UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-12958
UNION BANKSHARES COMPANY
------------------------
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
----- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation of organization)
66 Main Street, Ellsworth, Maine 04605
-------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (207) 667-2504
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
---- ----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $12.50 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES XXX NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES NO XXX
--- ---
The aggregate market closing value of the voting stock held by non-
affiliates of the registrant as of June 30, 2003, was approximately
$48,206,429.
572,409 shares of the Company's Common Stock, $12.50 par value, were issued
and outstanding on February 27, 2004.
Documents incorporated by reference in this report:
- ---------------------------------------------------
Proxy Statement, to be dated April 19, 2004, for 2004 annual meeting to be
held May 20, 2004 pursuant to Regulation 14A of the General Rules and
Regulations of the Commission, incorporated by reference into Part III of
this report. 2003 Annual Report to Shareholders pursuant to Rule 14a-3(b)
incorporated by reference to Parts I, II and IV of this report.
UNION BANKSHARES COMPANY
------------------------
INDEX TO FORM 10-K
------------------
PART I Page No.
- --------
Item 1: Business 1-14
Item 2: Properties 14-15
Item 3: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of Security Holders 15
PART II
- -------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 15-16
Item 6: Selected Financial Data 16
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 16
Item 8: Financial Statements and Supplementary Data 17
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
Item 9A: Controls and Procedures 17
PART III
- --------
Item 10: Directors and Executive Officers of the Registrant 17
Item 11: Executive Compensation 17
Item 12: Security Ownership of Certain Beneficial Owners
and Management 17
Item 13: Certain Relationship and Related Transactions 17
Item 14: Principal Accountant Fees and Services 17
PART IV
- -------
Item 15: Exhibits, Financial Statement Schedules and Reports
on Form 8-K 18-19
Signatures 20
PART I
------
This Form 10-K contains "forward-looking statements" which may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-
looking statements include, but are not limited to, estimates with respect
to our financial condition, results of operations and business that are
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not
limited to:
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.
ITEM I: Business
OVERVIEW
- --------
Union Bankshares Company ("the Company") was incorporated February 3, 1984
under the laws of the State of Maine. As of February 27, 2004, the
Company's securities consisted of one class of common stock ("the Common
Stock"), par value of $12.50 per share, of which there were 572,409 shares
outstanding held of record by 754 shareholders. The Company's only wholly
owned subsidiary is Union Trust Company ("the Bank" or "Union Trust"),
established in 1887. In 2000, the Company acquired Mid-Coast Bancorp,
Inc., and its principal subsidiary, The Waldoboro Bank, FSB. On September
29, 2000, The Waldoboro Bank, FSB was merged with and into the Bank.
BUSINESS
- --------
Union Bankshares 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 . On August 31, 2000, the
Company completed the acquisition of Mid-Coast Bancorp, Inc., and its
principal subsidiary, The Waldoboro Bank, FSB. On September 29, 2000, The
Waldoboro Bank, FSB was merged with and into Union Trust using the purchase
method of accounting. Union Bankshares' 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. Union Trust Company is a full service,
independent, community bank with fifteen offices located along Maine's
coast, stretching from Waldoboro to Machias.
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.
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.
1
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.
The Company's Financial Services division saw a continued expansion of its
business during 2003, with fee income increasing by 13.9% over 2002. This
growth was primarily the result of a $26 million increase in new assets
under management.
During 2003, the Federal Reserve decreased the Prime Rate by a total of
0.25 basis points. While this decrease puts continued pressure on the
Bank's net interest income, it did spur consumers to apply for mortgages
and to refinance existing mortgages. The number of mortgages closed in
2003 was a record high for the Bank, a 34.3% increase over 2002. The
Bank's mortgage business in 2003 included residential purchases,
construction, commercial, home equity and refinances.
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 and the other Knox, Lincoln and Waldo Counties. A senior regional
manager was appointed for each region and given responsibility for
planning, marketing and business development in their respective areas.
This structure allows decision making to be closer to the customer and
recognizes the reality that Mid-Coast and Down East Maine, while
geographically proximate, are very different markets, representing
different challenges.
The Bank competes actively with other commercial banks and other financial
institutions in its service areas. Strong competition exists among
commercial banks in efforts to obtain new deposits, in the scope and type
of services offered, in interest rates on time deposits and interest rates
charged on loans, and in other aspects of banking. In Maine, savings banks
are major competitors of commercial banks as a result of broadened powers
granted to savings banks. In addition, the Bank, like other commercial
banks, encounters substantial competition from other financial institutions
and other entities engaged in the business of either making loans or
accepting deposit accounts, such as savings and loan associations, credit
unions, insurance companies, certain mutual funds, and certain governmental
agencies. Furthermore, large out-of-state banks and other financial
services providers are active in servicing customers in the Bank's market
area.
As of December 31, 2003, the Bank employed 172 employees of which 12
employees were part time. The Company has no employees.
SUPERVISION AND REGULATION
- --------------------------
The business in which the Company and its subsidiary, the Bank, are engaged
is subject to extensive supervision, regulation and examination by various
federal and state bank regulatory agencies, including the Federal Reserve
Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC") and the
Maine Bureau of Financial Institutions (hereinafter the "MBF" or
"Superintendent"). The supervision, regulation and examination to which
the Company and the Bank are subject are intended primarily to protect
depositors and other customers or are aimed at carrying out broad public
policy goals, and not necessarily for the protection of shareholders.
Some of the more significant statutory and regulatory provisions applicable
to banks and bank holding companies ("BHC's") to which the Company and the
Bank are subject are described more fully below, together with certain
statutory and regulatory matters concerning the Company and the Bank. The
description of these statutory and regulatory provisions does not purport
to be complete and is qualified in its entirety by reference to the
particular statutory or regulatory provision. Any change in applicable law
or regulation may have a material effect on the Company's business and
operations, as well as those of the Bank. The Company's shareholders
generally are not subject to these statutory and regulatory provisions.
BHCs - Activities and Other Limitations. The Company is subject to
regulation under the BHC Act and Maine law and to examination and
supervision by the FRB and the Superintendent, and is required to file
reports with, and provide additional information requested by, the FRB and
the Superintendent. The FRB has the authority to issue orders to BHCs to
cease and desist from unsound banking practices and violations of
conditions imposed by, or violations of agreements with, the FRB. The FRB
is also empowered to assess civil money penalties against companies or
individuals that violate the BHC Act or orders or regulations thereunder,
to order termination of non-banking activities of non-banking subsidiaries
of BHCs, and to order termination of ownership and control of a non-banking
subsidiary by a BHC.
