Exhibit 13
UNION BANKSHARES COMPANY
2003 ANNUAL REPORT
True success is measured by the well-being of every woman, child and man in
the community. On the most basic level, we all need health, dependable work
and family support, not only to make ends meet, but to realize bigger dreams.
Dedication
In Memory of:
Alfred S. Martin
At Union Trust, community has always been as important to us as the bottom
line. Last year, 180 employees from all service areas gave over 11,000
hours of their time, volunteering in more that 200 charitable
organizations. Organizations like Make A Wish Foundation's Walk for
Wishes/Dash for Dreams - where the Hancock county walk raised the most
funds statewide. Or Habitat for Humanity, where our employees gave 200
hours in the name of low-cost housing. Or the National Teach Children to
Save Day to promote literacy in our schools, which saw 13 of our staff
members speaking to classrooms about topics like saving versus spending.
We encourage our employees to give by giving them time off during work, if
that's what the job demands, but we never had a formal volunteer policy and
we never insisted. We're lucky that way. We have people who care deeply
about their communities and are willing to put brain and muscle behind
their convictions.
We bowl with Big Brothers/Big Sisters; we walk for Cancer and the March of
Dimes; we hammer and paint for Habitat for Humanity; we educate potential
2
non-profit board members through The Board Network; we reward the
extraordinary. Our 2004 America's Promise Volunteer of the Year was
Charlie Ault of Damariscotta, for his exemplary work with kids.
Union Trust has been a bank for over 116 years. We do business with
virtually every segment of our society from Down East in Machias to the
Damariscotta area in the Mid-Coast. We provide loans, deposit services,
investment advice, financial support and - perhaps most important, our time
and energy. We work with nonprofit agencies, customers, and contractors to
help make owning a home a reality. We fund job-creating projects and
partner with agencies to ensure that business owners get the resources they
need to succeed. Entrepreneur Magazine repeatedly named us one of the top
small business-friendly banks in Maine.
Working year after year with the people in our communities, we are making a
difference. You can follow our financial growth and stability in the
numbers throughout this annual report, but how do you measure the success
of volunteering? Through personal stories. One man, one woman and one
child begin to tell us how communities can become a little easier, a little
richer - one life at a time.
Insert four photos - Friends of Acadia Roadside Pick-up, Habitat for
Humanity, Bowl for Kids Sake and Down East AIDS Network Walk
3
DYLAN BERNAQUER
Insert photo of Dylan Bernaquer
Bree Sargent was a single mom with a child care problem. To keep her job
at Jackson Lab and support her family, she had to take her son Dylan and
her infant Damon to separate care facilities in opposite directions. She
drove from Gouldsboro to Milbridge to Ellsworth to Bar Harbor and back,
every workday. Child and Family Opportunities (CFO) is one of the few
centers that take care of babies. When they called Bree with two openings,
she quit worrying. Now she spends more time with her boys and when they
need special care, the CFO staff comes through. "Seeing my boys smiling
faces when I drop them off in the morning and pick them up in the afternoon
is enough for me to know that they are well cared for and happy."
Insert photo of Bree Sargent, Damon and Dylan Bernaquer
4
Child & Family Opportunities has airy classrooms, windows stretching from
floor to ceiling, outdoor play areas that make you want to be a kid again
and trained professionals who obviously love what they do. Executive
Director Jeanie Mills sums it up. "This building is about children. The
administrative staff lines up to rock babies over their lunch hour."
What helps parents, helps local businesses. According to Mills, "Employers
complained they couldn't hire or keep good employees because child care
options were too few here." She says businesses are less likely to settle
in an area where basic human needs aren't being met.
Insert photo of CFO staff member Tammy Walker rocking Damon Bernaquer.
Union Trust knew there was a need, in fact the bank experienced it first
hand. "We employ a lot of young parents who benefit from the good care
their children receive," said John Lynch, Executive VP. "Many couldn't
work without it. Lending financial support helped the community, yes, but
it also helped us."
The bank helped fund the creation of the new child care center, which in
turn created 14 new jobs. But child care is only part of the CFO picture.
They respond personally to the unique needs of parents and individual
caregivers. They provide financial assistance, training and classes. They
make sure children are served healthy meals and pay close attention to
special food and allergy concerns. They have a lending library and put out
a newsletter loaded with current events. Dylan, however, doesn't care
about all that. He just likes the slide.
5
Coastal Enterprises, Inc. started as a community development corporation
with roots in the civil rights struggle. Today they have more than 4,000
corporations in the form of community development banks, credit unions and
micro funds. Their focus is bridging that capital gap to get things
cooking for cottage industries, small farms, child care centers and other
micro businesses. They also give technical assistance in everything from
writing business plans to designing web sites. But their focus has always
been on entrepreneurs - their values, integrity, ideas, experience. And
above all, they listen for passion in a project.
Their mission statement reads: to help people and communities,
particularly those with low incomes, reach an adequate and equitable
standard of living, working and learning in harmony with the natural
environment.
Union Trust shared their sentiments. The bank was looking for aggressive
ways of supporting new business ventures and partnering with projects to
boost local employment. Coastal Ventures II Fund represented a viable
means of delivering capital dollars to businesses in need or, in the case
of Maine Cat, businesses with the enviable problem of too much success.
Insert photo of CEI representatives Dawn Shillings and Nat Henshaw meeting
with Union Trust Company officers to discuss support for new business
ventures.
6
DICK VERMEULEN
Insert photo of Dick Vermeulen
Detail is everything to Maine Cat. Owner Dick Vermeulen works with fifteen
of the state's most talented craftsmen to build catamarans of such timeless
quality, the process is regarded as a dying art. To deliver his first four
orders, he relied on Union Trust. The world responded, orders mounted,
Maine Cat needed more room. Vermeulen found the perfect location - a spot
on the Bremen waterfront. Putting up a building? No small financial
venture. "Union Trust and CEI made it happen. More than a financial
partner, the bank's been a friend. I respect the business sense of
Christina Torres-York from the Waldoboro branch." Maine Cat got their
building, they're finishing up order #56, they're talking to Union Trust.
Seems they need more room...
7
PAT JORDAN
Insert photo of Pat Jordan
Seven years ago, thanks to an annual mammography, Pat Jordan learned she
had breast cancer. "It was difficult to comprehend I had the "Big C."
With help, she coped, but in 2001 cancer was found in her other breast.
"Thankfully, it wasn't invasive. I take daily medication, keep busy, keep
a positive outlook, but my priorities definitely changed. I feel a bond
with other women who have this. I call, send notes, I fundraise." The
American Cancer Society of North Eastern Maine gave Pat a "Courage Award"
in 2002. "I'm grateful for the MCMH Breast Clinic and for the support of
Union Trust. And by the way, the Gala's fun, too."
8
The Celebrity Chef's Gala has raised over $300,000 for the Maine Coast
Memorial Hospital's Breast and Osteoporosis Center. Securing operational
funds was a challenge, and to offer women the best care, they needed the
latest technology. They also needed a positive link with the community at
large. What better way than four-star food, live music and dancing? And
what if local chefs could show off their culinary prowess? The wheels
began to turn.
Rich Malaby, owner of The Crocker House Inn, has chaired the Gala for the
past ten years. He joined forces with the bank's Rebecca Sargent, Sr. Vice
President of Financial Services, and Union Trust became the major sponsor.
Rebecca recruited hands-on help from bank volunteers who decorated, set up
tables, made props, cleaned - you name it. And Malaby got so involved with
the needs of the hospital, he is now vice-chairman of the board. The Gala
has been successful on two important fronts: providing crucial financial
assistance for the hospital, and bringing the community closer together
through a shared goal.
And every year, there are more dancing feet, more sumptuous tables, more
funds pouring directly into the Breast and Osteoporosis Center so that
stories with good endings, like Pat Jordan's, can be the rule rather than
the exception.
Insert photo - Paul Marcosian, Sullivan Harbor Smokehouse chef and smoker,
and Rich Malaby taste testing the wine.
9
Dear Shareholder,
Last year would best be characterized as one of reorganizing,
repositioning, and rebuilding. The nature of the banking business in Maine
is distinguished by strong competitive pressures, slow economic growth and
a high cost of doing business. This puts a premium on strategic planning,
attracting and retaining high quality staff and making the right decisions
about resource allocation. Coastal Maine is more fortunate than other
areas of the state. The counties covered by the Bank are among the fastest
growing, not only in terms of population, but also as measured by other
indicators such as personal income. The combination of these and other
factors puts our focus on key areas that present the best opportunities for
future growth.
Reorganization
At the end of 2003 we announced a management reorganization aimed at
targeting our efforts more effectively on key growth opportunities. Two
banking regions were established, one encompassing Hancock and Washington
Counties, the other Knox, Lincoln and Waldo Counties. A senior regional
manager was appointed for each region. This structure puts the decision-
making closer to the customer and recognizes the reality that Mid-Coast and
Down East Maine, while geographically proximate, are very different markets
with unique challenges.
John Lynch, who has been responsible for business development throughout
the Bank during his career with Union Trust Company, continues to be
responsible for the Down East Region of Hancock and Washington Counties.
John is well-known and respected in the market and brings a depth of
knowledge and experience to bear on the challenges ahead. We were
fortunate in attracting Kent Winters as Mid-Coast Regional Manager
responsible for Knox, Lincoln and Waldo Counties. Kent has a long history
with Maine banks, having worked at Depositors Trust, Maine Savings and Key
Bank, where, among other things, he was President and CEO of Key Bank New
Hampshire.
Our third major business focus is in the Financial Services area.
Financial Services includes brokerage, insurance, retirement, employee
benefits, investments, personal trust and financial planning services to
individuals, businesses, municipalities and non-profit organizations.
Rebecca Sargent continues to bring a strong skill set to the job of
managing this business across our whole territory. Financial Services has
been a growth area for us for the past six years, and we see continued
opportunities there in the future.
Another component of the reorganization was the consolidation of bank
operations, mortgage services, branch administration, training and
development and human resources under one senior manager. Peter Greene has
expanded his roll as Senior Vice President of Bank Services and assumed the
new position of Chief Administrative Officer. Peter's years of experience
and management skills will enhance support for all business lines through
greater efficiency and operational effectiveness.
This reorganization allows us to focus on growing our two banking regions
and our financial service business. Everything we do internally will
support both efforts.
In keeping with the changing nature of our business and regulatory
environment, as well as a desire to improve Board interaction and
efficiency and effectiveness, the Board of Directors went through some
significant changes this year. Their corporate governance role was
enhanced. We created a separate Corporate Governance and a Compensation
Committees of the Board which, in addition to the Audit Committee, are
comprised solely
10
of independent Directors. The Corporate Governance Committee also acts as
the Nominating Committee for the Board and oversees our succession planning
efforts. For the past two years, the Audit Committee - in response to
changing regulatory requirements - established a practice of meeting
regularly with our outside auditors.
The Board also approved a set of Corporate Governance Principles, a Code of
Ethics for Bank Officers, and a Code of Ethics for the Board. In addition
to the committee restructuring, members of the Board are attending seminars
and conferences covering numerous areas of banking, as well as Board
practices and procedures. Your Board is organized, informed, educated and
cares deeply about the future of Union Trust Company.
Repositioning
As you know, several years ago we made a strategic decision to move down
the coast and establish a significant presence in the Mid-Coast region.
