Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission File Number 2-90679
UNION BANKSHARES COMPANY
------------------------
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
----- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
66 Main Street, Ellsworth, Maine
--------------------------------
(Address of Principal Executive Offices)
(Zip Code)
04605
-----
Registrant's telephone number, including area code
(207) 667-2504
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 9, 2003
----- ---------------------------
(Common stock, $12.50 Par Value) 572,663
1
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART I Financial Information Page No.
- ------ --------------------- --------
Item l: Financial Statements (Unaudited)
Independent Accountants' Report 3
Consolidated Balance Sheets -
June 30, 2003, June 30, 2002, December 31, 2002 4
Consolidated Statements of Income -
six months ended June 30, 2003 and June 30, 2002
three months ended June 30, 2003 and June 30, 2002 5-6
Consolidated Statements of Cash Flows -
six months ended June 30, 2003 and June 30, 2002 7
Consolidated Statements of Changes
in Shareholders' Equity -
six months ended June 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 9-11
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4: Controls and Procedures 21
PART II Other Information
- ------- -----------------
Item 1: Legal Proceedings 21
Item 2: Changes in Securities 21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21-22
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 22
Signatures 23
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Union Bankshares Company
We have reviewed the accompanying interim consolidated financial
information of Union Bankshares Company and Subsidiary as of June 30, 2003
and 2002, and for the three- and six-month periods then ended. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit in accordance with U. S. generally accepted auditing
standards, the objective of which is to express an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with U. S. generally accepted accounting principles.
Berry Dunn McNeil & Parker
Portland, Maine
August 1, 2003
3
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30 June 30 December 31
2003 2002 2002
(Unaudited) (Unaudited) (Audited)*
----------- ----------- ----------
ASSETS
- ------
Cash and due from banks $ 11,356,181 $ 10,666,633 $ 10,977,028
Federal funds sold 403 146,778 5,669,733
------------ ------------ ------------
Cash and cash equivalents 11,356,584 10,813,411 16,646,761
Available for sale securities 114,757,360 104,965,521 106,176,496
Held to maturity securities, at cost 3,065,656 3,622,674 3,316,653
Other investment securities, at cost 5,505,954 5,039,950 5,496,492
Loans (net of deferred fees) 246,548,604 222,867,023 226,225,857
Less: Allowance for loan losses 4,164,960 3,607,114 3,678,608
------------ ------------ ------------
Net Loans 242,383,644 219,259,909 222,547,249
------------ ------------ ------------
Premises, furniture & equip, net 6,014,880 6,210,732 6,129,058
Cash surrender value of life insurance 8,005,557 7,608,361 7,832,370
Core deposit intangible 190,864 237,606 214,235
Goodwill 6,305,130 6,305,130 6,305,130
Other assets 6,813,012 6,061,683 6,364,457
------------ ------------ ------------
Total Assets $404,398,641 $370,124,977 $381,028,901
============ ============ ============
LIABILITIES
- -----------
Deposits:
Demand $ 34,738,373 $ 30,291,032 $ 34,630,217
Savings and money market 142,646,619 127,241,127 142,146,193
Time 100,795,149 96,920,162 98,988,284
------------ ------------ ------------
Total Deposits 278,180,141 254,452,321 275,764,694
------------ ------------ ------------
Borrowed funds 67,562,583 61,698,642 45,959,829
Sweep repurchase agreements 9,946,211 10,905,255 13,063,631
Accrued expenses & other liabilities 8,279,081 6,737,928 7,922,352
------------ ------------ ------------
Total Liabilities 363,968,016 333,794,146 342,710,506
============ ============ ============
Commitments (Note E)
SHAREHOLDERS' EQUITY
- --------------------
Common Stock, $12.50 par value. Authorized
1,200,000 shares, issued 582,394 shares
in 2003 and 2002. $ 7,279,925 $ 7,279,925 $ 7,279,925
Surplus 4,024,564 3,963,116 4,024,564
Retained Earnings 27,301,436 24,214,675 25,744,448
Accumulated Other Comprehensive Income
Net Unrealized Gain on Securities
Available for Sale 2,931,157 1,306,146 2,250,696
Minimum pension liability adjustment (326,168) 0 (326,168)
Less: Treasury Stock (9,731 shares as of
June 30, 2003, 6,338 shares as of June
30, 2002 and 8,256 shares as of
December 31, 2002) 780,289 433,031 655,070
------------ ------------ ------------
Total Shareholders' Equity 40,430,625 36,330,831 38,318,395
------------ ------------ ------------
Total Liabilities & Shareholders' Equity $404,398,641 $370,124,977 $381,028,901
============ ============ ============
* Refer to Company's Annual Report on Form 10K dated December 31, 2002.
