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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 0-12958
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 XXX NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) YES NO XXX
--- ---
Indicate the number of shares outstanding of each of the issue's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2003
-------------------------------- -------------------------------
(Common stock, $12.50 Par Value) 573,529
1
UNION BANKSHARES COMPANY
INDEX TO FORM 10-Q
PART 1 Financial Information Page No.
- ------ --------------------- --------
Item 1 Financial Statements (Unaudited)
Independent Accountants' Report 3
Consolidated Balance Sheets -
September 30, 2003, September 30, 2002 and December 31, 2002 4
Consolidated Statements of Income -
nine months ended September 30, 2003 and September 30, 2002
three months ended September 30, 2003 and September 30, 2002 5-6
Consolidated Statements of Cash Flows -
nine months ended September 30, 2003 and September 30, 2002 7
Consolidated Statements of Changes in Shareholders' Equity -
nine months ended September 30, 2003 and September 30, 2002 8
Notes to Consolidated Financial Statements 9-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 Controls and Procedures 18-19
PART II Other Information
- ------- -----------------
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
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 September 30,
2003 and 2002, and for the three- and nine-month periods then ended. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards 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
November 4, 2003
3
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30 September 30 December 31
2003 2002 2002
(Unaudited) (Unaudited) (Audited)*
------------ ------------ -----------
ASSETS
- ------
Cash and due from banks $ 12,008,311 $ 12,541,584 $ 10,977,028
Federal funds sold 404 14,250,798 5,669,733
------------ ------------ ------------
Cash and cash equivalents 12,008,715 26,792,382 16,646,761
Available for sale securities 107,339,484 106,046,485 106,176,496
Held to maturity securities, at cost 2,992,650 3,419,665 3,316,653
Other investment securities, at cost 5,469,525 6,800,197 5,496,492
Loans (net of deferred fees) 275,450,780 226,583,268 226,225,857
Less: Allowance for loan losses 4,221,896 3,711,834 3,678,608
------------ ------------ ------------
Net Loans 271,228,884 222,871,434 222,547,249
------------ ------------ ------------
Premises, furniture & equip, net 5,919,066 6,114,010 6,129,058
Cash surrender value of life insurance 8,072,908 7,690,578 7,832,370
Core deposit intangible 179,178 225,920 214,235
Goodwill 6,305,130 6,305,130 6,305,130
Other assets 6,227,587 6,050,181 6,364,457
------------ ------------ ------------
Total Assets $425,743,127 $392,315,982 $381,028,901
============ ============ ============
LIABILITIES
- -----------
Deposits:
Demand $ 40,524,998 $ 42,087,553 $ 34,630,217
Savings and money market 159,241,338 144,554,343 142,146,193
Time 102,528,270 101,353,781 98,988,284
------------ ------------ ------------
Total Deposits 302,294,606 287,995,677 275,764,694
------------ ------------ ------------
Borrowed funds 60,225,203 47,834,479 45,959,829
Sweep repurchase agreements 15,690,032 11,208,874 13,063,631
Accrued expenses & other liabilities 7,491,159 7,248,023 7,922,352
------------ ------------ ------------
Total Liabilities 385,701,000 354,287,053 342,710,506
------------ ------------ ------------
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 4,039,615 3,963,116 4,024,564
Retained Earnings 28,061,163 25,163,437 25,744,448
Accumulated Other Comprehensive Income
Net Unrealized Gain on Securities Available for Sale 1,769,787 2,157,602 2,250,696
Minimum pension liability adjustment (326,168) 0 (326,168)
Less: Treasury Stock (9,572 shares as of
September 30, 2003; 7,562 shares as of
September 30, 2002; and 8,256 shares as of
December 31, 2002) 782,195 535,151 655,070
------------ ------------ ------------
Total Shareholders' Equity 40,042,127 38,028,929 38,318,395
------------ ------------ ------------
Total Liabilities & Shareholders' Equity $425,743,127 $392,315,982 $381,028,901
============ ============ ============
* Refer to the Company's Annual Report on Form 10K for the year ended
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)
Nine Months Ended - September 30,
---------------------------------
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and Fees on Loans $11,306,837 $11,958,985
