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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12958
UNION BANKSHARES COMPANY
------------------------
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
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(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
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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 value of the voting stock held by non-affiliates of
the registrant as of February 25, 2003, was approximately $43,964,004.
573,930 shares of the Company's Common Stock, $12.50 par value, were issued
and outstanding on February 25, 2003.
Documents incorporated by reference in this report:
- ---------------------------------------------------
Proxy Statement, dated April 17, 2003, for 2003 annual meeting to be held
May 15, 2003 pursuant to Regulation 14A of the General Rules and
Regulations of the Commission, incorporated by reference into Part III of
this report. 2002 Annual Report to Shareholders pursuant to Rule 14a-3(b)
incorporated by reference to Parts I, II and IV of this report.
1
UNION BANKSHARES COMPANY
------------------------
INDEX TO FORM 10-K
------------------
PART I Page No.
- ------ --------
Item 1: Business 3-15
Item 2: Properties 15-17
Item 3: Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
- -------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6: Selected Financial Data 18
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 18
Item 8: Financial Statements and Supplementary Data 19
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 19
PART III
- --------
Item 10: Directors and Executive Officers of the Registrant 19
Item 11: Executive Compensation 20
Item 12: Security Ownership of Certain Beneficial
Owners and Management 20
Item 13: Certain Relationship and Related Transactions 20
Item 14: Controls and Procedures 20
PART IV
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Item 15: Exhibits, Financial Statement Schedules
and Reports on Form 8-K 20-21
Signatures 22
2
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 1: Business
--------
OVERVIEW
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Union Bankshares Company ("the Company") was incorporated February 3, 1984
under the laws of the State of Maine. As of February 25, 2003, 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 573,930 shares
outstanding held of record by 751 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 ("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. 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 Company 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 115th
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 2002, our employees contributed over 11,000 hours of
volunteer time to over 150 organizations.
3
On a continuing basis, the Bank introduces new services and makes
improvements to current offerings that will add value to customer
relationships. Some of the service additions and improvements made during
2002 include:
Opening a new Financial Services Office in Camden
Breaking ground for a new Belfast branch facility on Route 3
Conducting numerous seminars and adult education courses in various
market areas
As customer service expectations increase, 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 Investment and Trust Services division saw a continued
expansion of its business during 2002, with fee income increasing by 23.5%
over 2001. This growth occurred even in a "down" market, offset primarily
by $25 million in new assets under management.
During 2002, the Federal Reserve decreased the Prime Rate by a total of 50
basis points. While this 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 2002 was a
record high for the Bank, a 32.2% increase over 2001. The Bank's mortgage
business in 2002 included residential purchases, construction, commercial,
home equity and refinances.
The Bank's investment in the Midcoast Maine area continues to show positive
returns. In particular, the Belfast branch grew its loan portfolio by 33%
over the year ended December 31, 2001. Also in 2002, the Belfast branch
increased its deposits by 23.9%.
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, 2002, the Bank employed 167 employees of which 21
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
4
non-banking subsidiaries of BHCs, and to order termination of ownership and
control of a non-banking subsidiary by a BHC.
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. Effective
April 1, 2003, Regulation W, a comprehensive regulation covering affiliated
transactions will become effective. 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.
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 that 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, such as the
Company. "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 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.
To date, the Company has not elected to become a FHC.
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
5
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 36 and 37 of the Company's 2002 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.
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.
6
At December 31, 2002, 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, 2002, 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 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 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:
7
* 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.
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.
December 31
-----------
2002 2001 2000
---- ---- ----
Obligations of states & political subdivisions $3,317 $3,527 $3,851
------ ------ ------
TOTAL $3,317 $3,527 $3,851
====== ====== ======
The table below shows the relative maturities of held to maturity
securities as of December 31, 2002.