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
4
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended - June 30,
---------------------------
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and Fees on Loans $7,412,999 $ 7,981,970
Interest and Fees on Municipal Loans and Bonds 447,774 514,684
Interest and Dividends on Securities 2,488,675 2,464,201
Interest on Federal Funds Sold 13,200 29,023
Amortization & Accretion - Net (458,881) (306,325)
---------- -----------
Total Interest and Dividend Income 9,903,767 10,683,553
---------- -----------
INTEREST EXPENSE
- ----------------
Interest on Deposits 1,778,585 2,383,166
Interest on Funds Purchased/Borrowed 1,223,931 1,223,839
---------- -----------
Total Interest Expense 3,002,516 3,607,005
---------- -----------
NET INTEREST INCOME 6,901,251 7,076,548
- -------------------
Provision for Loan Losses 210,000 180,000
---------- -----------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 6,691,251 6,896,548
---------- -----------
NONINTEREST INCOME
- ------------------
Net Securities Gains (Losses) 147,313 (6,444)
Exchange, Commission & Fees 675,429 648,617
Financial Services 910,036 748,817
Loan Department Income 980,398 593,664
Visa Income 227,712 351,337
Other Income 555,863 324,274
---------- -----------
Total Noninterest Income 3,496,751 2,660,265
---------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and Employee Benefits 3,925,516 3,497,095
Building Maintenance & Operations 539,419 444,764
FDIC Insurance 33,556 34,554
Other Expenses 2,578,125 2,475,646
---------- -----------
Total Noninterest Expense 7,076,616 6,452,059
---------- -----------
INCOME BEFORE TAXES 3,111,386 3,104,754
- -------------------
Income Taxes 895,000 950,000
---------- -----------
NET INCOME $2,216,386 $ 2,154,754
========== ===========
Weighted Average Shares 573,605 576,913
Per Share Data:
Net Income $ 3.86 $ 3.74
Dividends Declared $ 1.15 $ 1.10
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
5
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended - June 30,
-----------------------------
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and Fees on Loans $3,734,619 $ 3,982,991
Interest and Fees on Municipal Loans and Bonds 225,204 263,854
Interest and Dividends on Securities 1,270,143 1,236,623
Interest on Federal Funds Sold 683 6,344
Amortization & Accretion - Net (237,720) (140,584)
---------- -----------
Total Interest and Dividend Income 4,992,929 5,349,228
---------- -----------
INTEREST EXPENSE
- ----------------
Interest on Deposits 872,941 1,154,434
Interest on Funds Purchased/Borrowed 637,294 636,558
---------- -----------
Total Interest Expense 1,510,235 1,790,992
---------- -----------
NET INTEREST INCOME 3,482,694 3,558,236
- -------------------
Provision for Loan Losses 105,000 90,000
---------- -----------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 3,377,694 3,468,236
---------- -----------
NONINTEREST INCOME
- ------------------
Net Securities Gains (Losses) 147,313 (6,444)
Exchange, Commission & Fees 359,337 354,652
Financial Services 470,879 400,465
Loan Department Income 484,592 301,019
Visa Income 75,095 177,476
Other Income 285,216 178,799
---------- -----------
Total Noninterest Income 1,822,432 1,405,967
---------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and Employee Benefits 2,103,792 1,875,810
Building Maintenance & Operations 288,546 217,233
FDIC Insurance 10,692 10,777
Other Expenses 1,379,170 1,267,935
---------- -----------
Total Noninterest Expense 3,782,200 3,371,755
---------- -----------
INCOME BEFORE TAXES 1,417,926 1,502,448
- -------------------
Income Taxes 415,000 460,000
---------- -----------
NET INCOME $1,002,926 $ 1,042,448
========== ===========
Weighted Average Shares 573,016 576,800
Per Share Data:
Net Income $ 1.75 $ 1.81
Dividends Declared $ .60 $ .55
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
6
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Net Cash Flows Provided by Operating Activities:
- ------------------------------------------------
Net Income $ 2,216,386 $ 2,154,754
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 380,879 411,877
Provision for loan losses 210,000 180,000
Gain on sale of equipment 0 (953)
Net securities (gains) losses (147,313) 6,444
Net increase in other assets (950,168) (736,441)
Net increase in other liabilities 356,728 871,393
Net amortization of premium (accretion of discount) on investments 494,016 306,325
Net decrease in deferred loan origination fees (57,572) (33,795)
Origination of loans held for sale (33,383,401) (17,402,713)
Proceeds from loans held for sale 37,758,513 18,944,736
------------ ------------
Total adjustments 4,661,683 2,546,873
------------ ------------
Net cash provided by operating activities 6,878,068 4,701,627
------------ ------------
Cash Flows From Investing Activities:
- -------------------------------------
Purchase of securities available for sale (34,975,793) (24,448,059)
Purchase of securities held to maturity 0 (102,004)
Proceeds from sales of securities available for sale 6,569,072 4,084,234
Proceeds from sales of equipment 0 1,000
Proceeds from calls or maturities of securities available for sale 18,297,020 11,908,912
Proceeds from maturities of securities held to maturity 245,000 0
Net increase in loans to customers (22,176,379) (11,291,369)
Capital expenditures (243,329) (226,581)
------------ ------------
Net cash used in investing activities (32,284,409) (20,073,867)
------------ ------------
Cash Flows From Financing Activities:
- -------------------------------------
Net decrease in other borrowed funds (3,117,420) (1,230,143)
Net increase in advances from FHLB 21,602,754 19,741,001
Net increase/(decrease) in demand, savings and money market accounts 608,582 (5,761,526)
Net increase (decrease) in time deposits 1,806,865 (7,693,279)
Purchase of treasury stock (288,200) (183,942)
Proceeds from sale of treasury stock 162,981 83,309
Dividends paid (659,398) (635,501)
------------ ------------
Net cash provided by financing activities 20,116,164 4,319,919
------------ ------------
Net decrease in cash and cash equivalents (5,290,177) (11,052,321)
Cash and cash equivalents at beginning of year 16,646,761 21,865,732
------------ ------------
Cash and cash equivalents at end of period $ 11,356,584 $ 10,813,411
============ ============
In 2002, the Company transferred $2,972,574 from the Loans Held for Sale
portfolio to the loan portfolio.