Interest and Fees on Municipal Loans and Bonds 673,123 757,833
Interest and Dividends on Securities 3,673,078 3,754,884
Interest on Federal Funds Sold 13,509 54,750
Amortization & Accretion - Net (693,167) (453,934)
----------- -----------
Total Interest and Dividend Income 14,973,380 16,072,518
----------- -----------
INTEREST EXPENSE
- ----------------
Interest on Deposits 2,579,299 3,505,645
Interest on Funds Purchased/Borrowed 1,853,231 1,908,414
----------- -----------
Total Interest Expense 4,432,530 5,414,059
----------- -----------
NET INTEREST INCOME 10,540,850 10,658,459
- -------------------
Provision for Loan Losses 315,000 270,000
----------- -----------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 10,225,850 10,388,459
----------- -----------
NONINTEREST INCOME
- ------------------
Net Securities Gains 147,313 20,503
Exchange, Commission & Fees 1,034,033 1,020,939
Financial Services Income 1,375,657 1,164,221
Loan Department Income 1,394,397 887,869
Visa Income 340,941 720,751
Other Income 634,335 481,520
----------- -----------
Total Noninterest Income 4,926,676 4,295,803
----------- -----------
NONINTEREST EXPENSE
- -------------------
Salaries and Employee Benefits 5,880,022 5,187,430
Building Maintenance & Operations 788,163 663,217
FDIC Insurance 43,953 45,212
Other Expenses 3,678,106 3,903,266
----------- -----------
Total Noninterest Expense 10,390,244 9,799,125
----------- -----------
INCOME BEFORE TAXES 4,762,282 4,885,137
- -------------------
Income Taxes 1,442,000 1,465,000
----------- -----------
NET INCOME $ 3,320,282 $ 3,420,137
=========== ===========
Weighted Average Shares 573,446 576,416
Per Share Data:
Net Income $5.79 $5.93
Dividends Declared $1.75 $1.65
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-September 30,
--------------------------------
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME
- ----------------------------
Interest and Fees on Loans $3,893,838 $3,977,015
Interest and Fees on Municipal Loans and Bonds 225,349 243,149
Interest and Dividends on Securities 1,184,403 1,290,683
Interest on Federal Funds Sold 309 25,727
Amortization & Accretion - Net (234,286) (147,609)
---------- ----------
Total Interest and Dividend Income 5,069,613 5,388,965
---------- ----------
INTEREST EXPENSE
- ----------------
Interest on Deposits 800,714 1,122,479
Interest on Funds Purchased/Borrowed 629,300 684,575
---------- ----------
Total Interest Expense 1,430,014 1,807,054
---------- ----------
NET INTEREST INCOME 3,639,599 3,581,911
- -------------------
Provision for Loan Losses 105,000 90,000
---------- ----------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 3,534,599 3,491,911
---------- ----------
NONINTEREST INCOME
- ------------------
Net Securities Gains 0 26,947
Exchange, Commission & Fees 358,604 372,322
Financial Services Income 465,621 415,404
Loan Department Income 413,999 294,205
Visa Income 113,229 369,414
Other Income 78,472 157,246
---------- ----------
Total Noninterest Income 1,429,925 1,635,538
---------- ----------
NONINTEREST EXPENSE
- -------------------
Salaries and Employee Benefits 1,954,506 1,690,335
Building Maintenance & Operations 248,744 218,453
FDIC Insurance 10,397 10,658
Other Expenses 1,099,981 1,427,620
---------- ----------
Total Noninterest Expense 3,313,628 3,347,066
---------- ----------
INCOME BEFORE TAXES 1,650,896 1,780,383
- -------------------
Income Taxes 547,000 515,000
---------- ----------
NET INCOME $1,103,896 $1,265,383
========== ==========
Weighted Average Shares 573,133 575,439
Per Share Data:
Net Income $1.93 $2.20
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
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Net Cash Flows Provided by Operating Activities:
- ------------------------------------------------
Net Income $ 3,320,282 $ 3,420,137
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 562,256 611,340
Provision for loan losses 315,000 270,000
Gain on sale of equipment 0 (953)
Net securities gains (147,313) (20,503)
Net( increase)/decrease in other assets 151,138 (1,239,341)
Net increase/(decrease) in other liabilities (431,193) 1,381,489
Net amortization of premium (accretion of discount) on investments 693,167 453,934
Net increase/(decrease) in deferred loan origination fees 122,425 (11,258)
Origination of loans held for sale (39,351,981) (26,989,162)
Proceeds from loans held for sale 46,597,334 27,215,510
------------ ------------
