Exhibit 13
UNION BANKSHARES COMPANY
2002 ANNUAL REPORT
1
Dedication
In Memory of:
June C. Pierson
18 Years of Service
Joy M. Look
10 Years of Service
2
Dear Shareholder,
Considering that 2002 was a recessionary year and that the stock
markets continued to slide, the Bank's performance was certainly
satisfactory. Interest rates remain at levels not seen for a generation
and any significant economic recovery remains elusive for the foreseeable
future. The Bank saw decent growth in loans and deposits last year with
the bulk of the new assets concentrated in the consumer mortgage area. A
combination of new home purchases and a significant refinancing volume led
to record levels of mortgages being processed.
Our goal of becoming a full service financial services company is
closer to reality following the first full year of operation for
Cornerstone Investment Services. The staff was able to exceed our first
year's asset growth targets through a strong sales effort. We have also
opened an office in Camden, which houses a Financial Consultant for
Cornerstone as well as a Trust Administrator for our Trust business.
During 2002, we welcomed the following people to our team of
dedicated employees:
Penny Carter - VP Relationship Manager
Vicki Leathers - Relationship Manager
Sarah Luck - VP Trust Administrator
Charles Ault - Business Development Officer
Charles Yestramski - Information Services Specialist
Nancy Schultz - Financial Consultant
Janice Bell - Marketing Administrative Assistant
Kirsten Clark - Teller
Dawne Clay - Teller
Christina Craveiro - Administrative Assistant Cornerstone
Sylvia Cunningham - Teller
Colleen Durling - Teller
Joanna Fernald - Teller
Elizabeth Gimpel - Trust Administrative Assistant
Judith Hebert - Mortgage Processor
Melissa Hinckley - Teller
Michelle Martin - Teller
Jamie Phillips - Teller
Wanda Ring - Relationship Managers Associate
Cara Sawyer - Teller
Adele Simpson - Teller
Christina Willey - Teller
Jessica Wilson - Teller
Stephanie Wilson - Teller
Bruce Ottman - Credit Analyst
You should also be aware that in light of all the issues surrounding
corporate governance, your bank has met the various regulatory requirements
with very little change in our normal operations. We have always worked
hard over the years to operate in such a way as to keep all of our
constituencies properly informed, be conservative in our accounting and
conduct business in such a way that you can take pride in being a
shareholder.
We thank you for your continued support.
Sincerely, Sincerely,
John V. Sawyer, II Peter A. Blyberg
Chairman of the Board President and
Chief Executive Officer
3
Five-Year Summary (000's Omitted)
2002 2001 2000 1999 1998
<s> <c> <c> <c> <c> <c>
Deposits $ 275,765 $267,907 $245,581 $192,848 $188,029
Loans 226,286 211,615 205,019 127,623 110,399
Securities *109,569 *102,970 *109,958 *107,509 *111,304
Shareholders' equity **36,394 **33,606 **31,586 **29,771 **27,577
Total assets 381,029 362,003 348,242 257,850 251,195
Net earnings 4,315 3,226 3,000 3,355 3,090
Earnings per share 7.49 5.59 5.19 5.80 5.34
Equity Ratios
Total equity expressed as a percentage of average:
**2002 **2001 **2000 **1999 **1998
<s> <c> <c> <c> <c> <c>
Deposits 13.4% 13.1% 14.4% 15.6% 15.1%
Loans 16.6% 16.1% 19.0% 25.0% 25.4%
Total assets 9.8% 9.3% 10.4% 11.7% 11.6%
Earning assets 10.9% 10.3% 11.4% 12.7% 12.8%
Other Financial Highlights
2002 2001 2000 1999 1998
Return on average
shareholders' equity** 12.3% 9.9% 9.5% 11.7% 11.6%
Return on average assets 1.2% 0.9% 1.0% 1.3% 1.3%
Return on average
earning assets 1.3% 1.0% 1.1% 1.4% 1.4%
<FN>
* Carrying value. Includes available for sale securities with cost of
$97,329, $98,913, $100,678, $102,488 and $101,610 at December 31, 2002,
2001, 2000, 1999, and 1998, respectively.
** Excluding net unrealized gain (loss) net of deferred taxes on available
for sale securities of $2,250,696, $530,290, ($466,522), ($2,128,324) and
$1,162,032 at December 31, 2002, 2001, 2000, 1999, and 1998, respectively,
and minimum pension liability adjustment, net of deferred taxes, of
$(326,168) at December 31, 2002.
</FN>
Insert photo of Peter Blyberg
COMMUNITY
The phrase "It takes a village to raise a child" is all inclusive of a
bank's role in improving the quality of life in the community in which it
operates.
Insert the following 5 year bar charts:
Earnings Per Share
Book Value Per Share
Dividends Per Share
Total Assets
Net Income
Shareholders' Equity
4
COMMUNITY BANKING TODAY
The role of a community-oriented bank in today's world is a complex
one. It calls for the balancing of numerous demands which are placed on
the business by a number of different stake holders, each of which has
their own particular requirements. It is a measure of the strength of
community banks that their size and proximity to customers, communities,
employees and shareholders allows them to listen to and respond better than
larger institutions.
CUSTOMERS
First and foremost of the constituencies we serve are the numerous
customers who look to the bank for solutions to their financial needs.
Those needs can be as simple as purchasing a money order or opening up a
checking account. They can also involve complex estate planning issues,
retirement needs, or business expansion plans. It is the job of a strong,
community based, financial institution to anticipate those needs and
provide as full a range of services as possible. In some cases rather than
building in-house capabilities, working with an outside partner can be
economically attractive and allow an institution to be responsive without
having to invest large amounts of capital to build a business from the
ground up. Our long-term success depends upon how well we provide those
services, how responsive and creative our people are and how the customer
"experience" will lead to stronger relationships and more business. For
unless we maintain high standards of customer service and do so
consistently over time, we will not be successful in the long run.
COMMUNITIES
The bank's long-term health depends intrinsically upon the health of
the communities in which it operates. Here the bank's main role is acting
as an engine of economic development. Without capital and financial
advice, the efforts of those in the community who seek to create jobs,
expand opportunities and improve the lives of its citizens, will come to
naught. It truly is a virtuous circle as the stronger the community
becomes the stronger the bank and the more opportunities each have to grow
and prosper. But good corporate citizenship is more than just making
loans. It involves serving all the diverse groups in town and helping them
achieve their goals. As a member of the community, the bank is always
looked to for support by groups of all kinds. The strength of the non-
profits in an area corresponds to the health of the community as a whole.
While we believe in supporting these groups directly the bank is also
active in supporting the community involvement of its employees as they
work with local groups to improve the quality of life in their towns.
EMPLOYEES
Our employees are the essential link between our customers, our
communities and our shareholders. A community bank must work hard to
attract, motivate and retain good people. It has been said and it is true
that the only true competitive advantage that we have is the quality of our
people. The people we hire are bright, articulate, energetic and love
working with customers. We must provide them with a challenging and
rewarding place to work and instill a sense of pride and ownership in
everyone.
SHAREHOLDERS
Having a stake in the long-term success of the corporation is what
shareholders look for in a company. We must strive to justify the faith
our shareholders have in the organization and its people by constantly
looking for ways to improve the overall return on investment. Our view is
that there is a need to balance short-term performance with the longer-term
health of the organization. This may mean making investments in people,
technology or new services that contribute to the strategic positioning of
the bank.
Community bankers have long balanced the needs of a wide set of
constituencies and have served our communities well. We look forward every
day to the challenges and opportunities of being an active participant in
the daily lives of so many groups.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2002
FORWARD LOOKING STATEMENTS
This Annual Report 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 prospectus 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. See "Summary of Significant Accounting
Policies" on page 25 for a more detailed discussion of accounting policies.
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.
OVERVIEW OF COMPANY
Union Bankshares Company ("the Company") is a one-bank holding
company, organized under the laws of the State of Maine and headquartered
in Ellsworth, Maine. The Company's only subsidiary is Union Trust Company
('the Bank"), wholly-owned and established in 1887. In 2000, the Company
completed the acquisition of Mid-Coast Bancorp, Inc., and its principal
subsidiary, The Waldoboro Bank, FSB using the purchase method of
accounting. Our holding company structure can be used to engage in
permitted banking-related activities, either directly, through newly formed
subsidiaries, or by acquiring companies already established in those
activities. The Bank is a full service, independent, community bank with
15 offices located along Maine's coast, stretching from Waldoboro to
Machias.
BUSINESS
The Bank serves the financial needs of individuals, businesses,
municipalities and organizations with a full range of consumer, commercial,
trust and investment, brokerage and insurance services. Now in its 115th
year, the Bank is committed to providing outstanding personalized service
while maintaining and expanding its position as one of Maine's preeminent
community banks.
6
As a market driven sales and service organization, Union Trust is
focused on the needs of its customers. Our employees are listening to
customers' needs, suggesting solutions, answering their questions and
making it easy for them to purchase and use our services. It is through
our team of dedicated and knowledgeable employees that outstanding customer
service is delivered. That is why the Bank continues to hire quality
individuals, invest in their continuing education and training, and reward
them for the significant contribution they make to the overall success of
the organization.
The Company supports the people and communities it serves by
contributing to programs that address human needs within the community. It
also supports the volunteerism of the Bank's employees, directors, and
retirees. Reinvesting local money locally builds strong communities.
Through these programs, the Bank and the Company are able to give back to
the community it serves. During 2002, our employees contributed over 11,000
hours of volunteer time to over 150 organizations.
On a continuing basis, the Bank introduces new services and makes
improvements to current offerings that will add value to customer
relationships. Some of the service additions and improvements made during
2002 include:
Opening a new Financial Services Office in Camden
Breaking ground for a new Belfast branch facility on Route 3
Conducting numerous seminars and adult education courses in various
market areas
As customer service expectations increase, the Bank will continue to
anticipate customers' needs and pursue the appropriate strategic
initiatives that will add value to our customer relationships.
REVIEW OF FINANCIAL STATEMENTS
The following discussion and analysis focus on the factors affecting
the Company's financial condition at December 31, 2002 and 2001, and the
financial results of operations during 2002, 2001 and 2000. The
consolidated financial statements and related notes beginning on page 25 of
this report should be read in conjunction with this review.
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, which reflects management's assessment of the
adequacy of the allowance for loan losses; noninterest income, including
gains and losses on the sales of loans and securities; noninterest
expenses; and income tax expense. Each of these major components of the
Company's operating results is highlighted below.
NET INCOME
The Company reported net income in 2002 of $4,315,140, an increase of
$1,008,968 or 33.8% over 2001, as compared to an increase of $225,679 or
7.5% for 2001 and a decrease of $354,229 or 10.6% for 2000.
The following table summarizes the status of the Company's earnings
and performance for the periods stated.
December 31
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Earnings per share $ 7.49 $ 5.59 $ 5.19
Return on average shareholders' equity* 12.3% 9.9% 9.5%
Return on average assets 1.2% 0.9% 1.0%
Return on average earning assets 1.3% 1.0% 1.1%
<FN>
* Excluding net unrealized gain (loss) net of deferred taxes on available
for sale securities of $2,250,696, $530,290 and ($466,522) at
December 31, 2002, 2001 and 2000, respectively, and minimum pension
liability adjustment, net of deferred taxes, of $(326,168) at
December 31, 2002.
</FN>
The increase in net income for the twelve months ending December 31,
2002 versus the same period in 2001 was primarily due to an increase in net
interest income of $920,727, an increase in noninterest income of $967,729,
7
primarily due to loan and financial service fees, and a decrease in
goodwill amortization expense offset by an increase in noninterest expenses
of $349,489 and an increase in the provision of income taxes of $390,000.
NET INTEREST INCOME
Net interest income continues to be the most significant determinant
of the Company's earnings performance. Net interest income, when expressed
as a percentage of average assets, is referred to as net interest margin.
Management of interest rate risk has become paramount in ensuring the
Company's continued profitability. Changes in net interest income are the
results of interest rate movements, changes in the balance sheet mix of
earning assets and interest bearing liabilities, and changes in the level
of nonearning assets and liabilities.
The following table sets forth the information related to changes in
net interest income. For purposes of the table and the following
discussion, information is presented regarding (1) the total dollar amount
of interest income of the Company from interest earning assets and the
resulting average yields; (2) the total dollar amount of interest expense
on interest bearing liabilities and the resulting average cost; (3) net
interest income; (4) interest rate spread; and (5) net interest margin.
Information is based on average daily balances during the indicated
periods. For the purposes of the table and the following discussion, (1)
income from interest earning assets and net interest income are presented
on a tax equivalent basis and (2) nonaccrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
nonaccrual loans has not been included for purposes of determining interest
income.