Held to Maturity Securities
Maturity Distribution as of
December 31, 2002
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 yrs 10 Yrs
-------- ------ ------ ---------
Obligations of State and Political Subdivisions $ 435 $1,194 $1,231 $ 458
Weighted Average Yield 4.91% 5.36% 4.52% 4.70%
Percent of Total Portfolio 13.1% 36.0% 37.1% 13.8%
NOTE: Weighted Average Yields on tax exempt obligations have been computed
on a tax equivalent basis.
8
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.
December 31
-----------
2002 2001 2000
---- ---- ----
Mortgage backed securities $ 34,957 $38,164 $ 34,612
US Treasury notes and other U.S. Government agencies 47,392 36,038 51,240
Obligations of states and political subdivisions 12,415 15,746 11,277
Other securities 5,992 4,455 4,009
-------- ------- --------
TOTAL $100,756 $94,403 $101,138
======== ======= ========
The table below shows the relative maturities and carrying value of
available for sale debt securities as of December 31, 2002 (excludes stock
investments).
Securities Available for Sale
Maturity Distribution as of
December 31, 2002
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 Yrs 10 yrs
-------- ------ ------- ---------
Mortgage Backed Securities $ 0 $ 698 $ 8,584 $25,675
US Treasury Notes and Other
Government Agencies 3,782 42,087 1,523 0
Obligations of State and Political Subdivisions 482 1,951 4,896 5,086
Other Securities 0 4,579 255 483
------ ------- ------- -------
TOTAL $4,264 $49,315 $15,258 $31,244
====== ======= ======= =======
Weighted Average Yield 5.81% 5.08% 5.24% 5.70%
------ ------- ------- -------
Percent of Total Portfolio: 4.3% 49.3% 15.2% 31.2%
The Company's net unrealized gain on available for sale securities (net of
tax) of $2,250,696 at December 31, 2002 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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Real Estate Loans
A. Construction & Land
Development $ 14,542 $ 14,774 $ 10,710 $ 7,617 $ 6,431
B. Secured by 1-4 Family
Residential Properties 117,273 107,919 99,887 47,988 36,944
C. Secured by Non-Farm,
Non-Residential
Properties 51,118 47,580 49,736 32,443 30,550
Commercial & Industrial Loans 19,461 20,476 21,002 16,222 15,979
Loans to Individuals for Household,
Family & Other Consumer Expenditures 18,318 17,782 19,966 14,508 15,327
All Other Loans 5,574 3,084 3,718 8,845 5,168
-------- -------- -------- -------- --------
Total Gross Loans $226,286 $211,615 $205,019 $127,623 $110,399
======== ======== ======== ======== ========
9
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, 2002
Due 1 Year or Less Due 1-5 Years Due 5 Years +
------------------ ------------- -------------
Real Estate $ 83,783 $87,259 $11,891
Commercial & Industrial 14,440 3,698 1,323
Consumer 6,722 2,619 8,977
Municipal 3,935 1,639 0
-------- ------- -------
Total $108,880 $95,215 $22,191
======== ======= =======
Note: Real estate loans in the 1-5 category have $14,572,000 at a fixed
interest rate and $72,687,000 at a variable interest rate.
Commercial loans in the 1-5 year category have $2,688,000 at a
fixed interest rate and $1,010,000 at a variable interest rate.
Real estate and commercial loans in the 5+ category are all at
fixed interest rates.
Loan Concentrations
- -------------------
As of December 31, 2002 and 2001, 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 its debtor's 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, 2002.
Delinquent Loans
- ----------------
The following schedule is a summary of loans with principal and/or interest
payments over 30 days past due and still accruing:
December 31,
2002 2001 2000 1999 1998
--------------- --------------- ------------- --------------- --------------
% % % % %
Of Of Of Of Of
Total Total Total Total Total
Amt Loans Amt Loans Amt Loans Amt Loans Amt Loans
--- ----- --- ----- --- ----- --- ----- --- -----
Real Estate $5,491 2.4 $4,877 2.3 $1,054 0.5 $4,367 3.4 $3,079 2.8
Installment 218 0.0 62 0.0 64 0.0 65 0.1 153 0.1
All Others 1,171 0.6 516 0.3 327 0.2 192 0.2 134 0.1
------ --- ------ --- ------ --- ------ --- ------ ---
TOTAL $6,880 3.0 $5,455 2.6 $1,445 0.7 $4,624 3.7 $3,366 3.0
====== === ====== === ====== === ====== === ====== ===
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 non-accrual loans are recorded as reductions of
principal if principal payment is doubtful. The principal amount of loans
which have been placed on non-accrual 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.