Total adjustments 8,510,833 1,671,056
------------ ------------
Net cash provided by operating activities 11,831,115 5,091,193
------------ ------------
Cash Flows From Investing Activities:
- -------------------------------------
Purchase of securities available for sale (46,091,983) (31,145,310)
Purchase of securities held to maturity 0 (102,004)
Proceeds from sales of securities available for sale 6,569,072 7,264,765
Proceeds from sales of equipment 0 1,000
Proceeds from calls or maturities of securities available for sale 32,056,527 15,179,256
Proceeds from maturities of securities held to maturity 315,000 200,000
Net increase in loans to customers (51,306,616) (15,128,605)
Capital expenditures (317,207) (317,635)
------------ ------------
Net cash used in investing activities (58,775,207) (24,048,533)
------------ ------------
Cash Flows From Financing Activities:
- -------------------------------------
Net increase/(decrease) in other borrowed funds 2,626,401 (926,524)
Net increase in advances from FHLB 14,265,374 5,876,838
Net increase in demand, savings and money market accounts 22,989,926 24,610,479
Net increase/(decrease) in time deposits 3,539,986 (4,521,928)
Purchase of treasury stock (328,307) (345,989)
Proceeds from sale of treasury stock 216,233 143,236
Dividends paid (1,003,567) (952,122)
------------ ------------
Net cash provided by financing activities 42,306,046 23,883,990
------------ ------------
Net increase/(decrease) in cash and cash equivalents (4,638,046) 4,926,650
Cash and cash equivalents at beginning of year 16,646,761 21,865,732
------------ ------------
Cash and cash equivalents at end of period $ 12,008,715 $ 26,792,382
============ ============
In 2002, the Company transferred $113,174 from the Loans Held for Sale
portfolio to the loan portfolio.
In 2003, the Company transferred $2,187,556 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
Nine months ended September 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, nine months ended
September 30, 2002 0 0 0 3,420,137 0 3,420,137
Change in net unrealized gain on available
for sale securities, net of tax of $838,312 0 0 0 0 1,627,312 1,627,312
-----------------------------------------------------------------------------------
Total comprehensive income 0 0 0 3,420,137 1,627,312 5,047,449
Sale of 2,149 shares Treasury stock 0 0 143,236 0 0 143,236
Repurchase of 4,812 shares Treasury stock 0 0 (345,989) 0 0 (345,989)
Cash dividends declared 0 0 0 (952,122) 0 (952,122)
-----------------------------------------------------------------------------------
Balance at September 30, 2002 $7,279,925 $3,963,116 $(535,151) $25,163,437 $2,157,602 $38,028,929
-----------------------------------------------------------------------------------
Balance at December 31, 2002 $7,279,925 $4,024,564 $(655,070) $25,744,448 $1,924,528 $38,318,395
Net income, nine months ended
September 30, 2003 0 0 0 3,320,282 0 3,320,282
Change in net unrealized gain on available
for sale securities, net of tax benefit
of $247,742 0 0 0 0 (480,909) (480,909)
-----------------------------------------------------------------------------------
Total comprehensive income 0 0 0 3,320,282 (480,909) 2,839,373
Sale of 2,569 shares Treasury stock 0 15,051 201,182 0 0 216,233
Repurchase of 3,885 shares Treasury stock 0 0 (328,307) 0 0 (328,307)
Cash dividends declared 0 0 0 (1,003,567) 0 (1,003,567)
-----------------------------------------------------------------------------------
Balance at September 30, 2003 $7,279,925 $4,039,615 $(782,195) $28,061,163 $1,443,619 $40,042,127
===================================================================================
8
Union Bankshares Company and Subsidiary
---------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Unaudited
---------
(A) Basis of Presentation
---------------------
The accompanying consolidated financial statements of Union Bankshares
Company (the "Company") and its subsidiary, Union Trust Company (the
"Bank"), as of September 30, 2003 and 2002 and for the three- and nine
month periods then ended are unaudited. However, in the opinion of the
Company, all adjustments consisting of normal, recurring accruals necessary
for a fair presentation have been reflected therein. Interim results are
not necessarily indicative of results to be expected for the entire year.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes, has
been omitted. 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 this period.
