UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to _________
Commission File Number 0-12958
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation of organization)
66 Main Street, Ellsworth, Maine 04605
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (207) 667-2504
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $12.50 Par Value
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES XXX
NO _______
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 6, 1998, was approximately $54,272,125.
482,767 shares of the Company's Common Stock, $12.50 par value, were
issued and outstanding on February 17, 1998.
UNION BANKSHARES COMPANY
INDEX TO FORM 10-K
PART I Page No.
Item 1: Business 3-15
Item 2: Properties 15-16
Item 3: Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
PART II
Item 5: Market for Registrant's Common Equity
and Related Stockholder Matters 17
Item 6: Selected Financial Data 18
Item 7: Management's Discussion and Analysis
of Financial Condition and
Results of Operations 19
Item 7A: Quantitative and Qualitative Disclosures
About Market Risk 19-20
Item 8: Financial Statements and Supplementary Data 20
Item 9: Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 20
PART III
Item 10: Directors and Executive Officers of
the Registrant 20
Item 11: Executive Compensation 20
Item 12: Security Ownership of Certain Beneficial
Owners and Management 20
Item 13: Certain Relationship and Related
Transactions 20
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21-22
Signatures 23
PART I
ITEM I: Business
Union Bankshares Company is a one-bank holding company incorporated in
July 1984, 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 that is
locally owned and operated. Through its eleven offices, Union Trust
serves the financial needs of individuals, businesses, municipalities and
organizations in Hancock and Washington Counties. Union Trust offers a
full range of consumer, commercial, trust and investment services. Now
in its 110th year, Union Trust is committed to providing outstanding
personalized service and maintaining and expanding its position as one of
Maine's preeminent community banks.
Union Trust Company supports the people and communities it serves by
contributing to programs that address human needs within the community.
It also supports the volunteerism of the Bank's employees, directors and
retirees. Reinvesting local money locally builds strong communities.
Through these programs, Union Trust is able to give back to the community
it serves.
On a continual basis, the Bank introduces new services and makes
improvements to current offerings that will add value to customer
relationships. Some of the service additions and improvements made
during 1997 include:
Implemented new procedures to handle Federal government electronic
payment requirements, both making and receiving payments.
Opened a new branch in Bar Harbor with Saturday hours during the
summer.
Introduced BankLine PC, 24-hour computer banking.
Conducted four seminars and two adult education classes and held
eight Business Round Table luncheons for area professionals to discuss
business issues.
Union Trust's deposit services include: regular and basic checking
accounts, small business checking, NOW accounts, money market accounts,
Unlimited Club membership, savings accounts, Christmas Club, certificates
of deposit, IRAs and Simplified Employee Pension (SEP) Plans. The Bank
also provides the following loan products: personal loans, commercial
loans, municipal loans, real estate loans, home equity loans, VISA and
MasterCard credit cards, student loans, reserve checking and overdraft
protection, and lines of credit. The following cash management services
are also available at Union Trust: coin and currency exchange, merchant
card services, cash concentration, direct debit, electronic Federal tax
payment services (EFTPS), direct deposit payroll services, ACH and wire
transfers. Union Trust also provides many convenient banking services:
ATM and Convenience Check Cards, BankLine telephone banking and BankLine
PC computer banking, night deposit and safe deposit boxes.
Trust and Investment Services provides three distinct services: (1)
custody and investment management, (2) retirement accounts and planning
and (3) trust services, including estate planning. Investment services
include investment management and advisory services, MutualPARTNERS (an
asset allocation account using mutual funds), custodial services and
safekeeping. The following retirement savings vehicles are available:
IRAs, Simplified Employee Pension (SEP) plans, SIMPLE IRAs, profit
sharing and 401(k) plans, and money purchase pension plans. Trust
services include trust administration, personal representative and
fiduciary services and estate planning.
Union Trust's services are offered through our eleven convenient
locations and Customer Service Call Center. Customers can also access
their accounts 24 hours a day through our network of eleven ATMs,
BankLine telephone banking and BankLine PC computer banking.
The Bank competes actively with other commercial banks and other
financial institutions in its service areas. In the Bank's immediate
market area, there are two other independent community banks, one savings
and loan association, three savings bank branch offices and three
commercial banks owned outside of the state of Maine. Strong competition
exists among commercial banks in efforts to obtain new deposits, in the
scope and type of services offered, in interest rates on time deposits
and interest rates charged on loans, and in other aspects of banking. In
Maine, savings banks are major competitors of commercial banks as a
result of broadened powers granted to savings banks. In addition, the
Bank like other commercial banks, encounters substantial competition from
other financial institutions engaged in the business of either making
loans or accepting deposit accounts, such as savings and loan
associations, insurance companies, certain mutual funds, and certain
governmental agencies. Furthermore, the large banks located in Boston,
New York and Providence are active in servicing some of the large Maine
based companies. The Bank has not made any material changes in its
manner of conducting business during the past five years.
As of December 31, 1997, the Bank employed 129 employees of which 16
employees were part time. The President, Senior Vice President, Vice
President-Treasurer, Vice President-Deposit Services and Vice President-
Trust are employed by the Bank as well as serve as officers of the
Company. They are not compensated by the Company for their service and
there are no employees of the Company.
The primary regulator of the Company and the Bank is the Federal Reserve
Bank of Boston and the Bureau of Banking of the State of Maine.
Please refer to Footnote #15 on page 37 of the 1997 Annual Report of
Union Bankshares Company, regarding compliance with capital requirements.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that were not disclosed under Item III of
Industry Guide 3 do not (1) represent or result from trends or
uncertainties which management reasonable expects will materially impact
future operating results, liquidity, or capital resources or (2)
represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The Company and Bank are not aware of any current recommendations by the
regulatory authorities which if they were to be implemented would have or
would be reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
Loans, other than credit card loans, are placed on non accrual status
when, in the opinion of management, there are doubts as to the
collectibility of interest or principal, or when principal or interest is
past due 90 days or more, and the loan is not well secured and in the
process of collection. Interest previously accrued but not collected is
reversed and charged against interest income at the time the related loan
is placed on non-accrual status. Principal and accrued interest on
credit card loans are charged to the allowance for credit losses when 180
days past due.
Payments received on non-accrual loans are recorded as reductions of
principal if principal payment is doubtful.
Loans are considered to be restructured when the yield on the
restructured assets is reduced below the current market rates by an
agreement with the borrower. Generally this occurs when the cash flow of
the borrower is insufficient to service the loan under its original
terms.
In the Bank's market area, the banking business is somewhat seasonal due
to an influx of tourists and seasonal residents returning to the area
each spring and summer. As a result, the Bank has an annual deposit
swing, from a high point in mid October to a low point in June. The
deposit swing is predictable and does not have a material adverse effect
on the Bank and its operations.
In July 1997, the Company declared a stock split effected in the form of
a 20 percent stock dividend and a two for one stock split. Common share
amounts, per share earnings and dividends and common stock and retained
earnings for all years presented in this report have been adjusted to
reflect these transactions.
STATISTICAL PRESENTATION
The Supplemental Financial Data presented on the following pages contains
information to facilitate analysis and comparison of sources of income
and exposure to risk.
A. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
The following table sets forth the information related to changes in net
interest income. For purposes of the table and the following discussion,
information is presented regarding (1) the total dollar amount of
interest income of the Company from interest earning assets and the
resulting average yields; (2) the total dollar amount of interest expense
on interest bearing liabilities and the resulting average cost; (3) net
interest income; (4) interest rate spread; and (5) net interest margin.
