UNION BANKSHARES COMPANY
1996 ANNUAL REPORT
Insert photo of Steve Jordan
Insert text:
None of us operates in a vacuum. Least of all, perhaps, a community bank.
All the effort we put into developing new banking services would be wasted -
and the Bank soon out of business - if our services overshot the needs of
real people. So we listen, carefully, to what you want in banking. Then we
design new ways to make the process easier and more productive.
The payoff? It's hearing how the work we've done eases the work you do. In
this Annual Report, allow us to introduce a few of the good people we work
for - satisfied customers like John and Kendra Duley of Bar Harbor, town
manager Paul Blanchette of Stonington, and businessman Louis Wilson of
Merrill Furniture in Ellsworth, to name a few. We hope you'll enjoy
learning how committed, innovative community banking has made their lives
easier. This year, let us know what we can do for you.
2
We dedicate our 1996 Annual Report to Robert S. Boit, with appreciation for
23 years of outstanding service to Union Trust Company, its employees,
customers, and shareholders.
Bob joined the Bank in May 1973 as Executive Vice President and Trust
Officer, and was promoted to President and Chief Executive Officer in
January 1981. When Bob joined the Bank, total assets were $32,000,000.
Today, they are over $200,000,000. Since Bob's arrival, loans have
increased from $21,000,000 in 1973 to $101,000,000, and capital from
$2,600,000 to almost $24,000,000.
Thank you, Bob, for the dedication, guidance, and wise counsel that made
such growth possible.
3
March 6, 1997
Dear Shareholder:
Last year was another year of solid performance for your Bank. Total
earnings were $2,451,000, up slightly from the year before. This represents
a strong 1.4 percent return on average earning assets. Our business
development efforts continue, and the strong 8.4 percent increase in the
loan portfolio for the year is reflective of those efforts. So, too, is the
11 percent year-to-year increase in noninterest income. We continue to
expand our strong commercial customer base. In recognition of our efforts,
we were named a Certified SBA (Small Business Administration) lender and
ranked third in the state of Maine in small business lending.
We are committed to maintaining and expanding our position as one of Maine's
preeminent community banks. It is our belief that local, independent banks
are the backbone of the Downeast economy and must remain strong and active
partners in their communities. Our role is to stay close to our customers,
listen to their concerns, and respond to their need for a wide range of
financial services. While growing and expanding, we will maintain the asset
quality that is a hallmark of your Bank.
Meanwhile, the banking business is experienceing some of the most profound
changes of the last 50 years. Not only must we keep up with rapidly
changing technology, the evolution of new products and services, a host of
nonbank competitors, and increased consumer demands, but do so while
retaining the strong local atmosphere and accessibility you expect from a
community bank. We think we are succeeding.
We have sought to expand our accessibility for customers through expanded
branch hours; the establishment of a Customer Service Call Center, staffed
by trained customer service representatives; and toll-free access to
BankLine, which also was enhanced to provide faxed account data 24 hours a
day. For our mortgage customers, we became the first bank in Maine to
implement Freddie Mac's Loan Prospector automated underwriting system. This
system has significantly shortened the time it takes to close a mortgage and
can provide responses in minutes rather than days. We will continue to
invest in new technology as well as new products and services that allow us
to better serve our customers. Our people are our best asset, and our focus
on individual development and education remains a top priority.
We are committed to the expansion of our trust capabilities and in 1996 saw
significant growth in that area. Rebecca Sargent, as Senior Trust Officer,
leads a strong group of highly qualified trust professionals. Trust assets
reached the $100 million mark for the first time in 1996. With the recent
addition of David Krech as Investment Officer, we are well positioned for
even stronger growth in 1997 and beyond. David joins us havings spent five
years as an investment officer at Washington Trust Company in Rhode Island
and many years at Paine Webber in various capacities.
The following individuals joined our team in 1996, and we welcome their
contributions to our success:
Terry L. Bishop Audit Department
Melissa J. Bonville Teller, Somesville Branch
Patricia A. Dunbar Administrative Assistant, Trust Department
Jennifer L. White Teller, Ellsworth Shopping Center
Jenny M. Gray Teller, Castine Branch
4
In April, Robert S. Boit retired as President and CEO after 23 years of
service. Bob's contributions to the current success of the Bank are legend,
and we miss his daily presence. This Annual Report is respectfully
dedicated to Bob in appreciation for his outstanding service.
We extend our thanks to you, our shareholders, directors, officers, and
employees for your support.
Sincerely,
John V. Sawyer II Peter A. Blyberg
Chairman of the Board President and Chief Executive Officer
5
Five-Year Summary (000's Omitted)
1996 1995 1994 1993 1992
Deposits $168,829 $165,358 $160,249 $161,236 $158,674
Loans 101,044 93,242 84,208 80,993 84,977
Securities *81,568 *76,578 *83,391 *73,821 76,704
Shareholders' **23,885 **22,227 **20,570 18,875 17,391
Equity
Total assets 202,066 191,353 181,597 182,129 177,767
Net earnings 2,452 2,418 2,354 2,134 1,920
Earnings per 12.14 11.98 11.65 10.55 9.51
share
Equity Ratios
Equity expressed as a percentage of average:
**1996 **1995 **1994 1993 1992
Deposits 14.3% 13.7% 12.8% 11.8% 11.3%
Loans 24.6% 25.1% 24.9% 22.7% 19.4%
Total assets 12.1% 11.9% 11.3% 10.5% 10.1%
Earning assets 13.3% 12.9% 12.8% 11.2% 10.8%
Other Financial Highlights
1996 1995 1994 1993 1992
**Return on
average 10.6% 11.4% 11.9% 11.8% 11.5%
Shareholders'
equity
Return on
average 1.2% 1.3% 1.3% 1.2% 1.1%
assets
Return on
average 1.4% 1.4% 1.4% 1.3% 1.2%
earning assets
*Carrying value. Includes available for sale securities with cost of
$75,095, $70,938 and $76,007 at December 31, 1996, 1995 and 1994,
respectively. Includes securities held for sale with cost of $65,816 at
December 31, 1993.
**Excluding net unrealized gain (loss) on available for sale securities of
($171,460), $567,810 and ($1,389,168) at December 31, 1996, 1995 and 1994,
respectively.
6
Insert: Three 10 year bar charts referencing the following:
Earnings Per Share
Book Value Per Share
Dividends Per Share
7
Insert photo of David Witter and Bill Petry
Insert text:
Fine wines, fragrant teas, rich coffees...David Witter appreciates the finer
things in life at least as much as the next guy. But to make a living
selling them? For that, he's had to acquire a taste for business.
Thus, it's not surprising that David, who, with Bill Petry, runs the soul
satisfying emporium known as Blue Hill Tea & Tobacco, also appreciates Union
Trust's BankLine. To the businessman in David, the telephone based service
indulges a perpetual craving: the need for accurate financial information.
Currently receiving some 4,000 calls per month, BankLine affords Union Trust
customers immediate, round the clock access to the account information they
need most often. They can check their account balance, determine recent
transactions on their account, verify deposits and ATM transactions, see how
much interest they've paid or earned, make loan payments, or transfer funds
between accounts. With a fax machine, they can even receive up to date
statements. And it's all just a simple phone call (667-2855 or toll free
888-818-2265) away.
So while his customers bask amidst the temptations of exotic coffees,
cigars, pipe tobaccos, teas, and hundreds of the choicest wines. David can
swiftly resolve discrepancies between invoices and check stubs, perhaps, or
verify the amount of a credit card deposit. BankLine is perfect, comments
David, for the occasional problems even meticulous bookkeeping can't
prevent. And the service's toll free phone number makes balancing the books
a dish of caviar, from his office in Blue Hill or from his home in Sedgwick.
Romantic it's not. Yet, for David, BankLine easily qualifies as one of
life's little pleasures.
"It's just a more efficient way to do things."
8
Insert text:
For Boston Exxon engineer Joseph Grimaldi and his wife Mary, a nurse,
retirement brought a chance to create their own "little bit of heaven" a new
home they designed and built on Surry's Newbury Neck. But this new chapter
in their lives gave rise to new questions about financial planning. In
particular, what could they do to minimize the tax bite when it came time to
pass on their estate to their three grown children?
The Grimaldis found answers at a public seminar on estate planning, one of
several such events offered each year by Union Trust. Led by Rebecca
Sargent, head of Trust and Investment Services at Union Trust, along with
attorney Melissa Moll and accountant David Hawkes, the seminar provided an
introduction to trusts, how they are established, and related tax issues.
The experts, Joe remembers, went a long way toward dispelling the "fog"
that, for many people, surrounds estate planning. Cutting through confusing
terminology, they helped participants distinguish between the different
types of trusts, explore important considerations concerning wills, learn
ways to bypass probate, and save on taxes. As a result, Joe says, he and
Mary feel better prepared to make choices and have adjusted their wills
using what they learned.
Defogging, Joe calls it. By any name, it's powerful currency to bring home
from a visit to the bank.
Insert photo of Joseph and Mary Grimaldi
9
Insert photo of Hollis Fickett
Insert text:
A self described computer nut, Hollis Fickett made sure his family run
business, JC Milliken Agency, was the first to try Union Trust's Automated
Clearing House Direct Deposit Service when it debuted a year ago. It was a
leap of faith, Hollis admits, but after 25 plus years with Union Trust, it
seemed a leap worth taking.
The Direct Deposit Service uses computer technology to streamline the time
consuming and costly process of payroll. By the old method, a company's
bookkeeper had to print out employees' paychecks, get the checks signed,
stuff the envelopes, apply the postage, and mail. With the new service, one
need only type the paycheck amounts into a program installed on the
company's PC; then, with another keystroke or two, send the data
electronically to Union Trust. (The Bank charges a one time software
licensing fee, an annual fee for software maintenance and support, and a
modest fee per submission.) Immediately Union Trust withdraws the necessary
funds from the employer's account and automatically deposits each employee's
pay in his or her account at any bank the employee specifies. Each employee
receives confirmation of the transaction by mail.
To most of Milliken's 26 employees, divided between the company's three
locations, the Direct Deposit Service represents convenience and peace of
mind, no more trips to the bank to deposit paychecks; no more nail biting
when mail slow downs or holidays delay checks' arrival. To Hollis, the
system simply means time and money saved. What with printing, envelopes,
and postage, he figures, each payday used to cost Milliken about $1.50 per
employee, plus labor. Direct Deposit significantly trims that expense. As
a bonus, holidays, which sometimes complicated the process, no longer
present a problem.
With payroll now humming, Hollis the Technophile eagerly awaits Union
Trust's next technological leap. Anyone up for a little commercial
electronic bill paying?