This has worked out well for us, and the recent reorganization and staffing
moves should bolster our position there. We cannot, however, be all things
to all people, and are constantly looking to prioritize our efforts.
As part of providing better focus to our company, we reviewed several
business lines and made key decisions involving outsourcing, selling or
consolidation. In the case of our merchant card processing, we have
outsourced our business to Primax and expect not only to realize savings
but, more importantly, to be able to provide a better product at a better
price to our customers. The same competitive pressures drove us to sell
our credit card portfolio. This is a business of scale, and we were not in
a position to compete with the large monoline card companies. The third
step we took was to consolidate our Jefferson Branch operations into the
Waldoboro Branch. All these moves allow us to focus our resources where
the growth potential is better.
Rebuilding
We took several steps in rebuilding the capabilities of the organization.
First, we literally built a new branch to replace our old Belfast office,
moving into our new and better location on Route 3 last April. This
facility gives us more visibility, more room and, we believe, has
contributed to our significant growth in loans and deposits. We also
invested in people this year by adding two key positions to our corporate
structure. We strengthened our financial capabilities with the hiring of
Tim Maynard as CFO and our credit culture with the addition of Michael J.
Marino as Chief of Credit Administration.
We believe that all of these steps place us in a strong, competitive
position and provide for a stronger Board and management team. We are in
some of the best markets in Maine but also some of the most competitive.
However, we believe that by recruiting the strongest board, management and
staff, we can and will succeed in delivering better value for you, our
Shareholder.
We thank you for your continued support.
Sincerely,
/s/ John V. Sawyer II /s/ Peter A. Blyberg
John V. Sawyer, II Peter A. Blyberg
Chairman of the Board President and Chief Executive
Officer
11
FIVE-YEAR SUMMARY (000'S OMITTED)
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Deposits $298,454 $275,765 $267,907 $245,581 $192,848
Loans, gross 286,408 226,286 211,615 205,019 127,623
Securities 138,155 109,569 102,970 109,958 107,509
Shareholders' equity **39,210 **36,394 **33,606 **31,586 **29,771
Total assets 464,194 381,029 362,003 348,242 257,850
Net earnings 4,278 4,315 3,226 3,000 3,355
Earnings per share 7.46 7.49 5.59 5.19 5.80
EQUITY RATIOS
Total equity expressed as a percentage of average:
**2003 **2002 **2001 **2000 **1999
- -----------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Deposits 13.8% 13.4% 13.1% 14.4% 15.6%
Loans 15.3% 16.6% 16.1% 19.0% 25.0%
Total assets 9.8% 9.8% 9.3% 10.4% 11.7%
Earning assets 10.7% 10.9% 10.3% 11.4% 12.7%
OTHER FINANCIAL HIGHLIGHTS
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Return on average
shareholders' equity** 11.3% 12.3% 9.9% 9.5% 11.7%
Return on average assets 1.1% 1.2% 0.9% 1.0% 1.3%
Return on average earning assets 1.2% 1.3% 1.0% 1.1% 1.4%
<FN>
** Excluding net unrealized gain (loss) net of deferred taxes on
available for sale securities of $1,542,454, $2,250,696, $530,290,
$(466,522) and $(2,128,324) at December 31, 2003, 2002, 2001, 2000
and 1999, respectively, and minimum pension liability adjustment, net
of deferred taxes, of $(326,168) at December 31, 2002.
</FN>
</TABLE
Insert the following 5 year bar charts:
TOTAL ASSETS
(IN THOUSANDS)
<s> <c>
1999 257,850
2000 348,242
2001 362,003
2002 381,029
2003 464,194
EARNINGS PER SHARE
(IN DOLLARS)
<s> <c>
1999 5.80
2000 5.19
2001 5.59
2002 7.49
2003 7.46
12
NET INCOME
(IN THOUSANDS)
<s> <c>
1999 3,355
2000 3,000
2001 3,226
2002 4,315
2003 4,278
BOOK VALUE PER SHARE
(IN DOLLARS)
<s> <c>
1999 51.50
2000 54.67
2001 58.19
2002 63.21
2003 68.38
SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<s> <c>
1999 29,771
2000 31,586
2001 33,606
2002 36,394
2003 39,210
DIVIDENDS PER SHARE
(IN DOLLARS)
<s> <c>
1999 1.92
2000 2.00
2001 2.10
2002 2.20
2003 2.35
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2003
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 34
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. 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
Union Trust 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 116th
year, Union Trust is committed to providing outstanding personalized service
while maintaining and expanding its position as one of Maine's preeminent
community banks.
14
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 Union Trust 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.
Union Trust 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, Union Trust is able to give back to the community
it serves. During 2003, our employees contributed over 11,000 hours of
volunteer time to over 200 organizations.
As customer service expectations increase, Union Trust 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, 2003 and 2002, and the
financial results of operations during 2003, 2002 and 2001. The
consolidated financial statements and related notes beginning on page 29 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 2003 of $4,278,295, a decrease of
$36,845 or 0.9% over 2002, as compared to an increase of $1,088,968 or
33.8% for 2002 and an increase of $225,679 or 7.5% for 2001.
The following table summarizes the status of the Company's earnings and
performance for the periods stated.
December 31
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
Earnings per share $ 7.46 $ 7.49 $5.59
Return on average shareholders' equity* 11.30% 12.30% 9.90%
Return on average assets 1.10% 1.20% 0.90%
Return on average earning assets 1.20% 1.30% 1.00%
<FN>
* Excluding net unrealized gain (loss) net of deferred taxes on
available for sale securities of $1,542,454, $2,250,696 and $530,290
at December 31, 2003, 2002 and 2001, respectively, and minimum
pension liability adjustment, net of deferred taxes, of $(326,168) at
December 31, 2002.
</FN>
The decrease in net income for the twelve months ending December 31, 2003
versus the same period in 2002 was primarily due to an increase in
noninterest expenses of $379,285 or 2.8%, primarily due to salary and
benefit increases, offset by an increase in net interest income of $129,932
and an increase in noninterest income of $292,508, primarily due to loan
and financial service fees.
15
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. During 2003, a sustained low
interest rate environment resulted in lower interest income and expense
offset in part by overall loan growth.
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.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(Dollars In Thousands)
(On a Tax Equivalent Basis)
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
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 $115,905 $ 4,920 4.24% $106,587 $ 5,278 4.95% $ 95,873 $ 5,992 6.25%
Securities held to maturity 3,049 235 7.71 3,533 267 7.56 3,722 282 7.58
Federal funds sold 981 14 1.43 5,711 96 1.68 5,989 168 2.81
Loans, net 246,581 15,404 6.25 218,479 15,984 7.32 207,099 17,560 8.48
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning assets 366,516 $20,573 5.61 334,310 $21,625 6.47 312,683 $24,002 7.68
======= ==== ======= ==== ======= ====
Other nonearning assets 32,916 32,706 30,111
-------- -------- --------
$399,432 $367,016 $342,794
======== ======== ========
LIABILITIES
- -----------
INTEREST BEARING LIABILITIES:
Savings deposits $161,953 $ 485 0.30% $148,245 $ 786 0.53% $120,127 $ 1,311 1.09%
Time deposits 100,803 2,416 2.40 99,666 3,092 3.10 108,781 5,380 4.95
Money market accounts 22,465 406 1.81 19,810 677 3.42 25,951 834 3.21
Borrowings 61,491 2,655 4.32 53,474 2,529 4.73 46,025 2,882 6.26
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing liabilities 346,712 $ 5,962 1.72 321,195 $ 7,084 2.21 300,884 $10,407 3.46
======= ==== ======= ==== ======= ====
Other noninterest bearing liabilities
& shareholders' equity 52,720 45,821 41,910
-------- -------- --------
$399,432 $367,016 $342,794
======== ======== ========
Net interest income $14,611 $14,541 $13,595
Net interest rate spread 3.89 4.26 4.22
Net interest margin 3.99 4.35 4.35
16
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, 2003, 2002 and 2001
(In Thousands)
Year Ended December 31, 2003 vs. 2002
Increase (Decrease) Due to Change In
Volume Rate Rate/Volume Total
------ ---- ----------- -----
<s> <c> <c> <c> <c>
INTEREST EARNING ASSETS
- -----------------------
Securities available for sale $ 459 $ (401) $ (400) $ (342)
Securities held to maturity (36) 37 (23) (22)
Federal funds sold (80) 63 (65) (82)
Loans, net 2,065 (1,749) (862) (546)
------ ------- ------- -------
Total interest earning assets 2,408 (2,050) (1,350) (992)
------ ------- ------- -------
INTEREST BEARING LIABILITIES
- ----------------------------
Savings deposits 19 (11) (309) (301)
Time deposits 33 (24) (685) (676)
Money market accounts 91 (158) (204) (271)
Borrowed funds 380 (344) 90 126
------ ------- ------- -------
Total interest bearing liabilities 523 (537) (1,108) (1,122)
------ ------- ------- -------
Net change in net interest income $1,885 $(1,513) $ (242) $ 130
====== ======= ======= =======
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
====== ======= ======= =======
Net interest income increased $129,932 or 0.9% to $14,135,492 in 2003 from
$14,005,560 in 2002. Interest income on total earning assets decreased
$991,804 in 2003 from 2002. Interest income on loans decreased $546,000 in
2003 from 2002 primarily due to a decrease in average loan rates from 7.32%
to 6.25% offset in part by an increase in average loans outstanding of
$28,102,000. Interest expense on interest bearing liabilities decreased
$1,121,736 in 2003 from 2002, as a result of a $1,247,081 decrease in
interest expense on deposits offset by an increase of $125,345 in interest
expense on other borrowings. The decrease in interest expense was due
primarily to a combination of a decrease in the average rate
17
paid on deposits from 1.70% in 2002 to 1.20% in 2003 offset in part by a
$17,500,000 increase in average deposits. The decrease in interest expense
on borrowings was due primarily to a decrease in the overall interest rates
on borrowings from 4.73% in 2002 to 4.32% in 2003, offset in part, by an
increase in average balances of $8,017,000 of FHLB advances outstanding and
repurchase agreements during 2003.
Net interest income increased $920,737 or 7.0% to $14,005,559 in 2002 from
$13,084,832 in 2001. This increase was primarily due to increases in
average earning assets offset in part by a decrease in the yield of those
assets. Interest expense on interest bearing liabilities decreased
$3,322,807 in 2002 from 2001 primarily due to a decrease in the average
rate paid on deposits and borrowings.
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 2003, the Federal Reserve decreased the Prime Rate by a total of 25
basis points. The average yield on a tax equivalent basis on interest
earning assets decreased 86 basis points to 5.61% for the year ended
December 31, 2003 from 6.47% for the year ended December 31, 2002, while
the average cost of interest-bearing liabilities decreased 49 basis points
to 1.72% for the year ended December 31, 2003 from 2.21% for the year ended
December 31, 2002. As a result, the interest rate spread decreased by 36
basis points to 3.90% for the year ended December 31, 2003 from 4.26% for
the year ended December 31, 2002.
The average balances of nonaccrual loans can also affect the average yield
on all outstanding loans. Non-accrual loans as of December 31, 2003 were
$1,387,310 and lowered the average yield on loans by 4 basis points for
2003. As of December 31, 2002, nonaccrual loans were $1,472,870. The
average yield on loans was lowered by 5 basis points for 2002. The balance
on nonaccrual loans in 2001 was $1,823,000, and the average yield on loans
was lowered by 16 basis points.