10
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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans accounted for on a nonaccrual basis $1,473 $1,823 $3,390 $437 $534
Accruing loans contractually past due 90 days or more $ 351 $ 75 $ 21 $314 $47
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
2002 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 $47,000. There was approximately $8,000
included in the gross interest income on non-accrual and restructured loans
for 2002.
Allowance For Loan Losses
- -------------------------
Analysis of the allowance for loan losses for the past five years were as
follows:
(Dollars in thousands)
December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance at beginning of period: $ 3,453 $ 3,376 $ 2,629 $ 2,435 $ 2,213
Charge-offs:
Commercial & Industrial Loans 43 132 55 3 2
Real Estate Loans 113 98 9 5 0
Loans to Individuals 123 95 116 140 111
-------- -------- -------- -------- --------
279 325 180 148 113
-------- -------- -------- -------- --------
Recoveries:
Commercial & Industrial Loans 87 38 0 12 11
Real Estate Loans 16 19 10 0 0
Loans to Individuals 42 45 26 130 39
-------- -------- -------- -------- --------
145 102 36 142 50
-------- -------- -------- -------- --------
Net Charge-offs 134 223 144 6 63
Provision for Loan Losses 360 300 371 200 285
Allowance on Acquired Loans 0 0 520 0 0
Balance at end of period $ 3,679 $ 3,453 $ 3,376 $ 2,629 $ 2,435
======== ======== ======== ======== ========
Average Loans Outstanding $218,951 $210,561 $151,924 $118,311 $110,321
Ratio of Net Charge-offs to
average loans outstanding .061% .106% .095% .004% .057%
-------- -------- -------- -------- --------
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.
11
December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Amount % of Amount % Amount % Amount % Amount %
Loan Loan Loan Loan Loan
Categories Categories Categories Categories Categories
To Total To Total To Total To Total To Total
Loans Loans Loans Loans Loans
Balance At End of Period:
Applicable To:
Residential Real Estate $ 641 57.6% $1,289 60.9% $ 647 51.6% $ 500 44.0% $ 374 42.0%
Commercial &
Industrial 1,142 25.4% 1,081 31.7% 2,195 34.8% 1,846 38.1% 1,842 39.9%
Consumer 350 9.8% 115 5.4% 137 9.7% 145 11.4% 153 13.9%
Municipal 0 4.3% 31 1.5% 37 1.9% 88 6.5% 58 4.2%
Identified 552 2.9% 295 0.5% 257 2.0% 0 .0% 0 .0%
Contingent Liabilities 653 .0% 323 .0% 0 .0% 0 .0% 0 .0%
Unallocated 341 .0% 319 .0% 103 .0% 50 .0% 8 .0%
TOTAL $3,679 100.0% $3,453 100.0% $3,376 100.0% $2,629 100.0% $2,435 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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 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, 2002, the Bank had impaired loans totaling $1,472,870,
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
12
believes these are probable losses in the portfolio and has provided for
them in the allowance for loan losses accordingly.
At December 31, 2002, the allowance for loan losses was comprised of a
specific reserve on impaired loans of $313,000, a general reserve of
$2,915,000 and an unallocated reserve of $341,000.
During 2002, the Bank provided $360,000 to the allowance for loan losses,
compared to $300,000 and $371,000 in 2001 and 2000, respectively. During
2001, 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, 2002.