10
Insert text:
Ellsworth's Grasshopper Shop has sweet smells, charmingly creaky wooden
floors, delights from around the world, and growing numbers of customers
with a preference for plastic. In 1996, credit card sales at the 'Hopper's
Ellsworth and Stonington stores combined soared 34 percent over the previous
year, making swift, reliable processing of credit purchases more important
than ever.
So it was last fall, with the holidays looming, that Nancy Mayo, assistant
manager and bookkeeper in the Ellsworth store, developed doubts about the
California company she was paying for merchant card services: use of in
store terminals and printers, servicing of the devices, paper supplies, and
processing of each day's credit card receipts. The store, just a few doors
up the street from Union Trust's Main Office, had been a Bank customer since
opening in 1980; now, it was time to bring card services back home.
With Union Trust, Nancy explains, the fee for credit card services is built
into the percentage the Bank takes from total sales. We just punch our
sales figures into the terminal each evening, and the money is in our
account the next day. By contrast, the California company took a higher
percentage for its services, then charged extra for the terminals and
shipping of supplies. The store had to wait a few days before it could
access the funds deposited, and equipment repairs were delayed.
Thus, better service was there in Ellsworth all along. Of the attention she
receives from Union Trust and electronic services officer Terri Linscott,
Nancy says it's more economical; it's faster. I'm very pleased with the
processing, and the statements are easy to understand. It's excellent
service.
Insert photo of Nancy Mayo
11
Insert photo of Clair, Truth and Clair Whitten Jr.
Insert text:
Breaking ground has never been a problem for the Whitten family, owners of
the general contracting firm AR Whitten & Son in Winter Harbor. For more
than 40 years Whitten bulldozers, dump trucks, and backhoes have moved
heaven and especially earth for customers needing foundations, septic
systems, driveways, paving, and landscaping, or just a mountain or two of
sand, gravel, or loam. The challenge for Whitten & Son, as for any company,
is how to scratch up sufficient paydirt without falling into a financial
hole.
For help in that area, company president Clair Whitten, treasurer Truth
Whitten (his wife), and vice president Clair, Jr., turn to Union Trust,
another company whose local roots run deep. Truth says the Bank's
commercial banking services have eased some of the stress that goes with
running a business.
In addition to business checking, the Whittens receive, each year, a line of
credit from the Bank, enabling them to purchase needed equipment
immediately, without having to apply for a loan. So far, the company has
not had to use the line, Trust reports; nonetheless, it's reassuring. It's
there, she says, if we need it.
Meanwhile, the Whittens' payroll account for themselves and their 10
employees makes the company books easier to keep. Before making out
paychecks, Truth transfers the necessary funds from the company's regular
account into a payroll account. Bank statements show payroll activity
separately, so it's easy to monitor.
Then there are the money saving ideas that come from a bank that looks out
for its business customers. Not long ago, for example, Harold Metcalf at
the Bank's Main Office showed Truth how the business could save money by
consolidating two outstanding equipment loans into one loan at a lower
interest rate.
In the end, though, it's Union Trust's independence that Truth most values.
It's not a big company that might get sold to somebody else, she comments.
It's the local bank, and it'll always be here. For a business like Whitten
& Son, that's fertile ground for good banking.
12
Insert text:
To feel good about your bank, you have to trust it. That means knowing you
can cry foul when you think the bank has made a mistake.
Take Louis Wilson, manager of Merrill Furniture's expansive, 56,000 square
foot showroom and warehouse in Ellsworth, for example. Louis speaks
confidently of the depth of Merrill's 43 year relationship with Union Trust:
we respect them, and I know they appreciate our business. If we have any
requests, they're always there to help. So when Union Trust took what he
considered a wrong turn, discontinuing Saturday lobby hours at its High
Street branch, Louis wasn't shy. He called John Lynch at the Bank's Main
Office.
Merrill's is open on Saturdays and Sundays, Louis recalls telling John.
Without weekend banking, if we run short of change, we're stuck. We just
have to hope we don't get a customer with a big check we have to cash. John
listened, and it wasn't long before Saturday banking returned to High
Street.
Years in the furniture business have given Louis a heightened appreciation
for that kind of customer service. In the showroom, he says, consumers
often can't see the internal features that constitute quality in a sofa,
recliner, or bedroom set. The decision to buy is, in the end, a matter of
trust.
Come to think of it, that's not a bad way to do business.
Insert photo of Louis Wilson
13
Insert photo of Steve Jordan
Insert text:
As field manager for Merrill Apple Farms, Steve Jordan knows his way around
a lot of complicated equipment. But last year, presented with a chunk of
money to invest, the 42 year old Ellsworth man faced the complexity of the
investment world with little grasp of its workings.
It all began when Steve's employer switched retirement plans, leaving Steve
with a difficult decision: roll his nest egg over into the new plan, or
find a different approach. Fortunately, Steve remembered Lorraine
Ouellette, the Bank trust officer who had met with Merrill employees to
explain the plans. Lorraine's advice? Try Mutual Partners.
Specially designed for the mutual fund investor, Mutual Partners is a trust
account that uses a computer program to analyze an investor's savings needs
and attitude toward risk, then formulates a balanced, custom designed
strategy of mutual fund investment. A trust officer helps the customer
allocate assets, then monitors the account in accordance with the computer
generated strategy.
The account, backed by Lorraine's expertise, took a load off Steve's
shoulders. An hour long session with Lorraine and her computer yielded a
clear plan, a blend of investments that, Steve happily reports, has
performed beautifully. All the while, Lorraine monitors the Jordans'
portfolio, providing quarterly reports and ongoing advice.
Being a working person, says the fater of two, I don't have time to stay on
top of investments. Lorraine has been a godsend. She's very professional,
and yet down to earth.
In Union Trust, it seems, Steve has found just the Partner his family's
future demands.
14
Insert text:
John and Kendra Duley of Bar Harbor never heard of Union Trust's rapid
response mortgage. All they knew was, they'd found the home they wanted,
and they wanted to move in fast. John, manager of Galyn's Restaurant and a
man accustomed to getting things done, spoke plainly with Bill Weir of the
Bank's Somesville branch: Let's do it. Let's not lollygag about.
The Duleys got their wish. Two days after turning in their completed
application, they received approval of their loan request. Four weeks and
no sweat later, the house was theirs. Our biggest delay, John relates, was
waiting two days for the renters in the house to move out.
Of course, not all home purchases proceed as smoothly as the Duleys'. But
with the Bank's automated underwriting, many buyers now close in half the
time it once took to seal a deal. Loan approval (or information about
additional steps necessary to get approval) is accelerated. Paperwork and
other hassles are held to a minimum.
John, Kendra (who recently launched a Mary Kay business with a startup loan
from Union Trust), and their two cats are delighted with their 1,600 square
foot home on Frenchman Hill, the first they've owned. And while some other
homebuyers, like old soldiers, swap tales of woe, long waits for approval,
piles of paperwork, closings delayed again and again, John and Kendra just
smile.
We're really happy with Union Trust.
Insert photo of John and Kendra Duley
15
Insert photo of Paul Blanchette
Insert text:
In a cramped office papered with lists of phone numbers and to do reminders,
the town manager of hardworking Stonington receives a stream of customers:
people paying taxes on fishing boats, car registrations, dog licenses. The
men wear denim jackets and flannel shirts. Over the years, their hands have
smudged the edges of the doors black with motor grease.
Against the sound of hammering from the fish pier, Paul Blanchette shifts
from task to task with the confidence of the experienced trouble shooter.
In Stonington as in towns across Maine, managers struggle to balance
declining state funding with increasing demand for local services. We have
to stretch every dollar, Paul explains.
Stonington is holding its own, he says, thanks to prudent cash management
combined with support from Union Trust. The town of 1,200 receives from the
Bank tax anticipation and other loans that enable it to keep up with local
needs. In 1996, for example, Stonington borrowed $78,000 to purchase a town
vehicle and a fire truck. Reserve funds invested through the Bank's Trust
Department are pooled to fetch higher interest rates, then applied toward,
say, firefighting equipment, cemetery upkeep, or harbor maintenance.
Union Trust knows us very well, says Paul. If I call them, they know who I
am. But time and again, the Bank also proves the practical choice: We
often check other banks' rates. Union Trust's are very competitive.
Paul lauds the responsive service he receives from the Bank's Stonington
branch as well as its Trust Department. Stress relief for this town
manager? It's knowing that I can just pick up the phone, call the Bank, and
get answers.
16
Insert text:
At age 87, Whitneyville resident Blanche Palmer possesses the energy and
enthusiasm of a bounding pup. Once a Whitneyville schoolteacher, she was
postmaster for her town for a remarkable 52 years before retiring (if you
can call it that) just five years ago. But don't pull up the rocker for
this grandmother of four, she's too busy studying history and literature at
the University of Maine at Machias and laying plans for the St. Croix Postal
Museum she hopes to open someday.
Blanche's eye for opportunity, a great sale, say, or a chance to help one of
her grandchildren, makes quick, reliable bank service essential. So it's no
surprise she dotes on Union Trust's Customer Service Call Center.
When I call (the Call Center), I say, Oh, you probably have people waiting.
They always say, we have plenty of time for you, and they say it in such a
cheerful voice. She calls at least once a week, too often for those girls,
I'm sure, to determine whether she has enough money to cover a purchase, or
to transfer funds to a grandchild in need. Once, she called the Call Center
for an advance so she could help her granddaughter get home from Europe.
The Customer Service Call Center, available during Bank hours at 667-1268 or
toll free at 800-432-0271, is designed to give customers immediate access to
banking information. The emphasis is on the human touch, with specially
trained Bank personnel fielding the 1,500 (or so) calls placed each month.
Within a minute or two, they can tell me what my balance is. And they keep
information handy about the numbers I frequently transfer money to. I can
send money to my son in Portland so he can go to sales at LL Bean for me.
To Blanche, who doesn't drive and must rely on others for help with
shopping, that means a lot.
I appreciate, more than I can tell you, everything Union Trust does for me,
says Blanch. They truly are my friends.
Insert photo of Blanch Palmer
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
December 31, 1996
Union Bankshares Company is a one-bank holding company, organized under the
laws of the State of Maine, that has acquired 99.928% of the common stock of
Union Trust Company. The Company's only subsidiary is the Bank. 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. The Company has no immediate plans to engage in such
activities, but could do so if such action should appear desirable.
Union Trust is a full-service, independent community bank with 10 offices in
coastal Maine, serving the financial needs of individuals, businesses, and
municipalities in Hancock and Washington Counties. With its commitment to
outstanding service, quality products and ability to anticipate and respond
to customers' financial needs, Union Trust, now in its 109th year, is proud
to have earned a reputation as one of New England's preeminent independent
community banks.