2
Various other laws and regulations, including Sections 23A and 23B of the
Federal Reserve Act, as amended (the "FRA"), generally limit borrowings,
extensions of credit and certain other transactions between the Company and
its affiliate insured depository institution. Section 23A of the FRA also
generally requires that an insured depository institution's loans to non-
bank affiliates be secured in appropriate amounts, and Section 23B of the
FRA generally requires that transactions between an insured depository
institution and its non-bank affiliates be on market terms. These laws and
regulations also limit BHCs and their subsidiaries from engaging in certain
tying arrangements in connection with any extension of credit, sale or
lease of property, or furnishing of services.
Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its
interpretations of Sections 23A and 23B of the FRA and replaced these
interpretations with Regulation W. In addition, Regulation W makes various
changes to existing law regarding Sections 23A and 23B, including expanding
the definition of what constitutes an affiliate subject to Sections 23A and
23B and exempting certain subsidiaries of state-chartered banks from the
restrictions of Sections 23A and 23B.
Under Regulation W, all transactions entered into on or before December 12,
2002, which either became subject to Sections 23A or 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the
treatment of which will change solely because of Regulation W, became
subject to Regulation W on July 1, 2003. All other covered affiliate
transactions become subject to Regulation W on April 1, 2003. The Federal
Reserve Board expects each depository institution that is subject to
Sections 23A and 23B to implement policies and procedures to ensure
compliance with Regulation W. We do not expect that the changes made by
Regulation W will have a material adverse effect on our business.
The Bank's authority to extend credit to its directors, executive officers
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the
FRA and Regulation O of the Federal Reserve Board. Among other things,
these provisions require that extensions of credit to insiders (a) be made
on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve
more that the normal risk of repayment or present other unfavorable
features and (b) not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the Bank's capital. The regulations
allow small discounts on fees on residential mortgages for directors,
officers and employees. In addition, extensions for credit in excess of
certain limits must be approved by the Bank's Board of Directors.
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of
personal loans to directors and executive officers of issuers (as defined
in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages
advanced by an insured depository institution, such as the Bank, that are
subject to the insider lending restrictions of Section 22(h) of the Federal
Reserve Act.
The BHC Act prohibits a BHC from acquiring substantially all the assets of
a bank or acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control
of any bank, or merging or consolidating with any BHC without prior FRB
approval. Unless a BHC becomes a "financial holding company" (an "FHC")
under the Gramm-Leach-Bliley Act ("GLBA"), as discussed below, the BHC Act
also prohibits a BHC from acquiring a direct or indirect interest in or
control of more than 5% of the voting shares of any company which is not a
bank or BHC and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services
to its subsidiary banks, except that it may engage in and may own shares of
companies engaged in certain activities the FRB determined to be so closely
related to banking or managing and controlling banks as to be a proper
incident thereto. In addition, Maine law requires approval by the
Superintendent prior to acquisition of more than 5% of the voting shares of
a Maine financial institution or any financial institution holding company
which controls a Maine financial institution. The Superintendent also must
approve acquisition by a Maine financial institution holding company of
more than 5% of a financial institution or financial institution holding
company domiciled outside of the State of Maine.
The GLBA established a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other
financial service providers by revising and expanding the BHC Act framework
to permit BHCs that qualify and elect to be treated as FHCs to engage in a
range of financial activities broader than would be permissible for
traditional BHCs that have not elected to be treated as FHCs. "Financial
activities" is broadly defined to include not only banking, insurance and
securities activities, but also merchant banking and additional activities
that the FRB, in consultation with the Secretary of the Treasury,
determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk
to the safety and
3
soundness of depository institutions or the financial system generally.
In order to elect to become an FHC, a BHC must meet certain tests and file
an election form with the FRB. To qualify, all of a BHC's subsidiary banks
must be well-capitalized and well-managed, as measured by regulatory
guidelines. In addition, to engage in the new activities, each of the
BHC's banks must have been rated 'satisfactory' or better in its most
recent federal Community Reinvestment Act evaluation.
A BHC that elects to be treated as an FHC may face significant consequences
if its banks fail to maintain the required capital and management ratings,
including entering into an agreement with the FRB which imposes limitations
on its operations and may even require divestitures. Such possible
ramifications may limit the ability of a bank subsidiary to significantly
expand or acquire less than well-capitalized and well-managed institutions.
The Company became a FHC in 2003.
Further, the GLBA permits state banks, to the extent permitted under state
law, to engage in certain new activities which are permissible for
subsidiaries of an FHC. Further, the GLBA expressly preserves the ability
of state banks to retain all existing subsidiaries. In order to form a
financial subsidiary, a state bank must be well-capitalized, and such banks
would be subject to certain capital deduction, risk management and
affiliate transaction rules. Also, the FDIC's final rules governing the
establishment of financial subsidiaries adopt the position that a state
nonmember bank may only conduct through a financial subsidiary activities
that a national bank could only engage in through a financial subsidiary.
However, activities that a national bank could not engage in through a
financial subsidiary, such as real estate development or investment,
continue to be governed by the FDIC's standard activities rules. Moreover,
to mirror the FRB's actions with respect to state member banks, the final
rules provide that a state bank subsidiary that engages only in activities
that the bank could engage in directly (regardless of the nature of the
activities) will not be deemed to be a financial subsidiary.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
generally authorizes BHCs to acquire banks located in any state, possibly
subject to certain state-imposed age and deposit concentration limits, and
also generally authorizes interstate mergers and to a lesser extent,
interstate branching.
Declaration of Dividends. The Bank, as a state chartered member of the
Federal Reserve System, is also subject to the regulations of the FRB with
regard to the payment of dividends. The Bank must obtain the approval of
the FRB to pay a dividend, if the total of all dividends declared in any
calendar year would exceed the total of its net profits (as reportable in
its Reports of Condition or Income) during the current calendar year and
its retained net income from the prior two calendar years. In addition,
the Bank may not declare or pay a dividend, if the dividend would exceed
the Bank's undivided profits as reportable on its Reports of Condition or
Income, unless the Bank has received the prior approval of the Board of
Directors and of at least two-thirds of the shareholders of each class of
stock outstanding.
Under Maine law, a corporation's board of directors may declare, and the
corporation may pay, dividends on its outstanding shares in cash or other
property, generally out of the corporation's unreserved and unrestricted
earned surplus, or out of the unreserved and unrestricted net earnings of
the current fiscal year and the next preceding fiscal year taken as a
single period, except under certain circumstances, including when the
corporation is insolvent or when the payment of the dividend would render
the corporation insolvent or when the declaration would be contrary to the
corporation's charter. These same limitations generally apply to investor-
owned, Maine financial institutions.
Federal bank regulatory agencies also have authority to prohibit banking
institutions from paying dividends if those agencies determine that, based
on the financial condition of the bank, such payment would constitute an
unsafe or unsound practice.
Capital Requirements
- --------------------
Footnote #15 on pages 46 and 47 of the Company's 2003 Annual Report to
Shareholders, regarding compliance with capital requirements is
incorporated herein by reference.