Amount
------
3 Months or Less $ 5,018
Over 3 Through 6 8,139
Over 6 Through 12 Months 2,262
Over One Year 1,443
-------
Total $16,862
=======
BORROWINGS
- ----------
December 31
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Interest Rate Amount Interest Rate Amount Interest Rate Amount
------------- ------ ------------- ------ ------------- ------
Fixed advances 4.60 $44,294 4.90 $39,291 5.86 $30,000
Variable advances 5.37 $ 1,666 5.37 $ 2,666 4.62 $21,123
Securities sold under agreement 1.00 $13,064 1.45 $12,135 3.42 $15,079
to repurchase
2002 2001 2000
---- ---- ----
Fixed Variable Securities Fixed Variable Securities Fixed Variable Securities
Maximum amount $69,263 $2,666 $13,489 $52,000 $6,179 $13,948 $451 $21,123 $18,555
outstanding of any
month end during
the year
Average amount $50,403 $2,622 $10,417 $45,500 $4,423 $10,944 $451 $32,328 $13,870
outstanding during
the year
Weighted average 2.95% 2.10% 1.84% 5.40% 4.53% 2.73% 6.54% 5.69% 5.11%
interest rate for
the year
Advances at December 31, 2002 mature as follows:
2003 $ 6,000
2004 7,818
2005 7,675
2006 2,000
Thereafter 22,467
-------
Total $45,960
=======
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.
13
*2002 *2001 *2000
----- ----- -----
Deposits 13.4% 13.1% 14.4%
Loans 16.6% 16.1% 19.0%
Total Assets 9.8% 9.3% 10.4%
Earning Assets 10.9% 10.3% 11.4%
* Excluding net unrealized gain (loss) net of deferred taxes on available
for sale securities of $2,250,696, $530,290 and ($466,522) at December 31,
2002, 2001 and 2000, respectively and minimum pension liability adjustment,
net of deferred taxes, of $(326,168) at December 31, 2002.
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.
2002 2001 2000
---- ---- ----
Return on average shareholders' equity 12.3% 9.9% 9.5%
Return on average assets 1.2% 0.9% 1.0%
Return on average earning assets 1.3% 1.0% 1.1%
LIQUIDITY MANAGEMENT
- --------------------
Liquidity management is the process by which the Bank structures its cash
flow to meet the requirements of its customers as well as day to day
operating expenses.
Liquidity comes from both assets and liabilities. The asset side of the
balance sheet provides liquidity through the regular maturities on our
securities and loan portfolios, as well as interest received on these
assets. In addition, US government securities may be readily converted to
cash by sale in the open market. On the liability side, liquidity comes
from deposit growth and the Bank's accessibility to other sources of
borrowed funds. In this respect, liquidity is enhanced by a significant
amount of core demand and savings deposits from a broad customer base.
As a part of the Bank's asset and liability management and liquidity needs,
management actively evaluates its funding resources and strategies to
reduce and manage the vulnerability of its operation to changes in interest
rates.
A principal objective of the Bank is to reduce and manage the vulnerability
of its operations to changes in interest rates by managing the ratio of
interest rate sensitive assets to interest rate sensitive liabilities
within specified maturities or repricing dates.