Union Trust supports the people and communities it serves and believes that
reinvesting local money locally builds strong communities. The Bank's
charitable contribution program supports a broad range of local charities,
community development efforts and the volunteerism of its employees,
directors, and retirees.
Union Trust Company offers a full range of banking services, at competitive
rates and at convenient hours and locations, and is accessible to customers
24 hours a day at its physical locations and by electronic means.
The Bank is committed to be in the forefront as a financial service
provider. During 1996 the Bank implemented the following products and
services:
*Expanded Cash Management Capabilities.
Currently marketing fully electronic Automated Clearing House
(ACH) programs.
*Redesigned Mobile Home Loan Program.
Competitive rates, 24 hour turnaround.
*Freddie Mac Loan Prospector Program.
An automated underwriting system that can cut mortgage loan
processing time in half. Union Trust was the first in Maine to
offer this program.
*Expanded Electronic Banking Products.
*New BankLine Telephone Banking Features.
Faxed account statements, plus a nationwide toll-free number now
available.
*Customer Service Call Center.
Specially trained employees respond to customers' telephone
inquiries. Some 8,300 calls logged since July 1996.
18
*Saturday Lobby Hours at Ellsworth Shopping Center Branch.
*Internet Access at www.uniontrust.com.
Union Trust's deposit services include: regular and basic checking accounts,
NOW accounts, money market accounts, savings accounts, certificates of
deposit, IRA accounts, KEOGH Plans, ATM Convenience Cards, Convenience Check
Cards, reserve checking, credit cards, BankLine, Unlimited Club membership
and safe deposit boxes. The Bank also provides the following loan services:
installment loans, student loans, mortgages, lines of credit, commercial
loans, home equity loans and Visa and Master Card credit cards.
In addition, Union Trust Company offers a full range of investment and trust
services. Our professional trust advisors administer personal trusts,
investment management accounts, custody accounts, individual retirement
accounts, self-employed retirement accounts, company retirement plans
(pension, simplified employee pension, 401(k), simple profit sharing), and
estate plans. Our trust staff will help people of all ages and income
levels analyze their savings and retirement needs and plan customized
investment strategies to meet customer's goals. In 1996, the Trust
Department saw growth in MutualPARTNERS, an asset allocation account that
offers customers individualized investment programs using mutual fund
portfolios. Trust services are available for almost all customers, no matter
what their investable assets may be.
RESULTS OF OPERATIONS
The operating results of the Bank depend primarily on its net interest
income, which is the difference between interest income on earning assets
(primarily loans and investments) and interest expense (primarily deposits
and borrowings). The Bank's results are also affected by the Provision For
Loan Losses, which reflects management's assessment of the adequacy of the
Allowance For Loan Losses; noninterest income, including gains and losses on
the sales of loans and securities; noninterest expenses; and income tax
expense. Each of these major components of the Bank's operating results are
highlighted below.
NET INCOME
Net income in 1996 climbed to $2,451,972, an increase of $33,915 or 1.4%
over 1995. Net income in 1995 represented an increase of $64,094 or 2.7%
over 1994.
The following table summarizes the status of the Bank's earnings and
performance for the periods stated.
December 31,
1996 1995 1994
Earning Per Share $12.14 $11.98 $11.65
Return on average Shareholder's equity 10.6% 11.4% 11.9%
Return on average assets 1.2% 1.3% 1.3%
Return on average earning assets 1.4% 1.4% 1.4%
19
NET INTEREST INCOME
Net interest income continues to be the most significant determinant of the
Company's earning performance. Management of interest rate risk has become
increasingly important in ensuring the Bank's continued profitability.
Interest rate risk results from volatile interest rates, increased
competition and changes in the regulatory environment. The Bank's exposure
to interest rate movements is controlled by a careful balancing of interest
earned and interest paid as well as the maturities of assets and
liabilities.
Net interest income in 1996 was $9,137,524, an increase of $334,283 or 3.8%
over 1995. This increase was due primarily to higher loan levels in 1996
(up $7,801,165 on December 31, 1996, or 8.4% over December 31, 1995) and to
a prefunding strategy, implemented during 1996 for the investment portfolio,
that contributed some $300,000 to interest income over 1995 results.
Loan increases were primarily the result of a business development program
and a slowly improving local economy. Interest and fees earned on loans in
1996 amounted to $9,191,876, up $411,142 or 4.7% over the year ended
December 31, 1995. Variable rate loans amounting to $61,000,000 represent
approximately 60.0% of the total loan portfolio. During 1996, loan yields
declined by 75 basis points compared to the 1995 increase of 34 basis
points, due in part to a Federal Reserve cut in interest rates by .25%, as
well as narrower margins and competitive pricing. Moderate balance
increases were experienced in real estate, commercial and consumer
categories, and the loan mix remains mostly consistent with prior years,
noting a decine in municipal loans during 1996.
Interest expense on deposits in 1996 increased 7.1% or $360,240 over 1995.
The increase was primarily driven by the expense of short-term borrowings,
rather than higher funding costs, which was the case in 1995. In 1995,
interest expense on deposits increased 20.5% or $856,185 over 1994.
Interest margin, the percentage difference between interest earned on loans
and investments and interest paid to depositors and on borrowed funds,
declined 15 basis points in 1996 over 1995. Your Bank's net interest margin
is among the highest of all Maine banks. The Bank continues to monitor
short- and long-term interest rates, balance sheet volumes and maturities in
order to optimize its net interest margin.
The following table illustrates the Bank's net interest margin for the years
indicated:
December 31,
1996 1995 1994
Yield on earning assets 8.096% 8.330% 8.042%
Cost of all funds 3.026% 3.104% 2.586%
Net interest margin 5.070% 5.226% 5.456%
PROVISION FOR LOAN LOSSES
The Provision for Loan Losses increased by $90,000 in 1996. This increase
was due to increased loan volume and the Bank's desire to maintain the
Allowance for Loan Losses at 2.0% of gross loans. There was a $30,000
provision in 1995 and no provision in 1994.
20
The process of evaluating the adequacy of the Allowance for Loan Losses
involves a high degree of management judgement, based, in part, on
systematic methods. These methods include a loan-by-loan analysis of all
larger commercial and commercial real estate loans as well as those that
were nonperforming or or under close monitoring by management for potential
problems, and a quantitative analysis of residential real estate and
consumer loans. The analysis also incorporates all relevant matters
affecting loan collectibility. Based on this analysis, an estimation of
potential loss exposure is made and an allowance determined.
Management believes that the Allowance for Loan Losses and the carrying
value of real estate owned are adequate. While management uses available
information to recognize losses on loans and real estate owned, future
additions to the allowances may be necessary based on changes in economic
conditions, particularly in northern New England. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's Allowance for Loan Losses. Such agencies
may require the Company to recognize additions to the allowance based on
their judgements about information available to them at the time of their
examination.
The following table reflects the quality of the Bank's loan portfolio and
the emphasis placed upon the management of credit risk:
(000's omitted)
December 31,
1996 1995
Nonaccrual loans $ 491 $ 614
Loans past due 90 days and accruing 196 388
Other real estate owned (including
insubstance foreclosure) 842 1,316
Total nonperforming assets 1,529 2,318
Ratio of total nonperforming loans to capital and the
Allowance for Loan Losses (Texas ratio) .026 .041
Ratio of net recoveries (charge-offs) to loans .001 (.001)
Ratio of Allowance for Loan Losses to loans .02 .02
Coverage ratio (Allowance for Loan Losses divided by
nonperforming assets) 1.361 .845
Ratio of nonperforming assets to total assets .008 .01
Ratio of nonperforming loans to total loans .007 .007
NONINTEREST INCOME
The Company receives noninterest income from trust fees, service charges on
deposit accounts and income comprising fees earned from other banking
services. Security gains or losses are another major component of this
category.
Noninterest income, excluding securities gains, increased a healthy $218,231
or 11.0% in 1996, with increases in virtually all categories. In 1995 and
1994, a $4,068 or .21% increase and a $11,346 or .57% decrease
(respectively) were experienced.
The Bank made major efforts in 1996 to improve fee based income, resulting
in an increase of $27,244 or 8.8% in service charges on deposit accounts, an
21
increase of $63,865 or 14.8% in Visa income, an increase of $36,818 or 11.4%
in Loan Department income and an increase of $45,467 or 9.5% in other
account fees income.
Trust Department income increased $44,837 or 10.1% in 1996 and $43,352 or
10.8% in 1995. During 1996 new trust accounts opened totaled some
$10,000,000 and trust assets grew to an all time high of just under
$100,000,000.
Net security gains amounted to $2,718, $3,103 and $98,009 for the years
1996, 1995, and 1994, respectively.
NONINTEREST EXPENSE
Noninterest expense consists of employee compensation and benefits,
occupancy and equipment expenses and other general operating expenses.
During 1996, as a result of a study conducted in late 1995, the Bank
implemented many programs that enhanced the Bank's management process and
operating procedures. Going forward, we expect to achieve more efficient
use of resources, increased income opportunities and improved delivery of
products and services while reducing expenses.
Noninterest expenses increased 3.53% to $7,722,683 in 1996 and .53% in 1995.
The 1996 increase centered primarily in employee benefits, depreciation
expense and consulting fees. Bankcard expenses increased as part of
business development efforts. These increases were offset, to some extent,
by decreases in stationary and supplies due to cost saving efforts and a
1996 decrease in FDIC insurance premiums.
Salaries and wages decreased 4.9% in 1996 due to staff reductions and
planned retirements, down from a 5.7% increase in 1995 over 1994.
Pension and employee benefits (current and post-retirement) increased 15.9%
in 1996 following an 11.5% decrease in 1995 due to higher premium rates and
a change in the interest discount rate of 8.5% to 7.0%. The periodic post-
retirement benefit costs under Statement of Financial Accounting Standards
(SFAS) 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pension" were $184,493, $148,646 and $154,800 for 1996, 1995, and 1994,
respectively. Future changes in the discount rates applied to the actuarial
analysis will continue to have a corresponding impact on the Company's
pension and post-retirement liabilities.
INCOME TAXES
The status of the Bank's income tax expense is as follows:
Twelve Months Ended December 31,
Tax Expense Percentage of Pre-tax
Earnings
1996 1995 1994 1996 1995 1994
$1,050,000 $885,000 $797,000 30.0% 26.8% 25.3%
The Bank has sufficient refundable taxes paid in available carry-back years
22
to fully realize its recorded deferred tax asset of $1,309,340 at December
31, 1996.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
The Federal Reserve Board's capital requirements generally call for an 8%
total capital ratio, of which 4% must comprise Tier 1 capital. Risk-based
capital ratios are calculated by weighing assets and off-balance sheet
instruments according to their relative credit risks. The Company's Tier 1
capital ratio of 21.0% far exceeds the Federal Reserve Board's guidelines.