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, 2003 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 that would adversely affect
the Company's results of operations.
For the year ended December 31, 2003, the Company increased the allowance
for loan losses through a $420,000 provision for loan losses, compared to
$360,000 in 2002 and $300,000 in 2001. 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, that has risen from $88.0 million at the end
of 1999 to $241.8 million at December 31, 2003. 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.
18
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,
--------------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ ------------------------
% 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 $1,386 20.8% $1,142 25.4% $1,081 31.7%
Residential Real Estate 1,247 65.3 641 57.6 1,289 60.9
Municipal 0 1.1 0 4.3 31 1.5
Installment 287 9.3 247 9.0 96 4.5
Visa 1 0.0 67 0.6 14 0.7
Reserve Checking 25 0.1 36 0.2 5 0.2
Identified 824 3.4 552 2.9 295 0.5
Contingent Liabilities 456 0.0 653 0.0 323 0.0
Unallocated 113 0.0 341 0.0 319 0.0
------ ----- ------ ----- ------ -----
Totals $4,339 100.0% $3,679 100.0% $3,453 100.0%
====== ===== ====== ===== ====== =====
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,
2003 2002
---- ----
(Dollars in Thousands)
<s> <c> <c>
Nonaccrual loans $1,387 $1,473
Loans past due 90 days and accruing 360 351
------ ------
Total nonperforming assets 1,747 1,824
Ratio of total nonperforming loans to capital and the
allowance for loan losses .040 .046
Ratio of net (recoveries) charge-offs to loans (.001) .001
Ratio of allowance for loan losses to loans .020 .020
Coverage ratio (allowance for loan losses divided by
nonperforming assets) 2.484 2.017
Ratio of nonperforming assets to total assets .004 .004
Ratio of nonperforming loans to total loans .006 .008
NONINTEREST INCOME
Total noninterest income was $6,166,953, $5,874,445 and $4,906,716 for the
years ended December 31, 2003, 2002 and 2001, respectively. The $292,508
or 5.0% increase in noninterest income during 2003 was primarily
attributable to a $232,159 or 14.7% increase in financial service income,
an increase of $182,079 or 13.9% in loan department income and an increase
of $534,706 in net security gains taken in 2003 offset in part by a
decrease of $481,638 in VISA income due to the sale of that product. 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 services 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 during 2001 was primarily due to increases in financial
services income, VISA income, and loan department income.
19
The following table summarizes information relating to the Company's
noninterest income:
Year Ended December 31, 2003 2002 2001
- ----------------------- ---- ---- ----
<s> <c> <c> <c>
Net security gains $ 557,709 $ 23,003 $ 39,131
Financial services income 1,812,032 1,579,873 1,279,215
Service income 322,548 328,053 303,652
VISA income 384,543 866,181 944,025
Loan department income 1,496,406 1,314,327 862,602
Income from cash surrender value of life insurance 318,065 330,667 305,761
Other noninterest income 1,275,650 1,432,341 1,172,330
---------- ---------- ----------
Total noninterest income $6,166,953 $5,874,445 $4,906,716
========== ========== ==========
NONINTEREST EXPENSE
Total noninterest expenses, which consist primarily of employee
compensation and benefits, occupancy and equipment expenses and other
general operating expenses increased $379,285 or 2.8% during 2003, $349,489
or 2.7% during 2002 and $2,747,837 or 26.5% during 2001. The increase in
noninterest expenses in 2003 was primarily attributable to a $448,007
increase in salary expense due primarily to additional staff, a $411,354
increase in pension and employee benefits primarily due to significant
increases in premium costs and an increase of $57,838 in other professional
fees offset, in part, by a decrease in other expenses of $755,498 primarily
due to a decrease in VISA 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.
INCOME TAXES
The Company recognized $1,760,000, $1,740,000 and $1,350,000 in income tax
expense for the years ended December 31, 2003, 2002 and 2001, respectively.
The effective tax rate was 29.1% for 2003, 28.7% for 2002 and 29.5% for
2001. The Company has sufficient refundable taxes paid in available carry
back years to fully realize its recorded deferred tax asset of $2,175,091
at December 31, 2003.
FINANCIAL CONDITION
Following is a discussion of the material changes in the Company's
financial condition for the periods indicated.
- ---------------------------------------------------------------------------
CHILD & FAMILY OPPORTUNITIES, INC.
Child & Family Opportunities has grown from its humble beginning of serving
a handful of children with the Child and Adult Care Food Program, into an
agency providing early care and education for more than 500 children
annually in nine communities. Incorporated as Action Opportunities in
1970, the agency was renamed Child and Family Opportunities, Inc. in 1998
to better reflect its services that include Head Start, Early Head Start,
child care resource, and referral and subsidy programs.
A new Ellsworth state-of-the-art child care center with administrative
offices opened on June 23, 2003. The facility is literally a dream come
true with its six child care classrooms, two all-weather playgrounds, full
industrial kitchen, administrative wing and high tech conference room.
Designed by Stewart Brecher Architects of Bar Harbor, and enhanced with the
artwork of Jonesboro resident, Marilyn Dowling, the public's reaction has
been tremendous.
Insert photo - CFO staff member Dawn Dow feeding Avery Holbrook with Cole
Leeman and Camille Michaud looking on.
- ---------------------------------------------------------------------------
20
BALANCE SHEET REVIEW
OVERVIEW
Total assets at December 31, 2003 were $464,193,504, an increase of
$83,164,603 or 21.8% from December 31, 2002. The change in assets
consisted primarily of a $60,122,019 increase in loans, an increase of
$28,586,203 in investment securities, offset in part by a decrease in cash
and due from banks and federal funds sold of $1,945,271. Asset growth was
supported by an increase of $22,689,069 in deposits and an increase of
$58,459,604 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 $29,033,136 or 27.3%. During 2003, 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, 2003, the Company had a net unrealized
gain of $2,337,049 in this portfolio.
In 2002, securities available for sale increased $6,599,086 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, 2002, the Company had a net unrealized
gain of $3,426,704 in this portfolio.
Securities held to maturity, which include in-state municipals, decreased
$446,903 or 13.5% in 2003, compared to a $209,973 or 6.0% decrease in 2002.
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 24.
LOANS
The Company offers a wide variety of loan products to serve the financial
needs of individuals, businesses, municipalities and nonprofit
organizations. Total loans (excluding loans held for sale) reached a
record high of $288,906,247 during 2003 and, as of December 31, 2003, had
increased $60,122,019 or 26.6% over 2002 to $286,407,653, primarily due to
an increase in real estate loans as a result of a strategy to retain loans
rather than selling loans. As of December 31, 2002, loans increased 6.9%
over December 31, 2001.
Real estate mortgage loans, which consist of loans secured by real estate
(commercial and residential), increased by $58.9 million or 32.2% in 2003.
During 2002, real estate loans increased by $12.7 million or 7.4% from
$170.2 million to $182.9 million. With a very low interest rate
environment, it has been the Company's asset/liability strategy for 2003 to
hold a certain number of 15 and 30 year fixed rate mortgages in its
portfolio. The yields on these interest earning assets have been higher
- ---------------------------------------------------------------------------
Five of the six classrooms are currently operational and fully enrolled as
of March 2004 (62 children - 24 infants and toddlers; 38 preschoolers).
The sixth classroom will open later this spring and will be used to support
a community need for children needing a specialized child care setting for
up to 12 additional children.
The center provides services for Ellsworth and 10 surrounding communities.
Area businesses with multiple employees that use the services include
Jackson Lab, EBS Building Supply, Gallery Leather, Maine Coast Memorial
Hospital, Wal-Mart, and the Ellsworth Public School System. Thirty-six of
the agency's ninety employees work in the Ellsworth facility. Fourteen of
these employees are in new jobs that were created with the opening of this
facility.
Staff and the community utilize the Holt Conference Room, dedicated to
founding Board Member, Nicholas Holt, who helped create the agency through
his vision more than 30 years ago. Three different college-level courses
are held here three nights a week for between 12-20 students. The courses
are through Washington County Community College and Maine Roads to Quality,
a program of the Muskie Center of USM. In addition, parenting courses,
CPR/First Aid training, staff training and development sessions have been
held. The video conferencing capabilities in the conference room make it
easy to involve parents in agency decision making by linking Hancock County
and Washington County parents once a month for a program governance
meeting.
CFO is proud to open the doors of this beautiful facility every day for the
children and families of the greater Ellsworth area.
- ---------------------------------------------------------------------------
21
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 2003, volumes reached record highs due to
historical low rates.
Commercial loans increased by $4.4 million or 22.5% during 2003 as a result
of specific loan growth goals. In 2002, commercial loans decreased by $1.0
million or 4.9%. 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 decreased by $824 thousand or 4.5% in 2003. In 2002,
consumer loans increased by $536 thousand or 3.0%. Consumer loans include
credit card, overdraft protection, automobile, boat, recreation vehicle,
mobile home and personal loans. During 2003, the Bank sold its credit card
portfolio as part of its effort to provide better focus of its business
lines.
Municipal loans decreased $2.3 million or 41.2% in 2003. In 2002,
municipal loans increased by $2.5 million or 80.7%.
Loan mix and growth trends, as of December 31, 2003, are illustrated in the
graphs below:
INSERT 5 YEAR BAR CHART
LOAN GROWTH TRENDS
(IN MILLIONS)
<s> <c>
1999 127.6
2000 205.0
2001 211.6
2002 226.2
2003 286.4
INSERT PIE CHART
LOAN MIX
<s> <c>
Consumer R/E 65.8%
Commerical R/E 18.6%
Commerical Loans 8.3%
Municipal Loans 1.1%
Consumer Loans 3.3%
Home Equities 2.8%
DEPOSITS
Deposits represent the Company's primary source of funds for lending,
investing and are a general source of liquidity for the Bank. In 2003,
total deposits increased $22.7 million or 8.2% over 2002, ending the year
at $298,453,763. The Company experienced growth in 2003 with savings
accounts increasing 16.4%, and demand deposit accounts increasing 19.0%,
offset in part by a decrease in time deposits of 1.2%. 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 2002, total deposits increased by $7.9
million or 2.9%. The total deposit increase in 2003 of $22.7 million
versus the 2002 increase of $7.9 million was up primarily due to the low
interest rate environment and the ability to attract and maintain deposit
balances.
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.
22
Deposit mix and growth trends, as of December 31, 2003, are illustrated in
the graphs below:
INSERT 5 YEAR BAR CHART
DEPOSIT GROWTH TRENDS
(IN MILLIONS)
<s> <c>
1999 192.8
2000 245.6
2001 267.9
2002 275.8
2003 298.5
INSERT PIE CHART
DEPOSIT MIX
<s> <c>
Personal DDA 3.7%
Business DDA 10.1%
Savings 18.6%
Personal Nows 15.3%
Business Nows 6.7%
Money Markets 12.9%
Certificates of Deposits 32.8%
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 agreements to repurchase accounts to provide
additional liquidity. Total borrowings as of December 31, 2003 were
$117,483,064, an increase of $58,459,604. In 2002, total borrowings
increased $4,930,421 over 2001.
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, 2003, the Company's Tier I ratio of 12.7% far exceeds the Federal
Reserve Board's guidelines.
During 2003, total shareholders' equity increased $3,142,309, excluding a
net unrealized gain on available for sale securities of $1,542,454,
primarily as a result of net income of $4,278,295, offset by dividends
declared of $1,345,882.