FRB Guidelines. The FRB has adopted capital adequacy guidelines pursuant
to which it assesses the adequacy of capital in examining and supervising a
BHC and in analyzing applications to it under the BHC Act. The FRB's
capital adequacy guidelines apply on a consolidated basis to BHCs with
consolidated assets of $150 million or more; thus, these guidelines apply
to the Company on a consolidated basis.
4
The FRB's capital adequacy guidelines generally require BHCs to maintain
total capital equal to 8% of total risk-adjusted assets and off-balance
sheet items, with at least one-half of that amount consisting of Tier 1 or
core capital and the remaining amount consisting of Tier 2 or supplementary
capital. Tier 1 capital for BHCs generally consists of the sum of common
stockholders' equity and perpetual preferred stock (subject in the case of
the latter to limitations on the kind and amount of such stocks which may
be included as Tier 1 capital), less goodwill and other non-qualifying
intangible assets. Tier 2 capital generally consists of hybrid capital
instruments; perpetual preferred stock, which is not eligible to be
included as Tier 1 capital; term subordinated debt and intermediate-term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into
account different risk characteristics.
In addition to the risk-based capital requirements, the FRB requires BHCs
to maintain a minimum leverage capital ratio of Tier 1 capital (defined by
reference to the risk-based capital guidelines) to total assets of 3.0%.
Total assets for this purpose do not include goodwill and any other
intangible assets and investments that the FRB determines should be
deducted from Tier 1 capital. The FRB has announced that the 3.0% leverage
ratio requirement is the minimum for the strong BHCs without any
supervisory, financial or operational weaknesses or deficiencies or those
which are not experiencing or anticipating significant growth. All other
BHCs are required to maintain a minimum leverage ratio of at least 4.0%.
BHCs with supervisory, financial, operational or managerial weaknesses, as
well as BHCs that are anticipating or experiencing significant growth, are
expected to maintain capital ratios well above the minimum levels.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that were not disclosed under Item III of
Securities and Exchange Commission Industry Guide 3 do not (1) represent or
result from trends or uncertainties which management reasonably expects
will materially impact future operating results, liquidity, or capital
resources or (2) represent material credits about which management is aware
of any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The Company and Bank are not aware of any current recommendations by the
regulatory authorities which if they were to be implemented would have or
would be reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
At December 31, 2003, the Company's total risk-based capital ratio and
leverage ratio were, and its management expects these ratios to remain, in
excess of regulatory requirements.
Failure to meet capital guidelines could subject the Company or the Bank to
a variety of FDIC corrective actions, including for example, (i)
restricting payment of capital distributions and management fees, (ii)
requiring that the appropriate federal banking agency monitor the condition
of the institution and its efforts to restore its capital, (iii) requiring
submission of a capital restoration plan, (iv) restricting the growth of
the institution's assets and (v) requiring prior approval of certain
expansion proposals.
At December 31, 2003, the Company and the Bank were deemed to be well
capitalized for the above purposes. The federal bank regulatory agencies
may raise capital requirements applicable to banking organizations beyond
current levels. The Company is unable to predict whether higher capital
requirements will be imposed and, if so, at what levels and on what
schedules. Therefore, the Company cannot predict what effect such higher
requirements may have on it.
Other Regulatory Requirements
- -----------------------------
Activities and Investments of Insured State-Chartered Banks. FDIC insured,
state-chartered banks, such as the Bank, are also subject to similar
restrictions on their business and activities. Section 24 of the Federal
Deposit Insurance Act (FDIA), generally limits the activities as principal
and equity investments of FDIC-insured, state-chartered banks to those
activities that are permissible to national banks. In 1999, the FDIC
substantially revised its regulations implementing Section 24 of the FDIA
to ease the ability of state-chartered banks to engage in certain
activities not permissible for national banks, and to expedite FDIC review
of bank applications and notices to engage in such activities.
Customer Information Security. The FDIC and other bank regulatory agencies
have published final guidelines establishing standards for safeguarding
nonpublic personal information about customers that implement provisions of
the GLBA (the "Guidelines"). Among other things, the Guidelines require
each financial institution, under the supervision and ongoing oversight of
its Board of Directors or an appropriate committee thereof, to develop,
implement and maintain a comprehensive written information security program
designed to ensure the security and confidentiality of customer
information, to protect against any anticipated threats or hazards to the
security or integrity of such
5
information, and to protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.
Privacy. The FDIC and other regulatory agencies have published final
privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The
Privacy Rules, which govern the treatment of nonpublic personal information
about consumers by financial institutions, require a financial institution
to provide notice to customers (and other consumers in some circumstances)
about its privacy policies and practices, describe the conditions under
which a financial institution may disclose nonpublic personal information
to nonaffiliated third parties, and provide a method for consumers to
prevent a financial institution from disclosing that information to most
nonaffiliated third parties by "opting-out" of that disclosure, subject to
certain exceptions.
USA Patriot Act. The USA Patriot Act of 2001 (the "Patriot Act"), designed
to deny terrorists and others the ability to obtain access to the United
States financial system, has significant implications for depository
institutions, broker-dealers and other businesses involved in the transfer
of money. The Patriot Act requires financial institutions to implement
additional policies and procedures with respect to money laundering,
suspicious activities, currency transaction reporting and due diligence on
customers. Implementation of the Patriot Act's requirements will occur in
stages, as rules regarding its provisions are finalized by government
agencies.
Deposit Insurance. The FDIA does not require the FDIC to charge all banks
deposit insurance premiums when the ratio of deposit insurance reserves to
insured deposits is maintained above specified levels. However, as a
result of general economic conditions and recent bank failures, it is
possible that the ratio of deposit insurance reserves to insured deposits
could fall below the minimum ratio that FDIA requires, which would result
in the FDIC setting deposit insurance assessment rates sufficient to
increase deposit insurance reserves to the required ratio. A resumption of
assessments of deposit insurance premiums charged to well capitalized
institutions, such as the Company's subsidiary bank, could have an effect
on the Company's net earnings. The Company cannot predict whether the FDIC
will be required to increase deposit insurance assessments above their
current levels.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President George W. Bush
signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act
implements a broad range of corporate governance and accounting measures
for public companies designed to promote honesty and transparency in
corporate America and better protect investors from the type of corporate
wrongdoing that occurred in Enron, WorldCom and similar companies. The
Sarbanes-Oxley Act's principal legislation includes:
* the creation of an independent accounting oversight board;
* auditor independence provisions which restrict non-audit
services that accountants may provide to their audit clients;
* additional corporate governance and responsibility measures,
including the requirement that the chief executive officer and
chief financial officer certify financial statements and the
expansion of powers of audit committees;
* expanded disclosure requirements, including accelerated
reporting of stock transactions by insiders;
* mandatory disclosure by analysts of potential conflicts of
interest; and
* a range of enhanced penalties for fraud and other violations.
We do not believe that the Sarbanes-Oxley Act will have a material adverse
affect upon our operations in the near term.