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
7
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30, 2003 and 2002
(Unaudited)
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
------------------------------------------------------------------------------------
Balance at December 31, 2001 $7,279,925 $3,963,116 $(332,398) $22,695,422 $ 530,290 $34,136,355
Net income, six months ended June 30, 2002 0 0 0 2,154,754 0 2,154,754
Change in net unrealized gain on available
for sale securities, net of tax of $399,684 0 0 0 0 775,856 775,856
------------------------------------------------------------------------------------
Total comprehensive income 0 0 0 2,154,754 775,856 2,930,610
Sale of 1,722 shares Treasury stock 0 0 83,309 0 0 83,309
Repurchase of 2,317 shares Treasury stock 0 0 (183,942) 0 0 (183,942)
Cash dividends declared 0 0 0 (635,501) 0 (635,501)
------------------------------------------------------------------------------------
Balance at June 30, 2002 $7,279,925 $3,963,116 $(433,031) $24,214,675 $1,306,146 $36,330,831
====================================================================================
Balance at December 31, 2002 $7,279,925 $4,024,564 $(655,070) $25,744,448 $1,924,528 $38,318,395
Net income, six months ended June 30, 2003 0 0 0 2,216,386 0 2,216,386
Change in net unrealized gain on available
for sale securities, net of tax of $350,540 0 0 0 0 680,461 680,461
------------------------------------------------------------------------------------
Total comprehensive income 0 0 0 2,216,386 680,461 2,896,847
Sale of 1,949 shares Treasury stock 0 0 162,981 0 0 162,981
Repurchase of 3,424 shares Treasury stock 0 0 (288,200) 0 0 (288,200)
Cash dividends declared 0 0 0 (659,398) 0 (659,398)
------------------------------------------------------------------------------------
Balance at June 30, 2003 $7,279,925 $4,024,564 $(780,289) $27,301,436 $2,604,989 $40,430,625
====================================================================================
See Independent Accountants' review report. The accompanying notes are an
integral part of these consolidated financial statements.
8
Union Bankshares Company and Subsidiary
---------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Unaudited
---------
(A) Basis of Presentation
---------------------
The accompanying consolidated financial statements of Union Bankshares
Company (the "Company") and its subsidiary, Union Trust Company (the
"Bank"), as of June 30, 2003 and 2002 and for the three- and six month
periods then ended are unaudited. However, in the opinion of the Company,
all adjustments consisting of normal, recurring accruals necessary for a
fair presentation have been reflected therein. Interim results are not
necessarily indicative of results to be expected for the entire year.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has
been omitted. The accompanying consolidated financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 2002.
(B) Earnings Per Share
------------------
Earnings per common share are computed by dividing the net income available
for common stock by the weighted average number of common shares
outstanding during the period.
(C) Intangible Assets
-----------------
The Company has goodwill with a carrying amount of $6,305,130 as of June
30, 2003 and 2002, and as of December 31, 2002. Upon adoption of Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", on January 1, 2002, amortization of goodwill was
discontinued and the goodwill is evaluated for impairment at least
annually. Prior to the adoption of SFAS No. 142, goodwill was amortized on
a straight-line basis over 15 years.
The Company has an intangible asset subject to amortization related to the
acquisition of a bank in 2000. The core deposit intangible is being
amortized on a straight-line basis over 7 years, and reviewed for possible
impairment when it is determined that events or changed circumstances may
affect the underlying basis of the asset. The carrying amount is as
follows:
June 30, 2003 June 30, 2002 December 31, 2002
------------- ------------- -----------------
Core deposit intangible, cost $323,000 $323,000 $323,000
Accumulated amortization 132,136 85,394 108,765
-------- -------- --------
Core deposit intangible, net $190,864 $237,606 $214,235
Amortization expense related to the core deposit intangible amounted to
$23,372 for the six months ended June 30, 2003 and 2002. Amortization
expense amounted to $11,686 for the three month period ended June 30, 2003
and 2002. The expected amortization expense is estimated to be $46,744 per
year through 2006 and $27,259 in 2007.
(D) Comprehensive Income
--------------------
Total comprehensive income was $1,450,041 and $2,120,655 for the three
months ended June 30, 2003 and 2002, respectively, and $2,896,847 and
$2,930,610 for the six months ended June 30, 2003 and 2002, respectively.
9
(E) Off-Balance Sheet Items
-----------------------
In the normal course of business, the Bank is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and letters of credit. The instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheet. The contract amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. At
June 30, 2003, and June 30, 2002, the following financial instruments,
whose contract amounts represent credit risk, were outstanding.
June 30
(000's omitted)
2003 2002
---- ----
1. Unused Commitments:
-------------------
A. Revolving, open-end lines secured by
1-4 family residential properties,
e.g., Home Equity lines $12,245 $ 9,270
B. Credit card lines 6,452 6,251
C. Secured real estate loans 16,126 17,442
D. Lines of Credit, Reserve Checking, Municipal Loans 20,359 20,700
2. Financial Standby Letters of Credit: 290 217
------------------------------------
(F) Regulatory Agencies
-------------------
The Bank's primary regulators are the Federal Reserve Bank of Boston and,
as a state chartered bank, the Bureau of Financial Institutions of the
State of Maine.
(G) Classified Loans
----------------
Any loans classified for regulatory purposes as loss, doubtful, substandard
or special mention that were not disclosed under Item III of Securities and
Exchange Commission Industry Guide 3 do not (1) represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources or (2)
represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
(H) Impact of Inflation and Changing Prices
---------------------------------------
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of money over
time due to inflation.
Unlike many industrial companies, substantially all of the assets and
liabilities of the Company are financial in nature. As a result, interest
rates have a more significant impact on the Company's performance than the
general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
(I) Recent Accounting Developments
------------------------------
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
10
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133.
The amendment requires contracts with comparable characteristics be
accounted for similarly. This Statement clarifies under what circumstances
a contract with an initial net investment meets the characteristic of a
derivative as discussed in Statement 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting
in the statement of cash flows and amends certain other existing
pronouncements.
SFAS 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 Statement 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 affect the Company's consolidated financial condition and results
of operations.
In May 2003, FASB issued Statement 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).
The requirements of this Statement apply to issuers' classification and
measurement of freestanding financial instruments, including those that
comprise more than one option or forward contract.
This Statement 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. It is
to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim
period of adoption.
This Statement is not expected to have a material effect on the Company's
consolidated financial statements.