(C) Intangible Assets
-----------------
The Company has goodwill with a carrying amount of $6,305,130 as of
September 30, 2003 and 2002, respectively 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:
September 30, 2003 September 30, 2002 December 31, 2002
------------------ ------------------ -----------------
Core deposit intangible, cost $323,000 $323,000 $323,000
Accumulated amortization 143,822 97,080 108,765
-------- -------- --------
Core deposit intangible, net $179,178 $225,920 $214,235
Amortization expense related to the core deposit intangible amounted to
$35,057 for the nine month periods ended September 30, 2003 and 2002.
Amortization expense amounted to $11,686 for the three month periods ended
September 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 (loss) was $(57,474) and $2,926,793 for the
three months ended September 30, 2003 and 2002, respectively, and
$2,839,373 and $5,047,449 for the nine months ended September 30, 2003 and
2002, respectively.
(E) 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.
(F) 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 accounting for derivative
9
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133.
The amendment requires contracts with comparable characteristics to 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 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
affect the Company's consolidated financial condition and results of
operations.
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).
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.
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. 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.
(G) Stock Repurchase Plan
---------------------
On April 9, 2003, the Board of Directors voted to reauthorize the Company
to purchase up to 28,850 shares or approximately 5% of its outstanding
common stock. The authority may be exercised from time to time and in such
amounts as market conditions warrant. 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 461 shares as part of
this plan during the third quarter of 2003 at an average price of $87.00
and has repurchased 3,885 shares at an average price of $84.85 in 2003.
(H) 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.
10
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 September 30, 2003 to December 31, 2002, and
the results of operations for the three- and nine months ended September
30, 2003, compared to the same periods in 2002. This discussion and
analysis should be read in conjunction 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.
11
Net Income. Net income for the first three quarters of 2003 was
$3,320,282, or $5.79 per share, a 2.9% decrease compared to $3,420,137, or
$5.93 per share for the first three quarters of 2002. The decrease was
primarily a result of a decrease in net interest income of $117,609 and an
increase in noninterest expense of $591,119 offset by an increase in
noninterest income of $630,873. Net income for the third quarter of 2003
was $1,103,896, or $1.93 per share, a 12.8% decrease compared to $1,265,383
or $2.20 per share for the third quarter of 2002. The decrease was
primarily a result of a decrease in interest and dividend income of
$319,352 and a decrease in noninterest income of $205,613 offset by a
decrease in interest expense of $377,040 and a decrease in noninterest
expenses of $33,438.
The following table summarizes the status of the Company's earnings and
performance for the periods stated:
Nine months ended
September 30,
2003 2002
---- ----
Earnings Per Share $5.79 $5.93
Return on Average Shareholders' Equity 8.96%A 9.46%B
Return on Average Assets 0.81%A 0.91%B
Return on Average Earning Assets 0.85%A 1.00%B
A=annualized returns are: 11.95%, 1.08%, and 1.13%, respectively.
B=annualized returns are: 12.61%, 1.21%, and 1.33%, respectively.