SEASONAL INFORMATION
- --------------------
In the Bank's market area, the banking business is somewhat seasonal due to
an influx of tourists and seasonal residents returning to the area each
spring and summer. As a result, the Bank has a deposit fluctuation, from a
relative high point in mid October to a low point in June. The deposit
fluctuation is predictable and does not have a material adverse effect on
the Bank and its operations.
6
The Supplemental Financial Data presented on the following pages contains
information to facilitate analysis and comparison of sources of income and
exposure to risk. All amounts in tables presented in thousands, except per
share amounts.
INVESTMENT ACTIVITIES
- ---------------------
Held To Maturity Securities
- ---------------------------
The following table shows the book value of the Company's held to maturity
securities at the end of each of the last three years. (Dollars in
thousands)
December 31
------------------------------
2003 2002 2001
---- ---- ----
Obligations of states &
political subdivisions $2,870 $3,317 $3,527
------ ------ ------
TOTAL $2,870 $3,317 $3,527
====== ====== ======
The table below shows the relative maturities of held to maturity
securities as of December 31, 2003. (Dollars in thousands)
Held to Maturity Securities
Maturity Distribution as of
December 31, 2003
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 yrs 10 Yrs
-------- ------ ------ ---------
<s> <c> <c> <c> <c>
Obligations of State and Political Subdivisions $607 $576 $1,479 $208
Weighted Average Yield (1) 5.23% 5.41% 4.44% 5.27%
Percent of Total Portfolio 21.2% 20.1% 51.5% 7.2%
<FN>
<F1> Weighted Average Yields on tax exempt obligations have been computed
on a tax equivalent basis.
</FN>
Available For Sale Securities
- -----------------------------
The following table shows the carrying value of the Company's available for
sale securities and other investment securities at the end of each of the
last three years. (Dollars in thousands)
December 31
------------------------------------
2003 2002 2001
---- ---- ----
<s> <c> <c> <c>
Mortgage backed securities $ 67,958 $ 34,957 $ 38,164
US Treasury notes and other U.S. Government agencies 39,433 47,392 36,038
Obligations of states and political subdivisions 12,580 12,415 15,746
Other securities 8,983 5,992 4,455
-------- -------- --------
TOTAL $128,954 $100,756 $ 94,403
======== ======== ========
The table below shows the relative maturities and carrying value of
available for sale debt securities as of December 31, 2003 (excludes stock
investments). (Dollars in thousands)
7
Securities Available for Sale
Maturity Distribution as of
December 31, 2003
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 Yrs 10 yrs
-------- ------ ------ ---------
<s> <c> <c> <c> <c>
Mortgage Backed Securities $ 0 $ 692 $35,562 $31,704
US Treasury Notes and Other
Government Agencies 13,792 24,853 0 788
Obligations of State and Political Subdivisions 595 2,039 9,827 119
Other Securities 3,286 5,203 0 494
------- ------- ------- -------
TOTAL $17,673 $32,787 $45,389 $33,105
======= ======= ======= =======
Weighted Average Yield 5.24% 4.61% 4.76% 5.27%
------- ------- ------- -------
Percent of Total Portfolio: 13.7% 25.4% 35.2% 25.7%
The Company's net unrealized gain on available for sale securities (net of
tax) of $1,542,453 at December 31, 2003 is largely attributable to the
current interest rate environment. The unrealized gain has no effect on
regulatory capital or current earnings of the Company. The Company would
sell these securities only if it was consistent with the Bank's
asset/liability management strategies.
LENDING ACTIVITIES
- ------------------
The following table reflects the composition of the Company's consolidated
loan portfolio at the end of each of the last five years. (Dollars in
thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Real Estate Loans
A. Construction & Land
Development $ 15,064 $ 14,542 $ 14,774 $ 10,710 $ 7,617
B. Secured by Family
Residential Properties 177,712 117,273 107,919 99,887 47,988
C. Secured by Non-Farm,
Non-Residential
Properties 49,025 51,118 47,580 49,736 32,443
Commercial & Industrial Loans 23,837 19,461 20,476 21,002 16,222
Loans to Individuals for Household,
Family & Other Consumer Expenditures 17,494 18,318 17,782 19,966 14,508
All Other Loans 3,276 5,574 3,084 3,718 8,845
-------- -------- -------- -------- --------
Total Gross Loans $286,408 $226,286 $211,615 $205,019 $127,623
======== ======== ======== ======== ========
The above data is gathered from loan classifications established by the
Federal Reserve Call Report 032.
Maturities and Sensitivities of Loans
To Changes in Interest Rates
As of December 31, 2003
(Dollars in thousands)
Due 1 Year or Less Due 1-5 Years (1) Due 5 Years + (2)
------------------ ----------------- -----------------
<s> <c> <c> <c>
Real Estate $ 88,257 $108,569 $ 44,975
Commercial & Industrial 15,256 7,127 1,454
Consumer 12,683 2,607 2,204
Municipal 1,967 1,231 78
-------- -------- --------
Total $118,163 $119,534 $ 48,711
======== ======== ========
8
<FN>
<F1> Real estate loans in the 1-5 category have $64,816,000 at a fixed
interest rate and $43,753,000 at a variable interest rate.
Commercial loans in the 1-5 year category have $4,012,000 at a fixed
interest rate and $3,115,000 at a variable interest rate.
<F2> Real estate and commercial loans in the 5+ category are all at fixed
interest rates.
</FN>
Loan Concentrations
- -------------------
As of December 31, 2003 and 2002, the Company did not have any
concentration of loans in one particular industry that exceeded 10% of its
total loan portfolio.
The Bank grants residential, commercial and consumer loans to customers
principally located in Hancock, Washington, Knox, Lincoln and Waldo
Counties of the State of Maine. Although the loan portfolio is
diversified, a substantial portion of our debtors' ability to honor their
contracts is dependent upon the economic conditions in the area, especially
in the real estate sector. There are currently no borrowers whose total
indebtedness to the Bank exceeded regulatory limits at December 31, 2003.
Delinquent Loans
- ----------------
The following schedule is a summary of loans with principal and/or interest
payments over 30 days past due and still accruing: (Dollars in thousands)
December 31,
----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ---------------- ---------------- ---------------- ---------------
% % % % %
Of Of Of Of Of
Total Total Total Total Total
Amt Loans Amt Loans Amt Loans Amt Loans Amt Loans
--- ----- --- ----- --- ----- --- ----- --- -----
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real Estate $4,017 1.4 $5,491 2.4 $4,877 2.3 $1,054 0.5 $4,367 3.4
Installment 63 0.0 218 0.0 62 0.0 64 0.0 65 0.1
All Others 67 0.1 1,171 0.6 516 0.3 327 0.2 192 0.2
------ --- ------ --- ------ --- ------ --- ------ ---
TOTAL $4,147 1.5 $6,880 3.0 $5,455 2.6 $1,445 0.7 $4,624 3.7
====== === ====== === ====== === ====== === ====== ===
Loans, other than credit card loans, are placed on nonaccrual status when,
in the opinion of management, there are doubts as to the collectibility of
interest or principal, or when principal or interest is past due 90 days or
more, and the loan is not well secured and in the process of collection.