(J) Stock Repurchase Plan
---------------------
On April 9, 2003, the Board of Directors voted to authorize the Company to
purchase up to 28,850 shares or approximately 5% of its outstanding common
stock. The authority may be exercised from time to time and in such amounts
as market condition warrants. Any purchases are intended to make
appropriate adjustments to the Company's capital structure, including
meeting share requirements related to employee stock purchase plans and for
general corporate purposes. The Company repurchased 1,858 shares as part of
this plan during the second quarter of 2003 at an average price of $85.00.
(K) Reclassification
----------------
Certain items from the prior year were reclassified on the financial
statements to conform with the current year presentation. The
reclassifications do not have a material impact on the balance sheet and
income statement presentation.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward Looking Statements
- --------------------------
This Form 10-Q contains "forward-looking statements" which may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-
looking statements include, but are not limited to, estimates with respect
to our financial condition, results of operations and business that are
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited
to:
General and local economic conditions;
Changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values, and competition;
Changes in accounting principles, policies, or guidelines;
Changes in legislation or regulation; and
Other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products
and services.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed.
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis of the Company's financial condition
are based on the consolidated financial statements which are prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of such financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its
estimates, including those related to the allowance for loan losses.
Management bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis in making judgments
about the carrying values of assets that are not readily apparent from
other sources. Actual results could differ from the amount derived from
management's estimates and assumptions under different assumptions or
conditions.
Management believes the allowance for loan losses is a critical accounting
policy that requires the most significant estimates and assumptions used in
the preparation of the consolidated financial statements. The allowance for
loan losses is based on management's evaluation of the level of the
allowance required in relation to the estimated loss exposure in the loan
portfolio. Management believes the allowance for loan losses is a
significant estimate and therefore regularly evaluates it for adequacy by
taking into consideration factors such as prior loan loss experience, the
character and size of the loan portfolio, business and economic conditions
and management's estimation of potential losses. The use of different
estimates or assumptions could produce different provisions for loan
losses.
Earnings and Performance Overview
- ---------------------------------
The following discussion compares the financial condition of Union
Bankshares Company (the "Company") and its wholly owned subsidiary, Union
Trust Company (the "Bank"), at June 30, 2003 to December 31, 2002, and the
results of operations for the three- and six months ended June 30, 2003,
compared to the same periods in 2002. This discussion and analysis should
be read in conjunction
12
with the unaudited consolidated financial statements and related notes
thereto included within this report.
Results of Operations
- ---------------------
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on earning assets
(primarily loans and investments) and interest expense (primarily deposits
and borrowings). The Company's results are also affected by the provision
for loan losses; noninterest income, including gains and losses on the
sales of loans and securities; noninterest expense and income tax expense.
Each of these major components of the Company's operating results is
highlighted below.
Net Income. Net income for the first two quarters of 2003 was $2,216,386,
or $3.86 per share, a 2.9% increase compared to $2,154,754, or $3.74 per
share for the first two quarters of 2002. The increase was primarily a
result of an increase in noninterest income of $836,486 offset by an
increase in noninterest expense of $624,557. Net income for the second
quarter of 2003 was $1,002,926, or $1.75 per share, a 3.8% decrease
compared to $1,042,448 or $1.81 per share for the second quarter of 2002.
The decrease was primarily a result of a decrease in net interest income of
$75,542.
The following table summarizes the status of the Company's earnings and
performance for the periods stated:
Six months ended
June 30,
2003 2002
---- ----
Earnings Per Share $3.86 $3.74
Return on Average Shareholders' Equity 5.68%A 6.28%B
Return on Average Assets 0.57%A 0.59%B
Return on Average Earning Assets 0.61%A 0.64%B
A=annualized returns are: 11.37%, 1.14%, and 1.21%, respectively.
B=annualized returns are: 12.56%, 1.18%, and 1.28%, respectively.
Interest and Dividend Income. Total interest and dividend income decreased
by $779,786 or 7.3% to $9.9 million for the six month period ended June 30,
2003 from $10.7 million for the six month period ended June 30, 2002 and
decreased by $356,299 or 6.7% to $5.0 million for the three month period
ended June 30, 2003 from $5.3 million for the three month period ended June
30, 2002. The decrease in interest income for the first two quarters and
for the second quarter was primarily the result of lower yields on earning
assets, offset in part by a higher level of loans and investments. The
average balance of net loans for the six month period ended June 30, 2003
was $226.8 million compared to $214.4 million for the six month period
ended June 30, 2002. The average tax equivalent yield on loans was 6.6% for
the six month period ended June 30, 2003 compared to 7.4% for the six month
period ended June 30, 2002. The average balance of investments for the six
month period ended June 30, 2003 was $118.1 million compared to $108.3
million for the six month period ended June 30, 2002. The average tax
equivalent yield on investments was 4.3% for the six month period ended
June 30, 2003 compared to 5.3% for the six month period ended June 30,
2002.
Interest Expense. Total interest expense decreased by $604,489 or 16.8% to
$3.0 million for the six month period ended June 30, 2003 from $3.6 million
for the six month period ended June 30, 2002 and decreased by $280,757 or
15.7% to $1.5 million for the three month period ended June 30, 2003 from
$1.8 million for the three month period ended June 30, 2002. The decrease
in interest expense for the first two quarters and for the second quarter
was primarily the result of lower cost on deposits and borrowings, offset
in part by a higher level of deposits and borrowings. Average interest-
bearing deposits increased by $14.0 million or 6.2% to $240.0 million for
the six month period ended June 30, 2003. Average borrowings of $67.1
million for the six month period ended June 30, 2003 were up $10.1 million
or 17.7% from June 30, 2002 levels. The average rate on interest-bearing
deposits
13
decreased 40 basis points to 1.46% for the six month period ended June 30,
2003 from 1.86% for the six month period ended June 30, 2002, while the
average rate on borrowed funds decreased 14 basis points to 3.60% from
3.76% during the same period.