Information is based on average daily balance during the indicated
periods. For the purposes of the table and the following discussion, (1)
income from interest earning assets and net interest income are presented
on a tax equivalent basis and (2) non accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on non
accrual loans has not been included for purposes of determining interest
income.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(In Thousands)
(On a Tax Equivalent Basis)
1997 1996 1995
Average Int Yield/ Average Int Yield/ Average Int Yield/
Balance Earned/ Rate Balance Earned/ Rate Balance Earned/ Rate
Paid Paid Paid
Assets
Interest Earning Assets:
Securities Available
for Sale $ 72,741 $ 5,182 7.12 $ 80,333 $ 5,256 6.54 $ 65,896 $ 4,231 6.42
Securities Held
to Maturity 22,689 1,437 6.33 3,772 369 9.78 5,926 635 10.70
Federal Funds
Sold 598 41 6.86 1,411 76 5.39 7,409 424 5.72
Loans (Net) 100,208 9,660 9.64 94,139 9,192 9.76 88,588 8,781 9.91
Total Interest Earning
Assets 196,236 $16,320 8.32 179,655 $14,893 8.28 167,819 $14,071 8.38
Other Non Earning
Assets 18,878 14,926 14,685
$215,114 $194,581 $182,504
Liabilities
Interest Bearing Liabilities:
Savings
Deposits $ 65,432 $ 1,119 1.71 $ 65,770 $ 1,172 1.78 $ 65,690 $ 1,302 1.98
Time Deposits 73,419 4,298 5.85 67,294 3,752 5.57 59,544 3,187 5.35
Money Market
Accounts 12,271 482 3.93 14,107 478 3.39 15,142 552 3.65
Borrowings 14,007 835 5.96 4,012 229 5.71 96 11 11.40
Total Interest Bearing
Liabilities 165,129 $ 6,734 4.08 151,183 $ 5,631 3.67 140,472 $ 5,052 3.59
Other Non Interest Bearing
Liabilities & Shareholders'
Equity 49,985 43,398 42,032
$215,114 $194,581 $182,504
Net Interest Income 9,586 9,262 9,019
Net Interest Rate Spread 4.24 4.61 4.79
Net Interest Margin 4.88 5.16 5.37
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest earning assets and interest
bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old
volume), (2) changes in volume (change in volume multiplied by old
rate), and (3) changes in rate/volume (change in rate multiplied by
change in volume).
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
For the years ended December 31, 1997, 1996 and 1995
(In Thousands)
Year Ended December 31, 1997 vs. 1996
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets:
Assets Available for Sale (499) 463 (38) (74)
Securities Held to Maturity 1,223 (27) (136) 1,060
Federal Funds Sold (44) 21 (12) (35)
Loans, Net 588 (118) (2) 468
Total Interest Earning Assets 1,268 339 (188) 1,419
Interest Bearing Liabilities:
Savings Deposits (7) (47) 1 (53)
Time Deposits 337 185 24 546
Money Market Accounts (62) 76 (10) 4
Borrowed Funds 571 10 25 606
Total Interest Bearing
Liabilities 839 224 40 1,103
Change in Net Interest Income 429 115 (148) 316
Year Ended December 31, 1996 vs. 1995
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets:
Assets Available for Sale 926 78 21 1,025
Securities Held to Maturity (152) (36) 13 (175)
Federal Funds Sold (343) (25) 20 (348)
Loans, Net 548 135 (272) 411
Total Interest Earning Assets 979 152 (218) 913
Interest Bearing Liabilities:
Savings Deposits 0 (133) 3 (130)
Time Deposit 416 327 (178) 565
Money Market Accounts (37) (39) 2 (74)
Borrowed Funds 446 (6) (222) 218
Total Interest Bearing
Liabilities 825 149 (395) 579
Change in Net Interest Income 154 3 177 334
*Represents the change not solely attributable to change in rate or
change in volume but a combination of these two factors.
B. INVESTMENT PORTFOLIO
HELD TO MATURITY SECURITIES
The following table shows the book value of the Company's held to
maturity securities at the end of each of the last three years. (In
Thousands)
December 31
1997 1996 1995
U.S. Treasury Securities &
Other Government Agencies $25,814 $ 995 $ 0
Obligations of States & Political Subdivisions 6,985 3,792 4,120
TOTAL $32,799 $4,787 $4,120
The table below shows the relative maturities of investment and held to
maturity securities as of December 31, 1997.
Held to Maturity Securities
Maturity Distribution as of
December 31, 1997
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 yrs 10 Yrs
State and Municipal Bonds $ 297 $3,066 $1,865 $ 1,757
Average Weighted Yield 8.07% 9.22% 7.74% 7.69%
U.S. Government Agencies $ 0 $ 0 $1,384 $24,430
Average Weighted Yield 0% 0% 7.00% 7.26%
TOTAL $ 297 $3,066 $3,249 $26,187
Percent of Total Portfolio .9% 9.4% 9.9% 79.8%
NOTE: Average Weighted Yields on tax exempt obligations have been
computed on a tax equivalent basis
AVAILABLE FOR SALE SECURITIES
The following table shows the carrying value of the Company's Available
for Sale Securities and other investment securities at the end of each
of the last three years. (In Thousands)
December 31
1997 1996 1995
US Treasury Notes and Other
Government Agencies $60,105 $73,322 $71,799
Other Corporate Securities 541 1,513 0
Other Securities 2,619 1,946 659
TOTAL $63,265 $76,781 $72,458
The table below shows the relative maturities and carrying value of
available for sale debt securities as of December 31, 1997.
Securities Available for Sale
Maturity Distribution as of
December 31, 1997
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 Yrs 10 yrs
US Treasury Notes and Other
Government Agencies $ 502 $10,246 $48,806 $ 551
Average Weighted Yield 5.88% 6.29% 6.67% 7.06%
TOTAL $ 502 $10,246 $48,806 $ 551
Percent of Total Portfolio: .8% 17.0% 81.3% .9%
C. LOANS
The following table reflects the composition of the Company's
consolidated loan portfolio at the end of each of the last five years.
1997 1996 1995 1994 1993
(In Thousands)
Real Estate Loans
A. Construction & Land
Development $ 5,925 $ 4,073 $ 2,023 $ 2,168 $ 1,568
B. Secured by 1-4 Family
Residential Properties 33,528 30,457 27,402 25,528 26,129
C. Secured by Multi Family
(5 or more) Residential
Properties 0 0 2 4 7
D. Secured by Non-Farm,
Non-Residential
Properties 28,386 30,134 28,273 26,500 24,553
Commercial & Industrial Loans 18,566 16,582 13,778 12,975 12,834
Loans to Individuals for Household,
Family & Other Consumer
Expenditures 15,806 15,133 14,335 12,844 12,463
All Other Loans 4,852 4,664 7,430 4,189 3,439
Total Gross Loans $107,063 $101,043 $93,243 $84,208 $80,993
The above data is gathered from loan classifications established by the
Federal Reserve Call Report 033.
The percentages of loans by lending classification to total loans
outstanding at December 31 was as follows:
1997 1996 1995 1994 1993
Real Estate 63.4% 64.0% 61.9% 64.4% 64.5%
Commercial & Industrial - Including single
payment loans to individuals 17.3% 16.4% 14.8% 15.4% 15.9%
Consumer Loans 14.8% 15.0% 15.4% 15.3% 15.4%
All Other Loans 4.5% 4.6% 7.9% 4.9% 4.2%
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Maturities and Sensitivities of Loans
To Changes in Interest Rates
As of December 31, 1997
Due 1 Year or Less Due 1-5 Years Due 5 Years +
Real Estate $8,809 $6,828 $52,201
Commercial & Industrial 3,089 1,895 13,582
Consumer 1,616 5,829 8,361
Municipal 2,331 1,507 1,014
Total $15,845 $16,059 $75,158
Note:Real estate loans in the 1-5 category have $2,662,712 at a fixed
interest rate and $4,165,288 at a variable interest rate.
Commercial loans in the 1-5 year category have $67,688 at a fixed
interest rate and $1,827,312 at a variable interest rate.
Real estate loans in the 5+ category have $13,607,403 at a fixed
interest rate and $38,593,597 at a variable interest rate.
Commercial loans in the 5+ category have $1,448,041 at a fixed
interest rate and $12,133,959 at a variable rate.