Interest previously accrued but not collected is reversed and charged
against interest income at the time the related loan is placed on non-
accrual status. Principal and accrued interest on credit card loans are
charged to the allowance for credit losses when 180 days past due.
Payments received on nonaccrual loans are recorded as reductions of
principal if principal payment is doubtful. The principal amount of loans
which have been placed on nonaccrual status were comprised primarily of
certain real estate loans. For each of these loans, management has
evaluated the collectibility of the principal based on its best estimate of
the realizable collateral value of the loans and does not anticipate that
any losses from liquidation of these loans will have a material effect on
future operations.
Loans are considered to be restructured when the yield on the restructured
assets is reduced below the current market rates by an agreement with the
borrower. Generally this occurs when the cash flow of the borrower is
insufficient to service the loan under its original terms. (Dollars in
thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Loans accounted for on a nonaccrual basis $1,387 $1,473 $1,823 $3,390 $437
Accruing loans contractually past due 90 days or more $ 361 $ 351 $ 75 $ 21 $314
In accordance with the Securities and Exchange Commission Industry Guide 3
Item III. C (1), the gross interest income that would have been recorded in
2003 if nonaccrual and restructured loans had been current in accordance
with their original terms and had been outstanding throughout the period or
since origination approximates $111,000. There was
9
approximately $21,000 included in the gross interest income on non-accrual
and restructured loans for 2003.
Allowance For Loan Losses
- -------------------------
Analysis of the allowance for loan losses for the past five years were as
follows: (Dollars in thousands)
December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Balance at beginning of period: $ 3,679 $ 3,453 $ 3,376 $ 2,629 $ 2,435
Charge-offs:
Commercial & Industrial Loans 0 43 132 55 3
Real Estate Loans 117 113 98 9 5
Loans to Individuals 71 123 95 116 140
-------- -------- -------- -------- --------
188 279 325 180 148
-------- -------- -------- -------- --------
Recoveries:
Commercial & Industrial Loans 15 87 38 0 12
Real Estate Loans 370 16 19 10 0
Loans to Individuals 44 42 45 26 130
-------- -------- -------- -------- --------
429 145 102 36 142
-------- -------- -------- -------- --------
Net Charge-offs 241 134 223 144 6
Provision for Loan Losses 420 360 300 371 200
Allowance on Acquired Loans 0 0 0 520 0
-------- -------- -------- -------- --------
Balance at end of period $ 4,339 $ 3,679 $ 3,453 $ 3,376 $ 2,629
Average Loans Outstanding $250,638 $218,951 $210,561 $151,924 $118,311
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding .096% .061% .106% .095% .004%
-------- -------- -------- -------- --------
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The allocation of an
allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any
other category. (Dollars in thousands)
December 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------ ------------------ ------------------ ------------------
% of % % % %
Loan Loan Loan Loan Loan
Categories Categories Categories Categories Categories
To Total To Total To Total To Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance At End of Period:
Applicable To:
Residential Real Estate $1,248 65.3% $ 641 57.6% $1,289 60.9% $ 647 51.6% $ 500 44.0%
Commercial &
Industrial 1,386 20.5% 1,142 25.4% 1,081 31.7% 2,195 34.8% 1,846 38.1%
Consumer 312 7.7% 350 9.8% 115 5.4% 137 9.7% 145 11.4%
Municipal 0 2.8% 0 4.3% 31 1.5% 37 1.9% 88 6.5%
Identified 824 3.7% 552 2.9% 295 0.5% 257 2.0% 0 .0%
Contingent Liabilities 456 .0% 653 .0% 323 .0% 0 .0% 0 .0%
Unallocated 113 .0% 341 .0% 319 .0% 103 .0% 50 .0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
TOTAL $4,339 100.0% $3,679 100.0% $3,453 100.0% $3,376 100.0% $2,629 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The allowance for loan losses is a general allowance established by
management to absorb possible loan losses as they may exist in the loan
portfolio. This allowance is increased by provisions charged to operating
expenses and by recoveries on loans previously charged-off. Management
determines the adequacy of the allowance from independent reviews of the
quality of new and existing loans, from the results of reviews of the loan
portfolio by regulatory agency
10
examiners, evaluation of past loan loss experience, the character and size
of the loan portfolio, current economic conditions and other observable
data.
The process of evaluating the adequacy of the allowance for loan losses
involves a high degree of management judgment, based in part on systematic
methods. Actual losses could vary from these estimates. A detailed
analysis of the allowance for loan losses is reviewed quarterly, at which
time necessary increases or decreases are made to the allowance for loan
losses, with a related adjustment to the provision for loan losses. The
Bank's Board of Directors reviews and approves the analysis of the adequacy
of the allowance for loan losses quarterly.
The allocated portion of the allowance for loan losses is comprised of
general reserves for specific loan types and specific reserves for impaired
loans. The general reserve categories consist of reserve checking,
personal and commercial installments, commercial notes and mortgages,
residential mortgages and Visa loans. A general reserve has also been
established for contingent liabilities such as lines of credit, letters of
credit and residential and commercial construction lines.
Each general reserve category valuation consists of an assigned reserve
percentage. The factors used in determining the reserve percentage for
each category starts with the five year historical average of loan losses
to loans and makes adjustments for factors such as loan volumes and trends,
economic and industrial conditions, credit concentrations, lending
policies, procedures and practices all of which management believes may
impact the potential for losses in the loan portfolio.
The specific allocation for impaired loans is determined based on a loan by
loan review of impaired loans and specific loans under close monitoring by
management for potential problems.
As of December 31, 2003, the Bank had impaired loans totaling $1,387,000,
which consisted of real estate loans. The fair value of the loans'
collateral was used to evaluate the adequacy of the allowance for loans
losses allocated to these loans.
A loan is considered impaired by management when it is probable that the
creditor will be unable to collect all amounts due under the contractual
terms of the loan, including principal and interest. Based upon
management's periodic review of loans on non-accrual status, impairment is
based on a loan by loan analysis and not set by a defined period of
delinquency before a loan is considered impaired.
The unallocated portion of the allowance for loan losses is influenced by
overall loan growth, the character and mix of the loan portfolio, current
trends in nonperforming loans, current economic conditions and industry
conditions, and other asset quality considerations. Though these factors
have not been identified by specific borrower, management believes these
are probable losses in the portfolio and has provided for them in the
allowance for loan losses accordingly.
At December 31, 2003, the allowance for loan losses was comprised of a
specific reserve on impaired loans of $147,755, a general reserve of
$4,078,000 and an unallocated reserve of $113,000.