Total Shareholders' equity increased $919,364 in 1996 primarily as a result
of net income of $2,451,972, offset by dividends paid of $807,628 and a
$739,270 change in the category of "Unrealized Gains (Losses)on Securities
Available for Sale", net of applicable income taxes, in accordance with
Statement of Financial Accounting Standards (SFAS) 115, "Accounting for
Certain Investments on Debt and Equity Securities."
Dividends of $807,628 were declared on the Company's common stock and
represented a 6.7% increase over 1995. Dividend payout for 1996, 1995, and
1994 was 32.9%, 31.3%, and 25.8% of net income, respectively. In 1995, the
Company declared a 33 1/3 percent stock dividend.
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, U.S. Government securities may be readily converted to
cash by sale on the open market. On the liability side, liquidity comes
from deposit growth and the Bank's access 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 resource and strategies to manage
and reduce its vulnerability to changes in interest rates.
A principal objective of the Company is to manage and reduce its
vulnerability 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.
As of December 31, 1996, the Bank's ratio of rate sensitive assets to rate
sensitive liabilities at the one-year horizon was 94%, its one-year GAP
(measurement of interest sensitivity of interest-earning assets and
interest-bearing liabilities at a given point in time) was -4%, and
$88,000,000 in assets and $80,371,000 in liabilities will be repricable in
one year. The Bank becomes asset sensitive between 25 and 36 months. Bank
earnings may be negatively affected, should interest rates fall.
In addition to the "traditional" GAP calculation, the Company 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
23
account current economic conditions, the current interest rate environment,
and other factors.
The following table presents, as of December 31, 1996, the Company's
interest rate GAP analysis:
24
Interest Rate GAP Analysis
as of December 31, 1996 (000's omitted)
Interest-earning Assets:
0-3 4-12 1-5 over 5 Total
months months years years
Loans:
Real estate
fixed rate $ 553 $ 1,654 $ 8,756 $ 4,965 $ 15,928
variable rate 20,808 21,581 6,347 0 48,736
Commercial 11,154 2,002 2,815 612 16,583
Municipal 89 1,695 1,439 1,441 4,664
Consumer 11,067 684 3,382 0 15,133
Securities AFS 2,358 31,416 36,204 4,645 74,623
Held to maturity securities 0 752 3,339 696 4,787
Loans held for sale 3,241 0 0 0 3,241
Other earning assets 143 0 1,946 0 2,089
TOTAL $49,413 $59,784 $64,228 $12,359 $185,784
Interest-bearing Liabilities:
Deposits:
Savings $ 8,052 $21,315 $21,967 $ 0 $ 51,334
NOW 4,302 12,906 17,215 0 34,423
Money Market 6,480 6,478 0 0 12,958
Time 24,198 31,831 14,085 0 70,114
Borrowings 6,063 110 0 0 6,173
TOTAL $49,095 $72,640 $53,267 $ 0 $175,002
Rate sensitivity GAP $ 318 $(12,856) $10,961 $12,359
Rate sensitivity GAP as a percentage of
total assets .16% (6.36%) 5.42% 6.12%
Cumulative GAP $ 318 $(12,538) $(1,577) $10,782
Cumulative GAP as a percentage
of total assets .16% (6.20%) (.78%) 5.34%
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 judgement. 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.
25
The status of the Bank's sources of cash to fund its operation are as
follows:
December 31,
1996 1995
Net cash provided from operations $ 840,840 $ 2,632,741
Net cash used by investing activities (13,645,724) (1,983,445)
Net cash provided from financing
activities 8,740,804 4,347,261
Net (decrease) increase in cash and cash
equivalents $(4,064,080) $ 4,996,557
BALANCE SHEET ANALYSIS
Total assets increased $10,700,000 or 5.6% in 1996, primarily due to
increased loan volume, and growth in the security portfolio compared to an
increase of approximately $9,800,000 or 5.4%, in 1995.
SECURITIES
The objective of the securities portfolio is to provide for a stable
earnings base and the investment of excess liquidity. The carrying value of
the portfolio at December 31, 1996 totaled $81,000,000, consisting primarily
of U.S. government and agency securities. Approximately 40% of the
securities portfolio will mature within one to five years.
The Company has reviewed its investment policy regarding securities. In
recognition of current economic conditions and the attendant responsibility
of management to consider known liquidity requirements and provide for
capital planning, investment securities may be sold in keeping with prudent
asset/liability management. Accordingly, the Bank has classified certain
securities as assets available for sale. Therefore, such assets are
recorded at market value.
As a result of Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
unrealized holding gains or losses, net of tax effect, for securities
classified as available for sale are recorded as an adjustment of a separate
component of equity.
LOANS
Total loans increased $7,802,000, or 8.4%, due primarily to a $6,964,000, or
12.1% increase in real estate loans and a $2,805,000, or 20.4%, increase in
commercial and industrial loans offset by a $2,766,000 decrease in municipal
loans.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) 114, "Accounting by Creditors for Impairment of a Loan",
which states that a loan is defined as "impaired" when it is probable that
the creditor will be unable to collect all amounts due, including principal
and interest, under the contracted terms of the loan.
Loans that are reported on nonaccrual, overdue, rated or watch listings are
tested for impairment. Management then determines, loan by loan based upon
the credit history and repayment schedule, whether the loan is impaired or,
26
in all probability, uncollectible. Adoption of this standard has had no
effect on the Allowance for Loan Losses in 1996.
DEPOSITS
Total deposits increased $3,471,000 or 2.1% during 1996, due primarily to
competitive interest rates on products offered. Total deposits increased
3.2%, or $5,109,000, in 1995.
In the Bank's market area, the banking business is somewhat seasonal due to
an influx of tourists and summer residents each spring and summer. As a
result, the Bank has an annual deposit swing, from a high point in mid-
October, to a low point in June. This deposit swing is predictable and does
not have a materially adverse effect on the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related notes presented in this
Annual Report have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position
and operating results in terms of historical dollars without consideration
of changes in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As
a result, interest rates have a more significant impact on the Company's
performance than has the general level of inflation. Over short periods of
time, interest rates may not necessarily move in the same direction or in
the same magnitude as inflation.
OTHER STOCK INFORMATION
Union Bankshares, $25 par value, is not listed on any national exchange, nor
is it actively traded. Since the Company is not aware of all trades, the
market price is established by determining what a willing buyer will pay a
willing seller. Based upon the trades that the Company had knowledge of
(per quotes from local brokerages), high and low bids for each quarter for
1996 and 1995 are listed in the following table:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1996 $170.00 to $180.00 $180.00 to $210.00 $198.00 to $210.00 $200.00 to $235.00
1995 $160.00 to $175.00 $125.00 to $169.26 $150.00 to $167.00 $167.00 to $170.00
As of December 31, 1996, there were 665 holders of record of Union
Bankshares Company common stock.
Quarterly dividends paid by the Company in 1996 and 1995 were as
follows:
27
1996 1995
1st Quarter $1.00 $ .75
2nd Quarter $1.00 $1.00
3rd Quarter $1.00 $1.00
4th Quarter $1.00 $1.00
Total $4.00 $3.75
28
RECENT ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," effective
for financial statements for the fiscal year beginning after December 31,
1996 (excluding those sections identified in SFAS 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125"). SFAS 125 provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The Company has not
determined the impact of adopting SFAS 125.
29
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
ASSETS
Cash and due from banks (note 2) $ 9,458,971 $ 7,343,489
Federal funds sold 143,209 6,322,771
Available for sale securities,
at market value (note 3) 74,835,300 71,799,295
Held to maturity securities at cost (note 4)
(market value $4,861,061 and $4,232,683 at
December 31, 1996 and 1995, respectively) 4,786,800 4,119,546
Other investment securities at cost, which
approximates market value 1,946,200 659,325
Loans held for sale 3,241,054 1,227,447
LOANS (note 5):
Real estate 64,663,964 57,699,645
Commercial and industrial 16,582,761 13,778,012
Municipal 4,663,900 7,430,234
Consumer 15,133,300 14,334,869
101,043,925 93,242,760
Less deferred loan fees 73,534 203,497
Less Allowance for Loan Losses (note 6) 2,083,831 1,878,169
Net loans 98,886,560 91,161,094
Premises, furniture and equipment (note 7) 2,917,112 3,153,850
Other Assets (notes 8, 11 and 12) 5,851,051 5,566,349
Total Assets $202,066,257 $191,353,166
LIABILITIES
DEPOSITS:
Demand Deposits $ 19,185,504 $ 19,327,213
Savings deposits (including NOW deposits
totaling $34,423,418 in 1996 and
$34,237,051 in 1995) 63,736,332 63,621,013
Money market accounts 15,793,806 17,419,673
Time deposits (note 9) 70,113,369 64,989,970
Total deposits 168,829,011 165,357,869
Borrowed Funds (note 10) 6,173,000 110,000
Other liabilities (note 12) 3,350,388 3,090,803
Total liabilities 178,352,399 168,558,672
Contingent liabilities and commitments (notes 14 and 15)
SHAREHOLDERS' EQUITY
Common stock, $25 par value. Authorized 600,000
shares, issued 202,515
in 1996 and 1995 (note 13) $ 5,062,875 $ 5,062,875
Surplus 3,948,797 3,948,485
Retained earnings 14,929,681 13,285,337
Net unrealized gain (loss) on available for
sale securities (note 3) (171,460) 567,810
Treasury stock, at cost (612 shares in 1996
and 697 shares in 1995) (56,035) (70,013)
Total Shareholders' equity 23,713,858 22,794,494
Total liabilities and Shareholders' equity $202,066,257 $191,353,166
The accompanying notes are an integral part of these Consolidated Financial
Statements.