Delinquent Loans
The following schedule is a summary of loans with principal and/or
interest payments over 30 days past due:
December 31,
1997 1996 1995 1994 1993
Amt % Amt % Amt % Amt % Amt %
Real Estate $3,003 2.8 $2,649 2.6 $ 867 0.9 $ 479 0.6 $1,659 2.0
Installment $ 128 .1 $ 197 0.2 $ 95 0.1 $ 95 0.1 $ 96 0.1
All Others $ 151 .1 $ 220 0.2 $ 35 0.0 $ 189 0.2 $ 102 0.2
TOTAL $3,282 3.0 $3,066 3.0 $ 997 1.0 $ 763 0.9 $1,857 2.3
It is the policy of the Company to discontinue the accrual of interest
on loans when, in the opinion of the management, the ultimate
collectibility of principal or interest becomes doubtful. The
principal amount of loans which have been placed on non-accrual status
were comprised primarily of certain installment loans. For each of
these loans, management has evaluated the collectibility of the
principal based on its best estimate of the realizable collateral value
of the loans and does not anticipate that any losses from liquidation
of these loans will have a material effect on future operations. There
were approximately $503,000, $491,000 and $614,000 as of December 31,
1997, 1996 and 1995, respectively, of loans on a non-accrual status.
LOAN CONCENTRATIONS
As of December 31, 1997 and 1996, the Company did not have any
concentration of loans in one particular industry that exceeded 10% of
its total loan portfolio.
The Bank grants residential, commercial and consumer loans to customers
principally located in Hancock and Washington Counties of the State of
Maine. Although the loan portfolio is diversified, a substantial
portion of its debtor's ability to honor their contracts is dependent
upon the economic conditions in the area, especially in the real estate
sector. There are currently no borrowers whose total indebtedness to
the Bank exceeds 10% of the Bank's shareholders' equity at December 31,
1997.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses for the past five years were
as follows:
(Dollars in thousands)
December 31,
1997 1996 1995 1994 1993
Balance at beginning of period: $ 2,084 $ 1,878 $ 1,929 $ 1,802 $ 2,325
Charge-offs:
Commercial & Industrial Loans 5 15 44 30 62
Real Estate Loans 123 0 48 256 837
Loans to Individuals 97 73 104 34 87
225 88 196 320 986
Recoveries:
Commercial & Industrial Loans 118 138 43 5 84
Real Estate Loans 67 12 1 390 47
Loans to Individuals 49 24 71 52 302
234 174 115 447 433
Net Charge-offs (recoveries) (9) (86) 81 (127) 553
Provision for loan losses 120 120 30 0 30
Balance at end of period $ 2,213 $ 2,084 $ 1,878 $ 1,929 $ 1,802
Average Loans Outstanding $102,321 $ 97,143 $ 88,725 $ 82,600 $ 83,104
Ratio of Net Charge-offs (Recoveries) to
average loans outstanding (.009%) (.09%) .09% (.15%) .67%
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31,
1997 1996 1995 1994 1993
Amt % of Amt % of Amt % of Amt % of Amt % of
Loan Loan Loan Loan Loan
Categories Categories Categories Categories Categories
To Total To Total To Total To Total To Total
Loans Loans Loans Loans Loans
Balance At End of Period:
Applicable To:
Real Estate $ 413 63.4% $ 418 64.0% $ 647 61.9% $ 665 64.4% $ 621 64.5%
Commercial &
Industrial 1,473 17.0% 1,312 16.4% 1,024 14.8% 1,051 15.4% 983 15.9%
Consumer 211 14.7% 194 15.0% 207 15.4% 213 15.3% 198 15.4%
Municipal 49 4.5% 60 4.5% 0 7.9% 0 4.9% 0 4.2%
Identified 67 .4% 100 .1% 0 0 0 0 0 0
TOTAL $2,213 100.0% $2,084 100.0% $1,878 100.0% $1,929 100.0% $1,802 100.0%
The allowance for loan losses is a general allowance established by
management to absorb possible loan losses as they may exist in the loan
portfolio. This allowance is increased by provisions charged to
operating expenses and by recoveries on loans previously charged-off.
Management determines the adequacy of the allowance from continuous
reviews of the quality of new and existing loans, from the results of
independent reviews of the loan portfolio by regulatory agency
examiners, evaluation of past and anticipated loan loss experience, the
character and size of the loan portfolio and anticipated economic
conditions.
As of December 31, 1997, the Company had impaired loans totaling
$21,728, which consisted of a real estate loan. The fair value of the
loan's collateral was used to evaluate the adequacy of the Allowance
for Loans Losses allocated to this loan.
A loan is considered impaired by management when it is probable that
the creditor will be unable to collect all amounts due under the
contractual terms of the loan, including principal and interest. Loans
on a non-accrual status that are deemed collectable are not classified
as impaired. Based upon management's periodic review of loans on non-
accrual status, impairment is based on a loan by loan analysis and not
set by a defined period of delinquency before a loan is considered
impaired.
Risk Elements
1997 1996 1995 1994 1993
Loans accounted for on a
non accrual basis $503 $491 $614 $151 $486
Accruing loans contractually
past due 90 days or more $209 $196 $388 $ 86 $237
In accordance with Industry Guide 3 Item III. C (2), the gross interest
income that would have been recorded in 1997 if non accrual and
restructured loans had been current in accordance with their original
terms and had been outstanding throughout the period or since
origination approximates $39,000. There was approximately $1,900
included in the gross interest income on non-accrual and restructured
loans for 1997.
D. DEPOSITS
The following schedule summarizes the time remaining to maturity of
Certificates of Deposit $100,000 or greater at December 31, 1997.
Amount
(In Thousands)
3 Months or Less $5,819
Over 3 Through 6 $4,195
Over 6 Through 12 Months $ 535
Over One Year $ 209
E. CAPITAL RATIOS
The following table presents, for the last three years, the Company's
average capital expressed as a percentage of average deposits, loans,
total assets, and earning assets.
*1997 *1996 *1995
Deposits 14.9% 14.4% 13.7%
Loans 24.6% 24.6% 25.1%
Total Assets 12.0% 12.1% 11.9%
Earning Assets 13.0% 13.3% 12.9%
*Excluding net unrealized gain (loss) on available for sale securities
of $437,749, ($171,460), and $567,810 at December 31, 1997, 1996 and
1995, respectively.
F. RETURN ON SHAREHOLDERS' EQUITY
The following table presents, for each of the last three years, the
Company's return on shareholders' equity, return on assets, and return
on average earning assets.
1997 1996 1995
Return on Average Shareholders' Equity 10.9% 10.6% 11.4%
Return on Average Assets 1.3% 1.2% 1.3%
Return on Average Earning Assets 1.4% 1.4% 1.4%
G. 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 resources 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, 1997, the Bank's ratio of rate sensitive assets to
rate sensitive liabilities at the one year horizon was 106%, its one
year GAP (measurement of interest sensitivity of interest earning
assets and interest bearing liabilities at a given point in time) was
3%, and $102,233,000 in assets and $98,338,000 in liabilities will be
repriceable 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 account current economic conditions, the current interest
rate environment, and other factors.
