noncontributory 401(k) plan for employees who meet
certain service requirements.
Stock Purchase Plan
The Bank maintains a stock purchase plan which allows qualified
employees and directors to acquire stock at fair market value.
14. INCOME TAXES
Income tax expense (benefit) consists of the following:
Years Ended December 31,
----------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Federal current $2,166 $1,848 $1,866
Federal deferred (260) (168) (202)
State 139 80 76
------ ------ ------
Total $2,045 $1,760 $1,740
====== ====== ======
43
The actual tax expense for 2004, 2003 and 2002 differs from the
"expected" tax expense for those years (computed by applying the applicable
U.S. federal corporate tax rate to income before income taxes) due to the
following:
Years Ended December 31,
--------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
% of % of % of
Pretax Pretax Pretax
Amount Earnings Amount Earnings Amount Earnings
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Computed "expected" tax expense $2,337 34.0% $2,053 34.0% $2,059 34.0%
Nontaxable income on obligations of states
and political subdivisions (259) (3.8%) (276) (4.6%) (303) (5.0%)
Cash surrender value of life insurance (126) (1.8%) (124) (2.0%) (133) (2.2%)
Other 93 1.4% 107 1.7% 117 1.9%
------ ---- ------ ---- ------ ----
Total $2,045 29.8% $1,760 29.1% $1,740 28.7%
====== ==== ====== ==== ====== ====
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented as follows:
December 31,
-----------------------
2004 2003
---- ----
(Dollars in thousands)
<s> <c> <c>
Deferred Tax Assets
- -------------------
Allowance for loan losses $1,340 $1,265
Deferred compensation 271 247
Postretirement benefits 505 453
Minimum pension liability 220 -
------ ------
Deferred tax assets $2,336 $1,965
====== ======
Deferred Tax Liabilities
- ------------------------
Unrealized gain on available for sale securities $ 235 $ 795
Deferred origination fees 89 93
Premises, furniture and equipment, principally due to
differences in depreciation 395 424
Mortgage servicing rights 274 201
Cash surrender value of life insurance - 36
Other 511 103
------ ------
Deferred tax liabilities $1,504 $1,652
====== ======
The Bank has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset of $2.5 million at
December 31, 2004. The deferred tax asset and liability are included in
other assets and other liabilities in the balance sheet at December 31,
2004 and 2003.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators regarding components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined),
44
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2004, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2004, the most recent notification from the
Federal Reserve Board categorized the Bank as well capitalized under the
regulatory framework. To be so categorized, the Bank must maintain minimum
total risk based, Tier I risk based and Tier I leverage ratios as set forth
in the table. Management believes no conditions or events that would alter
the Bank's categorization have occurred since the Board's notification.
The actual capital amounts and ratios for the Company and the Bank as
of December 31, 2004 and 2003 are presented in the table below:
December 31, 2004
------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
----------------- ----------------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Total capital (to risk weighted assets)
Consolidated $38,443 12.39% > or = $24,819 > or = 8.0% N/A N/A
Union Trust Company $38,053 12.52% > or = $24,308 > or = 8.0% > or = $30,385 > or = 10.0%
Tier I capital (to risk weighted assets)
Consolidated $34,557 11.14% > or = $12,409 > or = 4.0% N/A N/A
Union Trust Company $34,246 11.27% > or = $12,154 > or = 4.0% > or = $18,231 > or = 6.0%
Tier I capital (to average assets)
Consolidated $34,557 7.19% > or = $19,236 > or = 4.0% N/A N/A
Union Trust Company $34,246 7.13% > or = $19,223 > or = 4.0% > or = $24,029 > or = 5.0%
December 31, 2003
------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
----------------- ----------------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Total capital (to risk weighted assets)
Consolidated $35,828 14.29% > or = $20,059 > or = 8.0% N/A N/A
Union Trust Company $35,711 14.25% > or = $20,050 > or = 8.0% > or = $25,063 > or = 10.0%
Tier I capital (to risk weighted assets)
Consolidated $32,679 13.03% > or = $10,029 > or = 4.0% N/A N/A
Union Trust Company $32,563 12.99% > or = $10,025 > or = 4.0% > or = $15,038 > or = 6.0%
Tier I capital (to average assets)
Consolidated $32,679 7.63% > or = $17,127 > or = 4.0% N/A N/A
Union Trust Company $32,563 7.49% > or = $17,386 > or = 4.0% > or = $21,733 > or = 5.0%
The Company may not declare or pay a cash dividend on or repurchase
any of its capital stock if the effect thereof would cause the capital of
the Company to be reduced below the capital requirements imposed by the
Federal Reserve Board.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION
OF CREDIT RISK
In the normal course of business, the Bank is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit. The instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the
consolidated balance sheet. The contract amounts of these instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments. At
December 31, 2004 and 2003, the following financial instruments, whose
contract amounts represent credit risk, were outstanding:
45
Contract Amount
----------------------
2004 2003
---- ----
(Dollars in thousands)
<s> <c> <c>
Commitments to extend credit $50,628 $36,849
Standby letters of credit 211 532
Unadvanced portions of construction loans 10,154 9,991
------- -------
Total $60,993 $47,372
======= =======
The Bank's exposure to credit loss in the event of nonperformance by
the other parties to the above financial instruments is represented by the
contractual amounts of the instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon the
credit extension, is based on management's credit evaluation of the
counterparty. The types of collateral held include residential and
commercial real estate and, to a lesser degree, personal property, business
inventory and accounts receivable.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Expiration dates are usually within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loans to customers.