Interest and Dividend Income. Total interest and dividend income decreased
by $1.1 million or 6.8% to $15.0 million for the nine month period ended
September 30, 2003 from $16.1 million for the nine month period ended
September 30, 2002 and decreased by $319,352 or 5.9% to $5.1 million for
the three month period ended September 30, 2003 from $5.4 million for the
three month period ended September 30, 2002. The decrease in interest
income for the first three quarters and for the third 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
nine month period ended September 30, 2003 was $238.1 million compared to
$216.8 million for the nine month period ended September 30, 2002. The
average tax equivalent yield on loans was 6.3% for the nine month period
ended September 30, 2003 compared to 7.4% for the nine month period ended
September 30, 2002. The average balance of investments for the nine month
period ended September 30, 2003 was $117.9 million compared to $109.2
million for the nine month period ended September 30, 2002. The average
tax equivalent yield on investments was 4.3% for the nine month period
ended September 30, 2003 compared to 5.2% for the nine month period ended
September 30, 2002.
Interest Expense. Total interest expense decreased by $1.0 million or
18.1% to $4.4 million for the nine month period ended September 30, 2003
from $5.4 million for the nine month period ended September 30, 2002 and
decreased by $377,040 or 20.9% to $1.4 million for the three month period
ended September 30, 2003 from $1.8 million for the three month period ended
September 30, 2002. The decrease in interest expense for the first three
quarters and for the third 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 liabilities increased by $27.9
million or 9.8% to $245.2 million for the nine month period ended September
30, 2003. Average borrowings of $67.8 million for the nine month period
ended September 30, 2003 were up $12.2 million or 21.9% from September 30,
2002 levels. The average rate on interest-bearing deposits decreased 55
basis points to 1.5% for the nine month period ended September 30, 2003
from 2.0% for the nine month period ended September 30, 2002, while the
average rate on borrowed funds decreased 121 basis points to 3.3% from 4.5%
during the same period.
Net Interest Income. Net interest income for the nine month period ended
September 30, 2003 was $10.5 million compared to $10.7 million for the nine
month period ended September 30, 2002 and for each of the three months
ended September 30, 2003 and September 30, 2002 was $3.6 million. The
$117,609 or 1.1% decrease for the first three quarters is attributed to the
$981,529 decrease in interest expense on deposits and borrowings offset in
part by the $1.1 million decrease in interest and dividend income. The
increase for the three months ended September 30, 2003 is attributed to the
$377,040 decrease in interest expense on deposits and borrowings offset in
part by the $319,352 decrease in interest and dividend income. The average
tax equivalent yield on interest earning assets decreased 100 basis points
to 5.6% for the nine month period ended September 30, 2003 from 6.6% for
the nine month period ended September 30, 2002, while the average cost on
interest-bearing liabilities decreased by 63 basis points to 1.9% for the
nine month period ended September 30, 2003 from 2.5% for the nine month
period ended September 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.
12
The following table presents the effect of tax exempt income on the
calculation of the net interest margin:
For the nine months ended September 30, 2003
(in thousands) 2003 2002
- -----------------------------------------------------------------------------------
Net interest income as presented $10,541 $10,658
Effect of tax-exempt income 137 304
Net interest income, tax equivalent $10,678 $10,962
The net interest margin calculation for the nine month periods ended
September 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).
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Dollars In Thousands)
(On a Tax Equivalent Basis)
Nine Months Ended September 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 $114,781 $ 4,801 4.18 $105,640 $ 5,403 5.11
Securities held to maturity 3,108 240 7.72 3,593 271 7.54
Federal funds sold 917 10 1.09 2,425 29 1.20
Loans (net) (1) 238,072 15,093 6.34 216,849 16,010 7.38
-------- ------- -------- -------
Total interest earning assets 356,878 $20,144 5.64 328,507 $21,713 6.61
======= =======
Other nonearning assets 37,665 40,274
-------- --------
$394,543 $368,781
======== ========
Liabilities
- -----------
Interest Bearing Liabilities:
- -----------------------------
Savings deposits $122,159 $ 907 0.74 $111,542 $ 1,836 1.65
Time deposits 101,241 2,490 2.46 99,344 2,440 2.46
Money market accounts 21,843 249 1.14 18,695 398 2.13
Borrowings 67,830 2,262 3.33 55,630 2,523 4.54
-------- ------- -------- -------
Total interest bearing liabilities 313,073 $ 5,908 1.89 285,211 $ 7,197 2.52
======= =======
Other noninterest bearing liabilities
& shareholders' equity 81,470 83,570
-------- --------
$394,543 $368,781
======== ========
Net interest income $14,236 $14,516
Net interest rate spread 3.75 4.34
Net interest margin 3.99 4.42
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 nine
month period ended September 30, 2003, increased $45,000 to $315,000 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 September 30, 2003, increased $15,000 to $105,000
from the same period last year. The allowance for loan losses was $4.2
million or 1.5% of total loans as of September 30, 2003 and $3.7 million or
1.6% of total loans at September 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
13
provisions for loan losses, which are charged to operations, in order to
maintain the allowance for loan losses at a level which is deemed to be
appropriate based upon an assessment of a number of factors which include,
among other factors, the current loan mix and loan volume, loan growth,
delinquency trends and historical net loan loss experience for each loan
type. Please refer to Financial Condition - "Allowance for Loan Losses"
for further details.