The following table presents, as of December 31, 1997, the Company's
interest rate GAP analysis:
Interest Rate GAP Analysis
As of December 31, 1997 (000's omitted)
0-3 4-12 1-5 Over
Months Months Years Years Total
Interest earning assets
Loans:
Real estate
Fixed rate $ 567 $ 1,982 $ 7,753 $ 6,110 $ 16,412
Variable rate 19,991 24,177 7,259 0 51,427
Commercial 10,614 4,465 3,487 0 18,566
Municipal 437 1,795 1,516 1,104 4,852
Consumer 11,692 751 3,363 0 15,806
Securities available
for sale 9,855 5,500 44,628 0 59,983
Held to maturity securities 1,247 3,771 15,904 11,878 32,800
Loans held for sale 3,138 0 0 0 3,138
Other earning assets 2,251 0 2,619 0 4,870
TOTAL $59,792 $42,441 $86,529 $19,092 $207,854
Interest bearing liabilities
Deposits:
Savings $ 3,117 $ 9,918 $15,902 $20,613 $49,550
NOW 0 0 36,186 0 36,186
Money market 2,280 6,840 5,888 0 15,008
Time 31,126 34,354 11,162 0 76,642
Borrowings 10,694 9 4,065 196 14,964
TOTAL $47,217 $51,121 $73,203 $20,809 $192,350
Rate sensitivity GAP $12,575 $(8,680) $13,32 6 $(1,717)
Rate sensitivity GAP as a
percentage of total assets 5.65% (3.90%) 5.99% .77%
Cumulative GAP $12,575 $ 3,895 $17,221 $15,504
Cumulative GAP as a
percentage of total assets 5.65% 1.75% 7.74% 6.97%
The distribution in the Interest Rate GAP Analysis is based on a
combination of maturities, call provisions, repricing frequencies,
prepayment patterns, historical data and management judgment. Variable
rate assets and liabilities are distributed based on the repricing
frequency of the investment. Management has estimated the rate
sensitivity of money market and savings deposits based on a historical
analysis of the Bank and industry data.
The status of the Bank's sources of cash to fund its operations are as
follows:
As of December 31, 1997 1996
Net cash provided from operations $ 3,106,220 $ 840,840
Net cash used by investing activities (19,134,989) (13,645,724)
Net cash provided from financing activities 16,327,780 8,740,804
Net (decrease) increase in cash and
cash equivalents $ 299,011 $ (4,064,080)
BANK'S PROPERTIES
ITEM 2: PROPERTIES
The Bank's principal office is located at 66 Main Street in Ellsworth,
Maine. The main office building consists of three floors, all of which
are utilized by the Bank for banking facilities and administrative
offices. The principal office includes a separate drive-up facility
and parking lot. In August 1981, plans were finalized for the
construction of an 8,000 square foot addition to our existing building.
Completed in November of 1982, it provided new and enlarged customer
service/teller area with street level access. During 1982 and 1983,
the existing building also received extensive renovation and
remodeling, tying it in to the new addition. The project was completed
in July of 1983. In April 1985, the Bank opened the first automated
drive-up in Downeast Maine. The automated teller machine is adjacent
to its drive-up facility located at 66 Main Street, in Ellsworth,
Maine. In 1988, the Main Office began construction of an addition to
its existing building that would house loan operations. In September
1989, construction was completed on the addition. In May 1992, the
Bank opened a trust office in Bangor (Penobscot County) to serve trust
customers in that city and surrounding areas. In May 1995, the Bank
elected not to renew its lease for its Bangor office. In addition, the
Bank owns the following properties:
(a) The Bank's Cherryfield office located on Church Street in
Cherryfield, Maine. A major renovation was undertaken at Cherryfield
in 1983, approximately doubling its size. These alterations were
completed in January of 1984.
(b) The Bank's Jonesport office located on Main Street in Jonesport,
Maine.
(c) The Bank's Blue Hill office located on Main Street in Blue Hill,
Maine. During 1989, the branch was renovated to include an office for
the Assistant Manager.
(d) The Bank's Stonington office located on Atlantic Avenue in
Stonington, Maine. The Stonington office was renovated and
expanded in 1980.
(e) The Bank's Milbridge office located on Main Street in Milbridge,
Maine. In 1987, management decided to replace the Milbridge Branch
with a larger up to date facility, located at the same site. The new
branch is now completed and has been open for business since April
1988.
(f) The Bank purchased in 1989 a parcel of land located on Route 3 in
Ellsworth with the possible intention of constructing a new branch.
This property is currently unoccupied and is available for sale.
All of the Bank's offices include drive-up facilities.
In addition to the above properties, which are owned by the Bank, the
Bank leases the following properties:
(a) The Bank leases its branch office at the
Ellsworth Shopping Center, High Street, Ellsworth, Maine,
from Ellsworth Shopping Center, Inc., a Maine Corporation
with principal offices in Ellsworth, Maine. The current
lease will expire in March of 1998.
(b) The Bank leases its Machias office which is located on Dublin
Street in Machias, Maine. The premises are owned by Hannaford Bros.,
Inc. of South Portland, Maine, and are leased to Gay's Super Markets,
Inc., under a lease dated July 26, 1975. The Bank subleased the
premises from Gay's Super Markets, Inc., under a sublease which
expires in April of 2001. The Bank has the right to extend the
sublease for three additional five year terms.
(c) The Bank leases its Somesville branch office which is located on
Route 102 in Somesville, Maine. The land and premises are owned by A.
C. Fernald Sons, Inc., Mount Desert, Maine. The current lease expires
on March 24, 2005, with an option to renew for an additional 20 years.
(d) The Bank leases its Castine branch office located on Main Street
from Michael Tonry, Castine, Maine. The current lease expires on
February 1, 1999 with the right to extend the lease for an additional
4 year term.
(e) The Bank leases its Bar Harbor branch office located on Cottage
Street from the Swan Agency, a Maine Corporation with a principal
office in Bar Harbor, Maine. The current lease will expire in April
of 2002.
All premises are considered to be in good condition and currently
adequate for the purposes for which they are utilized.
ITEM 3: LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
A. MARKET INFORMATION
Union Bankshares stock, $12.50 par value, is not listed on any national
exchange, nor is it actively traded. Since the Company is not aware of
all trades, the market price is established by determining what a
willing buyer will pay a willing seller. Based upon the trades that
the Company had knowledge of (per quotes from local brokerages), high
and low bids for each quarter for 1997 and 1996 are listed in the
following table. Prices have been adjusted to reflect a two for one
stock split distributed in August 1997.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1997 93.00 to 104.00 93.00 to 97.00 88.00 to 100.00 100.00 to 110.00
1996 75.00 to 80.00 80.00 to 93.00 88.00 to 93.00 88.00 to 104.00
B. HOLDER
As of March 1, 1998 there were approximately 679 stockholders of
record.
C. DIVIDENDS
1. History
The following table shows the cash dividends per share (adjusted for
the stock split) declared by Union Bankshares Company on its common
stock, $12.50 par value:
1997 1996
1st Quarter $ .41 $ .42
2nd Quarter $ .42 $ .42
3rd Quarter $ .50 $ .42
4th Quarter $ .50 $ .41
Cash dividends declared
per common share $1.83 $1.67
Item 6: SELECTED FINANCIAL DATA (in thousands, except for per share
amounts)
Years Ended December 31,
1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Operating Income $ 2,608 $ 2,207 $ 1,989 $ 2,080 $ 2,259
Operating Expense 8,016 7,723 7,459 7,420 7,034
Net Interest Income 9,452 9,137 8,803 8,490 7,667
Provision for Loan Losses 120 120 30 0 30
Net Income 2,700 2,452 2,418 2,354 2,065
PER COMMON SHARE DATA (1)
Net Income $ 5.59 $ 5.07 $ 5.00 $ 4.86 $ 4.41
Cash Dividends Declared 1.83 1.67 1.56 1.25 1.25
Book Value (3) 52.93 49.34 45.87 42.45 38.93
Market Value 110.00 104.00 75.00 71.00 68.00
FINANCIAL RATIOS
Return on Average
Equity (3) 10.9% 10.6% 11.4% 11.9% 11.8%
Return on Average Assets 1.3% 1.2% 1.3% 1.3% 1.2%
Return on Average Earning
Assets 1.4% 1.4% 1.4% 1.4% 1.3%
Net Interest Margin 4.88% 5.16% 5.37% 5.46% 4.79%
Dividend Payout Ratio (1) 32.8% 32.9% 31.3% 25.8% 28.4%
Allowance for Loan
Losses/Total Loans .02% .02% .02% .02% .02%
Non Performing Loans
to Total Loans .007% .007% .007% .003% .009%
Non Performing Assets
to Total Assets .005% .008% .010% .006% .009%
Efficiency Ratio 66.5% 67.2% 67.2% 69.1% 71.2%
Loan to Deposit Ratio 60.4% 60.7% 56.7% 52.5% 50.2%
BALANCE SHEET
Deposits $177,386 $166,445 $164,481 $160,249 $161,236
Loans 107,062 101,044 93,242 84,208 80,993
Securities (2) 96,065 81,568 76,578 83,391 73,821
Shareholder's Equity (3) 25,565 23,885 22,227 20,570 18,875
Total Assets 222,560 202,066 191,353 181,597 182,129
(1) Restated for effect of a 20% stock dividend effected in the form
of a stock split and a two for one stock split declared in 1997.