The Bank grants residential, commercial and consumer loans
principally to customers in Maine's Hancock, Washington, Waldo, Knox and
Lincoln counties. Although the loan portfolio is diversified, a
substantial portion of the debtors' ability to honor their contracts
depends upon local economic conditions, especially in the real estate
sector. At December 31, 2004, there were no borrowers whose total
indebtedness to the Bank exceeded regulatory limits.
The consolidated balance sheets do not include various contingent
liabilities such as liabilities for assets held in trust. Management does
not anticipate any loss as a result of these contingencies.
17. LITIGATION
At December 31, 2004, the Company was involved in litigation arising
from normal banking, financial and other activities of the Bank.
Management, after consultation with legal counsel, does not anticipate that
the ultimate liability, if any, arising out of these matters will have a
material effect on the Company's financial condition.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for
the Bank's financial instruments. Fair values are calculated based on the
value of one unit without regard to any premium or discount that may result
from concentrations of ownership of a financial instrument, possible tax
ramifications or estimated transaction costs. If these considerations had
been incorporated into the fair value estimates, the aggregate fair value
amount could have changed.
Cash and cash equivalents
The fair value of cash, due from banks and federal funds sold
approximates their relative book values at December 31, 2004 and 2003, as
these financial instruments have short maturities.
Securities, available for sale and held to maturity
Fair values are estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Management has determined that the fair value
approximates book value on all loans with maturities of one year or less or
variable interest rates. The fair values of all other loans are estimated
based on bid quotations received from securities dealers. The estimates of
maturity are based on the Bank's
46
historical experience with repayments for each loan classification, modified,
as required, by an estimate of the effect of current economic and lending
conditions and the effects of estimated prepayments.
Loans held for sale
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Accrued interest receivable
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Other investment securities, Federal Home Loan Bank stock and Federal
Reserve Bank stock
The fair value of these financial instruments approximates the book
value as these instruments do not have a market, nor is it practical to
estimate their fair value without incurring excessive costs.
Cash surrender value of life insurance
The fair value is based on the actual cash surrender value of life
insurance.
Mortgage servicing rights
The fair value of mortgage servicing rights is based on the expected
present value of future mortgage servicing income, net of estimated servicing
costs, considering market consensus loan prepayment predictions.
Deposits
Fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings deposits, NOW accounts and money market
and checking accounts, equals the amount payable on demand. The fair
values of certificates of deposit are based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from
the low cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market. If that value was considered, the
fair value of the Bank's net assets could increase.
Accrued interest payable
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Borrowings from Federal Home Loan Bank
The fair values of borrowings are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Other borrowed funds
The carrying amount of borrowings under repurchase agreements
maturing within 90 days approximates their fair value.
Commitments to extend credit
The Bank has not estimated the fair values of commitments to
originate loans due to their short-term nature and their relative
immateriality.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment, and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. The latter may include deferred
tax assets, bank premises and equipment and other real estate owned. In
addition, tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and
have not been considered in any of the estimates.