8
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Dollars In Thousands)
(On a Tax Equivalent Basis)
2002 2001 2000
---- ---- ----
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate Balance Earned/Paid Rate
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
ASSETS
INTEREST EARNING ASSETS:
Securities available for sale $106,587 $ 5,278 4.95% $ 95,873 $ 5,992 6.25% $101,234 $ 6,980 6.89%
Securities held to maturity 3,533 267 7.56 3,722 282 7.58 4,184 315 7.53
Federal funds sold 5,711 96 1.68 5,989 168 2.81 821 44 5.36
Loans, net 218,479 15,984 7.32 207,099 17,560 8.48 149,169 13,656 9.15
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning assets 334,310 $21,625 6.47 312,683 $24,002 7.68 255,408 $20,995 8.22
======= ==== ======= ==== ======= ====
Other nonearning assets 32,706 30,111 26,891
-------- -------- --------
$367,016 $342,794 $282,299
======== ======== ========
LIABILITIES
INTEREST BEARING LIABILITIES:
Savings deposits $148,245 $ 786 0.53% $120,127 $ 1,311 1.09% $100,245 $ 1,321 1.32%
Time deposits 99,666 3,092 3.10 108,781 5,380 4.95 84,012 4,540 5.40
Money market accounts 19,810 677 3.42 25,951 834 3.21 22,192 808 3.64
Borrowings 53,474 2,529 4.73 46,025 2,882 6.26 32,328 2,629 8.13
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing liabilities 321,195 $ 7,084 2.21 300,884 $10,407 3.46 238,777 $ 9,298 3.89
======= ==== ======= ==== ======= ====
Other noninterest bearing liabilities
& shareholders' equity 45,821 41,910 43,522
-------- -------- --------
$367,016 $342,794 $282,299
======== ======== ========
Net interest income $14,541 $13,595 $11,697
Net interest rate spread 4.26 4.22 4.33
Net interest margin 4.35 4.35 4.58
9
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest earning assets and interest
bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old
volume), (2) changes in volume (change in volume multiplied by old rate),
and (3) changes in rate/volume (change in rate multiplied by change in
volume).
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
For the years ended December 31, 2002, 2001 and 2000
(In Thousands)
Year Ended December 31, 2002 vs. 2001
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume Total
------ ---- ----------- -----
<s> <c> <c> <c> <c>
Interest Earning Assets
- -----------------------
Securities available for sale $ 670 $ (532) $ (926) $ (788)
Securities held to maturity (14) 14 (15) (15)
Federal funds sold (8) 5 (70) (73)
Loans, net 967 (824) (1,669) (1,526)
------ ------- ------- -------
Total interest earning assets 1,615 (1,337) (2,680) (2,402)
------ ------- ------- -------
Interest Bearing Liabilities
- ----------------------------
Savings deposits 305 (200) (631) (526)
Time deposits (447) 281 (2,122) (2,288)
Money market accounts (198) 120 (78) (156)
Borrowed funds 465 (352) (466) (353)
------ ------- ------- -------
Total interest bearing liabilities 125 (151) (3,297) (3,323)
------ ------- ------- -------
Net change in net interest income $1,490 $(1,186) $ 617 $ 921
====== ======= ======= =======
Year Ended December 31, 2001 vs. 2000
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume Total
------ ---- ----------- -----
<s> <c> <c> <c> <c>
Interest Earning Assets
- -----------------------
Securities available for sale $ (374) $ (335) $ (311) $(1,020)
Securities held to maturity (35) (35) 43 (27)
Federal funds sold 277 145 (299) 123
Loans, net 5,294 4,910 (6,263) 3,941
------ ------- ------- -------
Total interest earning assets 5,162 4,685 (6,830) 3,017
------ ------- ------- -------
Interest Bearing Liabilities
- ----------------------------
Savings deposits 265 218 (493) (10)
Time deposits 1,334 1,221 (1,715) 840
Money market accounts 137 122 (233) 26
Borrowed funds 1,113 858 (1,718) 253
------ ------- ------- -------
Total interest bearing liabilities 2,849 2,419 (4,159) 1,109
------ ------- ------- -------
Net change in net interest income $2,313 $ 2,266 $(2,671) $ 1,908
====== ======= ======= =======
Net interest income increased $920,737 or 7.0% to $14,005,559 in 2002
from $13,084,832 in 2001. Interest income on total earning assets
decreased $2,402,080 in 2002 from 2001. Interest income on loans decreased
$1,526,517 in 2002 from 2001 due to a $11,380,000 increase in average loans
outstanding, offsetting a decrease in average loan rates from 8.48% to
7.32%. Interest expense on interest bearing liabilities decreased
$3,322,807 in 2002 from 2001, as a result of a $2,979,636 decrease in
interest expense on deposits and a decrease of $353,171 in interest expense
on other borrowings. The decrease in interest expense was due primarily to
a combination of a $12,862,000 increase in average deposits offset in part
by a decrease in the average rate paid on deposits from 3.08% in 2001 to
1.70% in 2002. The decrease in interest expense on borrowings was due
primarily to an increase in average balances of $7,449,000 of FHLB advances
outstanding and repurchase agreements during 2002, offset, in part, by a
decrease in overall interest rates on borrowings from 6.26% in 2001 to
4.73% in 2002.
10
During 2001, net interest income increased by $1,908,394 or 17.1%.
This increase was primarily due to increases in average earning assets of
$57,275,000 and a decrease in the average rate earned from those assets of
7.68% in 2001 from 8.22% in 2000.
During 2000, net interest income increased by $1,007,607 or 9.9%
compared to 1999. This increase was attributed to increases in loans of
$33,344,000, offset in part by a decrease in investments of $4,556,000 and
an increase in savings and money market accounts.
During 2002, the Federal Reserve decreased the Prime Rate by a total
of 50 basis points. The average yield on a tax equivalent basis on
interest earning assets decreased 121 basis points to 6.47% for the year
ended December 31, 2002 from 7.68% for the year ended December 31, 2001
while the average cost of interest-bearing liabilities decreased 125 basis
points to 2.21% for the year ended December 31, 2002 from 3.46% for the
year ended December 31, 2001. As a result, the interest rate spread
increased by 4 basis points to 4.26% for the year ended December 31, 2002
from 4.22% for the year ended December 31, 2001. The interest rate spread
increased due to a higher volume of interest earning assets during a period
of basically flat interest rates.
The average balances of non-accrual loans can also affect the average
yield on all outstanding loans. Non-accrual loans as of December 31, 2002
were $1,472,870 and lowered the average yield on loans by 5 basis points
for 2002. For the year ended December 31, 2001, non-accrual loans were
$1,823,000. The average yield on loans was lowered by 16 basis points for
2001. The average balances on non-accrual loans in 2000 were $3,390,000
due to the acquisition and several large loans on non-accrual status.
PROVISION FOR LOAN LOSSES
The Company maintains an allowance for possible loan losses through a
provision that is charged to income. The process of evaluating the
adequacy of the allowance for loan losses involves a high degree of
management judgment, based, in part, on systematic methods. These methods,
which are generally quantitative measures, are employed, not so the
allowance will be the result of routine mathematical exercise, but to help
ensure that all relevant matters affecting loan collectability will be
consistently identified. Such methods at December 31, 2002 included a
loan by loan analysis of all impaired loans and loans under close
monitoring by management for potential problems, a risk rating analysis for
all commercial and commercial real estate loans and a quantitative analysis
of residential real estate and consumer loans. Other factors included in
the evaluation of the adequacy of the allowance for loan losses involve
overall loan growth; the character and mix of the loan portfolio; current
trends in nonperforming loans, delinquent loans and net charge-offs; new
loan origination; local economic conditions; regulatory changes and other
quality considerations.
The Company has a semi annual independent loan review program that
supports the Company's lending strategies, monitors compliance with
established loan policies and procedures and identifies credit trends. The
review included all criticized and classified assets over $100,000, all
loans delinquent over 30 days and over $100,000, new (closed) and renewed
loans over $100,000, a sampling of remaining commercial loans 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 otherwise which would
adversely affect the Company's results of operations.
For the year ended December 31, 2002, the Company increased the
allowance for loan losses through a $360,000 provision for loan losses,
compared to $300,000 in 2001 and $371,000 in 2000. The Company believes
that the current allowance for loan losses accurately reflects the level of
risk in the loan portfolio. The most significant trend influencing the
level of the allowance over the last five years is growth in the real
estate and construction loan portfolio, which has risen from $73.4 million
at the end of 1998 to $182.9 million at December 31, 2002. The Company
believes that, despite using prudent underwriting standards and that the
historical loss experience appears low relative to the level of the
allowance, overall loan growth, entering into a new market area and current
economic conditions has warranted the current level of the allowance.
11
The following table sets forth information concerning the allocation
of the Company's allowance for loan losses by category:
Allowance for Loan Losses
-------------------------
December 31,
-------------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------- -------------------------
% of Loans in % of Loans in % of Loans in
Each Category Each Category Each Category
Loan Category Amount to Total Loans Amount to Total Loans Amount to Total Loans
------------- ------ -------------- ------ -------------- ------ --------------
<s> <c> <c> <c> <c> <c> <c>
Commercial $1,142 25.4% $1,081 31.7% $2,195 34.8%
Residential Real Estate 641 57.6 1,289 60.9 647 51.6
Municipal 0 4.3 31 1.5 37 1.9
Installment 247 9.0 96 4.5 137 9.7
Visa 67 0.6 14 0.7 0 0.5
Reserve Checking 36 0.2 5 0.2 0 0.2
Identified 552 2.9 295 0.5 257 1.3
Contingent Liabilities 653 0 323 0 0 0
Unallocated 341 0 319 0 103 0
------ ----- ------ ----- ------ -----
Totals $3,679 100.0% $3,453 100.0% $3,376 100.0%
====== ===== ====== ===== ====== =====
Management believes that the allowance for loan losses and the
carrying value of real estate owned are adequate. While management uses
available information to recognize losses on loans and real estate owned,
future additions to the allowances might be necessary based on changes in
economic conditions, particularly in northern New England. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses.
The following table reflects the quality of the Company's loan
portfolio and the emphasis placed upon the management of credit risk:
December 31,
2002 2001
---- ----
(Dollars in Thousands)
<s> <c> <c>
Nonaccrual loans $1,473 $1,823
Loans past due 90 days and accruing 351 75
------ ------
Total nonperforming assets 1,824 1,898
Ratio of total nonperforming loans to capital and the
allowance for loan losses .046 .051
Ratio of net recoveries (charge-offs) to loans .001 .000
Ratio of allowance for loan losses to loans .02 .02
Coverage ratio (allowance for loan losses divided by
nonperforming assets) 2.017 1.819
Ratio of nonperforming assets to total assets .007 .005
Ratio of nonperforming loans to total loans .012 .009
NONINTEREST INCOME
Total noninterest income was $5,874,445, $4,906,716 and $3,639,548
for the years ended December 31, 2002, 2001 and 2000, respectively. The
$967,729 or 19.7% increase in noninterest income during 2002 was primarily
attributable to a $300,658 or 23.5% increase in financial service income,
an increase of $451,725 or 52.4% in loan department income and an increase
of $260,011 or 22.2% in other noninterest income primarily due to fees
earned on customer accounts and mortgage servicing income. The $1,267,168
or 34.8% increase in noninterest income during 2001 was primarily
attributable to a $126,305 or 11.0% increase in trust department income, a
$126,750 or 15.5% increase in VISA income, an increase of $463,188 or
116.0% in loan department income and an increase of $468,364 or 66.5% in
other noninterest income primarily due to fees earned on customer accounts
and mortgage servicing income. The $213,221 or 6.2% increase during 2000
was primarily due to increases in trust department income and VISA income.
12
The following table summarizes information relating to the Company's
noninterest income:
Year Ended December 31,
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Net security gains (losses) $ 23,003 $ 39,131 $ (13,545)
Financial services income 1,579,873 1,279,215 1,152,910
Service income 328,053 303,652 291,195
VISA income 866,181 944,025 817,275
Loan department income 1,314,327 862,602 399,414
Income from cash surrender value of life insurance 330,667 305,761 288,333
Other noninterest income 1,432,341 1,172,330 703,966
---------- ---------- ----------
Total noninterest income $5,874,445 $4,906,716 $3,639,548
========== ========== ==========
NONINTEREST EXPENSE
Total noninterest expenses, which consist primarily of employee
compensation and benefits, occupancy and equipment expenses and other
general operating expenses increased $349,489 or 2.7% during 2002,
$2,747,837 or 26.5% during 2001 and $1,704,412 or 19.7% during 2000. The
increase in noninterest expenses in 2002 was primarily attributable to a
$629,368 increase in salary expense due primarily to additional staff in
the financial services area, a $290,755 increase in pension and employee
benefits primarily due to significant increases in premium costs and an
increase of $134,496 in other professional fees offset in part by a
decrease in other expenses of $515,075 primarily due to a decrease in
goodwill amortization expense. Upon adoption of SFAS No. 142, on January
1, 2002, amortized goodwill was discontinued. See note 9 to the
consolidated financial statements for a more detailed discussion of the
impact of SFAS No. 142 on the Company's financial statements. The increase
in noninterest expenses in 2001 was primarily attributable to increased
staffing, additional branch facilities, additional equipment expenses and
advertising expenses related to the Bank's new market area. The increase
in 2000 was primarily attributable to increased staffing, the expenses
related to upgrading equipment and facilities and non-recurring acquisition
related costs.