(2) Carrying value. Includes available for sale securities with cost
of $59,983, $75,095 and $70,938 at December 31, 1997, 1996 and
1995, respectively. Includes securities held for sale with cost of
$65,816 at December 31, 1993.
(3) Excluding net unrealized gain (loss) on available for sale
securities of $437,749, ($171,460), $567,810 and ($1,389,168) at
December 31, 1997, 1996, 1995 and 1994, respectively.
The above summary should be read in conjunction with the related
consolidated financial statements and notes thereto for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993, and with Management's
discussion and analysis of financial conditions.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1997 annual Report is incorporated herein
by reference.
ITEM 7A: QUANTATIVE AND QUALATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. The
Company's primary market risk exposure is interest rate risk. The
ongoing monitoring and management of this risk is an important
component of the Company's asset/liability management process which is
governed by policies established by its Board of Directors that are
reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies
to the Asset/Liability Committee (ALCO). In this capacity ALCO
develops guidelines and strategies impacting the Company's
asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate
levels/trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change the interest income
and expense streams associated with the Company's financial instruments
also change thereby impacting net interest income (NII), the primary
component of the Company's earnings. ALCO utilizes the results of a
detailed and dynamic simulation model to quantify the estimated
exposure of NII to sustained interest rate changes. While ALCO
routinely monitors simulated NII sensitivity over a rolling two year
horizon, it also utilizes additional tools to monitor potential longer
term interest rate risk.
The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets
and liabilities reflected on the Company's balance sheet. This
sensitivity analysis is compared to ALCO policy limits which specify a
maximum tolerance level for NII exposure over a one year horizon,
assuming no balance sheet growth, given both a 200 point basis point
(bp) upward and downward shift in interest rates. A parallel and pro
rata shift in rates over a 12 month period is assumed. The following
reflects the Company's NII sensitivity analysis as of December 31,
1997.
Estimated
Rate Change NII Sensitivity
+200 bp +2.0%
- 200 bp -3.0%
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected
operating results. These hypothetical estimates are based upon
numerous assumptions including: the nature and timing of interest rate
levels including yield curve shape, prepayments on loans and
securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of asset and liability cashflows,
and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including
how customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to:
prepayment/refinancing levels likely deviating from those assumed, the
potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product
preference changes, and other internal/external variables.
Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest
rates.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) The financial statements required are contained in the Company's
1997 Annual Report and are incorporated herein by reference.
(See item 14 (a) )
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Previously reported in 8K filing in 1995.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item (and Items 11, 12, and 13
below) is incorporated by reference from the registrant's definitive
Proxy Statement dated March 27, 1998 for its regular annual meeting of
shareholders to be held April 16, 1998, where it appears under the
headings "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF AND ELECTION
OF DIRECTORS."
ITEM 11: EXECUTIVE COMPENSATION
See Item 10.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 10.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
(1) The financial statements listed below are filed as part of this
report; such financial statements (including report thereon and
notes thereto) are included in the registrant's Annual Report to
shareholders for its fiscal year ended December 31, 1997 (a
copy of which is being filed as Exhibit 13 hereto), and are
incorporated herein by reference.
Consolidated Balance Sheets
December 31, 1997 and 1996 21
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995 22
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1997, 1996 and 1995 23
Consolidated Statements of Cash Flow
For the years ended December 31, 1997, 1996 and 1995 24-25
Notes to Consolidated Financial Statements 27
Independent Auditors Opinion 43
(2) Financial statement schedules are omitted as they are not
required or included in the Annual Report to shareholders.
(3) Exhibits required by Item 601 - see Item 14(c)
(b) Reports on Form 8-K
During the registrant's fiscal quarter ended December 31, 1997,
the registrant was not required to and did not file any reports
on Form 8-K.
(c) Exhibits
* 3 Articles of Incorporation and By-laws of
Union Bankshares Company
* 10.1 Employee Benefit Plan for the employees
of Union Trust Company
Pension Plan for the employees of Union
Trust Company
401 (k) Profit Sharing Plan for the
employees of Union Trust Company
Stock Purchase Plan for the employees of
Union Trust Company
11 Computation of earnings per share, is
incorporated herein by reference to
Note 1 to the Consolidated Financial
Statements on page 21 of the 1997
Annual Report to Shareholders'
attached hereto as Exhibit 13.
12 Statement for computation of ratios is
incorporated herein by reference to
"Part II, Item 6 - Selected Financial
Data."
13 The registrant's Annual Report to
Shareholders' for its fiscal year
ended December 31, 1997. This exhibit,
except for those portions thereof
expressly incorporated by reference
into the Form 10 K annual report, is
furnished for the information of the
Commission only and is not to be
"filed" as part of the report.
*21 Subsidiary information is incorporated
herein by reference to "Part I, Item 1 -
Business".
27 Financial Data Schedule
99.1 Report of Berry, Dunn, McNeil & Parker.
99.2 Report of Baker, Newman and Noyes
*Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed on June 15, 1984,
Registration No. 2-90679.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY
By: ___________________________ By:____________________________
Peter A. Blyberg, President Sally J. Hutchins
and Chief Executive Officer Vice President, Treasurer
and Controller
March 25, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
Arthur J. Billings, Director
Peter A. Blyberg, Director
Robert S. Boit, Director
Richard C. Carver, Director
Peter A. Clapp, Director
Sandra H. Collier, Director
Robert B. Fernald, Director
Douglas A. Gott, Director
David E. Honey, Director
Thomas R. Perkins, Director
Casper G. Sargent, Director
John V. Sawyer, II, Director
Stephen C. Shea, Director
Richard W. Teele, Director
Paul L. Tracy, Director
Richard W. Whitney, Director
UNION BANKSHARES COMPANY
1997 ANNUAL REPORT
We dedicate this Report to and Delmont N. Merrill and the late Emery B.
Dunbar. These two gentlemen served on our Board of Directors for many years. As
directors, they cared about the bank, its employees, and its shareholders.
The role of a director is a difficult one and they both did an excellent
job of representing the interest of the shareholders and were wonderful
advisors to management.
February 11, 1998
Dear Shareholder:
The past year has seen an improvement in our earnings. Net income
was $2,700,472, an increase of 10.1 percent over 1996. We had strong
growth in both net interest income as well as fee revenues. Expenses
remain under control, and despite opening a new branch in Bar Harbor, non-
interest expenses came in only 3.8 percent higher than the previous year.
Balance sheet growth was driven by a 6 percent increase in the loan
portfolio as well as higher levels of investment securities. Deposits
grew by $10.9 million or 6.6 percent.
Our focus over the last few years on sales and revenue generation is
showing results. We have seen a strong business development effort in
all of our markets. Customer visits by our relationship managers in 1997
were up more than 30 percent over 1996. Strong growth in loan and
deposit volumes as well as trust assets under management are a testament
to the efforts of our staff in meeting with and responding to the needs
of our customers and prospects. These efforts will continue going
forward. The addition of Catherine Planchart, as director of marketing,
brings much needed focus to our marketing efforts.
As part of our efforts to make the Bank more accessible to our
customers, we not only opened a new branch in Bar Harbor but also
introduced BankLine PC, our computer based banking service. We now have
as full a range of banking options as any bank anywhere. You can now
access your Bank around the corner or around the world, from your local
branch to the Internet. We will continue developing services that help
our customers manage their financial lives, at the same time seeking to
retain the qualities that make a community bank successful. We will
continue to provide friendly, personal service. We will work to
understand every customer as an individual. We will continue to help
build our communities.