31
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 9,191,876 $ 8,780,734 $ 7,500,694
Interest on securities available
for sale 5,256,042 4,230,639 4,446,906
Interest on securities held to
maturity 244,561 419,829 520,215
Interest on Federal funds sold 75,889 424,146 209,210
Total interest income 14,768,368 13,855,348 12,677,025
INTEREST EXPENSE:
Interest on savings deposits 1,171,987 1,302,644 1,341,186
Interest on money market accounts 477,720 552,417 567,359
Interest on time deposits 3,525,114 2,912,040 2,175,936
Interest on certificates of deposit
$100,000 and over 226,589 274,069 100,504
Interest on short-term borrowings 229,434 10,937 1,647
Total interest expense 5,630,844 5,052,107 4,186,632
Net interest income 9,137,524 8,803,241 8,490,393
Provision for Loan Losses (note 6) 120,000 30,000 0
Net interest income after Provision
for Loan Losses 9,017,524 8,773,241 8,490,393
NONINTEREST INCOME:
Net securities gains (note 3) 2,718 3,103 98,009
Trust Department income 488,498 443,661 400,309
Service charges on deposit accounts 337,625 310,381 311,069
Visa income 495,203 431,338 355,411
Loan Department income 360,475 323,657 405,459
Other income 522,612 477,145 509,866
Total noninterest income 2,207,131 1,989,285 2,080,123
Income before noninterest expenses 11,224,655 10,762,526 10,570,516
NONINTEREST EXPENSE:
Salaries and wages 2,972,682 3,124,862 2,955,272
Pension and other employee
benefits (note 11) 1,036,792 894,706 1,011,960
Insurance 95,310 97,809 99,286
FDIC insurance 1,500 184,630 345,006
Net occupancy expenses 845,255 776,703 767,400
Equipment expenses 233,617 201,516 180,465
Advertising 266,544 248,510 223,087
Supplies 214,975 283,430 206,047
Postage 131,246 147,947 130,755
Telephone 142,971 155,120 165,357
Other professional fees 235,280 156,570 159,698
Other expenses 1,546,511 1,187,403 1,175,484
Total noninterest expenses 7,722,683 7,459,206 7,419,817
Income before income taxes 3,501,972 3,303,320 3,150,699
Income taxes (note 12) 1,050,000 885,263 796,736
Net income $2,451,972 $2,418,057 $2,353,963
Net income per common share $ 12.14 $ 11.98 $ 11.65
Cash dividends declared per
common share $ 4.00 $ 3.75 $ 3.00
Weighted average common shares
outstanding 201,899 201,821 202,128
The accompanying notes are an integral part of these consolidated financial
statements.
33
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
NET UNREALIZED
GAIN(LOSS)ON SHARE-
COMMON TREASURY RETAINED AVAILABLE FOR HOLDER'S
STOCK SURPLUS STOCK EARNINGS SALE SECURITIES EQUITY
Balance at December
31, 1993 $3,801,200 $3,948,680 $(43,468) $11,168,165 $ 0 $18,874,577
Net income, 1994 0 0 0 2,353,963 0 2,353,963
Repurchase of 322 shares Treasury
stock 0 0 (51,500) 0 0 (51,500)
Effect from implementation
of SFAS 115 0 0 0 0 1,545,654 1,545,654
Change in net unrealized gain (loss)
on available for sale securities,
net of tax
of $1,511,876 0 0 0 0 (2,934,822) (2,934,822)
Cash dividends
declared 0 0 0 (606,491) 0 (606,491)
Balance at December
31, 1994 3,801,200 3,948,680 (94,968) 12,915,637 (1,389,168) 19,181,381
Net income, 1995 0 0 0 2,418,057 0 2,418,057
Sale of 159 shares
Treasury stock 0 (195) 24,955 0 0 24,760
Stock split effected in the form of
a 33 1/3% stock
dividend (50,467
shares) 1,261,675 0 0 (1,261,675) 0 0
Payment for fractional shares
totaling
138.49 shares 0 0 0 (29,822) 0 (29,822)
Cash dividends
declared 0 0 0 (756,860) 0 (756,860)
Change in net unrealized gain (loss)
on available for sale
securities, net of tax
of $1,009,423 0 0 0 0 1,956,978 1,956,978
Balance at December
31, 1995 $5,062,875 $3,948,485 $(70,013) $13,285,337 $ 567,810 $22,794,494
Net income, 1996 0 0 0 2,451,972 0 2,451,972
Sale of 93 shares
Treasury Stock 0 312 15,498 0 0 15,810
Repurchase of 8 shares
Treasury Stock 0 0 (1,520) 0 0 (1,520)
Cash dividends
declared 0 0 0 (807,628) 0 (807,628)
Change in net unrealized gain (loss)
on available for sale
securities, net of tax
of $382,120 0 0 0 0 (739,270) (739,270)
Balance at December
31, 1996 $5,062,875 $3,948,797 $(56,035) $14,929,681 $(171,460) $23,713,858
The accompanying notes are an integral part of these consolidated financial
statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
NET CASH FLOWS PROVIDED (USED)
BY OPERATING ACTIVITIES:
Net income $ 2,451,972 $ 2,418,057 $ 2,353,963
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, amortization and
accretion 440,273 477,744 252,783
Provision for loan losses 120,000 30,000 0
Loss on sale of available for
sale securities (1,060) (3,103) (98,009)
Net gain on sale of equipment (3,778) 0 0
Gain on sale of other real estate
owned (16,918) 0 0
Provision for other real estate owned 15,000 60,000 0
Originations of loans held
for sale (11,993,334) (8,593,440) (10,813,150)
Proceeds from loans held for sale 9,979,727 7,936,912 11,042,763
Net change in other assets (455,947) (151,224) (588,825)
Net change in other liabilities 526,397 522,499 132,523
Net change in deferred loan
origination fees (129,963) (74,370) 60,471
Provision for deferred income tax
(benefit) expense (91,529) 9,666 (163,740)
Net cash provided by operating
activities $ 840,840 $ 2,632,741 $ 2,178,779
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for
sale securities $ 3,001,060 $16,933,182 $10,010,376
Purchase of available for sale
securities (35,337,132) (38,702,639) (49,678,400)
Proceeds from maturities and principal
payments on available for sale
securities 26,876,205 26,734,617 29,700,344
Purchase of held to maturity
securities (1,605,000) 0 (725,000)
Proceeds from maturities and principal
payments on held to maturity
securities 945,192 2,619,748 1,355,000
Purchase of investments 0 0 (12,300)
Proceeds from sales of other real
estate owned 380,000 0 37,000
Net increase in loans to
customers (7,715,503) (9,035,126) (2,547,926)
Proceeds from sales of fixed assets 16,541 4,000 0
Capital expenditures (207,087) (537,227) (309,006)
Net cash used by
investing activities $(13,645,724) $(1,983,445) $(12,169,912)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in demand, savings and
money market accounts (1,652,257) (6,470,836) 746,169
(Decrease) Increase in time
deposits 5,123,399 11,580,018 (1,733,145)
Net increase in cash surrender value
of life insurance policies 0 0 (348,911)
Net changes in short term borrowed
funds 6,063,000 0 0
Payment to eliminate fractional shares 0 (29,821) 0
Purchase of Treasury stock (1,520) 0 (51,500)
Sale of Treasury stock 15,810 24,760 0
Dividends paid (807,628) (756,860) (606,491)
Net cash (used) provided by
financing activities $ 8,740,804 $4,347,261 $(1,993,878)
Net (decrease) increase in cash and
cash equivalents (4,064,080) 4,996,557 (11,985,011)
Cash and cash equivalents at
beginning of year 13,666,260 8,669,703 20,654,714
Cash and cash equivalents at
end of year $ 9,602,180 $13,666,260 $ 8,669,703
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 5,665,358 $ 4,752,751 $ 4,264,239
Income taxes paid $ 1,077,250 $ 927,610 $ 1,049,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Net transfer of securities held for sale
to available for sale securities $ 0 $ 0 $65,816,445
Net transfer of investment securities
to assets held for sale $ 0 $ 0 $ 0
Net transfer from loans to
other real estate owned and insubstance
foreclosure $ 0 $ 0 $ 39,850
Net transfer from loans held for
sale to loans $ 0 $ 80,272 $ 701,917
Net (decreases) increases required by
Statement of Financial Accounting
Standards 115
Available for Sale Securities $ 1,121,390 $ 2,966,401 $(2,104,799)
Deferred income tax assets $ (362,120) $(1,009,423) $ 715,631
Net unrealized gain (loss) on
available for sale securities $ (739,270) $ 1,956,978 $(1,389,168)
The accompanying notes are an integral part of these consolidated financial
statements.
38
UNION BANKSHARES COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Union Bankshares Company provides a full range of banking services to
individual and corporate customers through its subsidiary and branches in
Maine. It is subject to regulations of certain Federal agencies and
undergoes periodic examinations by those regulatory authorities.
Basis of Consolidated Financial Statement Presentation
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles. In preparing the Statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of continuing
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from
those estimates.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its majority-owned subsidiary, Union Trust Company. All
significant intercompany balances and transactions have been eliminated in
the accompanying Financial Statements. Minority interests, which are not
significant, are included in other liabilities in the balance sheets and
other operating expenses in the Consolidated Statements of Income.
Earnings and Cash Dividends Per Share
Earnings per share is based upon the average number of common shares
outstanding during each year. In 1995, the Company declared a 33-1/3 percent
stock dividend.
Investments
The Company adopted Statement of Financial Accounting Standards 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
effective January 1, 1994. The adoption resulted in the reclassification of
certain investment securities as of January 1, 1994. The Company s
investment accounting policies are as follows:
Available for Sale Securities
Available for sale securities consist of debt securities that the Company
anticipates could be made available for sale in response to changes in
market interest rates, liquidity needs, changes in funding sources and
similar factors. These assets are specifically identified and are carried at
fair value. Amortization of premiums and accretion of discounts are recorded
as an adjustment to yield. Unrealized holding gains and losses for these
assets, net of related income taxes, are excluded from earnings and are
reported as a net amount in a separate component of Shareholders equity.
When decline in market value is considered other than temporary, the loss is
recognized in the Consolidated Statements of Income, resulting in the
establishment of a new cost basis for the security.
Held to Maturity Securities
Held to maturity securities consist of purchased debt securities that the
Company has the positive intent and ability to hold until maturity. Debt
securities classified as held to maturity are carried at amortized cost,
39
adjusted for amortization of premiums and accretion of discounts. When
decline in market value is considered other than temporary, the loss is
recognized in the Consolidated Statements of Income, resulting in the
establishment of a new cost basis for the security.
Other Investment Securities
Other investment securities consist of Federal Home Loan Bank (FHLB) stock
and Federal Reserve Bank stock. These securities are carried at cost, which
approximates market value at December 31, 1996 and 1995.
Loans Held for Sale
Loans held for sale are loans originated for the purpose of potential
subsequent sale. These loans are carried at the lower of cost or market at
December 31, 1996 and 1995. Gains and losses on the sale of these loans are
computed on the basis of specific identification.
Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
balance sheet. The Bank recognizes a loan servicing fee for the difference
between the principal and interest payment collected on the loan and the
payment remitted to the investor. In May 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
122, "Accounting for Mortgage Servicing Rights," which requires
capitalization of mortgage servicing rights for loans originated after
January 1, 1996. Implementation of SFAS 122 is immaterial to the financial
statements.
Premises, Furniture and Equipment
Premises, furniture and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed by accelerated and
straight-line methods over the estimated useful life of each type of asset.