At December 31, 2002, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one year horizon was 25%, its one year GAP
(measurement of interest sensitivity of interest earning assets and
interest bearing liabilities at a given point in time) was 98%, and
$120,461,000 in assets and $151,039,000 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, 2002, the Bank's interest
rate GAP analysis:
14
Interest Rate GAP Analysis
As of December 31, 2002
0-3 4-12 1-5 Over 5
Months Months Years Years Total
Interest earning assets
Loans:
Real estate
Fixed rate $ 15,220 $19,634 $ 36,300 $ 4,946 $ 76,100
Variable rate 21,367 27,563 57,903 0 106,833
Commercial 10,412 3,853 3,872 1,324 19,461
Municipal 1,047 2,887 1,415 225 5,574
Consumer 952 5,770 2,619 8,977 18,318
Securities available for sale 20,554 16,534 49,975 13,693 100,756
Held to maturity securities 0 255 3,305 5,253 8,813
Loans held for sale 23 65 444 4,888 5,420
Other earning assets 5,670 0 0 7,017 12,687
-------- ------- -------- --------- --------
TOTAL $ 75,245 $76,561 $155,833 $ 46,323 $353,962
======== ======= ======== ========= ========
Interest bearing liabilities
Deposits:
Savings $ 0 $ 153 $ 0 $ 49,438 $ 49,591
NOW 4,896 4,896 0 44,613 54,405
Money market 38,150 0 0 0 38,150
Time 34,448 38,093 26,430 17 98,988
Borrowings 14,815 8,145 22,311 13,752 59,023
-------- ------- -------- -------- --------
TOTAL $ 92,309 $51,287 $ 48,741 $107,820 $300,157
======== ======= ======== ======== ========
Rate sensitivity GAP $(17,064) $25,274 $107,092 $ (61,497)
Rate sensitivity GAP as a
percentage of total assets (4.48%) 6.63% 28.11% (16.14%)
Cumulative GAP $(17,064) $ 8,210 $115,302 $ 53,805
Cumulative GAP as a
percentage of total assets (4.48%) 2.15% 30.26% 14.12%
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:
As of December 31, 2002 2001
Net cash provided from operations $ 3,491 $ 2,165
Net cash provided (used) by investing activities $(19,972) $ 308
Net cash provided from financing activities $ 11,262 $ 9,039
Net increase in cash and cash equivalents $ (5,219) $11,512
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
15
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.
(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 March of 2003.
(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 three additional five 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
February 1, 2005 with the right to extend the lease for an
additional 2 2 year terms.
(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 15, 2007.
16
(g) The Bank assumed the lease of its Jefferson office located on
Route 32 in Jefferson on August 31, 2000 from the Waldoboro Bank
FSB, who leased from Jefferson Market Inc. The current lease
expires on December 4, 2011.
(h) 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 against the Company or the
Bank 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
---------------------------
A. MARKET INFORMATION
------------------
Union Bankshares common stock, $12.50 par value, is not actively traded but
is listed on the Pink Sheet Electronic System. 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 2001 and 2000 are listed in the following table.
The following high and low bids do not reflect prices in actual
transactions.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2002 63.00 to 63.00 61.00 to 73.00 80.00 to 84.00 84.00 to 84.50
2001 79.50 to 85.00 63.00 to 80.00 72.00 to 75.00 58.50 to 63.00
B. HOLDER
------
As of March 1, 2003 there were approximately 751 stockholders of record.
C. DIVIDENDS
---------
The following table shows the cash dividends per share declared by Union
Bankshares Company on its common stock, $12.50 par value:
2002 2001
---- ----
1st Quarter $ .55 $ .50
2nd Quarter $ .55 $ .50
3rd Quarter $ .55 $ .55
4th Quarter $ .55 $ .55
----- -----
Cash dividends declared
per common share $2.20 $2.10
===== =====
There are significant regulatory limitations on the Company's ability to
pay dividends depending on the dividends it receives from its subsidiary,
the Bank, which are subject to regulations and the Bank's continued
compliance with all regulatory capital requirements and the overall health
of the institution. See note 15 to the notes to consolidated financial
statements on page 36 of the Company's 2002 Annual Report to Shareholders.