INCOME TAXES
The Company recognized $1,740,000, $1,350,000 and $1,077,000 in
income tax expense for the years ended December 31, 2002, 2001 and 2000,
respectively. The effective tax rate was 28.7% for 2002, 29.5% for 2001
and 26.4% for 2000. The Company has sufficient refundable taxes paid in
available carry back years to fully realize its recorded deferred tax asset
of $2,047,495 at December 31, 2002.
FINANCIAL CONDITION
Set forth below is a discussion of the material changes in the
Company's financial condition for the periods indicated.
BALANCE SHEET REVIEW
OVERVIEW
Total assets at December 31, 2002 were $381,028,901, an increase of
$19,025,845 or 5.3% from December 31, 2001. The change in assets consisted
primarily of a $14,432,504 increase in loans, an increase of $6,599,086 in
investment securities, offset in part by a decrease in cash and due from
banks and federal funds sold of $5,218,971. Asset growth was supported by
an increase of $7,857,568 in deposits and an increase of $4,930,421 in
total borrowings.
INVESTMENT SECURITIES
Securities available for sale, which include U.S. Government
securities, callable agency bonds, municipals, mortgage backed securities
and certificates of deposit, increased $6,352,517 or 6.7%. During 2002,
the Company managed the securities portfolio to continue its significant
contribution to net interest income, maximize yields, reduce exposure of
continuously callable agencies, manage cash flow, control risk and provide
diversification. As of December 31, 2002, the Company had a net unrealized
gain of $3,426,704 in this portfolio.
13
In 2001, securities available for sale decreased $6,735,063 or 6.7%
due to the Company managing the securities portfolio to continue its
significant contribution to net interest income, maximize yields, reduce
exposure of continuously callable agencies, manage cash flow, control risk
and provide diversification. As of December 31, 2001, the Company had a
net unrealized gain of $803,468 in this portfolio.
Securities held to maturity, which include in-state municipals,
decreased $209,973 or 6.0% in 2002, compared to a $324,835 or 8.4% decrease
in 2001.
The changes in the securities portfolio reflect the Company's efforts
to meet asset and liability objectives and otherwise manage its liquidity
and funding needs within the parameters of the Company's policies. For
further discussion, see the Risk Management section, page 16.
LOANS
The Company offers a wide variety of loan products to serve the
financial needs of individuals, businesses, municipalities and nonprofit
organizations. Total loans (which excludes loans held for sale) reached a
record high of $228,727,058 during 2002 and, as of December 31, 2002, had
increased $14,432,504 or 6.9% over 2001 to $226,285,634, primarily due to
an increase in real estate loans. As of December 31, 2001, loans increased
3.2% over December 31, 2000.
Real estate mortgage loans, which consist of loans secured by real
estate (commercial and residential), increased by $12.7 million or 7.4% in
2002. During 2001, real estate loans increased by $9.6 million or 5.7%
from $166.9 million to $176.5 million. The Company generally retains
adjustable rate mortgages in its portfolio, but will from time to time,
retain fixed rate mortgages. With a very low interest rate environment, it
has been the Company's asset/liability strategy for 2002 to hold a certain
number of 15 year fixed rate mortgages in its portfolio. The yields on
these interest earning assets have been higher than yields available in the
investment portfolio. The Company also originates fixed rate residential
loans for sale to investors in the secondary market and during 2002,
volumes reached record highs due to historical low rates.
Commercial loans decreased by $1.0 million or 4.9% during 2002. In
2001, commercial loans decreased by $526 thousand or 2.5%. 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.
Consumer loans increased by $536 thousand or 3.0% in 2002. In 2001,
consumer loans decreased by $2.2 million or 10.9%. Consumer loans include
credit card, overdraft protection, automobile, boat, recreation vehicle,
mobile home and personal loans.
Municipal loans increased $2.5 million or 80.7% in 2002. In 2001,
municipal loans decreased by $634 thousand or 17.1%.
Loan mix and growth trends, as of December 31, 2002, are illustrated
in the graphs below:
INSERT 5 YEAR BAR CHART
LOAN GROWTH TRENDS
INSERT PIE CHART
LOAN MIX
DEPOSITS
Deposits represent the Company's primary source of funds for lending,
investing and are a general source of liquidity for the Bank. In 2002,
total deposits increased $7.9 million or 2.9% over 2001, ending the year at
$275,764,694. The Company experienced growth in 2002 with savings accounts
increasing 4.7%, money market accounts increasing 32.6%, offset in part by
a decrease in time deposits of 5.4% and a decrease of 1.6% in demand
deposits. The Company offers a wide array of deposit products in its
market area, including checking accounts, money market accounts, savings
accounts, certificates of deposit and retirement savings plans. In 2001,
total deposits increased by $22.3 million or 9.1%. The total deposit
increase in 2002 of $7.9 million versus the 2001 increase of $22.3 million
was down primarily due to the low interest rate environment and the ability
to attract and maintain deposit balances.
14
In the Bank's market area, the banking business is somewhat seasonal
due to an influx of tourist and seasonal residents returning to the area
each spring and summer. As a result, deposits fluctuate from a relative
high point in mid October to a low point in June. This deposit fluctuation
is predictable and does not have a material adverse effect on the Bank.
Deposit mix and growth trends, as of December 31, 2002, are
illustrated in the graphs below:
INSERT 5 YEAR BAR CHART
DEPOSIT GROWTH TRENDS
INSERT PIE CHART
DEPOSIT MIX
BORROWINGS
Borrowings supplement deposits as a source of funds for the Company.
In addition to borrowing from the Federal Home Loan Bank (FHLB), the
Company uses securities sold under agreement to repurchase accounts to
provide additional liquidity. Total borrowings as of December 31, 2002
were $59,023,460, an increase of $4,930,421. In 2001, total borrowings
decreased $12,109,522 over 2000.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
The Federal Reserve Board's capital requirement generally calls for
an 8% total capital ratio, of which 3% must be comprised of Tier I capital.
Risk based capital ratios are calculated by weighting assets and off
balance sheet instruments according to the relative credit risk. As of
December 31, 2002, the Company's Tier I ratio of 13.6% far exceeds the
Federal Reserve Board's guidelines.
During 2002, total shareholders' equity increased $2,787,803,
excluding a net unrealized gain on available for sale securities of
$2,250,696 and net minimum pension liability adjustment of $(326,168),
primarily as a result of net income of $4,315,140, offset by dividends
declared of $1,266,114.
Total shareholders' equity, excluding a net unrealized loss on
available for sale securities of $530,290, increased $2,019,869 in 2001,
primarily as the result of net income of $3,226,172 offset by dividends
declared of $1,212,896.
The dividend payouts for 2002, 2001 and 2000 were 29.3%, 37.6% and
38.5% of net income, respectively.
MARKET FOR COMMON STOCK
There are significant regulatory limitations on the Company's ability
to pay dividends depending on the dividends it receives from its
subsidiary, the Bank, which are subject to regulations and the Bank's
continued compliance with all regulatory capital requirements and the
overall health of the institution. See note 15 to the notes to
consolidated financial statements on page 36.
Union Bankshares Company common stock, $12.50 par value, is not
listed on any national exchange, nor is it actively traded. Since the
Company is not aware of all trades, the market price is established by
determining what a willing buyer will pay a willing seller. Based upon the
trades that the Company had knowledge of (per quotes from local
brokerages), high and low bids for each quarter for 2002 and 2001 are
listed in the following table.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<s> <c> <c> <c> <c>
2002 $63.00 to $63.00 $61.00 to $73.00 $80.00 to $84.00 $84.00 to $84.50
2001 $79.50 to $85.00 $63.00 to $80.00 $72.00 to $75.00 $58.50 to $63.00
As of December 31, 2002, there were 745 holders of record of Union
Bankshares Company common stock.
15
Quarterly dividends per share declared by the Company in 2002 and
2001 were as follows:
2002 2001
---- ----
<s> <c> <c>
1st Quarter $ .55 $ .50
2nd Quarter $ .55 $ .50
3rd Quarter $ .55 $ .55
4th Quarter $ .55 $ .55
------ ------
Total $ 2.20 $ 2.10
====== ======
RISK MANAGEMENT
The Company's continued success is primarily dependent upon its
ability to strategically manage financial and nonfinancial risks.
Nonfinancial risks facing the Company include:
* Competition from banks and nonbank financial service companies
* Changing regulatory and political environments
* Rapid change in technology
* Demographic changes
* Economic changes
Financial risks managed by the Company include:
* Credit risk
* Interest rate risk (including asset/liability management)
* Market risk
* Liquidity risk
* Off balance sheet risks/commitments
CREDIT RISK MANAGEMENT
The Company's net loan portfolio as of December 31, 2002 accounted
for 59% of total assets and represents its primary source of credit risk.
Substantial amounts of time and resources have been dedicated to the
management of credit risk within the Bank's loan portfolio. Future
emphasis will be applied toward enhancing the already proven systems of
checks and balances to manage the origination, processing and collection of
loans. Additional information relating to credit risk may be found on page
11, "Provision for Loan Losses," and Note 16 to the consolidated financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising
from adverse changes in market rates/prices such as interest rates, foreign
currency exchange rates, commodity prices and equity prices. The Company's
primary market risk exposure is interest rate risk. The ongoing monitoring
and management of this risk is an important component of the Company's
asset/liability management process, which is governed by policies
established by its Board of Directors that are reviewed and approved
annually. The Board of Directors delegates responsibility for carrying out
the asset/liability management policies to the Asset/Liability Committee
(ALCO). In this capacity ALCO develops guidelines and strategies impacting
the Company's asset/liability management-related activities based upon
estimated market risk sensitivity, policy limits and overall market
interest rate levels/trends.
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
Interest rate risk can be defined as the exposure of the Company's
net income or financial position to adverse movements in interest rates.
Changes in the level of interest rates also can affect:
* The amount of loans originated/sold by an institution
* The ability of the borrower to repay his/her loan
* The average maturity of mortgage loans
* The value of the Company's interest earning assets
* The market value of available for sale securities
16
The Company, through management of the relationship of interest rate
sensitive assets to interest rate sensitive liabilities, reduces the
volatility of its net income.
To accomplish this, the Company has undertaken various steps to
increase the percentage of fixed rate assets and to increase the average
maturity of such assets, in particular through the loan products offered
and its investment portfolio.
Net interest income sensitivity to movements in interest rates is
measured through the use of a simulation model that analyzes resulting net
income under various interest rate scenarios established by regulators.
Projected net interest income (NII) is modeled based on both an immediate
rise or fall in interest rates ("rate shock"). The model is based on the
actual maturity and repricing characteristics of interest rate sensitive
assets and liabilities and factors in projections for activity levels by
product lines of the Company. Assumptions are made as to the changing
relationship between different interest rates as interest rates
increase/decrease (basis risk) and the customer's ability to prepay loans
and withdraw deposit balances or transfer them to a higher yielding account
(embedded option). The sensitivity analysis is compared to ALCO policy
limits, which specify a maximum tolerance level for NII exposure over a
one-year horizon, assuming no balance sheet growth, given both a 200 basis
point (bp) upward and a 100 basis point downward shift in interest rates.
A parallel and pro rata shift in rates over a 12-month period is assumed.
The following reflects the Company's NII sensitivity analysis as of
December 31, 2002 and 2001.
Estimated
Rate Change NII Sensitivity
----------- ---------------
2002 2001
---- ----
<s> <c> <c>
+200 bp + 0.8% + 0.1%
-100 bp - 0.8% - 0.5%
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected
operating results. These hypothetical estimates are based upon numerous
assumptions including: the nature and timing of interest rate levels
including yield curve shape, prepayments on loans and securities, deposit
decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows and others.
While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions, including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing
levels likely deviating from those assumed, the potential effect of
changing debt service levels on customers with adjustable rate loans,
depositor early withdrawals and product preference changes and other
internal/external variables. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
LIQUIDITY RISK MANAGEMENT
Liquidity management is the process by which the Company structures
its liquidity to meet the cash flow requirements of its customers as well
as day to day operating expenses. Many factors affect the Company's
ability to meet its liquidity needs, including its mix of assets and
liabilities, interest rates and local economic conditions. The Company's
actual inflow and outflow of funds is detailed in the Consolidated
Statement of Cash Flows on pages 23-24.
Liquidity comes from both assets and liabilities. The assets of the
balance sheet provide liquidity through prepayment and maturities of
outstanding loans, investments and mortgage backed securities and the sale
of mortgage loans. The liability side provides liquidity through deposits
and borrowings from Federal Home Loan Bank of Boston. During 2002 and
2001, the Company used its sources of funds primarily to meet ongoing
commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan originations and maintain a substantial securities
portfolio.
The Company's liquidity policy currently includes requirements that
the Company maintain liquidity as a percentage of total assets at a minimum
of 5%. Access to Federal Home Loan Bank advances provides additional
funding options if the need arises. As of December 31, 2002, the Company
had a 17.7% liquidity ratio.
17
OFF BALANCE SHEET RISKS AND COMMITMENTS
As of December 31, 2002 and 2001, the total approved loan commitments
outstanding, the commitment under unused lines of credit and the unadvanced
portion of loans amounted to $51,712,000 and $40,969,000, respectively.