Leasehold improvements are amortized over the terms of the respective leases
or the service lives of the improvements. Maintenance and repairs are
charged to expense as incurred; betterments are capitalized.
Allowance for Loan Losses
The Allowance for Loan Losses is established by management to absorb
charge-offs of loans deemed uncollectible. This allowance is increased by
provisions charged to operating expense and by recoveries on loans
previously charged off. The amount of the provision is based on management s
evaluation of the loan portfolio. Considerations include past and
anticipated loan loss experience, the character and size of the loan
portfolio and the need to maintenance the allowance at a level adequate to
absorb anticipated future losses.
Statement of Financial Accounting Standards 114, "Accounting by Creditor for
Impairment of a Loan," was adopted on January 1, 1995. Under this standard,
loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a
portion of the Allowance for Loan Losses to such loans. If these
allocations cause the allowance to increase, the increase is reported as
loan loss provision.
Other Real Estate Owned
Other real estate owned, which is included in other assets, is recorded at
the lower of cost or fair value less estimated costs to sell at the time the
Company takes possession of the property. Losses arising from the
acquisition of such properties are charged against the Allowance for Loan
40
Losses. Operating expenses and any subsequent provisions to reduce the
carrying value are charged to operations. Gains and losses upon disposition
are reflected in earnings as realized.
Accounting Estimates
Material estimates that are particularly susceptible to significant change
in the future relate to the determination of the Allowance for Loan Losses.
In connection with the determination of the Allowance for Loan Losses and
the carrying value of real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the Allowance for Loan Losses and the carrying
value of real estate owned are adequate. While management uses available
information to recognize losses on loans and real estate owned, future
additions to the allowances may be necessary based on changes in economic
conditions, particularly in northern New England. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company s Allowance for Loan Losses. These agencies
may require the Company to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income using
methods that relate the income earned to the balances of loans outstanding
and investment securities. Interest expense on liabilities is derived by
applying applicable interest rates to principal amounts outstanding. The
recording of interest income on problem loan accounts ceases when
collectibility within a reasonable period of time becomes doubtful. Interest
income accruals are resumed only when they are brought fully current with
respect to principal and interest and when management expects the loan to be
fully collectible.
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows and increases in the
present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reflected in the loan loss provision.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
recognized over the life of the related loan as an adjustment to or
reduction of the loan s yield.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
41
on hand, amounts due from banks and Federal funds sold. Generally, Federal
funds are purchased and sold for one-day periods.
42
Fair Value Estimates
The Company has made fair value estimates on its financial instruments. Fair
value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company s entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company s financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
2. CASH AND DUE FROM BANK ACCOUNTS
The Federal Reserve Board requires the Bank to maintain a reserve balance.
The amount of this reserve balance as of December 31, 1996 was $100,000.
3. AVAILABLE FOR SALE SECURITIES
The Company carries available for sale securities at market value. A summary
of the cost and market values of available for sale securities at December
31, 1996 and 1995 are as follows:
Gross Gross Carrying &
Unrealized Unrealized Market Value
Amortized Gains Losses
Cost
1996 1996 1996 1996
U.S. Treasury Securities and
other U.S. Government agencies $73,633,395 $314,589 ($625,728) $73,322,256
Other Securities 1,461,693 68,396 17,045 1,513,044
Totals $75,095,088 $314,589 ($642,773) $74,835,300
1995 1995 1995 1995
U.S. Treasury Securities and
other U.S. Government agencies $70,308,793 $877,088 ($17,220) $71,168,661
Other Securities 628,900 1,734 0 630,634
Totals $70,937,693 $878,822 ($17,220) $71,799,295
The amortized cost and market value of available for sale debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
43
Amortized Market Value
Cost
Due in one year or less $ 7,281,792 $ 7,827,247
Due in one year
through five years 22,048,032 22,225,780
Due after five years
through ten years 45,293,660 44,782,273
$74,623,484 $74,295,300
4. HELD TO MATURITY SECURITIES
The carrying amounts of held to maturity securities for 1996 and
1995 as shown in the Company's Consolidated Balance Sheets, and their
approximate market values at December 31, are as follows:
Gross Gross Carrying &
Book Unrealized Unrealized Market
Value Gains Losses Value
1996 1996 1996 1996
Obligations of state
and political
subdivisions $3,792,285 $ 91,908 $ 0 $3,884,193
US government agencies 994,515 0 (17,647) 976,868
TOTALS $4,786,800 $ 91,808 $(17,647) $4,861,061
1995 1995 1995 1995
Obligations of state
and political
subdivisions $4,119,546 $ 117,723 $ (4,586) $4,232,683
US government agencies 0 0 0 0
TOTALS $4,119,546 $ 117,723 $ (4,586) $4,232,683
The amortized cost and market value of held to maturity securities
at December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
44
Amortized Market
Cost Value
Due in one year or less $ 751,821 $ 763,570
Due after one year through five years 2,298,907 2,364,945
Due after five years through ten years 741,557 755,678
Due after ten years 994,515 976,868
$4,786,800 $4,861,061
5. LOANS
At December 31, 1996 and 1995, loans on nonaccrual status totaled
approximately $491,000 and $614,000, respectively. If interest had been
accrued on such loans, interest income on loans would have been
approximately $32,000, $28,000 and $17,000 higher in 1996, 1995, and 1994,
respectively. Loans delinquent by 90 days or more that were still on accrual
status at December 31, 1996 and 1995 totaled approximately $196,000 and
$388,000, respectively.
In the ordinary course of business, the Company s subsidiary granted loans
to the Executive Officers and Directors of the Company and its subsidiary,
and to affiliates of Directors. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and did not involve
more than normal risk of collectibility.
The balance of loans to related parties amounted to $3,834,777 and
$1,338,780 at December 31, 1996 and 1995, respectively. New loans granted to
related parties in 1996 totaled $3,791,170; payments and reductions amounted
to $1,269,580.
6. Allowance for Loan Losses
Analysis of the Allowance for Loan Losses is as follows for the years ended
December 31, 1996, 1995 and 1994:
1996 1995 1994
Balance, beginning of year $1,878,169 $1,928,644 $1,802,443
Provision for loan losses 120,000 30,000 0
Balance before loan losses 1,998,169 1,958,644 1,802,443
Loans charged off 87,823 195,912 321,002
Less recoveries on loans charged off 173,485 115,437 447,203
Net loan charge off (recoveries) (85,662) 80,475 (126,201)
Balance, end of year $2,083,831 $1,878,169 $1,928,644
Information regarding impaired loans is as follows for the years ended
December 31, 1996 and 1995:
45
1996 1995
Average investment in impaired loans $21,000 $59,000
Interest income recognized on impaired loans
including interest income recognized on cash basis 0 6,400
Interest income recognized on impaired
loans on cash basis 0 5,500
Information regarding impaired loans at December 31, 1996 is as follows:
1996 1995
Balance of impaired loans $21,776 $58,874
Less portion for which no Allowance for Loan
Losses is allocated 0 0
Portion of impaired loan balance for which an allowance
for credit losses is allocated 21,776 58,874
Portion of Allowance for Loan Losses allocated to the
impaired loan balance 225 600
7. PREMISES, FURNITURE AND EQUIPMENT
Detail of Bank premises, furniture and
equipment is as follows: 1996 1995
Land $ 133,378 $ 131,743
Buildings and improvements 3,425,892 3,375,282
Furniture and equipment 3,088,902 2,966,160
Leasehold improvements 413,604 412,173
$7,061,776 $6,885,358
Less accumulated depreciation 4,144,664 3,731,508
$2,917,112 $3,153,850
At December 31, 1996, the Bank was obligated under a number of
noncancellable leases for premises and equipment that are accounted for as
operating leases. Leases for real property contain original terms from 2 to
20 years with renewal options up to 20 years. Management expects that in
the normal course of business, most leases will be renewed or replaced by
other leases, or when available, purchase options may be exercised.
Rental expense was $80,144 in 1996, $83,068 in 1995 and $90,175 in 1994.
The minimum annual lease commitments under noncancellable leases in effect
at December 31, 1996, are as follows:
46
Year Ending December 31, Amount
1997 $102,424
1998 $104,601
1999 $106,845
2000 $109,154
2001 $111,504
8. OTHER REAL ESTATE OWNED
Other real estate owned amounts to $842,424 and $1,315,505 at December
31,1996 and 1995, respectively. Activity in the allowance for losses on
other real estate owned for the years ended December 31, is as follows:
1996 1995
Balance, beginning of year $95,000 $35,000
Provisions charged to income 15,000 60,000
Adjustment to market 16,918 0
Balance, end of year $93,082 $95,000
9. DEPOSITS
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $6,554,857 and $6,886,055 in
1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
1997 $56,338,577
1998 10,414,203
1999 1,742,795
2000 720,821
2001 and thereafter 896,973
$70,113,369
10. Borrowed Funds
Advances from the Federal Home Loan Bank are summarized as follows:
INTEREST RATES
AT 1996 1995
DECEMBER 31, 1996
Fixed advances 6.25% to 6.36% $ 110,000 $ 110,000
Variable advances *7.32 2,000,000 0
Line of credit *7.32 4,063,000 0
$6,173,000 $ 110,000
*Average interest rate for December 1996 was 5.798%
Pursuant to the collateral agreements with the Federal Home Loan Bank
(FHLB), advances are collateralized by stock in the FHLB, qualifying first
mortgage loans and available for sale securities.
Advances at December 31, 1996, mature as follows:
1997 2005 2010
$6,063,000 $55,000 $55,000
11. Employee Benefits
PENSION PLAN
he Company's subsidiary has a noncontributory defined benefit pension plan
covering substantially all permanent full-time employees. The benefits are
based on employees' years of service and the average of their three highest
consecutive rates of annual salary preceding retirement.
It is the subsidiary's policy to fund the plan sufficiently to meet the
minimum requirements set forth in the Employee Retirement Income Security
Act of 1974, plus such additional amounts as the Company may determine to be
appropriate from time to time.