17
Item 6: SELECTED FINANCIAL DATA (in thousands, except for per share amounts)
-------------------------------------------------------------------
Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Operating Income $ 5,874 $ 4,907 $ 3,639 $ 3,426 $ 3,155
Operating Expense 13,465 13,115 10,367 8,663 8,413
Net Interest Income 14,006 13,085 11,176 10,169 9,927
Provision for Loan Losses 360 300 371 200 285
Net Income 4,315 3,226 3,000 3,355 3,090
PER COMMON SHARE DATA
Net Income $ 7.49 $ 5.59 $ 5.19 $ 5.80 $ 5.34
Cash Dividends Declared 2.20 2.10 2.00 1.92 1.67
Book Value (2) 62.82 58.19 54.67 51.50 47.69
FINANCIAL RATIOS
Return on Average Equity (2) 12.3% 9.9% 9.5% 11.7% 11.6%
Return on Average Assets 1.2% 0.9% 1.0% 1.3% 1.3%
Return on Average Earning Assets 1.3% 1.0% 1.1% 1.4% 1.4%
Net Interest Margin 4.35% 4.35% 4.58% 4.61% 4.72%
Dividend Payout Ratio 29.4% 37.6% 38.5% 33.0% 31.2%
Allowance for Loan Losses/Total Loans .02 . 02 . 02 . 02 .02
Non Performing Loans to Total Loans . 007 . 009 . 017 . 006 .005
Non Performing Assets to Total Assets . 004 .005 . 010 .003 .004
Efficiency Ratio 67.7% 70.1% 69.9% 63.7% 64.3%
Loan to Deposit Ratio 80.7% 79.0% 83.5% 66.2% 58.7%
BALANCE SHEET
Deposits $275,765 $267,907 $245,581 $192,848 $188,029
Loans 226,286 211,615 205,019 127,623 110,399
Securities (1) 109,569 102,970 109,958 107,509 111,304
Shareholders' Equity (2) 36,394 33,606 31,586 29,771 27,577
Total Assets 381,029 362,003 348,242 257,850 251,195
- --------------------
Carrying value. Includes available for sale securities with cost of
$97,329, $98,913, $100,678, $102,488 and $101,610 at December 31, 2002,
2001, 2000, 1999 and 1998, respectively.
Excluding net unrealized gain (loss) net of deferred taxes on available
for sale securities of $2,250,696, $530,290, ($466,522), ($2,128,324)
and $1,162,032 at December 31, 2002, 2001, 2000, 1999 and 1998,
respectively, and minimum pension liability adjustment of ($326,168) at
December 31, 2002.
The above summary should be read in conjunction with the related
consolidated financial statements and notes thereto for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998, 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 2002 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 2002 Annual
Report is incorporated herein by reference.
18
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(A) The financial statements required are contained in the
Company's 2002 Annual Report and are incorporated herein by
reference. (See item 15 (a))
(B) The following is a summary of the quarterly results of
operations for the years ended December 31, 2002 and 2001:
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
Mar 31 June 30 Sept 30 Dec 31
2002
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
Income before income taxes 1,602 1,502 1,780 1,171
Applicable income taxes 490 460 515 275
Net income 1,112 1,042 1,265 896
Per common share:
Basic 1.93 1.81 2.20 1.55
THREE MONTHS ENDED
Mar 31 June 30 Sept 30 Dec 31
2001
Interest income $6,187 $5,914 $5,713 $5,677
Interest expense 3,057 2,795 2,438 2,117
Net interest income 3,130 3,119 3,275 3,560
Provision for loan losses 75 75 75 75
Income before income taxes 1,060 815 1,131 1,570
Applicable income taxes 300 242 317 491
Net income 760 573 814 1,079
Per common share:
Basic 1.31 .99 1.41 1.88
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information called for by this Item (and Items 11, 12 and 13 below) is
incorporated by reference from the registrant's definitive Proxy Statement
dated April 17, 2003 for its regular annual meeting of shareholders to be
held May 15, 2003 where it appears under the headings "VOTING SECURITIES
AND PRINCIPAL HOLDERS THEREOF, ELECTION OF DIRECTORS, EXECUTIVE OFFICERS
AND COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS."
19
ITEM 11: EXECUTIVE COMPENSATION
----------------------
See Item 10 herein above.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
See Item 10 herein above.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
See Item 10 herein above.
ITEM 14: CONTROLS AND PROCEDURES
-----------------------
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's President and Chief Executive
Officer and the Senior Vice President/Treasurer, of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures. In designing and evaluating the Company's disclosure controls
and procedures, the Company and its management recognize that any controls
and procedures, no matter how well designed and operated, can provide only
a reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation,
the President and Chief Executive Officer and the Senior Vice
President/Treasurer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules
and forms.
(b) Changes in internal controls.