During 2003, the Bank provided $420,000 to the allowance for loan losses,
compared to $360,000 and $300,000 in 2002 and 2001, respectively. During
2003, the allowance was increased primarily because of overall loan growth,
in particular, real estate loans.
DEPOSIT ACTIVITIES
- ------------------
The following schedule summarizes the time remaining to maturity of
Certificates of Deposit $100,000 or greater at December 31, 2003. (Dollars
in thousands)
Amount
3 Months or Less $ 7,739
Over 3 Through 6 7,325
Over 6 Through 12 Months 2,050
Over One Year 1,819
-------
Total $18,933
=======
11
BORROWINGS
- ----------
(Dollars in thousands)
December 31
-------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Interest Rate Amount Interest Rate Amount Interest Rate Amount
------------- -------- ------------- -------- ------------- --------
<s> <c> <c> <c> <c> <c> <c>
Fixed advances 2.50 $103,360 4.60 $44,294 4.90 $39,291
Variable advances 5.45 $ 1,666 5.37 $ 1,666 5.37 $ 2,666
Securities sold under agreement 1.45 $ 12,456 1.00 $13,064 1.45 $12,135
to repurchase
2003 2002 2001
------------------------------- ------------------------------ ------------------------------
Fixed Variable Securities Fixed Variable Securities Fixed Variable Securities
----- -------- ---------- ----- -------- ---------- ----- -------- ----------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <<c>
Maximum amount $103,360 $1,666 $15,690 $69,263 $2,666 $13,489 $52,000 $6,179 $13,948
outstanding of any
month end during
the year
Average amount $ 58,958 $1,666 $12,597 $50,403 $2,622 $10,417 $45,500 $4,423 $10,944
outstanding during
the year
Weighted average 1.53% 2.13% 0.53% 2.95% 2.10% 1.14% 5.40% 4.53% 2.73%
interest rate for
the year
Advances at December 31, 2003 mature as follows: (Dollars in thousands)
2004 $ 78,789
2005 16,193
2006 2,000
2007 3,139
Thereafter 4,905
--------
Total $105,026
========
CAPITAL RATIOS
- --------------
The following table presents, for the last three years, the Company's
average capital expressed as a percentage of average deposits, loans, total
assets, and earning assets.
*2003 *2002 *2001
----- ----- -----
Deposits 13.8% 13.4% 13.1%
Loans 15.3% 16.6% 16.1%
Total Assets 9.8% 9.8% 9.3%
Earning Assets 10.7% 10.9% 10.3%
* 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.
RETURN ON SHAREHOLDERS' EQUITY
- ------------------------------
The following table presents, for each of the last three years, the
Company's return on average shareholders' equity, return on average assets,
and return on average earning assets.
12
2003 2002 2001
---- ---- ----
Return on average shareholders' equity 11.3% 12.3% 9.9%
Return on average assets 1.1% 1.2% 0.9%
Return on average earning assets 1.2% 1.3% 1.0%
LIQUIDITY 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.
Liquidity comes from both assets and liabilities. On the asset side of the
balance sheet, prepayments and maturity of outstanding loans, investments
and mortgage backed securities and the sale of mortgage loans provide
liquidity. On the liability side, deposits and borrowings from Federal
Home Loan Bank of Boston provide liquidity. 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.
At December 31, 2003, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one year horizon was 83%, its one year GAP
(measurement of interest sensitivity of interest earning assets and
interest bearing liabilities at a given point in time) was 93%, and
$160,963,000 in assets and $194,558,000 in liabilities will be repriceable
in one year. Bank earnings may be negatively affected, should interest
rates fall.
In addition to the "traditional" GAP calculation," the Bank analyzes future
net interest income based on budget projections including anticipated
business activity, anticipated changes in interest rates and other
variables, which are adjusted periodically by management to take into
account current economic conditions, the current interest rate environment,
and other factors.
The following table presents, as of December 31, 2003, the Bank's interest
rate GAP analysis: (Dollars in thousands)
Interest Rate GAP Analysis
As of December 31, 2003
---------------------------------------------------------------
0-3 4-12 1-5 Over 5
Months Months Years Years Total
------ ------ ----- ------ -----
<s> <c> <c> <c> <c> <c>
Interest earning assets
Loans:
Real estate
Fixed rate $ 6,796 $ 18,973 $ 64,786 $ 44,959 $135,514
Variable rate 26,355 36,181 43,437 314 106,287
Commercial 11,575 3,673 7,136 1,453 23,837
Municipal 311 1,655 1,231 79 3,276
Consumer 4,087 8,598 2,608 2,201 17,494
Securities available for sale 12,456 27,377 67,933 21,188 128,954
Held to maturity securities 0 0 5,815 3,386 9,201
Loans held for sale 2 9 55 871 937
Other earning assets 0 0 0 8,041 8,041
-------- -------- -------- -------- --------
TOTAL $ 61,582 $ 96,466 $193,001 $ 82,492 $433,541
======== ======== ======== ======== ========
13
Interest bearing liabilities
Deposits:
Savings $ 0 $ 166 $ 0 $ 55,229 $ 55,395
NOW 0 0 0 65,657 65,657
Money market 38,359 0 0 0 38,359
Time 30,984 37,050 29,722 78 97,834
Borrowings 78,314 12,324 19,514 7,331 117,483
-------- -------- -------- -------- --------
TOTAL $147,657 $ 49,540 $ 49,236 $128,295 $374,728
======== ======== ======== ======== ========
Rate sensitivity GAP $(86,075) $ 46,926 $143,765 $(45,803)
Rate sensitivity GAP as a
percentage of total assets (18.54)% 10.11% 30.97% (9.87)%
Cumulative GAP $(86,075) $(39,149) $104,616 $ 58,813
Cumulative GAP as a
percentage of total assets (18.54)% (8.43)% 22.54% 12.67%
The distribution in the Interest Rate GAP Analysis is based on a
combination of maturities, call provisions, repricing frequencies,
prepayment patterns, historical data and management judgment. Variable
rate assets and liabilities are distributed based on the repricing
frequency of the investment. Management has estimated the rate sensitivity
of money market and savings deposits based on a historical analysis of the
Bank and industry data.
The status of the Bank's sources of cash to fund its operations are as
follows: (Dollars in thousands)
As of December 31, 2003 2002
- ------------------ ---- ----
<s> <c> <c>
Net cash provided from operations $ 8,560 $ 3,491
Net cash provided (used) by investing activities (90,219) (19,972)
Net cash provided from financing activities 79,714 1,262
-------- --------
Net increase in cash and cash equivalents $ (1,945) $ (5,219)
======== ========
ITEM 2: BANK PROPERTIES
---------------
The Bank's principal office is located at 66 Main Street in Ellsworth,
Maine. The main office building consists of three floors, all of which are
utilized by the Bank for banking facilities and administrative offices.
The principal office includes a separate drive-up facility and parking lot.