Total shareholders' equity, excluding a net unrealized loss on available
for sale securities of $2,250,696, increased $2,787,803 in 2002, primarily
as the result of net income of $4,315,140 offset by dividends declared of
$1,266,114.
The dividend payouts for 2003, 2002 and 2001 were 31.5%, 29.3% and 37.6% 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 46.
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 2003 and 2002 are listed in the following table.
23
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<s> <c> <c> <c> <c>
2003 $84.00 to $84.00 $82.00 to $87.00 $84.00 to $87.00 $84.00 to $89.50
2002 $63.00 to $63.00 $61.00 to $73.00 $80.00 to $84.00 $84.00 to $84.50
As of December 31, 2003, there were 754 holders of record of Union
Bankshares Company common stock.
Quarterly dividends per share declared by the Company in 2003 and 2002 were
as follows:
2003 2002
---- ----
<s> <c> <c>
1st Quarter $ .55 $ .55
2nd Quarter $ .60 $ .55
3rd Quarter $ .60 $ .55
4th Quarter $ .60 $ .55
----- -----
Total $2.35 $2.20
===== =====
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, 2003 accounted for 62%
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. We intend to
continue to enhance our already strong 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 18, "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.
24
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
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, 2003 and 2002.
Estimated
Rate Change NII Sensitivity
----------- ---------------
2003 2002
---- ----
<s> <c> <c>
+200 bp + 0.8% + 0.8%
-100 bp - 2.4% - 0.8%
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 are detailed in the Consolidated Statement of Cash
Flows on pages 32 - 33.
25
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 2003 and
2002, 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, 2003, the Company had a
17.1% liquidity ratio.
OFF-BALANCE SHEET RISKS AND COMMITMENTS
As of December 31, 2003 and 2002, the total approved loan commitments
outstanding, the commitment under unused lines of credit and the unadvanced
portion of loans amounted to $47,372,000 and $51,712,000, respectively.
See Note 16 to our Consolidated Financial Statements for further discussion
of our off-balance sheet risk.
CONTRACTUAL OBLIGATIONS
The following table is a summary of the Company's contractual obligations,
as of December 31, 2003, to extend credit, commitments under contractual
leases as well as the Company's contractual obligations, consisting of
operating lease obligations and FHLB advances by contractual maturity date
for the next five years.
(Dollars in Thousands)
Payment due by period
------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ----- --------- --------- --------- ---------
<s> <c> <c> <c> <c> <c>
Operating lease obligations $ 1,585 $ 221 $ 287 $ 199 $ 878
FHLB borrowings 105,027 78,790 18,192 3,139 4,906
Off-balance sheet commitments 47,372 11,776 14,175 0 21,421
-------- ------- ------- ------ -------
Total $153,984 $90,787 $32,654 $3,338 $27,205
======== ======= ======= ====== =======
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, 2003 and 2002 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.
26
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 2003, FASB issued Statement of Financial Accounting Standards (SFAS) No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003. The guidance should be applied prospectively. The
provisions of this Statement that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to
June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities or other securities
that do not yet exist, should be applied to existing contracts as well as
new contracts entered into after June 30, 2003. SFAS No. 149 does not have
a material impact on the Company's consolidated financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. This
Statement does not impact the Company's consolidated financial statements
as the Company does not have any financial instruments with characteristics
of both liabilities and equity.
FASB's Emerging Issues Task Force, in its Issue No. 03-1, has issued new
disclosure requirements with respect to investment securities with
unrealized losses that have not been classified as other than temporary.
Companies are required to disclose separately investments that have had
continual unrealized losses for twelve months or more, and those that have
had continual unrealized losses for less than twelve months. For
investments in the former category, a narrative disclosure is required that
would allow financial statement users to understand the positive and
negative information management considered in reaching the conclusion that
the impairments are not other than temporary. The new disclosure
requirements, which are effective for years ending after December 15, 2003,
did not have a material impact on the Company's consolidated financial
statements.
In December 2003, FASB issued a revised version of SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
Statement retains all of the previous requirements and introduces
additional disclosure requirements and interim reporting requirements. SFAS
132 (revised 2003) is effective for years ending after December 15, 2003.
FASB Staff Position (FSP) No. FAS 106-1 was issued to address the
accounting impact of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) signed into law in December 2003. The
Act includes a prescription drug benefit under Medicare Part D and a
federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part
D.
The FSP provides temporary guidance whereby a plan's sponsoring company may
elect to defer, recognizing the effects of the Act on postretirement
benefit expense, and on the accumulated projected benefit obligation (APBO)
pursuant to SFAS 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and defer providing the information related to the
plan called for in SFAS 132. The Company has elected the deferral option.
Accordingly, the effects of the Act on the APBO or net periodic
postretirement benefit cost are not reflected in the financial statements
or accompanying notes. Pending specific authoritative guidance on the
accounting for the federal subsidy could require the Company to change
previously reported information when the guidance is issued.
27
QUARTERLY INFORMATION
The following tables provide unaudited financial information by quarter for
each of the past two years:
2003
Dollars in thousands Q1 Q2 Q3 Q4
- -------------------- -- -- -- --
<s> <c> <c> <c> <c>
Balance Sheets
Cash $ 9,510 $ 11,357 $ 12,009 $ 14,701
Investments 127,168 123,329 115,801 138,155
Net loans 224,598 242,384 271,229 281,993
Other assets 27,145 27,329 26,704 29,345
-------- -------- -------- --------
Total assets $388,421 $404,399 $425,743 $464,194
======== ======== ======== ========
Deposits $271,713 $278,180 $302,295 $298,454
Borrowed funds 57,078 67,563 60,225 105,027
Other liabilities 20,201 18,225 23,181 19,961
Shareholders' equity 39,429 40,431 40,042 40,752
-------- -------- -------- --------
Total liabilities & equity $388,421 $404,399 $425,743 $464,194
======== ======== ======== ========
Income Statements
Interest income $ 4,911 $ 4,993 $ 5,070 $ 5,123
Interest expense 1,492 1,510 1,430 1,530
-------- -------- -------- --------
Net interest income 3,419 3,483 3,640 3,593
Provision for loan losses 105 105 105 105
-------- -------- -------- --------
Net interest income after provision 3,314 3,378 3,535 3,488
Noninterest income 1,674 1,822 1,430 1,241
Noninterest expense 3,294 3,782 3,314 3,454
-------- -------- -------- --------
Income before taxes 1,694 1,418 1,651 1,275
Income taxes 480 415 547 318
-------- -------- -------- --------
Net income $ 1,214 $ 1,003 $ 1,104 $ 957
======== ======== ======== ========
Basic earnings per share $ 2.11 $ 1.75 $ 1.93 $ 1.67
2002
Dollars in thousands Q1 Q2 Q3 Q4
- -------------------- -- -- -- --
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
28
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
<s> <c> <c>
ASSETS
Cash and due from banks (note 2) $ 14,701,490 $ 10,977,028
Federal funds sold 0 5,669,733
------------ ------------
Cash and cash equivalents 14,701,490 16,646,761
Available for sale securities, at market
value (note 3) 128,954,447 100,755,799
Held to maturity securities, at cost (note 4)
(market value $3,040,557 and $3,470,703 at
December 31, 2003 and 2002, respectively) 2,869,750 3,316,653
Other investment securities at cost, which
approximates market value 6,330,950 5,496,492
Loans held for sale 937,000 5,420,697
LOANS (note 5):
Real estate 241,800,736 182,932,647
Commercial and industrial 23,837,418 19,461,034
Municipal 3,275,567 5,573,902
Consumer 17,493,932 18,318,051
------------ ------------
286,407,653 226,285,634
Deferred loan fees (74,875) (59,777)
Less allowance for loan losses (note 6) 4,339,336 3,678,608
------------ ------------
Net loans 281,993,442 222,547,249
------------ ------------
Premises, furniture and equipment, net (note 8) 5,819,098 6,129,058
Core deposit intangible (note 9) 167,492 214,235
Goodwill (note 9) 6,305,130 6,305,130
Other assets (notes 7, 9, 13 and 14) 16,114,705 14,196,827
------------ ------------
Total assets $464,193,504 $381,028,901
============ ============
LIABILITIES
DEPOSITS
Demand deposits $ 41,209,175 $ 34,630,217
Savings deposits (including NOW deposits
totaling $65,656,826 in 2003 and
$54,405,287 in 2002) 121,052,423 103,996,212
Money market accounts 38,358,644 38,149,981
Time deposits (note 10) 97,833,521 98,988,284
------------ ------------
Total deposits 298,453,763 275,764,694
------------ ------------
Advances from Federal Home Loan Bank (note 11) 105,026,706 45,959,829
Other borrowed funds (note 12) 12,456,358 13,063,631
Other liabilities (notes 13 and 14) 7,504,215 7,922,352
------------ ------------
Total liabilities 423,441,042 342,710,506
------------ ------------
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 2003
and 2002 7,279,925 7,279,925
Surplus 4,056,394 4,024,564
Retained earnings (note 15) 28,676,861 25,744,448
Accumulated other comprehensive income
Net unrealized gain on available for sale securities
net of deferred tax liability of $794,597 and
$1,159,450 at December 31, 2003 and 2002,
respectively (note 3) 1,542,454 2,250,696
Minimum pension liability adjustment, net of deferred
tax asset of $168,026 at December 31, 2002 (note 13) 0 (326,168)
Treasury stock, at cost (9,614 shares in 2003 and
8,256 shares in 2002) (803,172) (655,070)
Total shareholders' equity 40,752,462 38,318,395
------------ ------------
Total liabilities and shareholders' equity $464,193,504 $381,028,901
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
29
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $15,311,212 $15,855,692 $17,382,209
Interest on securities available for sale 4,619,905 4,962,287 5,750,207
Interest on securities held to maturity 152,831 175,785 190,922
Interest on federal funds sold 13,536 95,524 168,029
----------- ----------- -----------
Total interest and dividend income 20,097,484 21,089,288 23,491,367
----------- ----------- -----------
INTEREST EXPENSE
Interest on savings deposits 484,575 785,601 1,311,446
Interest on money market accounts 406,296 677,103 832,712
Interest on time deposits 2,416,475 3,091,723 5,379,905
Interest on borrowings 2,654,646 2,529,301 2,882,472
----------- ----------- -----------
Total interest expense 5,961,992 7,083,728 10,406,535
----------- ----------- -----------
Net interest income 14,135,492 14,005,560 13,084,832
Provision for loan losses (note 6) 420,000 360,000 300,000
----------- ----------- -----------
Net interest income after provision for loan losses 13,715,492 13,645,560 12,784,832
----------- ----------- -----------
NONINTEREST INCOME
Net securities gains (note 3) 557,709 23,003 39,131
Financial service income 1,812,032 1,579,873 1,279,215
Service charges on deposit accounts 322,548 328,053 303,652
VISA income 384,543 866,181 944,025
Loan department income 1,496,406 1,314,327 862,602
Income from cash surrender value of life insurance 318,065 330,667 305,761
Other income 1,275,650 1,432,341 1,172,330
----------- ----------- -----------
Total noninterest income 6,166,953 5,874,445 4,906,716
----------- ----------- -----------
Income before noninterest expenses 19,882,445 19,520,005 17,691,548
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages 6,030,047 5,582,040 4,952,672
Pension and other employee benefits (note 13) 1,961,848 1,550,494 1,259,739
Insurance 188,053 167,491 142,359
FDIC insurance 43,953 45,212 46,185
Net occupancy expenses 1,676,194 1,605,113 1,620,542
Equipment expenses 547,497 499,513 508,152
Advertising 192,639 170,078 286,155
Supplies 352,064 334,527 376,038
Postage 222,938 221,292 221,656
Telephone 201,112 163,641 195,835