The Bank has a Loan Review Program whereby an independent loan review
service firm conducts a periodic review of the commercial loan portfolio.
The review includes updates to comments on all criticized and classified
assets over $100,000, all loans delinquent over 30 days and over $100,000,
non accrual loans over $100,000, new (closed) and renewed loans over
$100,000 as well as the adequacy of the loan loss reserve.
Although management utilizes 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 $4.9 million for the nine month
period ended September 30, 2003 compared to $4.3 million for the nine month
period ended September 30, 2002. Noninterest income was $1.4 million for
the three month period ended September 30, 2003 compared to $1.6 million
for the three month period ended September 30, 2002. The $630,873 or 14.7%
increase for the nine month period was the result of an increase in loan
fees, financial services income and an increase in customer service fees.
The $205,613 or 12.6% decrease for the three month period was the result of
a decrease in customer service fees, Visa income, mortgage servicing income
and cash surrender value of life insurance. The nine month increase
includes a one time gain for the sale of the Company's merchant business
card product and personal credit card business. The gain had no material
impact to earnings.
Loan fees increased $506,528 or 57.0% during the first three quarters of
2003 from the comparable period in 2002 and $119,794 or 40.7% during the
third 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 nine months ended September 30, 2003 increased
$331,040 to $514,561.
Financial services income increased by 18.2% or $211,436 to $1.4 million
for the nine months ended September 30, 2003 and 12.1% or $50,217 to
$465,621 for the three months ended September 30, 2003 compared to
$1,164,221 and $415,404 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 $227.6 million as of September
30, 2003 compared to $205.8 million as of September 30, 2002. Financial
services income is also derived from financial planning and investment
brokerage commissions.
Income from the cash surrender value of life insurance decreased by 3.1% or
$7,762 to $240,538 for the nine month period ended September 30, 2003 over
the same period in 2002 and decreased by 18.1% to $67,351 for the three
month period ended September 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 expenses increased by $591,119 or 6.0% to
$10.4 million for the nine month period ended September 30, 2003 from the
same period in 2002 and decreased by $33,438 or 1.0% to $3.3 million for
the three month period ended September 30, 2003 from the same period in
2002. Salaries and employee benefits increased $264,171 and $692,592 for
the three and nine month periods, respectively, due primarily to additional
staff in the financial services area. Other noninterest expenses
decreased $225,160 or 5.8% and $327,639 or 22.9% for the nine month period
ended September 30, 2003 from the same period in 2002 and for the three
month period ended September 30, 2003, respectively, due to cost
containment efforts.
During 2003, several tactical moves were made to better position the Bank
to focus on key growth areas for the future. Merchant card processing was
outsourced with a third party and the credit card portfolio was sold to
another community bank group. While revenue is negatively impacted for the
short term, the Bank's cost structure will also be significantly reduced.
Additionally, the Bank elected to consolidate its Jefferson branch with the
Waldoboro facility to reduce the overall cost of the Bank's branch
structure.
14
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.