Net Interest Income. Net interest income for the six month period ended
June 30, 2003 was $6.9 million compared to $7.1 million for the six month
period ended June 30, 2002 and for the three months ended June 30, 2003 was
$3.5 million compared to $3.6 million for the three months ended June 30,
2002. The $175,297 or 2.5% decrease for the first two quarters is
attributed to the $604,489 decrease in interest expense on deposits and
borrowings offset by the $779,786 decrease in interest and dividend income.
The decrease for the three months ended June 30, 2003 is attributed to the
$280,757 decrease in interest expense on deposits and borrowings offset in
part by the $356,299 decrease in interest and dividend income. The average
tax equivalent yield on interest earning assets decreased 89 basis points
to 5.79% for the six month period ended June 30, 2003 from 6.68% for the
six month period ended June 30, 2002, while the average cost on interest-
bearing liabilities decreased by 26 basis points to 1.95% for the six month
period ended June 30, 2003 from 2.21% for the six month period ended June
30, 2002. The interest rate spread increased due to interest bearing
liabilities repricing faster than interest earning assets in a period of
falling interest rates.
The following table presents the effect of tax exempt income on the
calculation of the net interest margin:
For the six months ended June 30, 2003
(in thousands) 2003 2002
- -----------------------------------------------------------------------------
Net interest income as presented $6,901 $7,076
Effect of tax-exempt income 125 283
------ ------
Net interest income, tax equivalent $7,026 $7,359
====== ======
The net interest margin calculation for the six month periods ended June
30, 2003 and 2002 is shown below (interest income and average rate on non-
taxable securities and loans are reflected on a tax equivalent basis,
assuming a 34% federal income tax rate for 2003 and 2002).
14
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Dollars In Thousands)
(On a Tax Equivalent Basis)
June 30
2003 2002
---- ----
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
(annualized) (annualized)
------------------------------------------------------------------------
Assets
- ------
Interest Earning Assets:
- ------------------------
Securities available for sale $115,058 $ 4,870 4.23 $104,685 $ 5,378 5.14
Securities held to maturity 3,065 244 7.96 3,595 271 7.54
Federal funds sold 1,300 16 1.23 982 15 1.53
Loans (net) (1) 226,766 14,908 6.57 214,431 15,958 7.44
-------- ------- ---- -------- ------- ----
Total interest earning assets 346,189 $20,038 5.79 323,693 $21,622 6.68
======= =======
Other nonearning assets 41,048 38,874
-------- --------
$387,237 $362,567
======== ========
Liabilities
- -----------
Interest Bearing Liabilities:
- -----------------------------
Savings deposits $117,805 $ 750 0.64 $108,141 $ 1,828 1.69
Time deposits 100,750 2,548 2.53 100,166 2,555 2.55
Money market accounts 21,463 260 1.21 17,711 383 2.16
Borrowings 67,075 2,428 3.60 56,933 2,140 3.76
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 307,093 $ 5,986 1.95 282,951 $ 6,906 2.21
======= =======
Other noninterest bearing liabilities
& shareholders' equity 80,144 79,616
-------- --------
$387,237 $362,567
======== ========
Net interest income $14,052 $14,716
Net interest rate spread 3.84 4.47
Net interest margin 4.05 4.55
Nonaccrual loans are included in the average balance, however, these
loans are not earning any interest.
Provision For Loan Losses. The provision for loan losses for the six month
period ended June 30, 2003, increased $30,000 to $210,000 from the same
period last year, resulting from management's ongoing evaluation of the
allowance for loan losses. The provision for loan losses for the three
month period ended June 30, 2003, increased $15,000 to $105,000 from the
same period last year. The allowance for loan losses was $4.2 million or
1.7% of total loans as of June 30, 2003 and 1.6% at June 30, 2002. The
increase in the provision for loan losses is primarily due to the increase
in the loan portfolio, (in particular, the residential portfolio), general
economic conditions and a sluggish local economy. The Company establishes
provisions for loan losses, which are charged to operations, in order to
maintain the allowance for loan losses at a level which is deemed to be
appropriate based upon an assessment of a number of factors which include,
among other factors, the current loan mix and loan volume, loan growth,
delinquency trends and historical net loan loss experience for each loan
type. Please refer to page 19 "Allowance for Loan Losses" for further
details.
The Bank has a Loan Review Program whereby an independent loan review
service firm conducts a periodic review of the commercial loan portfolio.
The review includes updates to comments on all criticized and classified
assets over $100,000, all loans delinquent over 30 days and over $100,000,
15
nonaccrual loans over $100,000, new (closed) and renewed loans over
$100,000 as well as the adequacy of the loan loss reserve.
Although management utilized its best judgment in providing for possible
losses, there can be no assurance that the Company will not have to
increase its provision for possible loan losses in the future as a result
of increased loan demand in the Company's primary market areas, future
increases in non-performing assets or other factors, both within and
outside of management's control.
Noninterest Income. Noninterest income was $3.5 million for the six month
period ended June 30, 2003 compared to $2.7 million for the six month
period ended June 30, 2002. Noninterest income was $1.8 million for the
three month period ended June 30, 2003 compared to $1.4 million for the
three month period ended June 30, 2002. The $836,486 or 31.4% increase for
the six month period was the result of an increase in loan fees, financial
services income, mortgage servicing income and an increase in the cash
surrender value of life insurance. The $416,465 or 29.6% increase for the
three month period was the result of an increase in loan fees, financial
services income and mortgage servicing income. The three and six month
increase includes a one time gain of $73,000 for the sale of the Company's
merchant business credit card product. The sale of the personal credit card
business will occur in July but will not materially impact earnings. The
other income to average assets ratio was 0.32% for the three months ended
June 30, 2003 compared to 0.33% for the same period in 2002.