REGULATORY ENVIRONMENT
Under Federal Reserve Board guidelines, the Company is required to
maintain capital based on "risk adjusted" assets. Under risk based capital
guidelines, categories of assets with potentially higher credit risk
require more capital than assets with lower risk. In addition to balance
sheet assets, the Company is required to maintain capital, on a risk
adjusted basis, to support off balance sheet activities such as loan
commitments. The Federal Reserve guidelines classify capital into two
tiers, Tier I and Total Capital. Tier I risk based capital consists
primarily of shareholders' equity. Total risk based capital consists of
Tier I capital plus a portion of the general allowance for loan losses.
In addition to risk based capital requirements, the Federal Reserve
requires the Company to maintain a minimum leverage capital ratio of Tier I
capital to total assets.
The Company as of December 31, 2002 and 2001 exceeds all applicable
federal and state laws and regulations regarding minimum regulatory capital
and is categorized as a well-capitalized bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes presented in
this Annual Report 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 consideration
of changes in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As
a result, interest rates have a more significant impact on the Company's
performance than has the general level of inflation. Over short periods of
time, interest rates may not necessarily move in the same direction or in
the same magnitude as inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 147,
"Acquisitions of Certain Financial Institutions," amends SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions," to
exclude from its scope most acquisitions of financial institutions. Such
transactions should be accounted for in accordance with SFAS No. 141,
"Business Combinations." This Statement had no impact on the Company's
consolidated financial condition and results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," contains enhanced disclosure requirements for stock-based
compensation. The transition guidance and annual disclosure provisions of
Statement No. 148 are effective for fiscal years ending after December 15,
2002. The Statement had no impact on the Company's consolidated financial
condition and results of operations as the Company does not have stock-
based compensation.
Statement of Position (SOP) 01-6, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others," was issued in December 2001. The SOP is effective
for financial statements issued for the fiscal year beginning after
December 15, 2001. The SOP reconciles and conforms the accounting and
financial reporting provisions established by various Audit and Accounting
Industry Guides. Adoption of this Statement had no impact on the Company's
consolidated financial condition and results of operations.
18
QUARTERLY INFORMATION
The following tables provide unaudited financial information by quarter for
each of the past two years:
2002
Dollars in thousands Q1 Q2 Q3 Q4
<s> <c> <c> <c> <c>
Balance Sheets
Cash $ 9,331 $ 10,813 $ 26,792 $ 16,647
Investments 105,930 113,629 116,266 109,569
Net loans 215,018 219,259 222,871 222,547
Other assets 26,492 26,424 26,387 32,266
-------- -------- -------- --------
Total assets $356,771 $370,125 $392,316 $381,029
======== ======== ======== ========
Deposits $254,162 $254,452 $287,996 $275,765
Borrowed funds 54,272 61,699 47,834 45,959
Other liabilities 13,739 17,643 18,457 20,987
Shareholders' equity 34,598 36,331 38,029 38,318
-------- -------- -------- --------
Total liabilities & equity $356,771 $370,125 $392,316 $381,029
======== ======== ======== ========
Income Statements
Interest income $ 5,334 $ 5,349 $ 5,388 $ 5,018
Interest expense 1,816 1,791 1,807 1,669
-------- -------- -------- --------
Net interest income 3,518 3,558 3,581 3,349
Provision for loan losses 90 90 90 90
-------- -------- -------- --------
Net interest income after provision 3,428 3,468 3,491 3,259
Noninterest income 1,254 1,412 1,636 1,572
Noninterest expense 3,080 3,378 3,347 3,660
-------- -------- -------- --------
Income before taxes 1,602 1,502 1,780 1,171
Income taxes 490 460 515 275
-------- -------- -------- --------
Net income $ 1,112 $ 1,042 $ 1,265 $ 896
======== ======== ======== ========
Basic earnings per share $ 1.93 $ 1.81 $ 2.20 $ 1.55
2001
Dollars in thousands Q1 Q2 Q3 Q4
<s> <c> <c> <c> <c>
Balance Sheets
Cash $ 17,214 $ 11,148 $ 25,476 $ 21,865
Investments 100,912 94,075 95,531 105,744
Net loans 200,742 210,532 210,191 208,115
Other assets 25,861 25,965 26,319 26,279
-------- -------- -------- --------
Total assets $344,729 $341,720 $357,517 $362,003
======== ======== ======== ========
Deposits $243,639 $244,806 $268,430 $267,907
Borrowed funds 49,666 51,680 37,115 41,958
Other liabilities 18,621 12,266 17,761 18,002
Shareholders' equity 32,803 32,968 34,211 34,136
-------- -------- -------- --------
Total liabilities & equity $344,729 $341,720 $357,517 $362,003
======== ======== ======== ========
Income Statements
Interest income $ 6,187 $ 5,914 $ 5,713 $ 5,677
Interest expense 3,057 2,795 2,438 2,117
-------- -------- -------- --------
Net interest income 3,130 3,119 3,275 3,560
Provision for loan losses 75 75 75 75
-------- -------- -------- --------
Net interest income after provision 3,055 3,044 3,200 3,485
Noninterest income 1,074 1,144 1,324 1,365
Noninterest expense 3,069 3,373 3,393 3,280
-------- -------- -------- --------
Income before taxes 1,060 815 1,131 1,570
Income taxes 300 242 317 491
-------- -------- -------- --------
Net income $ 760 $ 573 $ 814 $ 1,079
======== ======== ======== ========
Basic earnings per share $ 1.31 $ .99 $ 1.41 $ 1.88
19
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
<s> <c> <c>
ASSETS
Cash and due from banks (note 2) $ 10,977,028 $ 12,940,420
Federal funds sold 5,669,733 8,925,312
------------ ------------
Cash and cash equivalents 16,646,761 21,865,732
Available for sale securities, at market
value (note 3) 100,755,799 94,403,282
Held to maturity securities, at cost (note 4)
(market value $3,470,703 and $3,586,393 at
December 31, 2002 and 2001, respectively) 3,316,653 3,526,626
Other investment securities at cost, which
approximates market value 5,496,492 5,039,950
Loans held for sale 5,420,697 2,774,179
LOANS (note 5):
Real estate 182,932,647 170,272,718
Commercial and industrial 19,461,034 20,476,149
Municipal 5,573,902 3,083,857
Consumer 18,318,051 17,782,261
------------ ------------
226,285,634 211,614,985
Deferred loan fees (59,777) (46,995)
Less allowance for loan losses (note 6) 3,678,608 3,453,245
------------ ------------
Net loans 222,547,249 208,114,745
------------ ------------
Premises, furniture and equipment, net (note 8) 6,129,058 6,372,705
Core deposit intangible (note 9) 214,235 260,977
Goodwill (note 9) 6,305,130 6,305,130
Other assets (notes 7, 9, 13 and 14) 14,196,827 13,339,730
------------ ------------
Total assets $381,028,901 $362,003,056
============ ============
LIABILITIES
DEPOSITS
Demand deposits $ 34,630,217 $ 35,218,551
Savings deposits (including NOW deposits
totaling $54,405,287 in 2002 and
$54,332,628 in 2001) 103,996,212 99,300,921
Money market accounts 38,149,981 28,774,213
Time deposits (note 10) 98,988,284 104,613,441
------------ ------------
Total deposits 275,764,694 267,907,126
------------ ------------
Advances from Federal Home Loan Bank (note 11) 45,959,829 41,957,641
Other borrowed funds (note 12) 13,063,631 12,135,398
Other liabilities (notes 13 and 14) 7,922,352 5,866,536
------------ ------------
Total liabilities 342,710,506 327,866,701
------------ ------------
Contingent liabilities and commitments
(notes 8, 15, 16 and 17)
SHAREHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized
1,200,000 shares, issued 582,394 shares in 2002 and
2001 7,279,925 7,279,925
Surplus 4,024,564 3,963,116
Retained earnings (note 15) 25,744,448 22,695,422
Accumulated other comprehensive income
Net unrealized gain on available for sale securities
net of deferred tax liability of $1,159,450 and
$273,178 at December 31, 2002 and 2001, respectively (note 3) 2,250,696 530,290
Minimum pension liability adjustment, net of deferred tax asset of
$168,026 at December 31, 2002 (note 13) (326,168) 0
Treasury stock, at cost (8,256 shares in 2002 and
4,899 shares in 2001) (655,070) (332,398)
------------ ------------
Total shareholders' equity 38,318,395 34,136,355
------------ ------------
Total liabilities and shareholders' equity $381,028,901 $362,003,056
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
20
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
<s> <c> <c> <c>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $15,855,692 $17,382,209 $13,441,308
Interest on securities available for sale 4,962,287 5,750,207 6,770,631
Interest on securities held to maturity 175,785 190,922 217,794
Interest on federal funds sold 95,524 168,029 44,557
----------- ----------- -----------
Total interest and dividend income 21,089,288 23,491,367 20,474,290
----------- ----------- -----------
INTEREST EXPENSE
Interest on savings deposits 785,601 1,311,446 1,321,363
Interest on money market accounts 677,103 832,712 807,451
Interest on time deposits 3,091,723 5,379,905 4,539,942
Interest on borrowings 2,529,301 2,882,472 2,629,096
----------- ----------- -----------
Total interest expense 7,083,728 10,406,535 9,297,852
----------- ----------- -----------
Net interest income 14,005,560 13,084,832 11,176,438
Provision for loan losses (note 6) 360,000 300,000 371,000
----------- ----------- -----------
Net interest income after provision for loan losses 13,645,560 12,784,832 10,805,438
----------- ----------- -----------
NONINTEREST INCOME
Net securities gains (losses) (note 3) 23,003 39,131 (13,545)
Financial service income 1,579,873 1,279,215 1,152,910
Service charges on deposit accounts 328,053 303,652 291,195
VISA income 866,181 944,025 817,275
Loan department income 1,314,327 862,602 399,414
Income from cash surrender value of life insurance 330,667 305,761 288,333
Other income 1,432,341 1,172,330 703,966
----------- ----------- -----------
Total noninterest income 5,874,445 4,906,716 3,639,548
----------- ----------- -----------
Income before noninterest expenses 19,520,005 17,691,548 14,444,986
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages 5,582,040 4,952,672 4,100,498
Pension and other employee benefits (note 13) 1,550,494 1,259,739 1,057,498
Insurance 167,491 142,359 122,786
FDIC insurance 45,212 46,185 44,851
Net occupancy expenses 1,605,113 1,620,542 1,206,485
Equipment expenses 499,513 508,152 450,104
Advertising 170,078 286,155 156,278
Supplies 334,527 376,038 372,911
Postage 221,292 221,656 187,435
Telephone 163,641 195,835 116,974
Other professional fees 511,466 376,970 200,922
Other expenses 2,613,998 3,129,073 2,350,751
----------- ----------- -----------
Total noninterest expenses 13,464,865 13,115,376 10,367,493
----------- ----------- -----------
Income before income taxes 6,055,140 4,576,172 4,077,493
Income taxes (note 14) 1,740,000 1,350,000 1,077,000
----------- ----------- -----------
Net income $ 4,315,140 $ 3,226,172 $ 3,000,493
=========== =========== ===========
Net income per common share $ 7.49 $ 5.59 $ 5.19
=========== =========== ===========
Cash dividends declared per common share $ 2.20 $ 2.10 $ 2.00
=========== =========== ===========
Weighted average common shares outstanding 576,479 577,512 577,716
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
21
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
ACCUMULATED TOTAL
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME (LOSS) EQUITY
<s> <c> <c> <c> <c> <c> <c>
Balance at December 31, 1999 $7,279,925 $3,963,533 $(309,171) $18,837,028 $(2,128,324) $27,642,991
Net income, 2000 0 0 0 3,000,493 0 3,000,493
Change in net unrealized gain (loss) on
available for sale securities, net of tax
of $856,080 0 0 0 0 1,661,802 1,661,802
---------- ---------- --------- ----------- ----------- -----------
Total comprehensive income 0 0 0 3,000,493 1,661,802 4,662,295
Sale of 516 shares treasury stock 0 (61) 55,084 0 0 55,023
Repurchase of 870 shares treasury stock 0 0 (85,260) 0 0 (85,260)
Cash dividends declared 0 0 0 (1,155,375) 0 (1,155,375)
---------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 2000 $7,279,925 $3,963,472 $(339,347) $20,682,146 $ (466,522) $31,119,674
---------- ---------- --------- ----------- ----------- -----------
Net income, 2001 0 0 0 3,226,172 0 3,226,172
Change in net unrealized gain (loss) on
available for sale securities, net of tax
of $513,509 0 0 0 0 996,812 996,812
---------- ---------- --------- ----------- ----------- -----------
Total comprehensive income 0 0 0 3,226,172 996,812 4,222,984
Sale of 563 shares treasury stock 0 (356) 47,855 0 0 47,499
Repurchase of 562 shares treasury stock 0 0 (40,906) 0 0 (40,906)
Cash dividends declared 0 0 0 (1,212,896) 0 (1,212,896)
---------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 2001 $7,279,925 $3,963,116 $(332,398) $22,695,422 $ 530,290 $34,136,355
---------- ---------- --------- ----------- ----------- -----------
Net income, 2002 0 0 0 4,315,140 0 4,315,140
Change in net unrealized gain (loss) on
available for sale securities, net of tax
of $886,270 0 0 0 0 1,720,406 1,720,406
Minimum pension liability adjustment, net
of tax of $168,026 0 0 0 0 (326,168) (326,168)
---------- ---------- --------- ----------- ----------- -----------
Total comprehensive income 0 0 0 4,315,140 1,394,238 5,709,378
Sale of 2,732 shares treasury stock 0 61,448 130,760 0 0 192,208
Repurchase of 6,089 shares treasury stock 0 0 (453,432) 0 0 (453,432)
Cash dividends declared 0 0 0 (1,266,114) 0 (1,266,114)
---------- ---------- --------- ----------- ----------- -----------
Balance at December 31, 2002 $7,279,925 $4,024,564 $(655,070) $25,744,448 $ 1,924,528 $38,318,395
========== ========== ========= =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
22
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
<s> <c> <c> <c>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income $ 4,315,140 $ 3,226,172 $ 3,000,493
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Amortization of intangible assets 46,742 498,307 162,406
Depreciation 768,515 863,801 662,742
Net amortization of premium (accretion of discount) on investments 673,488 21,643 (93,650)
Deferred income taxes (202,000) 0 0
Provision for loan losses 360,000 300,000 371,000
Net (gain) loss on sale of available for sale securities (23,003) (39,131) 13,545
Net gain on sale of equipment (953) (684) 0
Originations of loans held for sale (54,209,046) (24,520,344) (4,129,490)