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
---- ---- ---- ----
Nine Months Ended September 30, $1,442,000 $1,465,000 30.3% 30.0%
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 September 30,
2003 the Company's basic surplus was $57.0 million or 14.0% of total
assets. Total basic surplus (basic surplus plus funding available by using
qualifying loans to secure Federal Home Loan Bank ("FHLB") advances) was
$101.2 million, or 24.8% of total assets. This provides the Bank with
meaningful capacity and flexibility to fund new loan and investment
opportunities, and provide protection for unanticipated deposit
fluctuations.
A major portion of the Company's liquidity consists of cash and cash
equivalents, short-term U.S. Government and federal agency obligations and
corporate bonds. The level of these assets is dependent upon the Company's
operating, investing, lending and financing activities during any given
period.
Liquidity management is both a daily and long-term function of management.
If the Company requires funds beyond its ability to generate them
internally, the Bank has the ability to borrow additional funds from the
FHLB. At September 30, 2003, the Bank had borrowings of $60.2 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 September
30, 2003, the Company and the Bank had exceeded all the minimum capital
ratios. The Bank's capital position at September 30, 2003 was as follows:
Minimum Regulatory
September 30, 2003 Requirements
------------------ ------------------
Leverage Capital Ratio 7.74% 4.0%
Risk Based Ratio 14.27% 8.0%
Tier 1 Ratio 13.01% 4.0%
15
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 $60,225 $22,855 $11,513 $15,457 $10,400
Operating leases 33 23 9 1 0
------- ------- ------- ------- -------
Total $60,258 $22,875 $11,519 $15,458 $10,400
Financial Condition
- -------------------
The Company's total assets amounted to $425.7 million at September 30, 2003
compared to $381.0 million at December 31, 2002, an increase of $44.7
million or 11.7%. The increase in total assets is primarily attributable
to an increase in net loans offset by a decrease in cash and cash
equivalents. Year on year, total assets increased $33.4 million or 8.5%.
The increase in total assets from September 30, 2002 to September 30, 2003
is primarily attributable to an increase in net loans of $48.4 million or
21.7% offset in part by a decrease in cash and cash equivalents of $14.8
million or 55.2%.
Cash and Cash Equivalents. Cash and cash equivalents were $12.0 million at
September 30, 2003 compared to $16.6 million at December 31, 2002. Cash
and cash equivalents decreased primarily due to repayments of federal funds
sold of $5.7 million to $404 at September 30, 2003 from $5.7 million at
December 31, 2002. As of September 30, 2003, cash and cash equivalents
decreased $14.8 million or 55.2% from $26.8 million as of September 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 needs 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 September 30, 2003, net
unrealized gains, net of taxes on securities available for sale were $1.8
million compared to net unrealized gains of $2.3 at December 31, 2002. The
decrease in net unrealized gains on securities available for sale resulted
in a $480,909 decrease in shareholders' equity.
Securities available for sale increased $1.1 million or 1.1% to $107.3
million at September 30, 2003 compared to $106.2 million at December 31,
2002. Securities available for sale increased $1.3 million or 1.2% to
$107.3 million at September 30, 2003 from $106.0 million at September 30,
2002. Securities held to maturity decreased $324,003 or 9.8%, from $3.3
million at December 31, 2002 to $3.0 million at September 30, 2003.
Securities held to maturity decreased $427,015 or 12.5%, from $3.4 million
at September 30, 2002 to $3.0 million at September 30, 2003.
Loans. Gross loans increased by $49.1 million or 21.7% to $275.4 million
or 64.7% of total assets at September 30, 2003 as compared to $226.3
million or 59.4% of total assets at December 31, 2002. Year on year, gross
loans increased by $48.8 million or 21.5% as of September 30, 2003, from
$226.6 million or 57.8% of total assets at September 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.
16
Residential real estate loans increased $44.8 million, or 34.0%, to $176.5
million at September 30, 2003 from $131.7 million at December 31, 2002.