Loan fees increased $386,734 or 65.1% during the first two quarters of 2003
from the comparable period in 2002 and $183,573 or 60.1% during the second
quarter of 2003 from the comparable period in 2002. The increase is due
primarily to the decline in mortgage loan interest rates and the
corresponding increased new loan and refinancing activity. Gains on the
sale of loans for the six months ended June 30, 2003 increased $319,114 to
$420,901. In addition, related mortgage servicing income increased $58,052
or 58.7% during the same period.
Financial services income increased by 21.5% or $161,219 to $910,036 for
the six months ended June 30, 2003 and 17.6% or $70,414 to $470,879 for the
three months ended June 30, 2003 compared to $748,817 and $400,465 for the
similar periods in 2002. Financial services income is derived, in part,
from trust fees, which are derived from the market value of trust assets
under management and transactional charges. Trust assets under management
were $229.2 million as of June 30, 2003. Financial services income is also
derived from financial planning and investment brokerage commissions.
The cash surrender value of life insurance increased by 0.4% or $7,104 to
$173,187 for the six month period ended June 30, 2003 over the same period
in 2002 and decreased by 11.9% to $72,453 for the three month period ended
June 30, 2003 compared to the same period in 2002. Life insurance policies
were purchased to offset certain benefit costs. There have been no new
policies purchased since 2001.
Noninterest Expense. Noninterest expense increased by $624,557 or 9.7% to
$7.1 million for the six month period ended June 30, 2003 over the same
period in 2002 and increased by $410,445 or 12.2% to $3.8 million for the
three month period ended June 30, 2003 over the same period in 2002.
Salaries and employee benefits increased $227,982 and $428,421 for the
three- and six month periods due primarily to additional staff in the
financial services area. Other noninterest expenses for the six month
period ended June 30, 2003 increased only $102,479 or 4.1% due to cost
containment efforts.
Income Taxes. Income taxes are provided for in accordance with the
comprehensive income tax allocation method which recognizes the tax effects
of all income and expense transactions in each year's statement of income,
regardless of the year the transactions are reported for tax purposes.
16
Deferred income taxes are recognized in the consolidated balance sheets for
income and expense items that are reported in different years for financial
reporting purposes and income tax purposes using the tax rate applicable
for the year of the calculation.
The status of the Company's income tax expense is as follows:
Tax Expense Effective Rate
----------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Six Months Ended June 30, $895,000 $950,000 28.8% 30.6%
Liquidity and Capital Resources. The Company's primary sources of funds
consist of deposits, borrowings, repayments and prepayments of loans, sales
and participation of loans, maturities of securities and interest-bearing
deposits and funds provided from operations. While scheduled repayments of
loans and maturities of securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general
level of interest rates, economic conditions and competition. The Company
uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-
earning assets, to maintain liquidity and to meet operating expenses.
The Company is required to maintain adequate levels of liquid assets. This
guideline, which may be varied depending upon economic conditions and
deposit flows, is measured by the core basic surplus. As of June 30, 2003
the Company's basic surplus was $57.6 million or 14.7% of total assets.
Total basic surplus (basic surplus plus funding available by using
qualifying loans to secure Federal Home Loan Bank ("FHLB") advances) was
$81.6 million, or 20.9% of total assets. This provides the Bank with
meaningful capacity and flexibility to fund new loan and investment
opportunities, and provide protection for unanticipated deposit
fluctuations.
A major portion of the Company's liquidity consists of cash and cash
equivalents, short-term U.S. Government and federal agency obligations and
corporate bonds. The level of these assets is dependent upon the Company's
operating, investing, lending and financing activities during any given
period.
Liquidity management is both a daily and long-term function of management.
If the Company requires funds beyond its ability to generate them
internally, the Bank has the ability to borrow additional funds from the
FHLB. At June 30, 2003, the Bank had borrowings of $67.6 million from the
FHLB. The Company anticipates that it will continue to have sufficient
funds, through repayments, deposits and borrowings, to meet its current
commitments.
The Federal Reserve Board guidelines for risk-based approach to measuring
the capital adequacy of bank holding companies and state-chartered banks
that are members of the Federal Reserve System generally call for an 8%
total capital ratio of which 4% must be comprised of Tier I capital. Risk-
based capital ratios are calculated by weighing assets and off-balance
sheet instruments according to their relative credit risks. At June 30,
2003, the Company and the Bank had exceeded all the minimum capital ratios.
The Bank's capital position at June 30, 2003 was as follows:
Minimum Regulatory
June 30, 2003 Requirements
------------- ------------------
Leverage Capital Ratio 7.86% 4.0%
Risk Based Ratio 14.52% 8.0%
Tier 1 Ratio 13.27% 4.0%
17
Aggregate Contractual Obligations.
Payments due by period
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
(in thousands)
FHLB borrowings $67,563 $27,925 $10,695 $19,526 $9,417
Operating leases 36 23 9 4 0
------- ------- ------- ------- ------
Total $67,599 $27,948 $10,704 $19,530 $9,417
Financial Condition
- -------------------
The Company's total assets amounted to $404.4 million at June 30, 2003
compared to $381.0 million at December 31, 2002, an increase of $23.4
million or 6.1%. The increase in total assets is primarily attributable to
a decrease in cash and cash equivalents offset in part by an increase in
net loans. Year on year, total assets increased $34.3 million or 9.3%. The
increase in total assets from June 30, 2002 to June 30, 2003 is primarily
attributable to an increase in loans of $23.7 million or 10.6% and
investment securities of $9.7 million or 8.5%.
Cash and Cash Equivalents. Cash and cash equivalents were $11.4 million at
June 30, 2003 compared to $16.6 million at December 31, 2002. Cash and cash
equivalents decreased primarily due to a decrease in federal funds sold of
$5.7 million to $403 at June 30, 2003 from $5.7 million at December 31,
2002. As of June 30, 2003, cash and cash equivalents increased $543,173 or
5.0% from $10.8 million as of June 30, 2002. The decrease in federal funds
sold was caused by a decrease in deposits resulting from normal seasonal
deposit outflows and funding of new loan growth.