In connection with the rules regarding disclosure and control procedures,
we intend to continue to review and document our disclosure controls and
procedures, including our internal controls and procedures for financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business.
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. There were
no significant deficiencies or material weaknesses identified in the
evaluation and therefore, no corrective actions were taken.
PART IV
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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, 2002 (a copy of which is being filed as
Exhibit 13 hereto), and are incorporated herein by
reference.
Consolidated Balance Sheets
December 31, 2002 and 2001 20
Consolidated Statements of Income
For the years ended December 31, 2002, 2001 and 2000 21
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2002, 2001 and 2000 22
Consolidated Statements of Cash Flow
For the years ended December 31, 2002, 2001 and 2000 23-24
Notes to Consolidated Financial Statements 25-41
Independent Auditors Opinion 43
20
(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 14(c)
(b) Reports on Form 8-K
-------------------
During the registrant's fiscal quarter ended December 31, 2002,
the registrant did not file any reports on Form 8-K.
(c) Exhibits
--------
* 3 Articles of Incorporation and By-laws of
Union Bankshares Company
*10.1 Employee Benefit Plan for the employees
of Union Trust Company
Pension Plan for the employees of Union
Trust Company
401 (k) Profit Sharing Plan for the
employees of Union Trust Company
Stock Purchase Plan for the employees 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
25 of the 2002 Annual Report to Shareholders'
attached hereto as Exhibit 13.
13 The registrant's Annual Report to Shareholders'
for its fiscal year ended December 31, 2002.
This exhibit, except for those portions thereof
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 "filed" as part of the report.
*21 Subsidiary information is incorporated
herein by reference to "Part I, Item 1 -
Business".
99.1 Report of Berry, Dunn, McNeil & Parker.
99.2 CEO Statement Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 CFO Statement Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed on June 15, 1984,
Registration No. 2-90679.
21
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.
UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY
By: /s/ Peter A. Blyberg By: /s/ Sally J. Hutchins
--------------------------- -----------------------------------
Peter A. Blyberg, President Sally J. Hutchins
and Chief Executive Officer Senior Vice President and Treasurer
Date: March 12, 2003
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.
/s/ Arthur J. Billings
- -----------------------------
Arthur J. Billings, Director
/s/ Peter A. Blyberg
- -----------------------------
Peter A. Blyberg, Director
/s/ Blake B. Brown
- -----------------------------
Blake B. Brown, Director
/s/ Richard C. Carver
- -----------------------------
Richard C. Carver, Director
/s/ Peter A. Clapp
- -----------------------------
Peter A. Clapp, Director
/s/ Samuel G. Cohen
- -----------------------------
Samuel G. Cohen, Director
/s/ Sandra H. Collier
- -----------------------------
Sandra H. Collier, Director
/s/ Robert B. Fernald
- -----------------------------
Robert B. Fernald, Director
/s/ Douglas A. Gott
- -----------------------------
Douglas A. Gott, Director
/s/ James L. Markos, Jr.
- -----------------------------
James L. Markos, Jr., Director
/s/ John V. Sawyer, II
- -----------------------------
John V. Sawyer, II, Director
/s/ Stephen C. Shea
- -----------------------------
Stephen C. Shea, Director
/s/ Robert W. Spear
- -----------------------------
Robert W. Spear, Director
/s/ Richard W. Teele
- -----------------------------
Richard W. Teele, Director
/s/ Paul L. Tracy
- -----------------------------
Paul L. Tracy, Director
22
CERTIFICATIONS
I, Peter A. Blyberg, certify that:
1. I have reviewed this annual report on Form 10-K of Union Bankshares
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 3/25/03 /s/ Peter A. Blyberg
------- ----------------------------------
Peter A. Blyberg
President & CEO
23
CERTIFICATIONS
I, Sally J. Hutchins, certify that:
1. I have reviewed this annual report on Form 10-K of Union Bankshares
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 3/25/03 /s/ Sally J. Hutchins
------- ----------------------------------
Sally J. Hutchins
Senior Vice President/Treasurer
24