Residential real estate loans increased $43.1 million, or 32.3% to $176.5
million at September 30, 2003 from $133.4 million as of September 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 during 2003 has also elected to retain a large percentage
of fixed rate mortgages as part of an overall asset/liability strategy to
retain loans. The Bank has also sold and serviced $104.6 million of real
estate loans and $1.0 million of commercial mortgages for the nine months
ended September 30, 2003 and has $362,900 of loans held for sale as of
September 30, 2003.
Commercial loans at September 30, 2003 increased by $366,054 or 0.6% to
$62.2 million from $61.8 million at December 31, 2002. As of September 30,
2003, commercial loans increased by $1.6 million or 2.6% from September 30,
2002. 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 by $505,939 or 1.9% to $27.7 million at September
30, 2003 from $27.2 million at December 31, 2002. As of September 30,
2003, consumer loans increased by $161,560 or 0.6% from $27.5 million from
September 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, home equity and installment loans. The Bank sold
its credit card portfolio of $1.2 million on July 1, 2003.
Municipal loans at September 30, 2003 increased by $3.4 million or 60.9% to
$9.0 million from $5.6 million at December 31, 2002, primarily due to the
Bank being successful in the loan bidding process. As of September 30,
2003, municipal loans increased by $3.9 million or 77.3% from $5.1 million
from September 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 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 September 30, 2003, the Bank had impaired loans (consisting of real
estate loans) totaling $1,771,024, up $298,154 or 20.2% 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.
17
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 1.5% of total loans as of
September 30, 2003 compared to $3.7 million or 1.6% of total loans at
December 31, 2002.
Deposits. Total deposits increased $26.5 million or 9.6% to $302.3 million
at September 30, 2003 from $275.8 million at December 31, 2002 primarily
due to seasonal inflows and market growth. The increases occurred in all
categories. Savings deposits increased to $54.8 million at September 30,
2003 from $49.6 million at December 31, 2002, an increase of $5.2 million
or 10.6%. NOW deposits increased to $65.8 million at September 30, 2003
from $54.4 million at December 31, 2002, an increase of $11.4 million or
20.9%. Money market deposits remained flat at September 30, 2003 from
December 31, 2002. Prestige investment accounts increased to $15.5 million
at September 30, 2003 from $15.1 million at December 31, 2002, an increase
of $467,012 or 3.1%. Demand deposits increased to $40.5 million at
September 30, 2003 from $34.6 million at December 31, 2002, an increase of
$5.9 million or 17.0%. Certificates of deposit increased to $102.5 million
at September 30, 2003 from $99.0 million at December 31, 2002, an increase
of $3.5 million or 3.6%.
Borrowings. Total advances from the FHLB as of September 30, 2003
increased by $14.2 million to $60.2 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 $1.7 million or
4.5% from $38.3 million at December 31, 2002 to $40.0 million at September
30, 2003. The increase was due to cumulative earnings exceeding dividends
declared and a $480,909 decrease in accumulated other comprehensive income.
Off-Balance Sheet Arrangements. In the normal course of business, the Bank
is a party to financial instruments with off-balance sheet risk to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and letters of credit. The instruments
involve, to varying degrees, elements of credit risk 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 September 30, 2003, and September 30,
2002, the following financial instruments, whose contract amounts represent
credit risk, were outstanding.
September 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 $13,001 $ 8,687
B. Credit card lines 0 6,347
C. Secured real estate loans 17,541 15,155
D. Lines of Credit, Reserve Checking, Municipal Loans 22,224 23,869
2. Financial Standby Letters of Credit: 532 217
------------------------------------
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
Company's Annual Report on Form 10K.
Item 4: CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(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
18
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: None
Item 2: None
Item 3: None
Item 4: None
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
September 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) Exhibits
Exhibit 31.1 Rule 13a - 14 (a)/15d - 14(a) Certifications
Exhibit 32.1 Section 1350 Certifications
(B) Reports on Form 8-K
During the Registrant's fiscal quarter ended September 30, 2003, the
Registrant furnished 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 July 24, 2003.
19
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
November 12, 2003
/s/ Timothy R. Maynard
------------------------------------
Timothy R. Maynard, Chief Financial
Officer
20
Exhibit Index
Exhibit Number Description
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
32.1 Section 1350 Certifications
21