Securities. The Bank manages its securities portfolio to provide a source
of both liquidity and earnings. The Bank's asset/liability committee
develops an investment policy based upon the Bank's operating need and
market circumstances. The investment policy is reviewed and approved
annually by the Board of Directors in terms of its objectives, investment
guidelines and consistency with overall Bank performance and risk
management goals. The asset/liability committee is responsible for
reporting and monitoring compliance with the investment policy. Reports are
provided to the Board of Directors on a regular basis.
Securities are classified as available for sale and they may be sold as
part of the Company's asset/liability management strategy in response to
changes in interest rates, liquidity needs or significant prepayment risk.
Securities available for sale are carried at fair value, with related
unrealized net gains or losses, net of deferred income taxes, recorded as
an adjustment to shareholders' equity. At June 30, 2003, unrealized gains,
net of taxes on securities available for sale were $2.9 million compared to
unrealized gains of $2.3 million at December 31, 2002. The increase in net
unrealized gains on securities available for sale resulted in a $680,461
increase in shareholders' equity.
Securities available for sale increased $8.6 million or 8.1% to $114.8
million at June 30, 2003 compared to $106.2 million at December 31, 2002.
Securities available for sale increased $9.8 million or 9.3% to $114.8
million at June 30, 2003 from $105.0 million at June 30, 2002. Securities
held to maturity decreased $250,997 or 7.6%, from $3.3 million at December
31, 2002 to $3.1 million at June 30, 2003. Securities held to maturity
decreased $557,018 or 15.4%, from $3.6 million at June 30, 2002 to $3.1
million at June 30, 2003. The increases were primarily due to an overall
investment portfolio strategy to maintain interest income revenue levels
while maintaining adequate liquidity on the balance sheet.
18
Loans. Gross loans increased by $20.3 million or 9.0% to $246.5 million or
61.1% of total assets at June 30, 2003 as compared to $226.2 million or
59.4% of total assets at December 31, 2002. Year on year, loans increased
by $23.7 million or 10.6% as of June 30, 2003, from $222.9 million or 60.2%
of total assets at June 30, 2002. This increase in loans is due to the
Bank's efforts to develop new lending relationships and also due to lower
interest rates and the expansion of existing borrowing relationships.
Residential real estate loans increased $14.5 million, or 11.0%, to $146.2
million at June 30, 2003 from $131.7 million at December 31, 2002. Year on
year, residential real estate loans increased $15.7 million, or 12.1%, to
$146.2 million at June 30, 2003 from $130.5 million as of June 30, 2002.
Residential real estate loans consist of loans secured by one to four
family residences. The Bank generally retains adjustable rate mortgages in
its portfolio but will, from time to time, retain fixed rate mortgages in
its portfolio. The Bank has also sold and serviced $111.6 million of real
estate loans and $1.0 million of commercial mortgages and has $3.2 million
of loans held for sale at June 30, 2003.
Commercial loans at June 30, 2003 increased by $160,143 or 0.3% to $62.0
million from $61.8 million at December 31, 2002. Year on year, commercial
loans increased by $3.4 million or 5.8%. Commercial loans consist of loans
secured by various corporate assets, as well as loans to provide working
capital in the form of lines of credit, which may be secured or unsecured.
The Bank focuses on lending to what it believes to be a wide array of
financially sound, small- to medium-sized businesses within its service
area.
Consumer loans increased $1.7 million or 6.4% to $28.9 million at June 30,
2003 from $27.2 million at December 31, 2002. Year on year, consumer loans
increased by $1.8 million or 6.7% from $27.1 million as of June 30, 2002.
Consumer loans are originated by the Bank for a wide variety of purposes to
meet our customers' needs, and include personal notes, reserve checking,
installment and VISA loans. The Bank sold its credit card portfolio of $1.2
million on July 1, 2003.
Municipal loans at June 30, 2003 increased by $3.9 million or 69.6% to $9.5
million from $5.6 million at December 31, 2002, primarily due to the Bank
being successful in the loan bidding process. Year on year, municipal loans
increased by $2.7 million or 40.2% from $6.8 million as of June 30, 2002.
Allowance for Loan Losses. The allowance for loan losses is a general
allowance established by management to absorb possible loan losses as they
may exist in the loan portfolio. This allowance is increased by provisions
charged to operating expenses and by recoveries on loans previously
charged-off. Management determines the adequacy of the allowance from
independent reviews of the quality of new and existing loans, from the
results of reviews of the loan portfolio by regulatory agency examiners,
evaluation of past loan loss experience, the character and size of the loan
portfolio, current economic conditions and other observable data.
The process of evaluating the adequacy of the allowance for loan losses
involves a high degree of management judgment, based in part on systematic
methods. Actual losses could vary from these estimates. A detailed analysis
of the allowance for loan losses is reviewed quarterly, at which time
necessary increases or decreases are made to the allowance for loan losses,
with a related adjustment to the provision for loan losses. The Bank's
Board of Directors reviews and approves the analysis of the adequacy of the
allowance for loan losses quarterly.
The allocated portion of the allowance for loan losses is comprised of
general reserves for specific loan types and specific reserves for impaired
loans. The general reserve categories consist of reserve checking, personal
and commercial installments, commercial notes and mortgages, residential
mortgages and Visa loans. A general reserve has also been established for
contingent liabilities such as lines of credit, letters of credit and
residential and commercial construction lines.
A reserve percentage is assigned to each general reserve category. The
determination of the reserve percentage for each category starts with the
five year historical average of loan losses to
19
loans and makes adjustments for factors such as loan volumes, trends in
non-performing loans, economic and industrial conditions, credit
concentrations and changes in lending policies, procedures and practices.