Other professional fees 569,304 511,466 376,970
Other expenses 1,858,501 2,613,998 3,129,073
----------- ----------- -----------
Total noninterest expenses 13,844,150 13,464,865 13,115,376
----------- ----------- -----------
Income before income taxes 6,038,295 6,055,140 4,576,172
Income taxes (note 14) 1,760,000 1,740,000 1,350,000
----------- ----------- -----------
Net income $ 4,278,295 $ 4,315,140 $ 3,226,172
=========== =========== ===========
Net income per common share $ 7.46 $ 7.49 $ 5.59
=========== =========== ===========
Cash dividends declared per common share $ 2.35 $ 2.20 $ 2.10
=========== =========== ===========
Weighted average common shares outstanding 573,383 576,479 577,512
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
30
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
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, 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
========== ========== ========= =========== ========== ===========
Net income, 2003 0 0 0 4,278,295 0 4,278,295
Change in net unrealized gain (loss) on
available for sale securities, net of tax
of $(364,853) 0 0 0 0 (708,242) (708,242)
Minimum pension liability adjustment, net
of tax of $168,026 0 0 0 0 326,168 326,168
---------- ---------- --------- ----------- ---------- -----------
Total comprehensive income 0 0 0 4,278,295 (382,074) 3,896,221
Sale of 3,276 shares treasury stock 0 31,830 245,843 0 0 277,673
Repurchase of 4,633 shares treasury stock 0 0 (393,945) 0 0 (393,945)
Cash dividends declared 0 0 0 (1,345,882) 0 (1,345,882)
---------- ---------- --------- ----------- ---------- -----------
Balance at December 31, 2003 $7,279,925 $4,056,394 $(803,172) $28,676,861 $1,542,454 $40,752,462
========== ========== ========= =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
31
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income $ 4,278,295 $ 4,315,140 $ 3,226,172
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Amortization of intangible assets 46,743 46,742 498,307
Depreciation 696,622 768,515 863,801
Net amortization of premium (accretion of discount)
on investments 849,678 673,488 21,643
Deferred income taxes 0 (202,000) 0
Provision for loan losses 420,000 360,000 300,000
Net gain on sale of available for sale securities (557,709) (23,003) (39,131)
Net gain on sale of equipment 0 (953) (684)
Originations of loans held for sale (47,748,309) (54,209,046) (24,520,344)
Proceeds from loans held for sale 52,232,006 51,562,528 22,066,290
Net change in other assets (2,085,904) (1,575,341) (429,541)
Net change in other liabilities 413,017 1,761,776 218,728
Net change in deferred loan origination fees 15,099 12,782 (40,624)
------------ ------------ ------------
Net cash provided by operating activities 8,559,538 3,490,628 2,164,617
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs 0 0 (24,144)
Proceeds from sale of available for sale securities 7,548,218 8,538,565 11,731,432
Purchase of available for sale securities (78,326,065) (35,144,373) (48,872,524)
Proceeds from maturities and principal payments
on available for sale securities 40,391,580 21,764,919 45,416,263
Purchase of held to maturity securities 0 (102,004) (107,464)
Proceeds from maturities and principal payments
on held to maturity securities 435,000 300,000 420,000
Purchase of other investment securities 0 0 (71,600)
Purchase of life insurance policies 0 0 (500,000)
Net increase in loans to customers (59,881,292) (14,805,286) (6,819,427)
Proceeds from sales of fixed assets 0 1,000 8,000
Capital expenditures (386,662) (524,916) (872,358)
------------ ------------ ------------
Net cash provided (used) by investing activities (90,219,221) (19,972,095) 308,178
------------ ------------ ------------
- ---------------------------------------------------------------------------
The Breast Clinic at Maine Coast Memorial Hospital
Insert photo - MCMH technologist performing a mammogram.
The Breast Clinic at Maine Coast Memorial Hospital has had a long tradition
of integrating new technologies and excellent personnel to make it one of
the front-runners for mammography in the State of Maine.
In October of 1994, The American College of Radiology (ACR), prompted by
The Food and Drug Administration (FDA), set strict guidelines and protocols
for every aspect of mammography, including equipment, personnel,
interpretation and how an exam is performed. No problem for Maine Coast's
Breast Clinic, since they were accredited with the ACR since the day they
opened.
The primary focus of the clinic is patient comfort and education. All
personnel have specialized training to assure your visit will be smooth,
from scheduling to check out.
After a warm greeting, you'll be taken to a room where you will receive a
review of the latest, most effective techniques in breast self-examination
by
- ---------------------------------------------------------------------------
32
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 22,689,069 7,857,568 22,326,409
Proceeds from long-term borrowings 14,000,000 16,500,000 20,791,391
Repayment of long-term borrowings (10,443,000) (3,497,812) (2,500,000)
Net change in short-term advances from
Federal Home Loan Bank 55,509,877 (9,000,000) (27,457,000)
Net change in other borrowed funds (607,273) 928,232 (2,943,913)
Purchase of treasury stock (393,945) (453,432) (40,906)
Sale of treasury stock 277,673 192,208 47,499
Dividends paid (1,317,989) (1,264,268) (1,184,021)
------------ ------------ ------------
Net cash provided by financing activities 79,714,412 11,262,496 9,039,459
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,945,271) (5,218,971) 11,512,254
Cash and cash equivalents at beginning of year 16,646,761 21,865,732 10,353,478
------------ ------------ ------------
Cash and cash equivalents at end of year $ 14,701,490 $ 16,646,761 $ 21,865,732
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 6,002,405 $ 7,362,347 $ 10,739,397
Income taxes paid $ 1,887,100 $ 2,008,000 $ 1,355,155
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Changes in other comprehensive income:
Net increase (decrease) required by Statement
of Financial Accounting Standards No. 115
"Available for Sale Securities" $ (1,073,095) $ 2,606,677 $ 1,510,321
Deferred income tax receivable (liability) thereon $ 364,853 $ (886,270) $ (513,509)
Increase (decrease) required by Statement of
Financial Accounting Standards No. 87
Employers Accounting for Pension $ 494,194 $ (494,194) $ 0
Change in deferred income tax asset thereon $ (168,026) $ 168,026 $ 0
The accompanying notes are an integral part of these consolidated financial
statements.
- ---------------------------------------------------------------------------
a clinical member of our staff. She'll handle any concerns or questions
before conducting a thorough breast examination in our mammography room
where, once again, your concerns will be addressed. One of the most
important aspects of any mammography facility is its x-ray equipment, and
our current unit was designed to obtain the highest quality of imaging,
while specializing in patient comfort.
After your mammography, you will be asked to wait a few minutes while the
films are developed. While you wait, we offer a short film reviewing the
important breast self-examination procedure. When the quality of the films
has been confirmed, you can get dressed and be on your way. The entire
visit should take no more than 30 minutes.
A Radiologist will then read your films and the results of his
interpretation will be forwarded to your physician, who will inform you of
the findings. The Breast Clinic also sends you a letter with a brief
description of this information.
The main focus of the Breast Clinic is to constantly update and maintain
our high level of image quality, accessibility, and dedication to the
people of the greater Hancock County area. Over the years, Maine Coast
Memorial Hospital has been devoted to this same goal, and the Breast Clinic
has been a major part of achieving it.
- ---------------------------------------------------------------------------
33
UNION BANKSHARES COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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 allowance 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 April 2003, the Company increased
its cash dividend by 9% and 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.
34
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, 2003 and 2002.
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.
35
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income using
methods that relate the income earned to the balances of loans outstanding
and investment securities. Interest expense on liabilities is derived by
applying applicable interest rates to principal amounts outstanding. The
recording of interest income on problem loan accounts ceases when
collectibility within a reasonable period of time becomes doubtful.
Interest income accruals are resumed only when they are brought fully
current with 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 2002 balances have been reclassified to conform with the
2003 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, 2003 was $360,000.
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, 2003 and 2002 is as follows:
Gross Gross
Amortized Unrealized Unrealized Carrying &
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<s> <c> <c> <c> <c>
December 31, 2003
- -----------------
Mortgage-backed securities $ 67,637,487 $ 552,681 $(231,984) $ 67,958,184
U.S. Treasury securities and other
U.S. Government agencies 38,316,593 1,116,623 0 39,433,216
Obligations of states and political subdivisions 11,772,285 807,364 0 12,579,649
Other securities 8,891,032 144,407 (52,041) 8,983,398
------------ ---------- --------- ------------
Totals $126,617,397 $2,621,075 $(284,025) $128,954,447
============ ========== ========= ============
36
Gross Gross
Amortized Unrealized Unrealized Carrying &
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<s> <c> <c> <c> <c>
December 31, 2002
- -----------------
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
============ ========== ========= ============
The amortized cost and fair value of available for sale debt securities at
December 31, 2003, 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 Cost Fair Value
-------------- ----------
<s> <c> <c>
Due in one year or less $ 17,439,065 $ 17,673,162
Due after one year through five years 31,645,683 32,787,309
Due after five years through ten years 44,625,867 45,381,492
Due after ten years 32,906,782 33,112,484
------------ ------------
Totals $126,617,397 $128,954,447
============ ============
Mortgage-backed securities are allocated among the above maturity groupings
based on their final maturity dates.
Proceeds from the sale of securities were $7,548,218, $8,538,565 and
$11,731,432 in 2003, 2002 and 2001, respectively. Gross realized gains
were $557,709, $45,118 and $104,197 in 2003, 2002 and 2001, respectively.
Gross realized losses were $0, $22,115 and $65,066 in 2003, 2002 and 2001,
respectively.
The fair value and unrealized losses on available for sale securities that
have been in a continuous unrealized loss position for less than 12 months
and for 12 months and more as of December 31, 2003 are as follows:
Less Than 12 Months 12 Months or Longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
- ------------------------- ----- ---------- ----- ---------- ----- ----------
<s> <c> <c> <c> <c> <c> <c>
Federal agency mortgage
backed securities $23,070,726 $(231,984) $ 0 $ 0 $23,070,726 $(231,984)
Preferred stock 0 0 426,059 (52,041) 426,059 (52,041)
----------- --------- -------- -------- ----------- ---------
Total temporarily
impaired securities $23,070,726 $(231,984) $426,059 $(52,041) $23,496,785 $(284,025)
=========== ========= ======== ======== =========== =========
Available for sale securities consist of marketable securities that the
Company anticipates could be made available for sale in response to changes
in the market, interest rates, liquidity needs, and changes in funding
sources. As of December 31, 2003, there were 12 securities with a fair
value of $23,070,726 and an unrealized loss of $231,984 that have been in a
continuous unrealized loss position for less than 12 months. There was
also 1 security with a 12 month or more continuous unrealized loss position
that had a fair value of $426,059 and unrealized loss of $52,041. On a
monthly basis, Management reviews the unrealized loss position for the
Company's portfolio, in addition to industry analyst reports, sector credit
ratings and interest rate risk profiles, and has concluded that the
impairment was not other than temporary and was primarily due to the
volatility of the security's market price.