In August 1981, plans were finalized for the construction of an 8,000
square foot addition to our existing building. Completed in November of
1982, it provided new and enlarged customer service/teller area with street
level access. During 1982 and 1983, the existing building also received
extensive renovation and remodeling, tying it in to the new addition. The
project was completed in July of 1983. In April 1985, the Bank opened the
first automated drive-up in Downeast Maine. The automated teller machine
is adjacent to its drive-up facility located at 66 Main Street, in
Ellsworth, Maine. In 1988, the Main Office began construction of an
addition to its existing building that would house loan operations. In
September 1989, construction was completed on the addition. In May 1992,
the Bank opened a trust office in Bangor (Penobscot County) to serve trust
customers in that city and surrounding areas. In May 1995, the Bank
elected not to renew its lease for its Bangor office. In 1999, the Bank
sold a parcel of land located on Route 3 in Ellsworth. In addition, the
Bank owns the following properties:
(a) The Bank's Cherryfield office located on Church Street in
Cherryfield, Maine. A major renovation was undertaken at
Cherryfield in 1983, approximately doubling its size. These
alterations were completed in January of 1984.
(b) The Bank's Jonesport office located on Main Street in
Jonesport, Maine.
(c) The Bank's Blue Hill office located on Main Street in Blue
Hill, Maine. During 1989, the branch was renovated to include
an office for the Assistant Manager.
(d) The Bank's Stonington office located on Atlantic Avenue in
Stonington, Maine. The Stonington office was renovated and
expanded in 1980.
(e) The Bank's Milbridge office located on Main Street in
Milbridge, Maine. In 1987, management decided to replace the
Milbridge Branch with a larger up to date facility, located at
the same site. The new branch has been open for business since
April 1988.
14
(f) The Bank purchased in 1999 land and buildings located at 92
Main Street in Ellsworth, Maine, adjacent to the Bank's
principal office.
(g) The Bank acquired the Waldoboro property located on Atlantic
Highway in Waldoboro, Maine on August 31, 2000.
(h) The Bank acquired the Rockland property located on Camden
Street in Rockland, Maine on August 31, 2000.
All of the Bank's offices include drive-up facilities.
In addition to the above properties, which are owned by the Bank, the Bank
leases the following properties:
(a) The Bank leases its branch office at the Ellsworth Shopping
Center, High Street, Ellsworth, Maine, from Ellsworth Shopping
Center, Inc., a Maine Corporation with principal offices in
Ellsworth, Maine. The current lease will expire in December of
2004.
(b) The Bank leases its Machias office which is located on Dublin
Street in Machias, Maine. The premises are owned by Hannaford
Bros., Inc. of South Portland, Maine, and are leased to Gay's
Super Markets, Inc., under a lease dated July 26, 1975. The
Bank subleased the premises from Gay's Super Markets, Inc.,
under a sublease which expires in April of 2006. The Bank has
the right to extend the sublease for two additional three year
terms.
(c) The Bank leases its Somesville branch office which is located
on Route 102 in Somesville, Maine. The land and premises are
owned by A. C. Fernald Sons, Inc., Mount Desert, Maine. The
current lease expires on March 24, 2005, with an option to
renew for an additional 20 years.
(d) The Bank leases its Castine branch office located on Main
Street from Michael Tonry, Castine, Maine. The current lease
expires on January 31, 2005 with the right to extend the lease
for an additional 1 2 year term.
(e) The Bank leases its Bar Harbor branch office located on Cottage
Street from the Swan Agency, a Maine corporation with a
principal office in Bar Harbor, Maine. The current lease will
expire in April of 2007.
(f) The Bank assumed the lease of its Belfast office located on
Starret Drive in Belfast on August 31, 2000 from the Waldoboro
Bank FSB, who leased from Belfast Marketplace Association. The
current lease expires on January 31, 2018. During 2003, a new
facility was built by the current lessor on Route 3 in Belfast.
(g) The Bank leases its Camden office which is located on Elm
Street in Camden, Maine from Ellis and Catherine Cohn, Camden,
Maine. The current lease expires on January 31, 2005.
All premises are considered to be in good condition and currently adequate
for the purposes for which they are utilized.
ITEM 3: LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings pending to which the Company or the
Bank is a party, or of which any of their property is the subject, other
than ordinary routine litigation incidental to the business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not Applicable.
PART II
-------
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
-------------------------------------------------------------
MATTERS
-------
15
A. MARKET INFORMATION
------------------
The market information required is contained in the Company's 2003 Annual
Report and is incorporated herein by reference. (See Market for Common
Stock, page 23.)
Item 6: SELECTED FINANCIAL DATA
-----------------------
(in thousands, except for per share amounts)
--------------------------------------------
Years Ended December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
SUMMARY OF OPERATIONS
Noninterest Income $ 6,167 $ 5,874 $ 4,907 $ 3,639 $ 3,426
Noninterest Expense 13,844 13,465 13,115 10,367 8,663
Net Interest Income 14,135 14,006 13,085 11,176 10,169
Provision for Loan Losses 420 360 300 371 200
Net Income 4,278 4,315 3,226 3,000 3,355
PER COMMON SHARE DATA
Net Income $ 7.46 $ 7.49 $ 5.59 $ 5.19 $ 5.80
Cash Dividends Declared 2.35 2.20 2.10 2.00 1.92
Book Value (1) 68.29 63.13 58.19 54.67 51.50
FINANCIAL RATIOS
Return on Average Equity (1) 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%
Net Interest Margin 3.99% 4.35% 4.35% 4.58% 4.61%
Dividend Payout Ratio 31.5% 29.4% 37.6% 38.5% 33.0%
Allowance for Loan Losses/Total Loans .02 .02 .02 .02 .02
Non Performing Loans to Total Loans .006 .007 .009 .017 .006
Non Performing Assets to Total Assets .004 .004 .005 .010 .003
Efficiency Ratio 66.6% 67.7% 70.1% 69.9% 63.7%
Loan to Deposit Ratio 94.5% 80.7% 79.0% 83.5% 66.2%
BALANCE SHEET
Deposits $298,454 $275,765 $267,907 $245,581 $192,848
Loans 286,408 226,286 211,615 205,019 127,623
Securities 138,155 109,569 102,970 109,958 107,509
Shareholders' Equity (1) 39,210 36,394 33,606 31,586 29,771
Total Assets 464,194 381,029 362,003 348,242 257,850
<FN>
<F1> 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 of
($326,168) at December 31, 2002.
</FN>
The above summary should be read in conjunction with the related
consolidated financial statements and notes thereto for the years ended
December 31, 2003, 2002, 2001, 2000 and 1999, and with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Company's 2003 Annual Report is incorporated herein by reference.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information contained in the section captioned "Quantitative and
Qualitative Disclosures about Market Risk" in the Company's 2003 Annual
Report is incorporated herein by reference.