Proceeds from loans held for sale 51,562,528 22,066,290 4,403,829
Net change in other assets (1,575,341) (429,541) 1,185,273
Net change in other liabilities 1,761,776 218,728 (1,487,982)
Net change in deferred loan origination fees 12,782 (40,624) 114,193
------------ ------------ ------------
Net cash provided by operating activities 3,490,628 2,164,617 4,202,359
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs 0 (24,144) (1,564,452)
Cash paid to Mid-Coast stockholders in connection with
Mid-Coast acquisition 0 0 (11,809,047)
Cash received through Mid-Coast acquisition 0 0 4,403,785
Proceeds from sale of available for sale securities 8,538,565 11,731,432 8,278,721
Purchase of available for sale securities (35,144,373) (48,872,524) (10,821,602)
Proceeds from maturities and principal payments
on available for sale securities 21,764,919 45,416,263 12,535,982
Purchase of held to maturity securities (102,004) (107,464) (50,000)
Proceeds from maturities and principal payments
on held to maturity securities 300,000 420,000 421,250
Purchase of other investment securities 0 (71,600) 0
Purchase of life insurance policies 0 (500,000) 0
Net increase in loans to customers (14,805,286) (6,819,427) (11,074,816)
Proceeds from sales of fixed assets 1,000 8,000 0
Capital expenditures (524,916) (872,358) (2,022,435)
------------ ------------ ------------
Net cash provided (used) by investing activities (19,972,095) 308,178 (11,702,614)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 7,857,568 22,326,409 (10,681,322)
Proceeds from long-term borrowings 16,500,000 20,791,391 1,500,000
Repayment of long-term borrowings (3,497,812) (2,500,000) (5,285,000)
Net change in short-term advances from Federal Home Loan Bank (9,000,000) (27,457,000) 22,492,000
Net change in other borrowed funds 928,232 (2,943,913) 1,938,888
Purchase of treasury stock (453,432) (40,906) (85,260)
Sale of treasury stock 192,208 47,499 55,023
Dividends paid (1,264,268) (1,184,021) (1,155,375)
------------ ------------ ------------
Net cash provided by financing activities 11,262,496 9,039,459 8,778,954
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (5,218,971) 11,512,254 1,278,699
Cash and cash equivalents at beginning of year 21,865,732 10,353,478 9,074,779
------------ ------------ ------------
Cash and cash equivalents at end of year $ 16,646,761 $ 21,865,732 $ 10,353,478
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
23
2002 2001 2000
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
<s> <c> <c> <c>
Interest paid $7,362,347 $10,739,397 $8,900,821
Income taxes paid $2,008,000 $ 1,355,155 $1,185,800
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net increase required by Statement
of Financial Accounting Standards No. 115
"Available for Sale Securities" $2,606,677 $ 1,510,321 $2,517,882
Deferred income tax liability thereon $ (886,270) $ (513,509) $ (856,080)
Net decrease required by Statement of Financial
Accounting Standards No. 87 Employer's
Accounting for Pension $ (494,194) $ 0 $ 0
Deferred income tax asset thereon $ 168,026 $ 0 $ 0
The accompanying notes are an integral part of these consolidated financial
statements.
Insert photo of Andrea Leonard
RELATIONSHIPS
Successful relationships are based upon choosing and maintaining a
sustainable financial path for the future. Financial institutions
differentiate themselves by achieving a competitive advantage through their
excellence of delivery, support, and trust.
24
UNION BANKSHARES COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Union Bankshares Company (the Company) provides a full range of
banking services to individual and corporate customers through its
subsidiary and branches in Maine. It is subject to regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Union Trust
Company (the Bank). All significant intercompany balances and transactions
have been eliminated in the accompanying financial statements.
Operating Segments
Operations are managed and financial performance is evaluated on a
corporate-wide basis. Accordingly, all the Company's banking operations
are considered by management to be aggregated in one reportable operating
segment.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change in the future relate to the determination of the allowance for loan
losses and valuation of other real estate owned. In connection with the
determination of the allowance for loan losses and the carrying value of
other real estate owned, management obtains independent appraisals for
significant properties.
Management believes that the allowance for loan losses and the
carrying value of other real estate owned are adequate. While management
uses available information to recognize losses on loans and other real
estate owned, future additions to the allowances might be necessary based
on changes in economic conditions, particularly in northern New England.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. These agencies may require the Company to recognize additions to
the allowances based on their judgments about information available to them
at the time of their examination.
Earnings and Cash Dividends per Share
Earnings per share is based upon the weighted average number of
common shares outstanding during each year. In July 2001, the Company
increased its cash dividend by 10%.
Investments
Available for Sale Securities
Available for sale securities consist of marketable securities that
the Company anticipates could be made available for sale in response to
changes in market interest rates, liquidity needs, changes in funding
sources and similar factors. These assets are specifically identified and
are carried at fair value. Amortization of premiums and accretion of
discounts are recorded as an adjustment to yield. Unrealized holding gains
and losses for these assets, net of related income taxes, are excluded from
earnings and are reported as a net amount in a separate component of
shareholders' equity. When a decline in market value is considered other
than temporary, the loss is recognized in the consolidated statements of
income, resulting in the establishment of a new cost basis. Gains and
losses on the sale of available for sale securities are determined using
the specific identification method.
Held to Maturity Securities
Held to maturity securities consist of debt securities that the
Company has the positive intent and ability to hold until maturity. Debt
securities classified as held to maturity are carried at amortized cost,
adjusted for amortization of premiums and accretion of discounts. When a
decline in market value is considered other than temporary, the loss is
recognized in the consolidated statements of income, resulting in the
establishment of a new cost basis for the security.
Other Investment Securities
Other investment securities consist of Federal Home Loan Bank (FHLB)
stock and Federal Reserve Bank stock. These securities are carried at
cost, which approximates market value at December 31, 2002 and 2001.
25
Loans Held for Sale
Loans held for sale are loans originated for the purpose of potential
subsequent sale. These loans are carried at the lower of aggregate cost or
market value as determined by current investor yield requirements. Gains
and losses on the sale of these loans are computed on the basis of specific
identification.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff generally are reported at
their outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balances. Loan
commitments are recorded when funded.
Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying balance sheets. The Bank recognizes a loan servicing fee for
the difference between the principal and interest payment collected on the
loan and the payment remitted to the investor.
The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the following risk characteristics of the
underlying loans: interest rate, fixed versus variable rate, and period of
origination. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceed their fair
value.
Premises, Furniture and Equipment
Premises, furniture and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed by accelerated and
straight-line methods over the estimated useful life of each type of asset.
Leasehold improvements are amortized over the lesser of the terms of the
respective leases or the service lives of the improvements. Maintenance
and repairs are charged to expense as incurred; betterments are
capitalized.
Intangible Assets
The core deposit intangible is amortized on a straight-line basis
over 7 years. The core deposit intangible is reviewed for possible
impairment when it is determined that events or changed circumstances may
affect the underlying basis of the asset. Upon adoption of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", on January 1, 2002, amortization of goodwill was
discontinued and the goodwill asset is evaluated for impairment annually,
or more frequently upon the occurrence of certain events. Prior to the
adoption of SFAS No. 142, goodwill was amortized on a straight-line basis
over 15 years.
Allowance for Loan Losses
The allowance for loan losses is established by management to absorb
charge-offs of loans deemed uncollectible. This allowance is increased by
provisions charged to operating expense and by recoveries on loans
previously charged off. The amount of the provision is based on
management's evaluation of the loan portfolio. Considerations include past
and anticipated loan loss experience, current economic conditions, the
character and size of the loan portfolio and the need to maintain the
allowance at a level adequate to absorb probable losses.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If
these allocations cause the allowance to increase, the increase is reported
as loan loss provision.
Other Real Estate Owned
Other real estate owned, which is included in other assets, is
recorded at the lower of cost or fair value less estimated costs to sell at
the time the Company takes possession of the property. Losses arising from
the acquisition of such properties are charged against the allowance for
loan losses. Operating expenses and any subsequent provisions to reduce
the carrying value are charged to operations. Gains and losses upon
disposition are reflected in earnings as realized.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
26
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income
using methods that relate the income earned to the balances of loans
outstanding and investment securities. Interest expense on liabilities is
derived by applying applicable interest rates to principal amounts
outstanding. The recording of interest income on problem loan accounts
ceases when collectibility within a reasonable period of time becomes
doubtful. Interest income accruals are resumed only when they are brought
fully current with respect to principal and interest and when management
expects the loan to be fully collectible.
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows and increases
in the present value of expected cash flows due to the passage of time.
Cash payments representing interest income are reported as such. Other
cash payments are reported as reductions in carrying value, while increases
or decreases due to changes in estimates of future payments and due to the
passage of time are reflected in the loan loss provision.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
recognized over the life of the related loan as an adjustment to or
reduction of the loan's yield.
Advertising Costs
The Company expenses advertising costs as they are incurred.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Comprehensive Income
Comprehensive income includes both net income and other comprehensive
income. The only components of other comprehensive income are net
unrealized gains and losses on available for sale securities and minimum
pension liability adjustment, net of deferred taxes. The required
disclosures for all periods presented are included in the consolidated
statement of changes in shareholders' equity.
Reclassifications
Certain 2001 and 2000 balances have been reclassified to conform with
the 2002 presentation.
2. CASH AND DUE FROM BANKS
The Federal Reserve Board requires the Bank to maintain a reserve
balance. The amount of this reserve balance as of December 31, 2002 was
$236,000. In the normal course of business, the Bank has funds on deposit
at other financial institutions in amounts in excess of the $100,000
insured by the Federal Deposit Insurance Corporation.
3. AVAILABLE FOR SALE SECURITIES
The Company carries available for sale securities at fair value. A
summary of the cost and fair values of available for sale securities at
December 31, 2002 and 2001 is as follows:
Gross Gross
Amortized Unrealized Unrealized Carrying &
Cost Gains Losses Fair Value
2002 2002 2002 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Mortgage-backed securities $34,349,056 $ 620,553 $(12,136) $ 34,957,473
U.S. Treasury securities and other
U.S. Government agencies 45,553,235 1,838,534 0 47,391,769
Obligations of states and political subdivisions 11,812,732 604,955 (2,960) 12,414,727
Other securities 5,614,071 377,759 0 5,991,830
----------- ---------- -------- ------------
Totals $97,329,094 $3,441,801 $(15,096) $100,755,799
=========== ========== ======== ============
27
2001 2001 2001 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Mortgage-backed securities $38,157,879 $ 302,556 $(296,557) $38,163,878
U.S. Treasury securities and other
U.S. Government agencies 35,506,787 629,196 (98,489) 36,037,494
Obligations of states and political subdivisions 15,754,433 193,978 (201,959) 15,746,452
Other securities 4,180,714 283,795 (9,051) 4,455,458
----------- ---------- --------- -----------
Totals $93,599,813 $1,409,525 $(606,056) $94,403,282
=========== ========== ========= ===========
The amortized cost and fair value of available for sale debt
securities at December 31, 2002, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized Fair
Cost Value
<s> <c> <c>
Due in one year or less $ 4,191,255 $ 4,264,300
Due in one year through five years 47,353,374 49,314,855
Due after five years through ten years 14,707,204 15,257,636
Due after ten years 30,604,432 31,244,582
------------ ------------
Totals $ 96,856,265 $100,081,373
============ ============
Mortgage-backed securities are allocated among the above maturity
groupings based on their final maturity dates.
Proceeds from the sale of securities were $8,538,565, $11,731,432 and
$8,278,721 in 2002, 2001 and 2000, respectively. Gross realized gains were
$45,118, $104,197 and $37,472 in 2002, 2001 and 2000, respectively. Gross
realized losses were $22,115, $65,066 and $51,017 in 2002, 2001 and 2000,
respectively.