During 1997, we expanded our trust assets under management by over
$10 million. This reflects the commitment on the part of the Bank and
our professional staff members to this business. As part of this growth,
we are pleased to have added Joseph Connors to our team of trust
administrators. Joe is a graduate of the Maine Maritime Academy and has
family on Deer Isle. We are proud to put his skills and ties to the
area to work for our customers.
We're also pleased to welcome the following, who joined our staff in
1997:
Glen Carter Financial Analysis Clerk
Andrew Crosthwaite Teller
Johna Driscoll Bookkeeping
Shelly Gray Teller
Jill Havey Teller
Beth Jewell Teller
Debra Kalloch Teller
Tyra Letendre Administrative Assistant
Susan Saunders Project Management Officer
Stephanie Wilson Teller
In August, Delmont Merrill retired as Director. We thank him for
his service and miss his wise counsel. Emery Dunbar, a Director from
1973 to 1981, passed away in 1997. This Annual Report is respectfully
dedicated to Del and Emery. Your Directors are a dedicated, caring group
of individuals and these two individuals represented your interests
extremely well.
We thank you, our shareholders, directors, officers and employees
for your support.
Sincerely, Sincerely,
John V. Sawyer, II Peter A. Blyberg
Chairman of the Board President and Chief Executive Officer
Does Community Banking have a Future? Absolutely! In a world where size
and global reach have become buzzwords in corporate America, the need for
community banks just keeps on growing. Why?
We know our customers. One of the primary guidelines by which banks
should operate is "Know Thy Customer." As a community bank, we live and
die by this dictum. We know each and every one of our customers as
individuals. We believe that if we know our customers, then we can help
them achieve their financial goals. At Union Trust, you're not just an
account number, and you won't get a recording when you call. We serve
our customers one at a time, person to person. We've managed that way
for generations. You, your family, and your business will always be
vitally important to us.
We care. Some people wonder why the Bank and its employees put so much
time and effort into our communities. It's because the health of our
Bank depends upon the financial well being of our citizens, businesses,
and communities. Our corporate headquarters is here, not in some other
state. We live and work close to the people we serve; as they prosper,
we prosper. We support and encourage the volunteer efforts of our
employees. We contribute to numerous organizations that make our
communities better places to live and work. The money we receive from
our customers goes back to our communities. It does not leave the area.
Our shareholders, by and large, live and work in Maine, and they care
about the same towns and villages our customers and employees call home.
All of the people who have a stake in our Bank have a stake in our
community.
We're here. As a community bank serving downeast Maine, we are committed
to understanding and meeting the financial needs of the consumers,
businesses, and municipalities of Hancock and Washington County. That's
all we do. We are focused on helping our region grow and prosper. We
have no interest in becoming part of a larger institution that would not
serve this area well. We think there is a great future in being an
independent community bank; we have been doing it since 1887. Our
interest is in serving our customers when and where they want and with
the services they need to manage their lives better.
Does Union Trust have the resources to succeed? Definitely.
Capital. With over $26 million in capital and reserves, we are among the
strongest banks in the State of Maine. While our strong capital position
may help depositors sleep better at night, it provides other benefits as
well. With the rapidly increasing pace of change, the ability to
reinvest will be one of the keys to the future for community banks. Each
year, we reinvest a portion of our earnings in new technology and
education for our employees. Such investments ensure that we keep up
with change in the marketplace and the evolving needs of our customers.
When opportunities arise, and they fit with our strategic plan, we are
prepared to make investments to strengthen our market position or broaden
our product offerings. Our strong capital position gives us the
flexibility to act quickly when the time is right.
People. Your bank has an extremely loyal, hardworking group of
employees. Average tenure on our staff is about ten years - an unusually
high figure in banking - but time in grade does not necessarily guarantee
success. More important is the extent to which employees are willing to
learn, to grow and to change. The employees of Union Trust devote a
significant amount of time to learning new skills and new ways of doing
their jobs. In many cases, they perform jobs that didn't even exist a
few years ago. Their skills are sharper, their ability to deal with
change is stronger and their dedication to their customers is unwavering.
Technology. The evolution of technology in banking is truly a double-
edged sword. On the one hand, banking technology is changing so fast
that you have to run faster and faster just to keep up; on the other, the
cost of particular technologies is rapidly declining. We are dealing
with this situation in several ways. First, in order to sort through all
available options, we have developed a technology plan. During the past
two years, this has allowed us to set priorities, schedule new products
and control the direction and pace of our own technological change. We
review the plan each year and make necessary adjustments. We see no need
to be first with the latest fad. We want to do the right thing, at the
right time, for the right price. We dedicate substantial dollars to
technological improvements, and we want to ensure that they are well
spent. Second, we are taking advantage of the falling cost of technology
to offer products and services that just a few years ago were the
exclusive province of big banks. We feel we should be able to compete
with anyone in the range of services we offer. Third, we are dealing
with the Year 2000 computer issue. Last year, we began a systematic
effort to address any and all related challenges that might affect your
Bank. Our goal is to guarantee a smooth transition into the next
millenium.
Union Trust, its customers, and shareholders have much to look forward to
in the next century. Together, we are a growing community.
Five Year Summary (000's Omitted)
1997 1996 1995 1994 1993
Deposits $177,386 $166,445 $164,481 $160,249 $161,236
Loans 107,062 101,044 93,242 84,208 80,993
Securities *96,065 *81,568 *76,578 *83,391 *73,821
Shareholders' Equity **25,565 **23,885 **22,227 **20,570 18,875
Total Assets 222,560 202,066 191,353 181,597 182,129
Net Earnings 2,700 2,452 2,418 2,354 2,134
Earnings Per Share (1) 5.59 5.07 5.00 4.86 4.41
Equity Ratios
Equity expressed as a percentage of average:
**1997 **1996 **1995 **1994 1993
Deposits 14.9% 14.4% 13.7% 12.8% 11.8%
Loans 24.6% 24.6% 25.1% 24.9% 22.7%
Total Assets 12.0% 12.1% 11.9% 11.3% 10.5%
Earning Assets 13.0% 13.3% 12.9% 12.8% 11.2%
Other Financial Highlights
1997 1996 1995 1994 1993
**Return on Average
Shareholders' Equity 10.9% 10.6% 11.4% 11.9% 11.8%
Return on Average Assets 1.3% 1.2% 1.3% 1.3% 1.2%
Return on Average
Earning Assets 1.4% 1.4% 1.4% 1.4% 1.3%
*Carrying value. Includes available for sale securities with cost of
$59,983, $75,095 and $70,938 at December 31, 1997, 1996 and 1995,
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 $437,749, ($171,460), $567,810 and ($1,389,168) at December 31, 1997,
1996, 1995 and 1994, respectively.
(1) Restated for effect of a 20% stock dividend effected in the form of
a stock split and a two for one stock split declared in 1997.
Insert the following 5 year bar charts:
Earnings Per Share
Book Value Per Share
Dividends Per Share
Total Assets (in Thousands)
Net Income (in Thousands)
Shareholders' Equity (in Thousands)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
December 31, 1997
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 that is
locally owned and operated. Through its eleven offices, Union Trust
serves the financial needs of individuals, businesses, municipalities and
organizations in Hancock and Washington Counties. Union Trust offers a
full range of consumer, commercial, trust and investment services. Now
in its 110th year, Union Trust is committed to providing outstanding
personalized service and maintaining and expanding its position as one of
Maine's preeminent community banks.
Union Trust Company supports the people and communities it serves by
contributing to programs that address human needs within the community.
It also supports the volunteerism of the Bank's employees, directors and
retirees. Reinvesting local money locally builds strong communities.
Through these programs, Union Trust is able to give back to the community
it serves.
On a continual basis, the Bank introduces new services and makes
improvements to current offerings that will add value to customer
relationships. Some of the service additions and improvements made
during 1997 include:
Implemented new procedures to handle Federal government electronic
payment requirements, both making and receiving payments.
Opened a new branch in Bar Harbor with Saturday hours during the
summer.