37
4. HELD TO MATURITY SECURITIES
The carrying amounts of held to maturity securities for 2003 and 2002 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
----- ---------- ---------- -----
<s> <c> <c> <c> <c>
December 31, 2003
- -----------------
Obligations of states and
political subdivisions $2,869,750 $170,807 $ 0 $3,040,557
December 31, 2002
- -----------------
Obligations of states and
political subdivisions $3,316,653 $154,050 $ 0 $3,470,703
The amortized cost and fair value of held to maturity securities at
December 31, 2003, 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 $ 607,255 $ 621,855
Due after one year through five years 575,602 621,930
Due after five years through ten years 1,479,000 1,574,498
Due after ten years 207,893 222,274
---------- ----------
Totals $2,869,750 $3,040,557
========== ==========
Nontaxable interest income on municipal investments was $709,347, $827,002
and $712,889 for 2003, 2002 and 2001, respectively.
5. LOANS
At December 31, 2003 and 2002, loans on nonaccrual status totaled
approximately $1,387,000 and $1,473,000, respectively. If interest had
been accrued on such loans, interest income on loans would have been
approximately $111,144, $242,866 and $334,989 higher in 2003, 2002 and
2001, respectively. Loans delinquent by 90 days or more that were still on
accrual status at December 31, 2003 and 2002 totaled approximately $360,764
and $351,000, respectively.
In the ordinary course of business, the Company's subsidiary granted loans
to the executive officers and directors of the Company and its subsidiary,
and to affiliates of directors. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and did not involve
more than normal risk of uncollectibility or present other unfavorable
features.
- ---------------------------------------------------------------------------
Coastal Enterprises, Inc.
Insert photo of Maine coastline
Coastal Enterprises, Inc. (CEI) has been investing in people and places for
more than 26 years, contributing to a sustainable and equitable future for
Maine. They're part of a national network of organizations whose goal is
directing resources to communities and populations left out of the economic
mainstream.
CEI offers an array of programs supporting economic opportunity and united
in pursuit of a single mission: to create economically and environmentally
healthy communities in which all people, especially those with low incomes,
can reach full potential. Their support includes everything from financing
and technical assistance, to workforce development.
Access to capital is the cornerstone of their approach. CEI offers a
continuum of financing from micro-loans of less than $5,000, to loans and
investments of up to $1,000,000 used to generate jobs, support small
businesses, provide community facilities and affordable housing.
- ---------------------------------------------------------------------------
38
The balance of loans to related parties amounted to $3,398,432 and
$2,778,194 at December 31, 2003 and 2002, respectively. New loans granted
to related parties in 2003 and 2002 totaled $2,903,219 and $2,818,526,
respectively; payments and reductions amounted to $2,868,520 and $3,181,135
in 2003 and 2002, respectively.
6. ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses is as follows for the years ended
December 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
Balance, beginning of year $3,678,608 $3,453,245 $3,376,395
Provision for loan losses 420,000 360,000 300,000
---------- ---------- ----------
Balance before loan charge-offs 4,098,608 3,813,245 3,676,395
---------- ---------- ----------
Loans charged-off 187,937 279,495 324,720
Less recoveries on loans charged-off 428,665 144,858 101,570
---------- ---------- ----------
Net loan charge-offs (recoveries) (240,728) 134,637 223,150
---------- ---------- ----------
Balance, end of year $4,339,336 $3,678,608 $3,453,245
========== ========== ==========
Impairment of loans having recorded investments of $1,387,310 at December
31, 2003 and $1,472,870 at December 31, 2002 has been recognized in
conformity with SFAS No. 114, as amended by SFAS No. 118. The average
recorded investment in impaired loans during 2003 and 2002 was $1,671,242
and $1,526,834, respectively. All impaired loans have a related allowance
for loan losses. The total allowance for loan losses related to these
loans was $147,755 and $313,000 on December 31, 2003 and 2002,
respectively. There was $20,832, $47,354 and $68,810 interest income
recognized on impaired loans in 2003, 2002 and 2001, respectively.
7. LOAN SERVICING
The Bank services loans sold to others amounting to $102,720,072 and
$101,152,362 at December 31, 2003 and 2002, respectively. Mortgage
servicing rights of $557,400 and $576,502 were capitalized in 2003 and
2002, respectively. Mortgage servicing rights have been written down to
their fair value of $589,802 and $391,145 through a valuation allowance at
December 31, 2003 and 2002, and are included in other assets. Amortization
of mortgage servicing rights was $476,838, $290,160 and $201,968 in 2003,
2002 and 2001, respectively. Gain on loans sold was $546,330, $358,618 and
$137,150 in 2003, 2002 and 2001, respectively.
- ---------------------------------------------------------------------------
CEI's customers range from home-based child care providers, to
manufacturers of precision equipment and information technology firms.
Crucial to their financing activity is partnering with banks, state and
federal agencies, municipalities, private individual investors,
foundations, religious institutions and others to find the right resources
for each individual situation.
They offer technical assistance in managing resources for maximum
effectiveness, and give targeted help to women business owners through the
Women's Business Center; refugees and immigrants through StartSmart; people
with disabilities and others through the Maine Small Business Development
Center. They also address E-commerce and the Internet to help businesses
integrate new opportunities into their marketing strategies.
CEI's workforce development activity includes working with job training and
social service organizations so people with low incomes have access to
jobs. Recently, they added CEI Staffing Services to work with private
sector employers, providing on-site employment support for disadvantaged
individuals by creating a point of entry into the labor force.
They're proud to contribute to the growth of over 1,400 small businesses by
mobilizing nearly $500 million in social investment and lending, affecting
over 15,000 jobs, and providing management assistance to 17,600 emerging
and existing entrepreneurs. CEI looks forward to investing in the people
and places of Maine over the coming years.
- ---------------------------------------------------------------------------
39
8. PREMISES, FURNITURE AND EQUIPMENT
Detail of bank premises, furniture and equipment is as follows:
2003 2002
---- ----
<s> <c> <c>
Land $ 428,677 $ 422,805
Buildings and improvements 6,771,002 6,758,037
Furniture and equipment 5,733,218 5,448,456
Leasehold improvements 767,168 741,757
----------- -----------
13,700,065 13,371,055
Less accumulated depreciation 7,880,967 7,241,997
----------- -----------
Premises, furniture and equipment, net $ 5,819,098 $ 6,129,058
=========== ===========
At December 31, 2003, 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.
Rental expense was $207,317 in 2003, $202,143 in 2002 and $180,272 in 2001.
The minimum annual lease commitments under noncancellable leases in effect
at December 31, 2003 are as follows:
Year Ending December 31, Amount
------------------------ ------
<s> <c>
2004 $ 220,776
2005 170,569
2006 117,138
2007 106,633
2008 92,400
Thereafter 877,800
----------
Total $1,585,316
==========
9. INTANGIBLE ASSETS
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.
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, $0 and $451,565
in 2003, 2002 and 2001, respectively. Results of operations from the date
of acquisition are included in the Company's Consolidated Statements 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,
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
Reported net income $4,278,295 $4,315,140 $3,226,172
Add: Goodwill amortization 0 0 451,665
---------- ---------- ----------
Adjusted net income $4,278,295 $4,315,140 $3,677,837
========== ========== ==========
Reported earnings per share $7.46 $7.49 $5.59
Add: Goodwill amortization .00 .00 .78
---------- ---------- ----------
Adjusted earnings per share $7.46 $7.49 $6.37
========== ========== ==========
40
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,
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
Core deposit intangible, cost $323,000 $323,000 $323,000
Accumulated amortization 155,508 108,765 62,023
-------- -------- --------
Core deposit intangible, net $167,492 $214,235 $260,977
======== ======== ========
Amortization expense related to the core deposit intangible for the years
ended December 31, 2003, 2002 and 2001 amounted to $46,742, $46,742 and
$46,642, 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 $18,932,574 and $16,861,707 in 2003 and 2002,
respectively.
At December 31, 2003, the scheduled maturities of time deposits were as
follows:
<s> <c>
2004 $67,940,670
2005 15,914,153
2006 5,065,661
2007 6,271,834
2008 2,641,203
-----------
Total $97,833,521
===========
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, 2003 2003 2002
-------------- ----------------- ---- ----
<s> <c> <c> <c> <c>
Fixed advances 2004 to 2009 1.00% to 5.88% $103,360,456 $44,293,579
Variable advances 2005 to 2013 2.00% to 7.23% 1,666,250 1,666,250
------------ ------------- ------------ -----------
$105,026,706 $45,959,829
============ ===========
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, 2003.
Advances at December 31, 2003 mature as follows:
<s> <c>
2004 $ 78,789,286
2005 16,192,751
2006 2,000,000
2007 3,138,907
Thereafter 4,905,762
------------
Total $105,026,706
============
41
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, 2003, securities
with a fair value of $22,684,373 were pledged to collateralize other
borrowed funds. Information concerning securities sold under agreements to
repurchase for 2003 is summarized as follows:
Average balance during the year $12,596,874
Average interest rate during the year 0.53%
Maximum month-end balance during the year $15,690,032
13. EMPLOYEE BENEFITS
Pension Plan
The Company's subsidiary has a noncontributory defined benefit pension plan
covering substantially all permanent full-time employees. The benefits are
based on employees' years of service and the average of their three highest
consecutive rates of annual salary preceding retirement.
It is the subsidiary's policy to fund the plan sufficiently to meet the
minimum requirements set forth in the Employee Retirement Income Security
Act of 1974, plus such additional amounts as the Company may determine to
be appropriate from time to time.
The accumulated benefit obligation at December 31, 2003, 2002 and 2001 was
$5,889,792, $4,890,921 and $4,394,398, respectively. At December 31, 2002,
the accumulated benefit obligation exceeded the fair value of plan assets.
In 2002, 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. The minimum pension
liability adjustment was reversed in 2003 upon additional funding of the
plan.
Pension expense amounted to $486,945, $275,720 and $126,806 for the years
ended December 31, 2003, 2002 and 2001, respectively.
The measurement dates for the pension plan were January 1, 2003 for
purposes of determining the net periodic pension cost and December 31, 2003
for purposes of funded status disclosure.
Plan Assets
The Company's pension plan weighted-average asset allocations at December
31, 2003 and 2002, by asset category are as follows:
Plan Assets
at December 31
Asset Category 2003 2002
-------------- ---- ----
<s> <c> <c>
Cash and Equivalents 23.3% 4.9%
U.S. Govt Agencies 11.9 16.1
Corporate Bonds & Notes 14.1 24.0
Equity Securities 49.7 54.4
Other 1.0 0.6
----- -----
Total 100.0% 100.0%
----- -----
Investment Policies
The Retirement Plan for the Employees of Union Trust Company (the "Plan")
was established in 1959 to provide for the payment of benefits to employees
of Union Trust Company. The Plan is overseen by a Pension Plan Committee
who meets semi-annually to review asset performance, compliance to
investment guidelines and to set the investment policy guidelines. A
complete review is presented annually to the Board of Directors' Human
Resource Committee.
The Bank utilizes the investment management services of Union Trust
Company's Trust Department. The goal of the Union Trust Pension Fund is to
provide sufficient funds to pay the pension obligations, which the Bank has
incurred for current and future retirees. As such, it should be
conservatively managed with the appropriate mix of fixed income and equity
securities.
42
On an annual basis, the Fund should obtain sufficient cash to pay all
obligations from either income, the Bank's contribution or appreciation
in the value of the equity portion of the portfolio. Growth in the total
value of the Fund will come from excess growth or Bank contribution.