16
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(A) The financial statements required are contained in the
Company's 2003 Annual Report and are incorporated herein by
reference. (See item 15 (a). )
(B) The summary of the quarterly results of operations for the
years ended December 31, 2003 and 2002 are incorporated herein
by reference from page 28 of the Company's 2003 Annual Report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
ITEM 9A: CONTROLS AND PROCEDURES
-----------------------
Management of the Company, including the Company's President and Chief
Executive Officer and Senior Vice President and Chief Financial Officer,
has evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report. Based upon that evaluation,
the Company's President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer concluded that the disclosure
controls and procedures were effective, in all material respects, to ensure
that information required to be disclosed in the reports the Company files
and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information called for by this Item (and Items 11, 12, 13 and 14 below)
is incorporated by reference from the registrant's definitive Proxy
Statement to be dated April 19, 2004 for its regular annual meeting of
shareholders to be held May 20, 2004 where it appears under the headings
"VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF", "ELECTION OF DIRECTORS",
"EXECUTIVE OFFICERS", "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE", "TRANSACTIONS WITH CERTAIN RELATED PERSONS", "COMMITTEES AND
BOARD MEETINGS", "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS" AND
"AUDIT FEES AND PRE-APPROVAL POLICIES".
The Company has adopted a Code of Ethics, which applies to the Company's
principal executive officer, principal financial officer, principal
accounting officer or controller or person performing similar functions for
the Company. Our Code of Ethics meets the requirements of a "code of
ethics" as defined by Item 406 of Regulation S-K and is filed as Exhibit 14
to this annual report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
----------------------
See Item 10 above.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
See Item 10 above.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
See Item 10 above.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
See Item 10 above.
17
PART IV
-------
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Financial Statements and Exhibits
(1) The financial statements listed below are filed as part
of this report; such financial statements (including
report thereon and notes thereto) are included in the
registrant's Annual Report to Shareholders for its fiscal
year ended December 31, 2003 (a copy of which is being
filed as Exhibit 13 hereto), and are incorporated herein
by reference.
Consolidated Balance Sheets
December 31, 2003 and 2002 29
Consolidated Statements of Income
For the years ended December 31, 2003, 2002 and 2001 30
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2003, 2002 and 2001 31
Consolidated Statements of Cash Flow
For the years ended December 31, 2003, 2002 and 2001 32-33
Notes to Consolidated Financial Statements 34-51
Independent Auditors Report 52
(2) Financial statement schedules are omitted as they are not
required or included in the Annual Report to
Shareholders.
(3) Exhibits required by Item 601 - see Item 15(c) below.
(b) Reports on Form 8-K
On October 23, 2003, the Company furnished a report of Form
8-K, dated October 21, 2003, pursuant to Item 12 to report the
Company's issuance of a press release dated October 21, 2003
describing the Company's quarterly earnings and furnishing the
press release as an exhibit.
(c) Exhibits
* 3 Articles of Incorporation and By-laws of
Union Bankshares Company
* 4 Articles of Incorporation and By-laws of Union
Bankshares Company (see Exhibit 3)
* 10.1 Stock Purchase Plan for the employees of
Union Trust Company
* 10.2 Deferred Compensation Agreements for the
Executive Officers of Union Trust Company
* 10.3 Salary Continuation Agreements for the
Executive Officers of Union Trust Company
11 Computation of earnings per share, is
incorporated herein by reference to Note 1 to
the Consolidated Financial Statements on page
34 of the 2003 Annual Report to Shareholders
attached hereto as Exhibit 13.
13 The registrant's Annual Report to Shareholders'
for its fiscal year ended December 31, 2003.
This exhibit, except for those portions thereof
18
expressly incorporated by reference into the
Form 10 K annual report, is furnished for the
information of the Commission only and is
not to be deemed "filed" as part of the report.
14 Code of Ethics
21 Subsidiaries of the Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
* Incorporated by reference into this document from the Exhibits to the
Company's Form S-1, Registration Statement, initially filed on June
15, 1984, Registration No. 2-90679.
19
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: 3/29/04
UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY
By: /s/ Peter A. Blyberg By: /s/ Timothy R. Maynard
Peter A. Blyberg, President Timothy R. Maynard
and Chief Executive Officer Senior Vice President and CFO
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date: 3/29/04
UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY
By: /s/ Peter A. Blyberg By: /s/ Timothy R. Maynard
Peter A. Blyberg, President Timothy R. Maynard
And Chief Executive Officer Senior Vice President and CFO
Date Signature Name
- ---- --------- ----
3/30/04 /s/ Arthur J. Billings Arthur J. Billings, Director
3/30/04 /s/ Peter A. Blyberg Peter A. Blyberg, Director
3/30/04 /s/ Blake B. Brown Blake B. Brown, Director
3/30/04 /s/ Richard C. Carver Richard C. Carver, Director
3/30/04 /s/ Peter A. Clapp Peter A. Clapp, Director
3/30/04 /s/ Samuel G. Cohen Samuel G. Cohen, Director
3/30/04 /s/ Sandra H. Collier Sandra H. Collier, Director
3/30/04 /s/ Robert B. Fernald Robert B. Fernald, Director
3/30/04 /s/ Douglas A. Gott Douglas A. Gott, Director
3/30/04 /s/ James L. Markos, Jr. James L. Markos, Jr., Director
3/30/04 /s/ John V. Sawyer, II John V. Sawyer, II, Director
3/30/04 /s/ Stephen C. Shea Stephen C. Shea, Director
3/30/04 /s/ Robert W. Spear Robert W. Spear, Director
3/30/04 /s/ Richard W. Teele Richard W. Teele, Director
3/30/04 /s/ Paul L. Tracy Paul L. Tracy, Director
20
Exhibit Index
-------------
Exhibit Number Description
- -------------- -----------
* 3 Articles of Incorporation and By-laws of Union Bankshares
Company
* 4 Articles of Incorporation and By-laws of Union Bankshares
Company
* 10.1 Stock Purchase Plan for the employees of Union Trust
Company
* 10.2 Deferred Compensation Agreements for the Executive
Officers of Union Trust Company
* 10.3 Salary Continuation Agreements for the Executive Officers
of Union Trust Company
11 Computation of earnings per share, is incorporated herein
by reference to Note 1 to the Consolidated Financial
Statements on page 34 of the 2003 Annual Report to
Shareholders attached hereto as Exhibit 13.
13 The registrant's Annual Report to Shareholders' for its
fiscal year ended December 31, 2003. This exhibit,
except for those portions thereof expressly incorporated
by reference into the Form 10K annual report, is
furnished for the information of the Commission only and
is not to be deemed "filed" as part of the report.
14 Code of Ethics
21 Subsidiaries of the Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
* Incorporated by reference into this document from the Exhibits to the
Company's Form S-1, Registration Statement initially filed on June 15,
1984, Registration No. 2-90679.