Introduced BankLinerPC, 24-hour computer banking.
Conducted four seminars and two adult education classes and held
eight Business Round Table luncheons for area professionals to discuss
business issues.
Union Trust's deposit services include: regular and basic checking
accounts, small business checking, NOW accounts, money market accounts,
Unlimited Club membership, savings accounts, Christmas Club, certificates
of deposit, IRAs and Simplified Employee Pension (SEP) Plans. The Bank
also provides the following loan products: personal loans, commercial
loans, municipal loans, real estate loans, home equity loans, VISA and
MasterCard credit cards, student loans, reserve checking and overdraft
protection and lines of credit. The following cash management services
are also available at Union Trust: coin and currency exchange, merchant
card services, cash concentration, direct debit, electronic Federal tax
payment services (EFTPS), direct deposit payroll services, ACH and wire
transfers. Union Trust also provides many convenient banking services:
ATM and Convenience Check Cards, BankLiner telephone banking and
BankLinerPC computer banking, night deposit and safe deposit boxes.
Trust and Investment Services provides three distinct services: (1)
custody and investment management, (2) retirement accounts and planning
and (3) trust services, including estate planning. Investment services
include investment management and advisory services, MutualPARTNERS (an
asset allocation account using mutual funds), custodial services and
safekeeping. The following retirement savings vehicles are available:
IRAs, Simplified Employee Pension (SEP) plans, SIMPLE IRAs, profit
sharing and 401(k) plans and money purchase pension plans. Trust
services include trust administration, personal representative and
fiduciary services and estate planning.
Union Trusts' services are offered through our eleven convenient
locations and Customer Service Call Center. Customers can also access
their accounts 24 hours a day through our network of eleven ATMs,
BankLiner telephone banking and BankLiner PC computer banking.
REVIEW OF FINANCIAL STATEMENTS
The discussion and analysis that follows focuses on the factors
affecting Union Bankshares Company's (the "Company") financial condition
at December 31, 1997 and 1996 and the financial results of operations
during 1997, 1996 and 1995. The consolidated financial statements and
related notes beginning on page 21of this report should be read in
conjunction with this review.
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; non interest
income, including gains and losses on the sales of loans and securities;
non interest expenses; and income tax expense. Each of these major
components of the Bank's operating results is highlighted below.
NET INCOME
The Company reported net income in 1997 of $2,700,472, an increase
of $248,500 or 10.1% over 1996, as compared to an increase of $33,915 or
1.4% and $64,094 or 2.7% for 1996 and 1995, respectively.
The following table summarizes the status of the Bank's earnings and
performance for the periods stated.
December 31, 1997 1996 1995
Earnings per share $ 5.59 $ 5.07 $ 5.00
Return on average shareholder's equity 10.9% 10.6% 11.4%
Return on average assets 1.3% 1.2% 1.3%
Return on average earning assets 1.4% 1.4% 1.4%
The improved results were attributable to moderate increases in net
interest income, which amounted to $9,452,159, $9,137,524, and $8,803,241
for the years ended 1997, 1996, and 1995, respectively.
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 paramount in ensuring the Bank's continued profitability.
Changes in net interest income are the results of interest rate
movements, changes in the balance sheet mix of earning assets and
interest bearing liabilities, and changes in the level of non earning
assets and liabilities.
The following table sets forth the information related to changes in
net interest income. For purposes of the table and the following
discussion, information is presented regarding (1) the total dollar
amount of interest income of the Company from interest earning assets and
the resulting average yields; (2) the total dollar amount of interest
expense on interest bearing liabilities and the resulting average cost;
(3) net interest income; (4) interest rate spread; and (5) net interest
margin. Information is based on average daily balance during the
indicated periods. For the purposes of the table and the following
discussion, (1) income from interest earning assets and net interest
income are presented on a tax equivalent basis and (2) non accrual loans
have been included in the appropriate average balance loan category, but
unpaid interest on non accrual loans has not been included for purposes
of determining interest income.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(In Thousands)
(On a Tax Equivalent Basis)
1997 1996 1995
Average Int Yield/ Average Int Yield/ Average Int Yield/
Balance Earned/ Rate Balance Earned/ Rate Balance Earned/ Rate
Paid Paid Paid
Assets
Interest Earning Assets:
Securities Available
for Sale $ 72,741 $ 5,182 7.12 $ 80,333 $ 5,256 6.54 $ 65,896 $ 4,231 6.42
Securities Held to
Maturity 22,689 1,437 6.33 3,772 369 9.78 5,926 635 10.70
Federal Funds
Sold 598 41 6.86 1,411 76 5.39 7,409 424 5.72
Loans (Net) 100,208 9,660 9.64 94,139 9,192 9.76 88,588 8,781 9.91
Total Interest Earning
Assets 196,236 $16,320 8.32 179,655 $14,893 8.28 167,819 $14,071 8.38
Other Non Earning
Assets 18,878 14,926 14,685
$215,114 $194,581 $182,504
Liabilities
Interest Bearing Liabilities:
Savings
Deposits $ 65,432 $ 1,119 1.71 $ 65,770 $ 1,172 1.78 $ 65,690 $ 1,302 1.98
Time Deposit 73,419 4,298 5.85 67,294 3,752 5.57 59,544 3,187 5.35
Money Market
Accounts 12,271 482 3.93 14,107 478 3.39 15,142 552 3.65
Borrowings 14,007 835 5.96 4,012 229 5.71 96 11 11.40
Total Interest Bearing
Liabilities 165,129 $ 6,734 4.08 151,183 $ 5,631 3.67 140,472 $ 5,052 3.59
Other Non Interest Bearing
Liabilities & Shareholders'
Equity 49,985 43,398 42,032
$215,114 $194,581 $182,504
Net Interest Income $9,586 $9,262 $9,019
Net Interest Rate Spread 4.24 4.61 4.79
Net Interest Margin 4.88 5.16 5.37
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest earning assets and interest
bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old
volume), (2) changes in volume (change in volume multiplied by old rate),
and (3) changes in rate/volume (change in rate multiplied by change in
volume).
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
For the years ended December 31, 1997, 1996 and 1995
(In Thousands)
Year Ended December 31, 1997 vs. 1996
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets:
Assets Available for Sale $(499) $463 $ (38) $ (74)
Securities Held to Maturity 1,223 (27) (136) 1,060
Federal Funds Sold (44) 21 (12) (35)
Loans, Net 588 (118) (2) 468
Total Interest Earning Assets 1,268 339 (188) 1,419
Interest Bearing Liabilities:
Savings Deposits (7) (47) 1 (53)
Time Deposits 337 185 24 546
Money Market Accounts (62) 76 (10) 4
Borrowed Funds 571 10 25 606
Total Interest Bearing
Liabilities 839 224 40 1,103
Net Change in Net Interest
Income $429 $115 $(148) $ 316
Year Ended December 31, 1996 vs. 1995
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets:
Assets Available for Sale $926 $78 $21 $1,025
Securities Held to Maturity (152) (36) 13 (175)
Federal Funds Sold (343) (25) 20 (348)
Loans, Net 548 135 (272) 411
Total Interest Earning Assets 979 152 (218) 913
Interest Bearing Liabilities:
Savings Deposits 0 (133) 3 (130)
Time Deposit 416 327 (178) 565
Money Market Accounts (37) (39) 2 (74)
Borrowed Funds 446 (6) (222) 218
Total Interest Bearing
Liabilities 825 149 (395) 579
Net Change in Net Interest
Income $154 $ 3 $ 177 $334
*Represents the change not solely attributable to change in rate or
change in volume but a combination of these two factors.