The asset allocation shall be as follows:
Fixed Income:
- -------------
At least 40% - 50% of the portfolio should be invested in high quality
fixed income securities. A preference exists for US Treasury and Agency
securities. As much as 30% of the fixed income portfolio may be invested
in corporate bonds rated A or better, and with final maturities of no
greater than 15 years. The Treasury and Agency portion of the portfolio
should be a balanced portfolio with maturities ranging from 2 - 15 years
upon purchase.
Common Stocks:
- --------------
Up to 50% - 60% of the portfolio may be invested in a diversified group of
high quality common stocks or common stock equivalents. (1) The portfolio
should consist of no more than thirty individual companies spread across at
least eight industries. (2) At the time of purchase, there shall be a
maximum of ten percent of the portfolio in any one equity. (3) After
appreciation, there shall be no more than 15% of the total portfolio value
in any one equity. (4) There shall be no more than 25% of the equity
portfolio in any one industry.
Expected Long Term Rate of Return
- ---------------------------------
Basis for the expected long term rate of return assumption: the 8%
expected long term rate of return assumption was derived from historical
rates of return on stocks, government bonds and 30 day T-Bills, assuming a
portfolio comprised of 55% stocks, 45% bonds and 5% cash equivalents.
The expected contribution for 2004 is $55,000 for the pension plan.
Postretirement Benefits Other Than Pensions
The Company sponsors a postretirement benefit program that provides medical
coverage and life insurance benefits to certain employees and directors who
meet minimum age and service requirements. Active employees and directors
accrue benefits over a 25-year period.
In December 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act
includes the following two new features to Medicare (Medicare Part D) that
could affect the measurement of the accumulated postretirement benefit
obligation (APBO) and net periodic postretirement benefit cost for the
Plan:
* A subsidy to plan sponsors that is based on 28% of an individual
beneficiary's annual prescription drug costs between $250 and
$5,000, and,
* The opportunity for a retiree to obtain a prescription drug
benefit under Medicare.
The effects of the Act on the APBO or net periodic postretirement benefit
cost are not reflected in these financial statements or accompanying notes.
Pending specific authoritative guidance on the accounting for the federal
subsidy could require the Company to change previously reported information
when the guidance is issued.
The measurement dates for postretirement benefits were January 1, 2003 for
the purpose of determining the net periodic postretirement benefit cost and
December 31, 2003 for the purpose of funded status disclosure. The
expected benefit cost for 2004 is $49,592 for postretirement benefits.
43
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, 2003, 2002 and 2001.
2003 2002 2001
--------------------------- --------------------------- --------------------------
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 $ 6,283,472 $ 1,475,868 $ 5,557,779 $ 1,298,068 $4,977,665 $ 1,106,380
Service cost 349,319 72,918 292,682 53,650 217,737 45,771
Interest cost 411,146 97,376 385,302 85,578 356,242 73,129
Actuarial (gain) loss 759,577 (20,691) 309,721 97,991 266,362 129,878
Benefits paid (263,959) (61,738) (262,012) (59,419) (260,227) (57,090)
----------- ----------- ----------- ----------- ---------- -----------
Benefit obligations at
end of year $ 7,539,555 $ 1,563,733 $ 6,283,472 $ 1,475,868 $5,557,779 $ 1,298,068
----------- ----------- ----------- ----------- ---------- -----------
Change in Plan Assets
Fair value of plan assets
at beginning of year $ 4,279,653 $ 0 $ 4,960,626 $ 0 $5,396,748 $ 0
Actual return on plan assets 623,830 0 (581,690) 0 (175,895) 0
Employer contributions 1,271,000 61,738 162,729 59,419 0 57,090
Benefits paid (263,959) (61,738) (262,012) (59,419) (260,227) (57,090)
----------- ----------- ----------- ----------- ---------- -----------
Fair value of plan assets at
end of year $ 5,910,524 $ 0 $ 4,279,653 $ 0 $4,960,626 $ 0
----------- ----------- ----------- ----------- ---------- -----------
Funded Status $(1,629,031) $(1,563,733) $(2,003,819) $(1,475,868) $ (597,153) $(1,298,068)
Unrecognized net actuarial
(gain) loss 2,314,132 (163,384) 1,920,563 (144,260) 653,212 (254,017)
Unamortized prior service cost (18,120) 0 (20,666) 0 (23,212) 0
Unrecognized transition
(net asset) net obligation 0 411,900 (13,152) 457,500 (36,930) 503,100
----------- ----------- ----------- ----------- ---------- -----------
Net amount recognized $ 666,981 $(1,315,217) $ (117,074) $(1,162,628) $ (4,083) $(1,048,985)
----------- ----------- ----------- ----------- ---------- -----------
Amounts recognized in the consolidated balance sheets consist of:
Prepaid (accrued) benefit cost $ 666,981 $(1,315,217) $ (611,268) $(1,162,628) $ (4,083) $(1,048,985)
Accumulated other
comprehensive loss 0 0 326,168 0 0 0
Deferred tax asset 0 0 168,026 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net prepaid (accrued)
benefit cost $ 666,981 $(1,315,217) $ (117,074) $(1,162,628) $ (4,083) $(1,048,985)
----------- ----------- ----------- ----------- ---------- -----------
Net periodic benefit cost includes the following components:
2003 2002 2001
---------------------- ---------------------- ----------------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c>
Service cost $ 349,319 $ 72,918 $ 292,682 $ 53,650 $ 217,737 $ 45,771
Interest cost 411,146 97,376 385,302 85,578 356,242 73,129
Expected return on plan assets (331,289) 0 (385,889) 0 (420,849) 0
Recognized net actuarial (gain) loss 73,467 (1,567) 9,949 (11,766) 0 (24,811)
Amortization (accretion) of
unrecognized transition asset
or obligation (13,152) 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 $ 486,945 $214,327 $ 275,720 $173,062 $ 126,806 $139,689
--------- -------- --------- -------- --------- --------
44
Weighted-average assumptions as of December 31
2003 2002 2001
--------------------- --------------------- ---------------------
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
-------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c>
Discount rate 6.75% 6.75% 7.00% 6.75% 7.25% 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 2003, 2002 and 2001,
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
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c> <c>
Effect on total service and
interest components $ 33,989 $ 27,074 $ 142,531 $ (26,213) $ (20,981) $ (100,726)
Effect on postretirement
benefit obligation $254,424 $213,588 $1,484,439 $(199,647) $(170,172) $(1,150,001)
401(k) Plan
The Company has a noncontributory 401(k) plan for employees who meet
certain service requirements.
Stock Purchase Plan
The Bank maintains a stock purchase plan which allows qualified employees
and directors to acquire stock at fair market value.
14. INCOME TAXES
Income tax expense (benefit), consists of the following:
Total
-----
<s> <c>
2003
Federal Current $1,680,000
Federal Deferred 0
State 80,000
----------
$1,760,000
==========
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
==========
45
The actual tax expense for 2003, 2002 and 2001 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:
2003 2002 2001
----------------------- ----------------------- -----------------------
Amount % of Amount % of Amount % of
Pretax Pretax Pretax
Earnings Earnings Earnings
------ -------- ------ -------- ------ --------
<s> <c> <c> <c> <c> <c> <c>
Computed "expected" tax expense $2,053,020 34.0% $2,058,750 34.0% $1,555,900 34.0%
Nontaxable income on obligations of states
and political subdivisions (276,161) (4.6) (302,983) (5.0) (337,753) (7.4)
Cash surrender value of life insurance (123,741) (2.0) (132,631) (2.2) (123,631) (2.7)
Goodwill amortization 0 0.0 0 0.0 153,685 3.4
Other 106,882 1.7 116,864 1.9 101,799 2.2
---------- ---- ---------- ---- ---------- ----
$1,760,000 29.1% $1,740,000 28.7% $1,350,000 29.5%
========== ==== ========== ==== ========== ====
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:
2003 2002
---- ----
<s> <c> <c>
DEFERRED TAX ASSETS
Allowance for loan losses $1,475,374 $1,250,727
Deferred compensation 247,113 238,323
Post-retirement benefits 452,604 390,419
Minimum pension liability 0 168,026
---------- ----------
Deferred tax assets $2,175,091 $2,047,495
========== ==========
DEFERRED TAX LIABILITIES
Unrealized gain on available for sale securities $ 794,597 $1,159,450
Deferred origination fees 93,401 109,267
Allowance for loan losses 209,813 127,965
Premises, furniture and equipment, principally due to
differences in depreciation 424,346 365,529
Mortgage servicing rights 200,533 132,989
Cash surrender value of life insurance 36,386 36,386
Other 103,279 0
---------- ----------
Deferred tax liabilities $1,862,355 $1,931,586
========== ==========
The Bank has sufficient refundable taxes paid in available carryback years
to fully realize its recorded deferred tax asset of $2,175,091 at December
31, 2003. The deferred tax asset and liability are included in other
assets and other liabilities in the balance sheet at December 31, 2003 and
2002.
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, 2003, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2003, 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
46
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, 2003 and 2002 are presented in the table below:
December 31, 2003
-----------------------------------------------------------------------------------
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 $35,825,000 14.3% > = $20,045,000 > = 8.0% N/A N/A
Union Trust Company $35,650,000 14.2% > = $20,081,000 > = 8.0% > = $25,612,000 > = 10.0%
Tier I capital (to risk weighted assets)
Consolidated $32,738,000 13.0% > = $10,041,000 > = 4.0% N/A N/A
Union Trust Company $32,563,000 13.0% > = $10,023,000 > = 4.0% > = $15,034,000 > = 6.0%
Tier I capital (to average assets)
Consolidated $32,738,000 7.5% > = $13,053,000 > = 3.0% N/A N/A
Union Trust Company $32,563,000 7.5% > = $13,040,000 > = 3.0% > = $21,733,000 > = 5.0%
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% N/A N/A
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% N/A N/A
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% N/A N/A
Union Trust Company $29,290,000 7.7% > = $15,301,000 > = 3.0% > = $19,127,000 > = 5.0%
The Company may not declare or pay a cash dividend on or repurchase any of
its capital stock if the effect thereof would cause the capital of the
Company to be reduced below the capital requirements imposed by the Federal
Reserve.
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, 2003 and 2002, the following
financial instruments, whose contract amounts represent credit risk, were
outstanding:
Contract Amount
2003 2002
---- ----
<s> <c> <c>
Commitments to extend credit $36,849,000 $42,413,000
Standby letters of credit 532,000 201,000
Unadvanced portions of construction loans 9,991,000 9,098,000
----------- -----------
Total $47,372,000 $51,712,000
=========== ===========
47
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, 2003,
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, 2003, 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, 2003 and 2002, 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 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.
48
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.