Pension expense amounted to $122,702, $126,219 and $124,720 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the Company's Consolidated Financial Statements at December
31, 1996 and 1995:
48
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: 1996 1995
Accumulated benefit obligation including vested
benefits of $3,327,705 in 1996
and $3,077,477 in 1995 $(3,427,498) $(3,133,283)
Projected benefit obligation for service
rendered to date (4,347,390) (4,030,311)
Plan assets at fair value (cash and equivalent,
U.S. government securities and other investments) 4,157,524 3,884,088
Projected benefit obligation in excess of plan assets (189,866) (146,223)
Unrecognized net loss from past experience different
from that assumed and effects of changes
in assumptions 639,608 608,338
Unrecognized prior service cost (35,942) (38,488)
Unrecognized net asset at January 1, being recognized
over 17 years (155,820) (179,598)
Prepaid pension cost included in other assets $ 257,980 $ 244,029
1996 1995 1994
NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS:
Service cost - benefits earned
during the period $165,142 $158,055 $ 170,374
Interest cost on projected benefit
obligation 281,514 253,278 232,087
Actual return on plan assets (274,912) (550,892) 95,028
Net amortization and deferral (49,042) 265,778 (372,769)
Net periodic pension cost $122,702 $126,219 $ 124,720
NET AMORTIZATION AND DEFERRAL INCLUDED THE FOLLOWING COMPONENTS:
Amortization of unrecognized net obligations existing at
January 1 $(23,778) $(23,778) $(23,778)
Asset (loss) deferred (34,436) 289,222 (357,725)
Amortization of unrecognized prior
service cost (2,546) (2,546) (2,546)
Amortization of net gain from earlier periods 11,718 2,880 11,280
$(49,042) $(265,778) $(372,769)
The weighted average discount rate of 7.0% was used in determining the
projected benefit in 1996 and 1995, respectively. The increase in salary
levels was 5.0%. Expected long-term rates of return on assets were 8.0% for
1996, 1995, and 1994.
Postretirement Benefits Other Than Pensions
The Company sponsors a postretirement benefit program that provides medical
coverage and life insurance benefits to certain employees and Directors who
meet minimum age and service requirements. Active employees and Directors
accrue benefits over a 25-year period.
The following table sets forth the status of the Company's post-retirement
obligation at December 31, 1996 and 1995:
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
1996 1995
Retirees $ 552,020 $ 457,603
Fully eligible active program participants 119,250 150,412
Other active program participants 633,434 601,411
Other 0 19,420
$1,304,704 $1,228,846
Accumulated postretirement benefit obligation
in excess of plan assets $1,304,704 $1,228,846
Unrealized net loss for current year (130,630) 0
Unrecognized prior service cost (731,100) (776,700)
Accrued postretirement benefit cost $ 442,974 $ 452,146
Net period postretirement benefit cost for the years ended December 31,
1996, 1995, and 1994, respectively, includes the following components:
1996 1995 1994
Service cost $ 55,581 $ 30,129 $ 29,800
Interest cost 82,697 74,758 79,400
Amortization of accumulated
postretirement obligation 45,600 45,600 45,600
Amortization of net
(gain)/loss 615 (1,841) 0
Net periodic postretirement
benefit cost $184,493 $148,646 $154,800
For measurement purposes, the assumed annual rates of increase in the per
capita cost of covered benefits were 12% and 15% for 1996 and 1995,
respectively. Per capita medical costs are assumed to decrease annually by
1% until the year 2002 (which at that time will be 6%) and later. The health
care cost trend rate assumption has a significant effect on the amounts
reported; however, these amounts are not currently available. The weighted
average discount rate and rate of compensation increase used in determining
the accumulated postretirement benefit obligation was 7% and 5%,
respectively, on December 31, 1996 and 1995.
401(K) PLAN
The Company has a noncontributory 401(k) plan for employees who meet certain
service requirements.
12. INCOME TAXES
Income tax expense (benefit) consists of the following:
Current Deferred Total
1996
Federal $l,101,529 $ (91,529) $1,010,000
State 40,000 0 40,000
$1,141,529 $ (91,529) $1,050,000
1995
Federal $ 835,597 $ 9,666 $ 845,263
State 40,000 0 40,000
$ 875,597 $ 9,666 $ 885,263
1994
Federal $ 913,476 $(163,740) $ 749,736
State 47,000 0 47,000
$ 960,476 $(163,740) $ 796,736
51
Income tax expense amounted to $1,050,000 for 1996, $885,263 for 1995 and
$796,736 for 1994. The actual tax expense for 1996, 1995 and 1994 differs
from the "expected" tax expense for those years (computed by applying the
applicable U.S. Federal Corporate Tax Rate to income before income taxes)
due to the following:
1996 1995 1994
Amount % of Amount % of Amount % of
Pretax Pretax Pretax
Earnings Earnings Earnings
Computed "expected"
tax expense $1,190,670 34.0% $1,098,900 34.0% $1,071,237 34.0%
Nontaxable income on
obligations of states
and political
subdivisions (143,854) (4.1%) (225,810) (7.0%) (251,808) (8.0%)
Other 3,184 .1% 12,173 1.0% (22,693) (0.7%)
$1,050,000 30.0% $ 885,263 28.0% $ 796,736 25.3%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented as follows:
DEFERRED TAX ASSETS: 1996 1995
Unrealized loss on available for sale securities $ 111,582 $ 0
Allowance for Loan Losses 708,503 638,577
Real estate owned 37,400 32,300
Deferred loan fees 25,002 63,590
Accrued FDIC assessment 0 17,000
Deferred compensation 267,963 186,164
Postretirement benefits 149,167 118,358
Other 9,723 16,647
Deferred tax assets $1,309,340 $1,072,636
DEFERRED TAX LIABILITIES:
Unrealized gain on available for sale securities $ 23,255 $ 293,793
Allowance for Loan Losses 169,805 168,041
Premises, furniture and equipment, principally due
to differences in depreciation 271,833 259,748
Prepaid pension expense 87,713 81,668
Cash surrender value of life insurance 36,386 36,386
Other 13,699 0
Deferred tax liabilities $ 602,691 $ 839,636
The Bank has sufficient refundable taxes paid in available carry-back years
to fully realize its recorded deferred tax asset of $1,309,340 at December
31, 1996. The deferred tax asset and liability are included in other assets
and other liabilities on the balance sheet at December 31, 1996 and 1995.
13. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
52
by Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory (and possibly additional discretionary)
actions by regulators that could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
regarding components, risk weightings, and other factors.
Quantitive measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Board categorized the Bank as well capitalized under the regulatory
framework. To be so categorized, the Bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. Management believes no conditions or events that would alter the
Bank's categorization have occured since the Board's notification.
The actual capital amounts and ratios for the Bank and the Company as of
December 31, 1996 are presented in the table below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Bank Only: Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital
(to risk-weighted
assets) $24,832,936 22.0% >$9,041,440 >8.0% >$11,301,800 >10.0%
Tier I capital
(to risk-weighted
assets) $23,411,936 20.7% >$4,520,720 >4.0% >$ 6,781,080 > 6.0%
Tier I capital
(to average
assets) $23,411,936 11.8% >$7,949,040 >4.0% >$ 9,936,300 > 5.0%
Consolidated:
Total capital
(to risk-weighted
assets) $25,216,318 23.7% >$8,522,720 >8.0% N/A N/A
Tier I capital
(to risk-weighted
assets) $23,885,318 22.4% >$4,261,360 >4.0% N/A N/A
Tier I capital
(to average
assets) $23,885,318 12.1% >$7,868,388 >4.0% N/A N/A
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, the Bank is a party to financial
instruments with off balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and letters of credit. The instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the Statement of
Financial Position. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. At December 31, 1996, the following financial instruments,
whose contract amounts represent credit risk, were outstanding:
Contract Amount
1996
Commitments to extend credit $26,558,000
Standby letters of credit $ 61,000
Unadvanced portions of construction loans $ 1,534,000
The Bank s exposure to credit loss in the event of nonperformance by the
other party to the above financial instruments is represented by the
contractual amounts of the instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for on
balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon the credit
extension, is based on management s credit evaluation of the counterparty.
The types of collateral held include residential and commercial real estate
and, to a lesser degree, personal property, business inventory and accounts
receivable.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
The Bank grants residential, commercial and consumer loans principally to
customers in Maine's Hancock and Washington Counties. Although our loan
portfolio is diversified, a substantial portion of our debtors ability to
honor their contracts depends upon local economic conditions, especially in
54
the real estate sector. At December 31, 1996, there were no borrowers whose
total indebtedness to the Bank exceeded 10% of the Bank s Shareholders
equity.
The Consolidated Balance Sheets do not include various contingent
liabilities such as liabilities for assets held in trust. Management does
not anticipate any loss as a result of these contingencies.
15. Litigation
At December 31, 1996, the Company was involved in litigation arising from
normal banking, financial and other activities of the Bank. Management,
after consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect
on the Company's financial condition.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Bank s financial instruments. Fair values are calculated based on the value
of one unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications or estimated transaction costs. If these considerations had
been incorporated into the fair value estimates, the aggregate fair value
amount could have changed.
Cash, Due from Banks and Federal Funds Sold
The fair value of cash, due from banks and Federal funds sold approximates
their relative book values at December 31, 1996 and 1995, as these financial
instruments have short maturities.
Available for Sale Securities and Held to Maturity Securities
Fair values are estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value estimates
are based on quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Management has determined that the fair value approximates
book value on all loans with maturities of one year or less or variable
interest rates. The fair values of all other loans are estimated based on
bid quotations received from securities dealers. The estimates of maturity
are based on the Bank s historical experience with repayments for each loan
classification modified, as required, by an estimate of the effect of
current economic and lending conditions and the effects of estimated
prepayments.
Loans Held for Sale
The fair market value of this financial instrument approximates the book
value as the instrument has a short maturity.
Accrued Interest Receivable
The fair market value of this financial instrument approximates the book
value as the instrument has a short maturity. It is the Bank s policy to
stop accruing interest on loans past due by more than 90 days.
55
Other Investment Securities, Federal Home Loan Bank Stock and
Federal Reserve Bank Stock
The fair market value of these financial instruments approximates the book
value as these instruments do not have a market nor is it practical to
estimate their fair value without incurring excessive costs.
Deposits
Fair value of deposits with no stated maturity, such as noninterest bearing
demand deposits, savings deposits, NOW accounts and money market and
checking accounts, equals the amount payable on demand. The fair values of
certificates of deposit are based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. If that value was considered, the fair value
of the Bank s net assets could increase.
Accrued Interest Payable
The fair value of this financial instrument approximates the book value as
the instrument has a short maturity.
Commitment to Extend Credit
The Bank has not estimated the fair values of commitments to originate loans
due to their short-term nature and their relative immateriality.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
values do not reflect any premium or discount that could result from
offering for sale at one time the Bank s entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Bank s financial instruments, fair value estimates are based on
judgments regarding future expected loss, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. The latter may include deferred tax
assets, Bank premises and equipment and other real estate owned. In
addition, tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and
have not been considered in any of the estimates.