4. HELD TO MATURITY SECURITIES
The carrying amounts of held to maturity securities for 2002 and 2001
as shown in the Company's consolidated balance sheets, and their
approximate fair values at December 31, are as follows:
Gross Gross
Book Unrealized Unrealized Fair
Value Gains Losses Value
2002 2002 2002 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Obligations of states and
political subdivisions $3,316,653 $154,050 $ 0 $3,470,703
2001 2001 2001 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
Obligations of states and
political subdivisions $3,526,626 $ 89,260 $(29,493) $3,586,393
The amortized cost and fair value of held to maturity securities at
December 31, 2002, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
<s> <c> <c>
Due in one year or less $ 435,301 $ 441,721
Due after one year through five years 1,193,338 1,275,317
Due after five years through ten years 1,230,000 1,281,010
Due after ten years 458,014 472,655
---------- ----------
Totals $3,316,653 $3,470,703
========== ==========
Nontaxable interest income on municipal investments was $827,002,
$712,889 and $597,258 for 2002, 2001 and 2000, respectively.
28
5. LOANS
At December 31, 2002 and 2001, loans on nonaccrual status totaled
approximately $1,472,000 and $1,823,000, respectively. If interest had
been accrued on such loans, interest income on loans would have been
approximately $47,354, $68,810 and $126,100 higher in 2002, 2001 and 2000,
respectively. Loans delinquent by 90 days or more that were still on
accrual status at December 31, 2002 and 2001 totaled approximately $351,000
and $75,000, respectively.
In the ordinary course of business, the Company's subsidiary granted
loans to the executive officers and directors of the Company and its
subsidiary, and to affiliates of directors. These loans were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and did not involve more than normal risk of uncollectibility.
The balance of loans to related parties amounted to $2,778,194 and
$3,104,703 at December 31, 2002 and 2001, respectively. New loans granted
to related parties in 2002 and 2001 totaled $2,818,526 and $2,713,536,
respectively; payments and reductions amounted to $3,181,135 and $2,283,148
in 2002 and 2001, respectively.
6. ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses is as follows for the years
ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Balance, beginning of year $3,453,245 $3,376,395 $2,629,472
Provision for loan losses 360,000 300,000 371,000
Allowance on acquired loans 0 0 520,019
---------- ---------- ----------
Balance before loan charge-offs 3,813,245 3,676,395 3,520,491
---------- ---------- ----------
Loans charged-off 279,495 324,720 179,903
Less recoveries on loans charged-off 144,858 101,570 35,807
---------- ---------- ----------
Net loan charge-offs 134,637 223,150 144,096
---------- ---------- ----------
Balance, end of year $3,678,608 $3,453,245 $3,376,395
========== ========== ==========
Impairment of loans having recorded investments of $1,472,870 at
December 31, 2002 and $1,822,604 at December 31, 2001 has been recognized
in conformity with SFAS No. 114, as amended by SFAS No. 118. The average
recorded investment in impaired loans during 2002 and 2001 was $1,526,834
and $2,242,003, respectively. All impaired loans have a related allowance
for loan losses. The total allowance for loan losses related to these
loans was $735,338 and $273,391 on December 31, 2002 and 2001,
respectively. There was $7,561, $68,810 and $126,100 interest income
recognized on impaired loans in 2002, 2001 and 2000, respectively.
7. LOAN SERVICING
The Bank services loans sold to others amounting to $101,152,362 and
$80,849,851 at December 31, 2002 and 2001, respectively. Mortgage
servicing rights of $576,502 and $280,253 were capitalized in 2002 and
2001, respectively. Mortgage servicing rights have been written down to
their fair value of $391,145 and $219,303 through a valuation allowance at
December 31, 2002 and 2001, and are included in other assets. Amortization
of mortgage servicing rights was $290,160, $201,968 and $198,092 in 2002,
2001 and 2000, respectively. Gain on loans sold was $358,618, $137,150 and
$15,175 in 2002, 2001 and 2000, respectively.
8. PREMISES, FURNITURE AND EQUIPMENT
Detail of bank premises, furniture and equipment is as follows:
2002 2001
---- ----
<s> <c> <c>
Land $ 422,805 $ 413,675
Buildings and improvements 6,758,037 6,629,518
Furniture and equipment 5,448,456 5,086,413
Leasehold improvements 741,757 724,931
----------- -----------
13,371,055 12,854,537
Less accumulated depreciation 7,241,997 6,481,832
----------- -----------
$ 6,129,058 $ 6,372,705
=========== ===========
At December 31, 2002, the Bank was obligated under a number of
noncancellable leases for premises and equipment that are accounted for as
operating leases. Leases for real property contain original terms from 2
to 20 years with renewal options up to 20 years. Management expects that,
in the normal course of business, most leases will be renewed or replaced
by other leases, or, when available, purchase options may be exercised.
29
Rental expense was $202,143 in 2002, $180,272 in 2001 and $142,420 in
2000.
The minimum annual lease commitments under noncancellable leases in
effect at December 31, 2002 are as follows:
Year Ending December 31, Amount
<s> <c>
2003 $ 244,156
2004 232,796
2005 168,691
2006 138,065
2007 113,146
Thereafter 1,359,179
----------
Total $2,256,033
==========
9. ACQUISITION of MID-COAST BANCORP, INC.
On August 31, 2000, the Bank acquired the outstanding stock of Mid-
Coast Bancorp, Inc., and its subsidiary, The Waldoboro Bank, FSB. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction.
<s> <c>
Cash and equivalents $ 4,403,785
Loans acquired 65,945,392
Investments 10,215,683
Premises, furniture and equipment 2,024,200
Goodwill 5,155,225
Other assets 1,899,664
Deposits and accrued interest assumed (63,414,205)
Borrowings (13,965,000)
Other liabilities (455,697)
------------
Net cash paid to the Stockholders of Mid-Coast Bancorp 11,809,047
Acquisition costs (goodwill) 1,564,452
------------
Net cash paid $ 13,373,499
============
Following are proforma results of operations for the year ended
December 31, 2000, as though Union Bankshares Company and Mid-Coast
Bancorp, Inc. had been combined at the beginning of the period.
December 31,
2000
----
<s> <c>
Net interest income $13,230,742
Net income $ 3,317,787
Earnings per share $ 5.74
Prior to January 1, 2002, goodwill, including acquisition costs, was
being amortized using the straight line method over 15 years. On January
1, 2002, the Company discontinued amortization of goodwill in accordance
with SFAS No. 142. Amortization charged to operations was $0, $451,565 and
$147,025 in 2002, 2001 and 2000, respectively. Results of operations from
the date of acquisition are included in the Company's Consolidated
Statement of Income.
Following is the effect on net income and earnings per share had
amortization of goodwill not been recorded in each period presented.
December 31,
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Reported net income $4,315,140 $3,226,172 $3,000,493
Add: Goodwill amortization 0 451,665 147,025
---------- ---------- ----------
Adjusted net income $4,315,140 $3,677,837 $3,147,518
Reported earnings per share $7.49 $5.59 $5.19
Add: Goodwill amortization .00 .78 .26
----- ----- -----
Adjusted earnings per share $7.49 $6.37 $5.45
30
The Company has an intangible asset subject to amortization related
to the acquisition 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:
December 31,
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Core deposit intangible, cost $323,000 $323,000 $323,000
Accumulated amortization 108,765 62,023 15,381
-------- -------- --------
Core deposit intangible, net $214,235 $260,977 $307,619
Amortization expense related to the core deposit intangible for the
years ended December 31, 2002, 2001 and 2000 amounted to $46,742, $46,642
and $15,381, respectively. The expected amortization expense is estimated
to be $46,742 each year through December 31, 2006 and $27,167 in 2007.
10. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was $16,861,707 and $18,541,406 in 2002
and 2001, respectively.
At December 31, 2002, the scheduled maturities of time deposits were
as follows:
<s> <c>
2003 $70,277,589
2004 9,077,651
2005 11,405,870
2006 3,488,062
2007 4,739,112
-----------
Total $98,988,284
===========
11. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank are summarized as follows:
Range of Final Interest Rates at
Maturity Dates December 31, 2002 2002 2001
---- ----
<s> <c> <c> <c> <c>
Fixed advances 2003 to 2011 2.71% to 6.09% $44,293,579 $39,291,391
Variable advances 2005 to 2013 2.00% to 7.23% 1,666,250 2,666,250
----------- -----------
$45,959,829 $41,957,641
=========== ===========
Pursuant to the collateral agreements with the Federal Home Loan Bank
(FHLB), advances are collateralized by stock in the FHLB, qualifying first
mortgage loans and available for sale securities. The Bank has an
available line of credit with the FHLB of $5,000,000. The amount of
advances with a call option totaled $17,000,000 at December 31, 2002.
Advances at December 31, 2002 mature as follows:
<s> <c>
2003 $ 6,000,000
2004 7,818,500
2005 7,674,624
2006 2,000,000
Thereafter 22,466,705
-----------
Total $45,959,829
===========
12. OTHER BORROWED FUNDS
Securities sold under agreements to repurchase generally mature
within one day from the transaction date. The Bank provides collateral
based upon the par value of the underlying securities. At December 31,
2002, securities with a fair value of $23,314,583 were pledged to
collateralize other borrowed funds. Information concerning securities sold
under agreements to repurchase for 2002 is summarized as follows:
<s> <c>
Average balance during the year $10,417,373
Average interest rate during the year 1.14%
Maximum month-end balance during the year $13,489,686
31
13. EMPLOYEE BENEFITS
Pension Plan
The Company's subsidiary has a noncontributory defined benefit
pension plan covering substantially all permanent full-time employees. The
benefits are based on employees' years of service and the average of their
three highest consecutive rates of annual salary preceding retirement.
It is the subsidiary's policy to fund the plan sufficiently to meet
the minimum requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time.
At December 31, 2002, the accumulated benefit obligation exceeded the
fair value of plan assets. The Company recognized an additional minimum
liability equal to the unfunded accumulated benefit obligation of $494,194.
The minimum pension liability adjustment was recorded as a separate
component of equity, net of a deferred tax asset of $168,026.
Pension expense amounted to $275,720, $126,806 and $60,279 for the
years ended December 31, 2002, 2001 and 2000, respectively.
Postretirement Benefits Other Than Pensions
The Company sponsors a postretirement benefit program that provides
medical coverage and life insurance benefits to certain employees and
directors who meet minimum age and service requirements. Active employees
and directors accrue benefits over a 25-year period.
The following table sets forth the benefit obligations, fair value of
plan assets and funded status for the Company's pension and other
postretirement benefit plans at December 31, 2002 and 2001.
2002 2001 2000
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c>
Change in Benefit Obligations
Benefit obligations at
beginning of year $ 5,557,779 $ 1,298,068 $4,977,665 $ 1,106,380 $4,489,648 $ 1,124,843
Service cost 292,682 53,650 217,737 45,771 175,039 37,433
Interest cost 385,302 85,578 356,242 73,129 331,444 74,206
Actuarial (gain) loss 309,721 97,991 266,362 129,878 223,969 (87,362)
Benefits paid (262,012) (59,419) (260,227) (57,090) (242,435) (42,740)
----------- ----------- ---------- ----------- ---------- -----------
Benefit obligations at
end of year $ 6,283,472 $ 1,475,868 $5,557,779 $ 1,298,068 $4,977,665 $ 1,106,380
----------- ----------- ---------- ----------- ---------- -----------
Change in Plan Assets
Fair value of plan assets
at beginning of year $ 4,960,626 $ 0 $5,396,748 $ 0 $5,372,984 $ 0
Actual return on plan assets (581,690) 0 (175,895) 0 266,199 0
Employer contributions 162,729 59,419 0 57,090 0 42,740
Benefits paid (262,012) (59,419) (260,227) (57,090) (242,435) (42,740)
----------- ----------- ---------- ----------- ---------- -----------
Fair value of plan assets at
end of year $ 4,279,653 $ 0 $4,960,626 $ 0 $5,396,748 $ 0
----------- ----------- ---------- ----------- ---------- -----------
Funded Status $(2,003,819) $(1,475,868) $ (597,153) $(1,298,068) $ 419,083 $(1,106,380)
Unrecognized net actuarial (gain) loss 1,920,563 (144,260) 653,212 (254,017) (209,894) (408,706)
Unamortized prior service cost (20,666) 0 (23,212) 0 (25,758) 0
Unrecognized transition
(net asset) net obligation (13,152) 457,500 (36,930) 503,100 (60,708) 548,700
----------- ----------- ---------- ----------- ---------- -----------
Net amount recognized $ (117,074) $(1,162,628) $ (4,083) $(1,048,985) $ 122,723 $ (966,386)
----------- ----------- ---------- ----------- ---------- -----------
32
Amounts recognized in the consolidated balance sheets consist of:
Prepaid (accrued) benefit cost $ (611,268) $(1,162,628) $ (4,083) $(1,048,985) $ 122,723 $ (966,386)
Accumulated other
comprehensive loss 326,168 0 0 0 0 0
Deferred tax asset 168,026 0 0 0 0 0
----------- ----------- ---------- ----------- ---------- -----------
Net amount recognized $ (117,074) $(1,162,628) $ (4,083) $(1,048,985) $ 122,723 $ (966,386)
----------- ----------- ---------- ----------- ---------- -----------
Net periodic benefit cost includes the following components:
2002 2001 2000
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c>
Service cost $ 292,682 $ 53,650 $ 217,737 $ 45,771 $ 175,039 $ 37,433
Interest cost 385,302 85,578 356,242 73,129 331,444 74,206
Expected return on plan assets (385,889) 0 (420,849) 0 (419,880) 0
Recognized net actuarial (gain) loss 9,949 (11,766) 0 (24,811) 0 (18,448)
Amortization (accretion) of
unrecognized transition asset
or obligation (23,778) 45,600 (23,778) 45,600 (23,778) 45,600
Amortization of prior service cost (2,546) 0 (2,546) 0 (2,546) 0
--------- -------- -------- -------- --------- --------
Net periodic benefit cost $ 275,720 $173,062 $126,806 $139,689 $ 60,279 $138,791
--------- -------- -------- -------- --------- --------
Weighted-average assumptions as of December 31
2002 2001 2000
---- ---- ----
<s> <c> <c> <c> <c> <c> <c>
Discount rate 7.00% 6.75% 7.25% 6.75% 7.50% 6.75%
Expected return on plan assets 8.00% - 8.00% - 8.00% -
Rate of compensation increase 4.00% - 4.00% - 4.00% -
For measurement purposes, the annual rates of increase in the per
capita health care cost of covered benefits were 12% for 2002, 2001 and
2000, respectively. The annual rate of increase in per capita health care
costs is assumed to decrease annually by .5% to an ultimate rate of 6% per
year.