49
A summary of the fair values of the Company's significant financial
instruments at December 31, 2003 and 2002 follows:
2003 2002
----------------------------- -----------------------------
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 $ 14,701,490 $ 14,701,490 $ 16,646,761 $ 16,646,761
Available for sale securities 128,954,447 128,954,447 100,755,799 100,755,799
Held to maturity securities 2,869,750 3,040,557 3,316,653 3,470,703
Other investment securities 6,330,950 6,330,950 5,496,492 5,496,492
Loans 281,993,442 289,240,673 222,547,249 227,131,722
Loans held for sale 937,000 937,000 5,420,697 5,420,697
Accrued interest receivable 2,123,431 2,123,431 2,365,133 2,365,133
Cash surrender value life insurance 8,040,950 8,040,950 7,832,370 7,832,370
LIABILITIES
Deposits 298,453,703 299,199,837 275,764,694 277,088,365
Accrued interest payable 579,994 579,994 613,083 613,083
Advances from Federal Home Loan Bank 105,026,706 106,717,636 45,959,829 47,085,845
Other borrowed funds 12,456,358 12,456,358 13,063,631 13,063,631
19. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Union Bankshares Company as of
December 31, 2003 and 2002 and for each of the years ended December 31,
2003, 2002 and 2001 are presented as follows:
BALANCE SHEETS
December 31, 2003 and 2002 2003 2002
- -------------------------- ---- ----
<s> <c> <c>
ASSETS
Cash $ 19,123 $ 36,513
Investment in subsidiary 34,164,516 31,120,217
Core deposit intangible 167,492 214,235
Goodwill 6,305,130 6,305,130
Other assets 448,473 1,092,973
----------- -----------
Total assets $41,104,734 $38,769,068
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 343,669 $ 315,776
Other liabilities 8,603 134,896
Shareholders' equity 40,752,462 38,318,396
----------- -----------
Total liabilities and shareholders' equity $41,104,734 $38,769,068
=========== ===========
STATEMENTS OF INCOME
Years ended December 31, 2003, 2002 and 2001 2003 2002 2001
- -------------------------------------------- ---- ---- ----
<s> <c> <c> <c>
Dividend income $ 1,503,300 $ 1,367,200 $ 1,224,900
Equity in undistributed earnings of subsidiary 2,410,239 3,033,392 2,523,002
Other income 470,667 20,806 12,836
----------- ----------- -----------
Total income 4,384,206 4,421,398 3,760,738
Operating expenses 105,911 106,258 534,566
----------- ----------- -----------
Net income $ 4,278,295 $ 4,315,140 $ 3,226,172
=========== =========== ===========
50
STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001 2003 2002 2001
- -------------------------------------------- ---- ---- ----
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,278,295 $ 4,315,140 $ 3,226,172
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Undistributed earnings of subsidiary (2,410,239) (3,033,392) (2,523,002)
Amortization 46,743 46,742 498,307
Gain on sale of stock (410,396) 0 0
(Increase) decrease in other assets (28,700) (160,000) (23,426)
Increase (decrease) in other liabilities (57,750) 66,353 0
----------- ----------- -----------
Net cash provided by operating activities 1,417,953 1,234,843 1,178,051
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Union Trust Company (883,082) 0 0
Proceeds from sale of stock 882,000 0 0
Acquisition costs 0 0 (24,144)
----------- ----------- -----------
Net cash used by investing activities (1,082) 0 (24,144)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,317,989) (1,267,960) (1,184,021)
Purchase of treasury stock (393,945) (453,432) (40,906)
Sale of treasury stock 277,673 192,208 47,499
----------- ----------- -----------
Net cash used by financing activities (1,434,261) (1,529,184) (1,177,428)
----------- ----------- -----------
Net decrease in cash (17,390) (294,341) (23,521)
Cash at beginning of year 36,513 330,854 354,375
----------- ----------- -----------
Cash at end of year $ 19,123 $ 36,513 $ 330,854
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Changes in other comprehensive income:
Net increase (decrease) in net unrealized gain
on available for sale securities $ (708,242) $ 1,720,407 $ 996,812
Net increase (decrease) from minimum
pension liability adjustment $ 326,168 $ (326,168) $ 0
51
BERRY, DUNN, MCNEIL & PARKER [LETTERHEAD]
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, 2003 and 2002, 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,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above represent
fairly, in all material respects, the consolidated financial position of
Union Bankshares Company and Subsidiary as of December 31, 2003 and 2002,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
2003 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."
/s/Berry, Dunn, McNeil & Parker
Portland, Maine
January 23, 2004
52
UNION BANKSHARES COMPANY &
UNION TRUST COMPANY DIRECTORS
Arthur J. Billings
President, Barter Lumber Company
Peter A. Blyberg
President, Chief Executive Officer
Blake B. Brown
President & Owner, Brown's Appliance and TV
Richard C. Carver
Former Owner of 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
UNION BANKSHARES 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
Peter F. Greene
Senior Vice President, Chief Administrative Officer
Sally J. Hutchins
Senior Vice President & Clerk
Timothy R. Maynard
Senior Vice President, Chief Financial Officer
Rebecca J. Sargent
Senior Vice President, Senior Financial Services Officer
Richard W. Teele
Secretary
UNION BANKSHARES COMPANY
& UNION TRUST COMPANY
HONORARY DIRECTORS
Franklin L. Beal
Retired
Robert S. Boit
Retired, President and Chief Executive Officer
of the Company and the Bank
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.
53
Mary T. Slaven
Realtor
Douglas N. Smith
Retired
I Frank Snow
Retired
Richard W. Whitney
Dentist
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, Regional Manager
Robert E. Carter
Senior Vice President, Branch Administration
Peter F. Greene
Senior Vice President, Chief Administrative Officer
Sally J. Hutchins
Senior Vice President, Treasurer & Clerk
Timothy R. Maynard
Senior Vice President, Chief Financial Officer
Rebecca J. Sargent
Senior Vice President, Senior Financial Services Officer
Kent Winters
Senior Vice President, Regional Manager
Edwin Bonenfant
Vice President, Investment Officer
James M. Callnan
Vice President, Senior Information Services Officer
Debra A. Ehrlenbach
Vice President, Auditor
Janis Guyette
Vice President, Trust Operations
David A. Krech
Vice President, Investment Officer
Michael J. Marino
Vice President, Chief of Credit Administration
Lorraine S. Ouellette
Vice President, Trust Officer
Bette B. Pierson
Vice President, Mortgage Lending
Sarah Ruef-Lindquist
Vice President, Trust Administration
Sandy Salsbury
Vice President, Human Resources
Susan A. Saunders
Vice President, Bank Services
Geddes Simpson, Jr.
Vice President, Trust Officer
Craig Worcester
Vice President, Financial Services
Michelle Bannister
AVP, Training and Development Officer
Laurence D. Fernald, Jr.
AVP, Appraisal Review and Loan Officer
Lynda C. Hamblen
AVP, Relationship Manager
Patti S. Herrick
AVP, Information Services
Mary Lou Lane
AVP, Mortgage Underwriter
Kathe Marion-Gallant
AVP, Mortgage Underwriter
Peter C. O'Brien
AVP, Mortgage Underwriter
Renee Ouellette
AVP, Financial Analyst
Deborah F. Preble
AVP, Controller
Diane Rimm
AVP, Operations Manager, Cornerstone
Stephen L. Tobey
AVP, Security Officer
54
Tina Torres-York
AVP, Relationship Manager
Charlie Ault
Business Development Officer
Shawn Ellis
Collections Officer
Brenda Gatcomb
Trust Officer
Ronald Hamilton
Financial Consultant
Guy Hamlin
Financial Consultant
Sylvia Joy
Trust Officer
Jeannie Merchant
Marketing Officer
Cynthia Pinkham
Teller Services Officer
Rhonda Reardon
Assistant Trust Officer
Annette Russell
Financial Planning Officer
Scott Shields
Financial Planning Officer
Chuck Yestramski
Network Administrator Specialist
Jon C. Young
Relationship Manager
UNION TRUST COMPANY OFFICES
Bar Harbor
Christopher H. Keefe
Vice President, Senior Relationship Manager
Belfast
Paul Doody
AVP, Relationship Manager
Blue Hill
Pamela G. Fowler
VP, Relationship Manager
Dianne Thompson
Branch Manager
Camden
Kent Winters
Senior Vice President, Regional Manager
Castine
Pamela G. Fowler
VP, Relationship Manager
Cherryfield
James E. Haskell
AVP, Relationship Manager
Ellsworth Main Office
Beth Jewell
Manager
Ellsworth Shopping Center
Melody L. Wright
AVP, Branch Manager
Jonesport
Wendy W. Beal
AVP, Relationship Manager
Machias
Lisa A. Holmes
AVP, Relationship Manager
Milbridge
James E. Haskell
AVP, Relationship Manager
Rockland
Jane Dagley
AVP, Relationship Manager
Pamela Dalfonso
Branch Manager
Somesville
Andrea G. Leonard
Vice President, Relationship Manager
Stonington
Harry R. Vickerson III
AVP, Relationship Manager
Waldoboro
Diane Y. Lawrence
AVP, Branch Manager
55
UNION TRUST COMPANY PERSONNEL
Allen, Deborah
Austin, Dodi
Bagley, Joanna
Batson, Harold
Baum, Jennifer
Bayrd, Rona
Bell, Janice
Bonville, Melissa
Bragg, Randy
Brooks, Wendy
Candage, Brandi
Carter, Glendon
Carter, Linda
Carver, Lisa
Clay, Dawne
Cole, Christina
Cole, Richard
Colson, Sylvia
Craveiro, Christina
Crosby, Lisa
Cunningham, Sylvia
Curtis, Kristen
Damon, Jennie
Davis, Sharon
Day, Francis
Day, Margaret
DeCesere, Joanne
Dillon, Patricia
Douglass, Joanne
Duffy, Tracy
Durling, Colleen
Dyer, Tia
Edgecomb, Deborah
Emery, Sherry
Faulkner, Kathy
Foss, John
Gaul, Judith
Gimpel, Elizabeth
Gokey, Tammy
Grant, Victoria
Gray, Shelley
Gray-York, Denice
Grindle, Eugene
Hall, Maria
Hamilton, Kirsten
Handy, Louise
Hebert, Judith
Hennigan, Robin
Hewson, Krystal
Hills, Darlene
Hinckley, Melissa
Hustus, Gayle
Hutchins, Rebecca
Hutchinson, Elwell
Kalloch, Debra
Kaspala, Tammy
Kelley, Cindy
Kenney, Doria
Leighton, Mindy
Leonard, Kathy
Look, Cheryl
Look, Lisa
Lufkin, Delia
MacLaughlin, Wendy
Marshall, Carol
McCarty, Melinda
McCormick, Bernadette
McHenan, Regina
McMahon, Jane
Merchant, Michelle
Merritt, Caroline
Merritt, Jared
Murray, Alanna
Murray, April
Oakes, Suzette
Otis-Anderson, Sandra
Ottman, Bruce
Phillips, Jamie
Pineo, Muriel
Podlubny, Helene
Podraza, Kathleen
Rackliff, Kathy
Richardson, Candice
Ring, Wanda
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
Storer, Jessica
Swett, Andrea
Thayer, Jeannie
Thibault, Travas
Thompson, Amy
Tracy, Deborah
Treadwell, Mattie
Tucker, Nancy
Tyler, Kimberly
Upham, Vanessa
Vittum, Julie
Wallace, Jayne
Willey, Christina
Wilson, Stephanie
Woodsum, Anne
Woodward, Cheryl
Youngblood, Mary
56
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 2003 Annual Report on SEC Form 10-K, including the financial statements
and schedules required to be filed with the Securities and Exchange
Commission. Interested persons should write to:
Timothy R. Maynard, Senior Vice President
Union Bankshares Company
P.O. Box 479
Ellsworth, Maine 04605
MEMBER FDIC EQUAL HOUSING LENDER
Making the community strong, one life, one business, one dream at a time.
Union Trust. Success starts here.