47
A summary of the fair values of the Company's significant financial
instruments at December 31, 2004 and 2003 follows:
December 31,
--------------------------------------------------
2004 2003
----------------------- -----------------------
Carrying Estimate of Carrying Estimate of
Value Fair Value Value Fair Value
-------- ----------- -------- -----------
(Dollars in thousands)
<s> <c> <c> <c> <c>
ASSETS
Cash and cash equivalents $ 10,112 $ 10,112 $ 14,702 $ 14,702
Securities, available for sale 134,157 134,157 129,427 129,427
Securities, held to maturity 2,255 2,384 2,870 3,041
Other investment securities 7,727 7,727 5,858 5,858
Loans 305,447 312,728 281,994 289,241
Loans held for sale 246 246 937 937
Accrued interest receivable 1,895 1,895 2,123 2,123
Cash surrender value of life insurance 8,413 8,413 8,041 8,041
Mortgage servicing rights 806 1,113 590 978
LIABILITIES
Deposits 304,982 304,936 298,454 299,200
Accrued interest payable 611 611 580 580
Borrowings from Federal Home Loan Bank 120,160 120,991 105,027 106,718
Other borrowed funds 14,254 14,254 12,702 12,702
19. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Union Bankshares Company as of
December 31, 2004 and 2003 and for each of the years ended December 31,
2004, 2003 and 2002 are presented as follows:
BALANCE SHEETS
December 31, 2004 and 2003
Dollars in thousands 2004 2003
---- ----
<s> <c> <c>
ASSETS
Cash $ 207 $ 19
Investment in subsidiary 34,353 34,165
Core deposit intangible 121 168
Goodwill 6,305 6,305
Other assets 477 448
------- -------
Total assets $41,463 $41,105
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 371 $ 344
Other liabilities - 9
Shareholders' equity 41,092 40,752
------- -------
Total liabilities and shareholders' equity $41,463 $41,105
======= =======
STATEMENTS OF INCOME
Years ended December 31, 2004, 2003 and 2002
Dollars in thousands 2004 2003 2002
---- ---- ----
<s> <c> <c> <c>
Dividend income $3,270 $1,503 $1,367
Equity in undistributed earnings of subsidiary 1,701 2,410 3,033
Other income - 471 21
------ ------ ------
Total income 4,971 4,384 4,421
Operating expenses 142 106 106
------ ------ ------
Net income $4,829 $4,278 $4,315
====== ====== ======
48
STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
Dollars in thousands 2004 2003 2002
---- ---- ----
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,829 $ 4,278 $ 4,315
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Undistributed earnings of subsidiary (1,701) (2,410) (3,033)
Amortization 47 47 47
Gain on sale of stock - (410) -
Increase in other assets (29) (30) (160)
Increase (decrease) in other liabilities 18 (57) 63
------- ------- -------
Net cash provided by operating activities 3,164 1,418 1,232
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Union Trust Company - (883) -
Proceeds from sale of stock - 882 -
------- ------- -------
Net cash used by investing activities - (1) -
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,457) (1,318) (1,264)
Purchase of common and treasury stock (1,869) (394) (454)
Sale of treasury stock 186 277 192
Proceeds from stock issuance 164 - -
------- ------- -------
Net cash used by financing activities (2,976) (1,435) (1,526)
------- ------- -------
Net decrease in cash 188 (18) (294)
Cash at beginning of year 19 37 331
------- ------- -------
Cash at end of year $ 207 $ 19 $ 37
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Changes in other comprehensive income:
Net increase (decrease) in net unrealized gain
on available for sale securities $(1,086) $ (708) $ 1,721
Net increase (decrease) from minimum
pension liability adjustment $ (427) $ 326 $ (326)
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Management of the Company, including the Company's Chief Executive
Officer and the Company's 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 Company's
Chief Executive Officer and the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are 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.
49
Item 9B. Other Information
As previously discussed on Form 8-K, on March 16, 2005, the Board of
Directors of the Company adopted a resolution to "freeze" all future
benefit accruals under the Retirement Plan for the Employees of Union Trust
Company, a non-contributory defined benefit pension plan, effective May 15,
2005. The purpose of the "freeze" is to afford the Company flexibility in the
retirement benefits that are provided while preserving all retirement plan
participants' earned and vested benefits and managing the increasing costs
associated with the retirement plan. The Company incurred no early termination
penalties in connection with the freezing of the retirement plan. The freezing
of the retirement plan will not have a material effect on the Company's
financial condition.
In addition, the Board of Directors voted to amend the Bank's 401(k)
Profit Sharing Plan, a 401(k) plan available to all employees. The
amendments to the 401(k) plan include the following enhancements:
* An employer-paid match on amounts deferred by employees;
* An annual discretionary profit sharing contribution paid by the
Company;
* Increased amounts eligible for pre-tax deferral by
participating employees;
* The addition of up to eighteen (18) investment choices;
* Availability of loans to participating employees from their
account balances in the 401(k) plan; and
* Daily access by participants to view and/or change their
investment elections.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information included in the Proxy Statement under the captions
"Section 16(a) Beneficial Ownership Reporting Compliance," "Election of
Directors," "Information about the Board of Directors and Management -
Audit Committee," and "Compensation of Directors and Executive Officers -
Executive Officers Who are Not Directors" is incorporated herein by
reference.
The Company has adopted a Code of Ethics, which applies to the
Company's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions for the Company. Our Code of Ethics meets the requirements of a
"code of ethics" as defined by Item 406 of Regulation S-K. The Company
filed the Code of Ethics with the SEC as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 2003.
Copies of the Code of Ethics are available free of charge upon
written request to Sally J. Hutchins, Clerk, Union Bankshares Company, P.O.
Box 479, Ellsworth, Maine 04605.