The effects of a one-percentage-point change in the assumed health
care cost trend rate on the aggregate service and interest cost components
of the net periodic postretirement health care benefit cost and on the
postretirement benefit obligation would be:
1 Percentage 1 Percentage
Point Increase Point Decrease
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c> <c>
Effect on total service and
interest components $ 27,074 $ 142,531 $ 161,157 $ (20,981) $ (100,726) $(121,746)
Effect on postretirement
benefit obligation $213,588 $1,484,439 $1,269,267 $(170,172) $(1,150,001) $(977,805)
401(k) Plan
The Company has a noncontributory 401(k) plan for employees who meet
certain service requirements.
Stock Purchase Plan
The Bank maintains a stock purchase plan which allows qualified
employees and directors to acquire stock at fair market value.
33
14. INCOME TAXES
Income tax expense (benefit), consists of the following:
Total
-----
<s> <c>
2002
Federal Current $1,866,000
Federal Deferred (202,000)
State 76,000
----------
$1,740,000
==========
2001
Federal Current $1,278,000
State 72,000
----------
$1,350,000
==========
2000
Federal Current $1,019,000
State 58,000
----------
$1,077,000
==========
The actual tax expense for 2002, 2001 and 2000 differs from the
"expected" tax expense for those years (computed by applying the applicable
U.S. Federal Corporate Tax Rate to income before income taxes) due to the
following:
2002 2001 2000
---- ---- ----
Amount % of Amount % of Amount % of
Pretax Pretax Pretax
Earnings Earnings Earnings
<s> <c> <c> <c> <c> <c> <c>
Computed "expected" tax expense $2,058,750 34.0% $1,555,900 34.0% $1,386,350 34.0%
Nontaxable income on obligations
of states and political subdivisions (302,983) (5.0) (337,753) (7.4) (285,624) (7.0)
Cash surrender value of life insurance (132,631) (2.2) (123,631) (2.7) (118,118) (2.9)
Goodwill amortization 0 0.0 153,685 3.4 0 0.0
Other 116,864 1.9 101,799 2.2 94,392 2.3
---------- ---- ---------- ---- ---------- ----
$1,740,000 28.7% $1,350,000 29.5% $1,077,000 26.4%
========== ==== ========== ==== ========== ====
Insert photo of Jane Dagley
LOYALTY
Customers will give their loyalty to financial institutions able to
understand and fulfill their financial needs. Understanding customer
preferences and needs is an investment into a long lasting customer
relationship.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented as follows:
2002 2001
---- ----
<s> <c> <c>
DEFERRED TAX ASSETS
Allowance for loan losses $1,250,727 $1,174,103
Deferred compensation 238,323 265,884
Post-retirement benefits 390,419 375,405
Minimum pension liability 168,026 0
Other 0 37,715
---------- ----------
Deferred tax assets $2,047,495 $1,853,107
========== ==========
DEFERRED TAX LIABILITIES
Unrealized gain on available for sale securities $1,159,450 $ 273,178
Deferred origination fees 109,267 93,233
Allowance for loan losses 127,965 127,965
Premises, furniture and equipment, principally
due to differences in depreciation 365,529 370,776
Mortgage servicing rights 132,989 73,407
Cash surrender value of life insurance 36,386 36,386
Other 0 246,240
---------- ----------
Deferred tax liabilities $1,931,586 $1,221,185
========== ==========
34
The Bank has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset of $2,047,495 at
December 31, 2002. The deferred tax asset and liability are included in
other assets and other liabilities in the balance sheet at December 31,
2002 and 2001.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators regarding components, risk weightings and other
factors.
Quantitive measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2002, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2002, the most recent notification from the
Federal Reserve Board categorized the Bank as well capitalized under the
regulatory framework. To be so categorized, the Bank must maintain minimum
total risk based, Tier I risk based and Tier I leverage ratios as set forth
in the table. Management believes no conditions or events that would alter
the Bank's categorization have occurred since the Board's notification.
The actual capital amounts and ratios for the Company and the Bank as
of December 31, 2002 and 2001 are presented in the table below:
December 31, 2002
------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
<s> <c> <c> <c> <c> <c> <c>
Total capital (to risk weighted assets)
Consolidated $32,576,000 15.1% > = $17,287,000 > = 8.0% > = $21,609,000 > = 10.0%
Union Trust Company $31,991,000 14.9% > = $17,210,000 > = 8.0% > = $21,513,000 > = 10.0%
Tier I capital (to risk weighted assets)
Consolidated $29,875,000 13.8% > = $ 8,644,000 > = 4.0% > = $12,965,000 > = 6.0%
Union Trust Company $29,290,000 13.6% > = $ 8,605,000 > = 4.0% > = $12,907,000 > = 6.0%
Tier I capital (to average assets)
Consolidated $29,875,000 7.8% > = $11,505,000 > = 3.0% > = $19,175,000 > = 5.0%
Union Trust Company $29,290,000 7.7% > = $15,301,000 > = 3.0% > = $19,127,000 > = 5.0%
December 31, 2001
------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
<s> <c> <c> <c> <c> <c> <c>
Total capital (to risk weighted assets)
Consolidated $29,764,000 14.5% > = $16,410,000 > = 8.0% > = $20,513,000 > = 10.0%
Union Trust Company $28,840,000 14.1% > = $16,351,000 > = 8.0% > = $20,439,000 > = 10.0%
Tier I capital (to risk weighted assets)
Consolidated $27,198,000 13.3% > = $ 8,205,000 > = 4.0% > = $12,308,000 > = 6.0%
Union Trust Company $26,274,000 12.9% > = $ 8,175,000 > = 4.0% > = $12,263,000 > = 6.0%
Tier I capital (to average assets)
Consolidated $27,198,000 7.6% > = $14,238,000 > = 4.0% > = $17,798,000 > = 5.0%
Union Trust Company $26,274,000 7.4% > = $14,209,000 > = 4.0% > = $17,761,000 > = 5.0%
35
The Company may not declare or pay a cash dividend on or repurchase
any of its capital stock if the effect thereof would cause the capital of
the Company to be reduced below the capital requirements imposed by the
Federal Reserve.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF
CREDIT RISK
In the normal course of business, the Bank is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit. The instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the
consolidated balance sheet. The contract amounts of these instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments. At December 31, 2002 and 2001, the following
financial instruments, whose contract amounts represent credit risk, were
outstanding:
Contract Amount
2002 2001
---- ----
<s> <c> <c>
Commitments to extend credit $42,413,000 $35,550,000
Standby letters of credit 201,000 86,000
Unadvanced portions of construction loans 9,098,000 5,333,000
----------- -----------
Total $51,712,000 $40,969,000
=========== ===========
The Bank's exposure to credit loss in the event of nonperformance by
the other parties to the above financial instruments is represented by the
contractual amounts of the instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case by case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon the
credit extension, is based on management's credit evaluation of the
counterparty. The types of collateral held include residential and
commercial real estate and, to a lesser degree, personal property, business
inventory and accounts receivable.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Expiration dates are usually within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loans to customers.
The Bank grants residential, commercial and consumer loans
principally to customers in Maine's Hancock, Washington, Waldo, Knox and
Lincoln counties. Although the loan portfolio is diversified, a
substantial portion of the debtors' ability to honor their contracts
depends upon local economic conditions, especially in the real estate
sector. At December 31, 2002, there were no borrowers whose total
indebtedness to the Bank exceeded regulatory limits.
The consolidated balance sheets do not include various contingent
liabilities such as liabilities for assets held in trust. Management does
not anticipate any loss as a result of these contingencies.
17. LITIGATION
At December 31, 2002, the Company was involved in litigation arising
from normal banking, financial and other activities of the Bank.
Management, after consultation with legal counsel, does not anticipate that
the ultimate liability, if any, arising out of these matters will have a
material effect on the Company's financial condition.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for
the Bank's financial instruments. Fair values are calculated based on the
value of one unit without regard to any premium or discount that may result
from concentrations of ownership of a financial instrument, possible tax
ramifications or estimated transaction costs. If these considerations had
been incorporated into the fair value estimates, the aggregate fair value
amount could have changed.
Cash, Due from Banks and Federal Funds Sold
The fair value of cash, due from banks and federal funds sold
approximates their relative book values at December 31, 2002 and 2001, as
these financial instruments have short maturities.
Available for Sale Securities and Held to Maturity Securities
Fair values are estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily available
through market sources
36
other than dealer quotations, so fair value estimates are based on quoted
market prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Management has determined that the fair value
approximates book value on all loans with maturities of one year or less or
variable interest rates. The fair values of all other loans are estimated
based on bid quotations received from securities dealers. The estimates of
maturity are based on the Bank's historical experience with repayments for
each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions and the effects of
estimated prepayments.
Loans Held for Sale
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Accrued Interest Receivable
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Other Investment Securities, Federal Home Loan Bank Stock and Federal
Reserve Bank Stock
The fair value of these financial instruments approximates the book
value as these instruments do not have a market, nor is it practical to
estimate their fair value without incurring excessive costs.
Cash Surrender Value Life of Insurance
The fair value is based on the actual cash surrender value of life
insurance.
Deposits
Fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings deposits, NOW accounts and money market
and checking accounts, equals the amount payable on demand. The fair
values of certificates of deposit are based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from
the low cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market. If that value was considered, the
fair value of the Bank's net assets could increase.
Accrued Interest Payable
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Advances from Federal Home Loan Bank
The fair values of advances are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Other Borrowed Funds
The carrying amount of borrowings under repurchase agreements
maturing within 90 days approximates their fair value.
Commitments to Extend Credit
The Bank has not estimated the fair values of commitments to
originate loans due to their short-term nature and their relative
immateriality.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment, and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. The latter may include deferred
tax assets, bank premises and equipment and other real estate owned. In
addition, tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and
have not been considered in any of the estimates.
37
A summary of the fair values of the Company's significant financial
instruments at December 31, 2002 and 2001 follows:
2002 2001
---- ----
Carrying Estimate of Carrying Estimate of
Value Fair Value Value Fair Value
<s> <c> <c> <c> <c>
ASSETS
Cash, due from banks and federal
funds sold $ 16,646,761 $ 16,646,761 $ 21,865,732 $ 21,865,732
Available for sale securities 100,755,799 100,755,799 94,403,282 94,403,282
Held to maturity securities 3,316,653 3,470,703 3,526,626 3,586,393
Other investment securities 5,496,492 5,496,492 5,039,950 5,039,950
Loans 222,547,249 227,131,722 208,114,745 206,490,000
Loans held for sale 5,420,697 5,420,697 2,774,179 2,774,179
Accrued interest receivable 2,365,133 2,365,133 2,128,351 2,128,351
Cash surrender value life insurance 7,832,370 7,832,370 7,442,277 7,442,277
LIABILITIES
Deposits 275,764,694 277,088,365 267,907,126 268,862,000
Accrued interest payable 613,083 613,083 887,426 887,426
Advances from Federal Home Loan Bank 45,959,829 47,085,845 41,957,641 43,130,000
Other borrowed funds 13,063,631 13,063,631 12,135,398 12,135,398
Insert photo of Becky Sargent
INVESTMENT
Free educational opportunities provided by financial institutions help
prepare their customers make better financial choices. A proactive
approach of investment through education helps to secure financial success
and further strengthen customer relationships.
19. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Union Bankshares Company as of
December 31, 2002 and 2001 and for each of the years ended December 31,
2002, 2001 and 2000 are presented as follows:
BALANCE SHEETS
December 31, 2002 and 2001 2002 2001
---- ----
<s> <c> <c>
ASSETS
Cash $ 36,513 $ 330,854
Investment in subsidiary 31,120,217 26,729,355
Core deposit intangible 214,235 260,977
Goodwill 6,305,130 6,305,130
Other assets 1,092,973 877,263
----------- -----------
Total assets $38,769,068 $34,503,579
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 315,776 $ 317,622
Other liabilities 134,896 49,602
Shareholders' equity 38,318,396 34,136,355
----------- -----------
Total liabilities and shareholders' equity $38,769,068 $34,503,579
=========== ===========
STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000 2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Dividend income $1,267,200 $1,224,900 $ 14,704,600
Equity in undistributed earnings of subsidiary (1) 3,133,392 2,523,002 (11,519,371)
Other income 20,806 12,836 11,754
---------- ---------- ------------
Total income 4,421,398 3,760,738 3,196,983
Operating expenses 106,258 534,566 196,490
---------- ---------- ------------
Net income $4,315,140 $3,226,172 $ 3,000,493
========== ========== ============
<FN>
(1) Amount in parenthesis represents the excess of dividends over net
income of subsidiary.
</FN>
38
STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000 2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,315,140 $ 3,226,172 $ 3,000,493
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Undistributed earnings of subsidiary (2,996,623) (2,523,002) 11,519,371
Amortization 46,742 498,307 162,406
(Increase) decrease in other assets (215,710) (23,426) 156,367
Increase in other liabilities 85,294 0 0
----------- ----------- ------------
Net cash provided by operating activities 1,234,843 1,178,051 14,838,637
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs 0 (24,144) (1,560,759)
Cash paid to Mid-Coast stockholders in connection with
Mid-Coast acquisition 0 0 (11,809,047)
Cash received through Mid-Coast acquisition 0 0 21,698
----------- ----------- ------------
Net cash used by investing activities 0 (24,144) (13,348,108)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,267,960) (1,184,021) (1,155,552)
Purchase of treasury stock (453,432) (40,906) (85,260)
Sale of treasury stock 192,208 47,499 55,023
----------- ----------- ------------
Net cash used by financing activities (1,529,184) (1,177,428) (1,185,789)
----------- ----------- ------------
Net increase (decrease) in cash (294,341) (23,521) 304,740
Cash at beginning of year 330,854 354,375 49,635
----------- ----------- ------------
Cash at end of year $ 36,513 $ 330,854 $ 354,375
=========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Net increase in net unrealized gain
on available for sale securities $ 1,720,407 $ 996,812 $ 1,661,802
Net decrease from minimum pension liability adjustment $ (326,168) $ 0 $ 0
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Union Bankshares Company
We have audited the accompanying consolidated balance sheets of Union
Bankshares Company and Subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent
fairly, in all material respects, the consolidated financial position of
Union Bankshares Company and Subsidiary as of December 31, 2002 and 2001,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
2002 in conformity with U.S. generally accepted accounting principles.
As discussed in notes 1 and 9 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002 in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
Berry, Dunn, McNeil & Parker
Portland, Maine
January 24, 2003
40
UNION BANKSHARES COMPANY &
UNION TRUST COMPANY DIRECTORS
Arthur J. Billings
President, Barter Lumber Company
Peter A. Blyberg
President
Blake B. Brown
President & Owner, Brown's Appliance and TV
Richard C. Carver
Owner, Carver Oil Company; Part Owner, Carver Industries
Peter A. Clapp
President, Blue Hill Garage
Samuel G. Cohen
Attorney, Cohen & Cohen
Sandra H. Collier
Attorney at Law, Sandra Hylander Collier Law Offices
Robert B. Fernald
Treasurer, A. C. Fernald Sons, Inc. & Jordan Fernald
Douglas A. Gott
Owner, Douglas A. Gott & Sons
James L. Markos, Jr.
General Manager, Maine Shellfish Company, Inc.
John V. Sawyer II
Chairman of the Board; Retired President, Worcester-Sawyer Agency
Stephen C. Shea
Treasurer, E. L. Shea, Inc.; President, Shea Leasing
Robert W. Spear
Commissioner of Agriculture - State of Maine
Richard W. Teele
Secretary; Retired Former Executive Vice President & Treasurer
Paul L. Tracy
President, Owner, Winter Harbor Agency; Vice President,
Co-Owner, Schoodic Insurance Agency;
Vice President, Co-Owner, MDI Insurance Agency;
Co-Owner, Grindstone Financial Group LLC
Co-Owner, Insurance Source of ME
41
UNION BANKSHARES COMPANY
DIRECTORY OF OFFICERS
John V. Sawyer II
Chairman of the Board
Peter A. Blyberg
President
John P. Lynch
Executive Vice President
Peter F. Greene
Senior Vice President
Sally J. Hutchins
Senior Vice President & Clerk
Rebecca J. Sargent
Senior Vice President, Senior Trust Officer
Richard W. Teele
Secretary
UNION BANKSHARES COMPANY
& UNION TRUST COMPANY
HONORARY DIRECTORS
Franklin L. Beal
Retired
David E. Honey
Retired, Former Manager Swan's Island Electric Co-op
Delmont N. Merrill
President, Merrill Blueberry Farms, Inc.
Thomas R. Perkins
Retired Pharmacy Owner, Retired Maine Legislator (Senator),
Retired Legislative Liaison MSHA
John E. Raymond
President, Bimbay, Inc.
Casper G. Sargent, Jr.
Owner, Sargent's Real Estate Corp.
Mary T. Slaven
Realtor
Douglas N. Smith
Retired
I. Frank Snow
Retired
Richard W. Whitney
Dentist
42
UNION TRUST COMPANY
DIRECTORY OF OFFICERS
John V. Sawyer II
Chairman of the Board
Peter A. Blyberg
President, Chief Executive Officer
John P. Lynch
Executive Vice President, Senior Banking Officer
Robert E. Carter
Senior Vice President, Branch Administrator
Peter F. Greene
Senior Vice President, Senior Bank Services Officer
Sally J. Hutchins
Senior Vice President, Treasurer & Clerk
Rebecca J. Sargent
Senior Vice President, Senior Trust Officer
Edwin Bonenfant
Vice President, Investment Officer
Penny Carter
Vice President, Relationship Manager
Janis Guyette
Vice President, Trust Operations Officer
Phyllis C. Harmon
Vice President, Relationship Manager
David A. Krech
Vice President, Investment Officer
Bonnie Lash
Vice President, Relationship Manager
Sarah Luck
Vice President, Trust Administrator
Lorraine S. Ouellette
Vice President, Trust Officer
Bette B. Pierson
Vice President, Mortgage Loan Officer
Geddes Simpson, Jr.
Vice President, Trust Officer
Craig Worcester
Vice President, Financial Services Officer
Michelle Bannister
AVP, Training and Development Officer
James M. Callnan
AVP, Senior Information Services Officer
43
Paul Doody
AVP, Relationship Manager
Debra A. Ehrlenbach
AVP, Auditor
Laurence D. Fernald, Jr.
AVP, Appraisal Review and Loan Officer
Lynda C. Hamblen
AVP, Relationship Manager
Patti S. Herrick
AVP, Information Services Officer
Mary Lou Lane
AVP, Mortgage Underwriter Officer
Kathe Marion-Gallant
AVP, Underwriter
Peter C. O'Brien
AVP, Underwriter
Deborah F. Preble
AVP, Controller
Diane Rimm
AVP, Operations Manager, Cornerstone
Sandy Salsbury
AVP, Human Resource Officer
Susan A. Saunders
AVP, Bank Services Officer
Stephen L. Tobey
AVP, Security Officer
Tina Torres-York
AVP, Relationship Manager
Charlie Ault
Business Development Officer
Linda Carter
Deposit Services Officer
Patricia Ellis
Assistant Treasurer
Ronald Hamilton
Financial Consultant
Sylvia Joy
Trust Officer
Vicki Leathers
Relationship Manager
Jeannie Merchant
Marketing Officer
44
Cynthia Pinkham
Teller Services Officer
Rhonda Reardon
Assistant Trust Officer
Annette Russell
Financial Planning Officer
Nancy Schultz
Financial Consultant
Scott Shields
Financial Planning Officer
Brenda Strout
Trust Officer
Chuck Yestramski
Network Administrator Specialist
UNION TRUST COMPANY OFFICES
Bar Harbor
Christopher H. Keefe
Vice President, Senior Relationship Manager
Belfast
Pamela Dalfonso
Relationship Manager
Blue Hill
Pamela G. Fowler
VP, Relationship Manager
Dianne Thompson
Assistant Branch Manager
Castine
Pamela G. Fowler
VP, Relationship Manager
Cherryfield
James E. Haskell
AVP, Relationship Manager
Ellsworth Shopping Center
Melody L. Wright
Branch Manager
Jefferson
Dianne Lawrence
AVP, Branch Manager
Jonesport
Wendy W. Beal
AVP, Relationship Manager
Machias
Lisa A. Holmes
AVP, Relationship Manager
Milbridge
James E. Haskell
AVP, Relationship Manager
45
Rockland
Jane Dagley
AVP, Relationship Manager
Somesville
Andrea G. Leonard
Vice President, Relationship Manager
Stonington
Harry R. Vickerson III
AVP, Relationship Manager
Waldoboro
April Murray
Branch Manager
UNION TRUST COMPANY PERSONNEL
Allen, Deborah
Allen, Tabatha
Austin, Lois
Batson, Harold
Bayrd, Rona
Beal, Jessica
Bell, Janice
Bonville, Melissa
Bragg, Randy
Brooks, Wendy
Carter, Glendon
Carter, Khristy
Carver, Lisa
Chatto, Elizabeth
Clark, Kirsten
Clay, Dawn
Cole, Richard
Colson, Sylvia
Cook, Diana
Craveiro, Christina
Cunningham, Sylvia
Curtis, Kristen
Davis, Rachael
Davis, Sharon
Day, Francis
Dillon, Patricia
Douglass, Joanne
Duffy, Tracy
Durling, Colleen
Edgecomb, Deborah
Emery, Sherry
Faulkner, Kathy
Fernald, Joanna
Foss, John
Gaul, Judith
Gimpel, Elizabeth
Gokey, Tammy
Grant, Victoria
Gray, Shelley
Grindle, Eugene
Hall, Maria
Handy, Louise
Hebert, Judith
Hennigan, Robin
Hills, Darlene
Hinckley, Melissa
Hustus, Gayle
Hutchins, Rebecca
46
Hutchinson, Elwell
Jewell, Beth
Johnson, Mindy
Kalloch, Debra
Kaspala, Tammy
Kelley, Cindy
Kimball, Brandi
Leonard, Kathy
Libby, Gretta
Look, Cheryl
Look, Lisa
MacLaughlin, Wendy
Marshall, Carol
Martin, Michelle
McCormick, Bernadette
McHenan, Regina
Merchant, Michelle
Merritt, Caroline
Merritt, Jared
Otis-Anderson, Sandra
Ottman, Bruce
Owen, Doris
Philbrook, Michelle
Phillips, Jamie
Pineo, Muriel
Podlubny, Helene
Podraza, Kathleen
Reese, Nancy
Richardson, Candice
Ring, Wanda
Salisbury, Jane
Sargent, Lucinda
Sargent, Tammy
Sawyer, Cara
Sawyer, Donna
Scott, Marsha
Shields, Valerie
Silverman, Mary
Simpson, Adele
Sinford, Nicole
Spaulding, Virginia
Spear, Annette
Sprague, Donna
Sproul, Bonnie
Sprowl, Kelly
Starr, Alana
Storer, Jessica
Swett, Andrea
Tracy, Deborah
Treadwell, Mattie
Tucker, Nancy
Tyler, Kimberly
Vittum, Julie
Wallace, Jayne
Willey, Christina
Wilson, Jessica
Wilson, Stephanie
Woodward, Cheryl
Worster, Nancy
Youngblood, Mary
47
Union Trust Company is committed to offering equal opportunity in regard to
employment, training, benefits, salary administration and promotional
opportunities to all employees, regardless of race, color, religion, sex,
age or national origin. The Bank has implemented an Affirmative Action
Plan.
Upon written request, the Company will provide, without charge, a copy of
its 2002 Annual Report on SEC Form 10K, including the financial statements
and schedules required to be filed with the Securities and Exchange
Commission. Interested persons should write to:
Sally J. Hutchins, Senior Vice President
Union Bankshares Company
P.O. Box 479
Ellsworth, Maine 04605
Insert photos of Belfast Branch
BRANCHING OUT
Construction began in 2002 on the new Belfast branch location. The new
location at 17 Belmont Avenue will bring higher levels of customer
convenience with scheduled Saturday hours beginning in April 2003.
Insert photo of Camden Branch
SERVICING FINANCIAL SERVICES NEEDS IN CAMDEN
A new Financial Services Center was opened at 75 Elm Street in Camden
during 2002. The office offers a full array of advisory services staffed
with a Cornerstone Financial Consultant and a Trust Administrator.
48