A summary of the fair values of the Company s significant financial
instruments at December 31, 1996 and 1995 follows:
56
1996 1995
Carrying Estimate Carrying Estimate of
Value of Fair Value Fair Value
Value
ASSETS
Cash, due from banks and Federal
funds sold $ 9,602,180 $ 9,602,180 $ 13,666,260 $ 13,666,260
AFS securities 74,835,300 74,835,300 71,799,295 71,799,295
HTM securities 4,786,800 4,861,061 4,119,546 4,232,683
Other invest securities 1,946,200 1,946,200 659,325 659,325
Loans 98,960,094 99,089,190 91,364,591 92,762,722
Loans held for sale 3,241,054 3,241,054 1,227,447 1,227,447
Accrued int receivable 2,003,002 2,003,002 1,846,149 1,846,149
LIABILITIES
Deposits 168,829,011 170,533,025 165,357,869 166,729,943
Accrued interest payable 773,588 773,588 808,103 808,103
17. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Union Bankshares Company as of
December 31, 1996 and 1995 and for each of the years ended December 31,
1996, 1995, and 1994 are presented as follows:
57
BALANCE SHEET
December 31, 1996 and 1995 1996 1995
ASSETS:
Cash $ 21,044 $ 17,056
Investment in subsidiary 23,178,116 22,809,268
Other assets 739,856 199,856
Total assets $23,939,016 $23,026,180
LIABILITIES AND SHAREHOLDER'S EQUITY:
Dividends payable $ 201,903 $ 201,818
Other liabilities 23,255 29,868
Shareholders' equity 23,713,858 22,794,494
Total liabilities and Shareholders' equity $23,939,016 $23,026,180
STATEMENTS OF INCOME
Years ended December 31,
1996, 1995 and 1994 1996 1995 1994
Dividend income $1,274,684 $ 749,460 $ 599,568
Equity in undistributed
earnings of subsidiary 1,153,258 1,670,357 1,697,344
Service income 29,868 0 59,000
Total income $2,457,810 $2,419,817 $2,355,912
Operating expenses 5,839 1,760 1,949
Net income $2,451,971 $2,418,057 $2,353,963
58
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,451,971 $ 2,418,057 $ 2,353,963
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Undistributed earnings of subsidiary $(1,153,258) $(1,670,357) $(1,697,344)
Increase in other assets (471,604) (49,963) 0
Increase (decrease) in other liabilities 29,868 29,868 0
Increase (decrease) in dividends payable 85 50,434 (321)
Net cash provided by operating activities $ 797,326 $ 778,039 $ 656,298
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends $ (807,628) $ (756,860) $ (606,491)
Purchase of Treasury stock (1,520) 0 (51,500)
Sale of Treasury stock 15,810 24,759 0
Net cash used by financing activities (793,338) (761,922) (657,991)
Net increase (decrease) in cash and cash
equivalents 3,988 16,117 (1,693)
Cash and cash equivalents, beginning of year 17,056 939 2,632
Cash and cash equivalents, end of year $ 21,044 $ 17,056 $ 939
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
ACTIVITIES:
Net unrealized gain (loss) on available for sale
securities $ (739,270) $ 1,956,978 $(1,389,168)
59
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Union Bankshares Company
We have audited the accompanying consolidated balance sheets of Union
Bankshares Company and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of Union Bankshares Company and Subsidiary as of and
for the year ended December 31, 1994, were audited by other auditors whose
report thereon dated January 20, 1995, included an explanatory paragraph
that described the Company's change in its method of acounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities at January
1, 1994, as discussed in Notes 3 and 4 to the financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly,
in all material respects, the consolidated financial position of Union
Bankshares Company and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
January 24, 1997
60
UNION BANKSHARES COMPANY &
UNION TRUST COMPANY DIRECTORS
Arthur J. Billings Richard W. Whitney
President, Barter Lumber Company Dentist
Peter A. Blyberg UNION BANKSHARES COMPANY
President DIRECTORY OF OFFICERS
Robert S. Boit John V. Sawyer II
Retired, President Chairman of the Board
Richard C. Carver Peter A. Blyberg
Owner, Carver Oil Co. President
& Carver Shellfish, Inc.
Sally J. Hutchins
Peter A. Clapp Vice President & Clerk
President, Blue Hill Garage
Richard W. Teele
Sandra H. Collier Secretary
Attorney-at-Law,
Ferm, Collier & Larson John P. Lynch
Senior Vice President
Robert B. Fernald
Treasurer, A.C. Fernald Sons, Inc. Peter F. Greene
& Jordan-Fernald Vice President
Douglas A. Gott Rebecca J. Sargent
Owner, Douglas A. Gott & Sons Vice President - Trust Officer
David E. Honey
Retired, Former Manager, UNION BANKSHARES COMPANY
Swan's Island Electric Coop & UNION TRUST COMPANY
HONORARY DIRECTORS
Delmont N. Merrill
President, Merrill Blueberry Farms, Inc. Franklin L. Beal
Retired
Thomas R. Perkins
Retired Pharmacy Owner Emery B. Dunbar
Owner, Edgewater Cabins
Casper G. Sargent, Jr.
Owner, Sargent's Real Estate Corp. Carroll V. Gay
Retired
John V. Sawyer II
Chairman of the Board John E. Raymond
President, Worcester-Sawyer Agency President, Bimbay, Inc.
Stephen C. Shea Mary T. Slaven
Secretary, E.L. Shea, Inc., Realtor
President, Shea Leasing
Douglas N. Smith
Richard W. Teele Retired
Secretary, Retired Executive President
& Treasurer I. Frank Snow
President, Snow's Plumbing
Paul L. Tracy and Heating
President, Owner, Winter Harbor Agency;
Vice President, Co-Owner, Schoodic Insurance Agency
61
UNION TRUST COMPANY
DIRECTORY OF OFFICERS
John V. Sawyer II Peter C. O'Brien
Chairman of the Board AVP, Loan Support Manager and
CRA Officer
Peter A. Blyberg Stephen L. Tobey
President, Chief Executive Officer AVP, Cash Management and
Security Officer
John P. Lynch Patti S. Herrick
Senior Vice President, Information Services Officer
Senior Banking Officer
Dawn L. Lacerda
Peter F. Greene Loan Services Officer
Vice President, Bank Services
Mary Lou Lane
Sally J. Hutchins Mortgage Underwriter
Vice President, Treasurer
Controller & Clerk Teresa L. Linscott
Retail Banking Services Officer
Christopher H. Keefe
Vice President, Sr. Relationship Manager Marsha L. Osgood
Trust Officer
Bette B. Pierson
Vice President, Mortgage Loan Officer Deborah F. Preble
Assistant Controller
Rebecca J. Sargent
Vice President, Senior Trust Officer Lorraine S. Ouellette
Trust Officer
Leah S. Allen
AVP, Deposit Services Officer Julie C. Vittum
AVP, Senior Auditor
James M. Callnan
AVP, Sr. Information Services Officer Cynthia D. West
Customer Services Officer
Nancy E. Domagala
AVP, Mortgage Underwriter
Laurence D. Fernald, Jr.
AVP, Relationship Mgr and Appraisal Review Officer
Janis M. Guyette
AVP, Trust Operations Officer
Lynda C. Hamblen
AVP, Relationship Manager
Phyllis C. Harmon
AVP, Relationship Manager
Harold L. Metcalf
AVP, Relationship Manager
63
UNION TRUST COMPANY
BRANCH OFFICES
Blue Hill Hills, Darlene
Pamela G. Hutchins, AVP, Hinckley, Wayne
Relationship Manager Hutchins, Rebecca
Hutchinson, Elwell
Castine Ingalls, Laurea
Sherry L. Oliver, Johnson, Mindy
Branch Supervisor Joy, Michelle
Kelley, Cindy
Cherryfield Leach, Gail
C. Foster Mathews, AVP, Branch Manager Look, Cheryl
Look, Lisa
Ellsworth Shopping Center Lounder, Lorraine
Melody L. Wright, Branch Manager MacLaughlin, Wendy
Madden, Anita
Jonesport Marshall, Carol
Wendy W. Beal, AVP, Relationship Manager McCormick, Bernadette
Mitchell, Stacie
Neale, Debra
Machias Norton, Clifford III
Lisa A. Holmes, AVP, Owen, Doris
Relationship Manager Page, Deborah
Pineo, Muriel
Milbridge Pinkham, Wanda
James E. Haskell, AVP, Podlubny, Helene
Relationship Manager Robbins, Nancy
Rose, Brenda
Somesville Sackett, Jacqueline
William R. Weir, Jr., AVP, Salisbury, Jane
Relationship Manager Salsbury, Sandra
Santerre, Tammy
Stonington Scott, Marsha
Harry R. Vickerson III, AVP, Scoville, Clark
Relationship Manager Sinford, Stacey
Smith, Katherine
Smith, Ronald
UNION TRUST COMPANY PERSONNEL Snow, Christie
Spaulding, Virginia
Spizio, Barbara
Albert, Betty Sprague, Donna
Allen, Deborah Sproul, Bonnie
Armstrong, Rebecca St. Pierre, Bettina
Babson, William Swett, Andrea
Bayrd, Rona Thompson, Dianne
Billings, Holly Treadwell, Mattie
Bishop, Terry Wallace, Jayne
Bonville, Melissa Wenger, April
Boyce, Katrina White,Jennifer
Bragg, Randy White, Tammy
Bunker, Corace Willey, Christina
Carter, Linda Woodward, Cheryl
Chisholm, Catherine York, Caroline
Condon, Helen Young, Vicki
Curtis, Kristen
Curtis, Marjorie
Dearborn, Trevor
Douglass, Joanne
Dunbar, Patricia
Edgecomb, Ann
Elliott, Linda
Faulkner, Kathy
Gilbert, Jennie
Gommo, Heidi
Grant, Victoria
Gray, Jenny
Grindle, Eugene
Handy, Louise
Harriman, Barbara
65
Union Trust Company is committed to offering equal opportunity in regard to
employment, training, benefits, salary administration and promotional
opportunities to all employees, regardless of race, color, religion, sex,
age or national origin. The Bank has implemented An Affirmative Action
Plan.
Upon written request, the Company will provide, without charge, a copy of
its Annual Report on SEC Form 10K for 1996, including the financial
statements and schedules required to be filed with the Securities and
Exchange Commission.
Interested persons should write to:
Sally J. Hutchins, Vice President
Union Bankshares Company
PO Box 479
Ellsworth, Maine 04605
Annual Shareholders Meeting
2:00 pm.
Thursday, April 17, 1997
Holiday Inn, High Street
Ellsworth, Maine
66
Insert text:
The closing of another Annual Report, and another successful year....Laurels
we have, but no time to rest on them. In fact, we're already building the
successes we'll celebrate this time next year, striving to earn more and
more satisfied customers like those you've met here. If you have questions
or comments concerning this Report, please don't hesitate to call or write.
We're working hand in hand for you and your community.
67