The specific allocation for impaired loans is determined based on a loan by
loan review of impaired loans and specific loans under close monitoring by
management for potential problems.
As of June 30, 2003, the Bank had impaired loans (consisting of real estate
loans) totaling $1,829,265, up $356,395 or 24.2% from $1,472,870 as of
December 31, 2002. The fair value of the collateral was used to evaluate
the adequacy of the allowance for loan losses allocated to these loans.
A loan is considered impaired by management when it is probable that the
creditor will be unable to collect all amounts due under the contractual
terms of the loan, including principal and interest. Based upon
management's periodic review of loans on nonaccrual status, impairment is
based on a loan by loan analysis and not set by a defined period of
delinquency before a loan is considered impaired.
The unallocated component of the allowance for loan losses represents
management's view that, given the complexities of the loan portfolio, there
are estimated losses that have been incurred within the portfolio but not
yet specifically identified. Management has provided for these probable
losses in the allowance for loan losses accordingly.
The allowance for loan losses was $4.2 million or 1.7% of total loans as of
June 30, 2003 compared to $3.7 million or 1.6% of total loans at December
31, 2002.
Deposits. Total deposits increased $2.4 million or 0.9% to $278.2 million
at June 30, 2003 from $275.8 million at December 31, 2002. The increases
occurred in all categories with the exception of the money market and
prestige investment account categories. Savings deposits increased to $51.6
million at June 30, 2003 from $49.6 million at December 31, 2002, an
increase of $2.0 million or 4.1%. NOW deposits increased to $55.8 million
at June 30, 2003 from $54.4 million at December 31, 2002, an increase of
$1.4 million or 2.6%. Money market deposits decreased to $20.9 million at
June 30, 2003 from $23.1 million at December 31, 2002, a decrease of $2.2
million or 9.4%. Prestige investment accounts decreased to $14.3 million at
June 30, 2003 from $15.1 million at December 31, 2002, a decrease of
$803,160 or 5.3%. Demand deposits increased to $34.7 million at June 30,
2003 from $34.6 million at December 31, 2002, an increase of $108,156 or
0.3%. Certificates of deposit increased to $100.8 million at June 30, 2003
from $99.0 million at December 31, 2002, an increase of $1.8 million or
1.8%.
Borrowings. Total advances from the FHLB as of June 30, 2003 increased by
$21.6 million to $67.6 million from $46.0 million at December 31, 2002. The
continued use of borrowed funds reflects additional funding needed to
support the growth in net loans and is a low cost funding alternative.
Shareholders' Equity. Shareholders' equity increased by $2.1 million or
5.5% from $38.3 million at December 31, 2002 to $40.4 million at June 30,
2003. The increase was due to cumulative earnings exceeding dividends
declared and a $680,461 increase in accumulated other comprehensive income.
Off-Balance Sheet Arrangements. The Company does not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on the Company's financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In Management's opinion, there have been no material changes in the
reported market risks since December 31, 2002 as reported in Item 7A of the
Annual Report on Form 10K.
20
Item 4: CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(e)) as of the end of the period covered by this
report. Based upon that evaluation, the President and Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls
and procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
-------
Item 1: N/A
Item 2: N/A
Item 3: N/A
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 15, 2003 (the
"Meeting"). All of the proposals submitted to the shareholders at the
Meeting were approved. The proposals submitted to shareholders and the
tabulation of votes for each proposal is as follows:
1. Adopt the proposal to set the number of board of directors to 18. The
number of votes cast with respect to this matter was as follows:
For Against Abstain Broker Non-Votes
451,090 917 3,178 0
2. Election of six directors of the Company. The number of votes cast
with respect to this matter was as follows:
Nominee For Withheld Broker Non-Votes
Arthur J. Billings 453,811 0 0
Richard C. Carver 453,406 0 0
Samuel G. Cohen 453,406 0 0
Robert B. Fernald 453,811 0 0
Stephen C. Shea 453,283 0 0
Robert W. Spear 453,370 0 0
The following directors' terms continued after the meeting: Blake B.
Brown, Douglas A. Gott, James L. Markos, Jr., John V. Sawyer II, Paul L.
Tracy, Peter A. Blyberg, Peter A. Clapp, Sandra H. Collier and Richard W.
Teele.
3. Adoption of the proposal to elect Sally J. Hutchins as Clerk of the
Company for the year ended December 31, 2003.
For Against Abstain Broker Non-Votes
455,055 0 130 0
21
4. Ratification of the appointment of Berry, Dunn, McNeil & Parker as
the Company's independent public accountants for the fiscal year
ending December 31, 2003.
For Against Abstain Broker Non-Votes
445,981 6,198 3,006 0
5. Adoption of the proposal to transact such other business as may
properly come before the meeting or any adjournment thereof.
For Against Abstain Broker Non-Votes
455,185 0 0 0
Item 5: Other Information
The Company's Principal Executive Officer and Principal Financial Officer
have furnished statements relating to its Form 10-Q for the quarter ended
June 30, 2003 pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002. The statements are attached
hereto as Exhibit 32.1.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibit 31.1 Certifications pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
B. Exhibit 32.1 Certifications pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
C. Reports on Form 8-K
During the Registrant's fiscal quarter ended June 30, 2003, the Registrant
filed one report on Form 8-K - "Disclosure of Results of Operations and
Financial Condition" furnished under Item 7 and under Item 9 in
satisfaction of Item 12, dated April 30, 2003.
22
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934 , the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION BANKSHARES COMPANY
/s/ Peter A. Blyberg
-----------------------------------
Peter A. Blyberg, President and
Chief Executive Officer
August 13, 2003
/s/ Timothy R. Maynard
-----------------------------------
Timothy R. Maynard, Chief Financial
Officer
23