Item 11. Executive Compensation
The information included in the Proxy Statement under the captions
"Compensation of Directors and Executive Officers" and "Performance Graph"
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
The information included in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information included in the Proxy Statement under the caption
"Compensation of Directors and Executive Officers - Transactions with
Certain Related Persons" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information included in the Proxy Statement under the captions
"Ratification of Independent Registered Public Accountants - Principal
Accountant Fees and Services" and "Ratification of Independent Registered
Public Accountants - Pre-Approval Policies" is incorporated herein by
reference.
50
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following financial statements are incorporated by
reference to Part II, Item 8 of this report on Form 10-K:
Consolidated Balance Sheets - December 31, 2004 and 2003;
Consolidated Statements of Income - Years Ended December 31,
2004, 2003 and 2002;
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 2004, 2003 and 2002;
Consolidated Statements of Cash Flows - Years Ended December
31, 2004, 2003 and 2002; and
Notes to Consolidated Financial Statements.
(b) Exhibits
Exhibit Number Description
-------------- -----------
** 3.1 Amended and Restated Articles of
Incorporation of Union Bankshares Company
(the "Company")
3.2 Amended and Restated Bylaws of the Company
*10.1 Stock Purchase Plan for the employees of
Union Trust Company (the "Bank")
*10.2 Deferred Compensation Agreements for the
Executive Officers of the Bank
*10.3 Salary Continuation Agreements for the
Executive Officers of the Bank
13 2004 Annual Report to Shareholders
***14 Code of Ethics
21 Subsidiaries of the Registrant
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
* Incorporated by reference to the Company's Registration Statement on
Form S-1, filed with the SEC on June 15, 1984, Registration No. 2-
90679.
** Incorporated by reference to the Company's Quarterly Report on Form
10-Q, filed with the SEC on November 15, 2004.
*** Incorporated by reference to the Company's Annual Report on Form 10-
K, filed with SEC on March 30, 2004.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 16, 2005 UNION BANKSHARES COMPANY
By: /s/ Peter A. Blyberg
-------------------------------
Peter A. Blyberg
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 16, 2005
NAME TITLE DATE
/s/ Peter A. Blyberg Director, President and Chief March 16, 2005
- ------------------------ Executive Officer
Peter A. Blyberg (Principal Executive Officer)
/s/ Timothy R. Maynard
- ------------------------ Senior Vice President and Chief March 16, 2005
Timothy R. Maynard Financial Officer
(Principal Financial Officer)
/s/ Arthur J. Billings Director March 16, 2005
- ------------------------
Arthur J. Billings
/s/ Blake B. Brown Director March 16, 2005
- ------------------------
Blake B. Brown
/s/ Richard C. Carver Director March 16, 2005
- ------------------------
Richard C. Carver
/s/ Peter A. Clapp Director March 16, 2005
- ------------------------
Peter A. Clapp
/s/ Samuel G. Cohen Director March 16, 2005
- ------------------------
Samuel G. Cohen
/s/ Sandra H. Collier Director March 16, 2005
- ------------------------
Sandra H. Collier
/s/ Robert B. Fernald Director March 16, 2005
- ------------------------
Robert B. Fernald
/s/ Douglas A. Gott Director March 16, 2005
- ------------------------
Douglas A. Gott
/s/ James L. Markos, Jr. Director March 16, 2005
- ------------------------
James L. Markos, Jr.
/s/ John V. Sawyer, II Director March 16, 2005
- ------------------------
John V. Sawyer, II
/s/ Stephen C. Shea Director March 16, 2005
- ------------------------
Stephen C. Shea
/s/ Robert W. Spear Director March 16, 2005
- ------------------------
Robert W. Spear
/s/ Karen W. Stanley Director March 16, 2005
- ------------------------
Karen W. Stanley
/s/ Paul L. Tracy Director March 16, 2005
- ------------------------
Paul L. Tracy
52
Exhibit Index
Exhibit Number Description
- -------------- -----------
** 3.1 Amended and Restated Articles of Incorporation of the
Company
3.2 Amended and Restated Bylaws of the Company
* 10.1 Stock Purchase Plan for the employees of the Bank
* 10.2 Deferred Compensation Agreements for the Executive
Officers of the Bank
* 10.3 Salary Continuation Agreements for the Executive
Officers of the Bank
13 2004 Annual Report to Shareholders
***14 Code of Ethics
21 Subsidiaries of the Registrant
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
* Incorporated by reference to the Company's Registration Statement on
Form S-1, filed with the SEC on June 15, 1984, Registration No. 2-
90679.
** Incorporated by reference to the Company's Quarterly Report on Form
10-Q, filed with the SEC on November 15, 2004.
*** Incorporated by reference to the Company's Annual Report on Form
10-K, filed with SEC on March 30, 2004.
53