Net interest income increased by $314,905 or 3.4% during 1997. This
increase was primarily attributable to increases in the volume of
interest earning assets, in particular loans and investments, offset by
an increase in volume of interest paying liabilities, in particular
certificates of deposit. During 1996, net interest income increased by
$334,013 or 3.8% compared to 1995. This increase was attributed to
higher loan and investment volumes, offset by a higher cost of funds
(interest on deposits and borrowings). In 1995, net interest income
increased $312,848 or 3.7% due mainly to higher loan volumes offset by
interest expense on certificate of deposits. The weighted average yield
on a tax equivalent basis on all categories of interest earning assets
was 8.32% for 1997, up slightly over 1996 of 8.28%. In 1995, the
weighted average yield was 8.38%. The Company's net interest margin was
4.88%, 5.16% and 5.37% for 1997, 1996, and 1995, respectively and the net
interest income spread was 4.24% in 1997, 4.61% in 1996, and 4.79% in
1995.
Interest and dividend income increased $1,417,984 or 9.60% during
1997, primarily due to increased interest on loans and investments. Loan
increases, particularly in real estate and commercial categories, were
primarily the result of the business development program conducted by the
Bank's relationship managers, attractive interest rates, and a stable
local economy. Investment increases were primarily due to increased
volumes, in particular to the securities held to maturity category, with
a strategy to grow the portfolio, improve cash flow and offset lagging
loan growth to improve net interest income. Interest and dividend income
increased $913,020 or 6.6% in 1996 and $1,178,323 or 9.3% in 1995. The
primary reason for the decline from 1995 to 1996 was the fact that
previously higher yielding investments repriced at lower rates.
The amount of non accrual loans can also affect the average yield
earned on all outstanding loans. Non accrual loans for 1997, 1996 and
1995 were insignificant, and therefore did not have a material effect on
the average loan yield.
Interest expense on deposits and borrowings increased $1,103,349 or
19.6% in 1997 compared to 1996. This increase is attributable to both
increases in borrowings and deposits and the interest rates paid on those
borrowings and certificates of deposit. This type of growth results in a
squeeze of the net interest margin that must be offset by higher interest
earning assets, increased yields, and control of operating expenses.
Interest expense on deposits and borrowings in 1996 increased $578,737 or
11.5% over 1995. This increase was primarily driven by the expense of
short term borrowings, rather than high funding costs.
PROVISION FOR LOAN LOSSES
The Provision for Loan Losses was $120,000 in 1997. This level was
set reflecting increased loan volume and the Bank's desire to maintain
the Allowance for Loan Losses at 2.0% of gross loans. There was a
$120,000 provision in 1996 and a $30,000 provision in 1995.
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 non performing or under close monitoring by management for potential
problems. Other factors included in the evaluation of the adequacy of the
Allowance for Loan Losses involve the character and mix of the loan
portfolio, current trends in non performing loans, delinquent loans and
net charge-offs, new loan originations and other asset quality
considerations.
Management believes that the Allowance for Loan Losses and the
carrying value of real estate owned are adequate. While management uses
available information to recognize losses on loans and real estate owned,
future additions to the allowances might be necessary based on changes in
economic conditions, particularly in northern New England. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Company's Allowance for Loan Losses.
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,
1997 1996
Non accrual loans $ 503 $ 491
Loans past due 90 days and accruing 209 196
Other real estate owned (including insubstance foreclosure) 376 842
Total non-performing assets 1,088 1,529
Ratio of total non-performing loans to capital and the
Allowance for Loan Losses (Texas ratio) .025 .026
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
non-performing assets) 2.034 1.361
Ratio of non-performing assets to total assets .005 .008
Ratio of non-performing loans to total loans .007 .007
NON INTEREST INCOME
Total non interest income was $2,608,206, $2,207,131, and $1,989,285
for the years ended December 31, 1997, 1996, and 1995, respectively. The
$401,075 or 18.2% increase in non interest income during 1997 was
primarily attributable to a $106,463 or 21.8% increase in Trust
department income, a $116,036 or 23.4% increase in Visa income, and a
$185,051 or 35.4% increase in other income, primarily due to the Mortgage
Servicing Rights, which increased other income by $127,062. The $217,846
or 10.9% increase during 1996 was primarily due to increases in virtually
all non interest income categories. The $90,838 or 4.4% decrease during
1995 was primarily attributable to a decrease in mortgage fee income and
security gains.
The following table summarizes information relating to the Company's
non interest income:
Year Ended December 31,
1997 1996 1995
Net Security Gains (Losses) $ (1,463) $ 2,718 $ 3,103
Trust Department Income 594,961 488,498 443,661
Service Income 343,272 337,625 310,381
Visa Income 611,239 495,203 431,338
Loan Department Income 352,534 360,475 323,657
Other Non Interest Income 707,663 522,612 477,145
Total Non Interest Income $2,608,206 $2,207,131 $1,989,285
NON INTEREST EXPENSE
Total non interest expenses, which consist primarily of employee
compensation and benefits, occupancy and equipment expenses and other
general operating expenses, increased $293,210 or 3.8% during 1997,
$263,477 or 3.5% during 1996 and $39,389 or .53% during 1995. The
increase in non interest expenses in 1997 was attributable to net
occupancy and equipment expenses related to the opening of our newest
branch in Bar Harbor, cash transactions between the Bank and the Company
and bank card expenses incurred due to business development efforts in
1997. In 1996, the increase centered primarily in employee benefits,
depreciation expense and consulting fees. In 1995, change was basically
flat due to the decline in FDIC insurance premiums offset by increases in
general operating expenses.
Salaries and wages and employee benefits, one of the largest
components of non interest expenses, remained relatively flat during
1997, 1996, and 1995 due to the strategic plan to grow the Bank with the
current resources available.
INCOME TAXES
The Company recognized $1,224,000, $1,050,000 and $885,000 in income
tax expense for the years ended December 31, 1997, 1996, and 1995,
respectively. The effective tax rate was 31.2% for 1997, 30.0% for 1996,
and 28.0% for 1995. The Bank has sufficient refundable taxes paid in
available carry back years to fully realize its recorded deferred tax
asset of $1,297,759 at December 31, 1997.
FINANCIAL CONDITION
Set forth below is a discussion of the material changes in the
Company's financial condition for the periods indicated.
BALANCE SHEET REVIEW
Total assets increased $20,493,574 or 10.1% in 1997, primarily due
to increased loan volume and growth in the securities portfolio compared
to an increase of $10,713,091 or 5.6% in 1996.
Securities available for sale, which include US Government
securities, callable agency bonds and other securities, decreased
$14,188,569 or 19.0% in 1997. In particular during 1997, the Bank
elected to reduce the callable agencies portfolio and reinvest in longer
term agencies and mortgage backed securities to better control risk of
possible calls, and spread interest rate risk exposure within the total
portfolio. The overall decrease in securities available for sale is
consistent with the Company's investment strategy for 1997. As of
December 31, 1997, the Bank has a net unrealized gain of $663,257 in this
portfolio.
Securities held to maturity, which include municipals and mortgage
backed securities increased $28,012,886 compared to an increase of
$667,254 in 1996. This increase was primarily in mortgage backed
securities, which extended maturities, improved cash flows, and helped
improve an overall portfolio yield to just under 7.00%.
The changes in the security portfolio reflect the Company's efforts
to meet asset and liability objectives, and otherwise manage its
liquidity and funding needs within the parameters of the Company's
policies. For further discussion, see the Risk Management section.
LOANS
Total loans reached a record high of $109,112,000 during 1997 and as
of December 31, 1997 had increased $6,018,203 or 6.0% over 1996 primarily
due to a $3,175,373 or 4.9% increase in real estate loans and a
$1,982,782 or 12.0% increase in commercial loans.
There has been no material change in the Bank's loan mix, and as of
December 31, 1997 the loan portfolio remains diversified with a total of
64% secured by real estate of which consumer loans were 34% and
commercial real estate were 30%. Loans to individuals for household,
family and other personal expenditures were 9%, home equities were 5%,
commercial loans accounted for 17% and 5% was invested in municipal
loans.
As of December 31, 1997, the loan mix and growth trends are
illustrated in the graphs below:
LOAN GROWTH TRENDS BAR CHART
LOAN MIX PIE CHART
Deposits
During 1997, deposits peaked at a record level of $177,920,000 and
increased $10,940,398 or 6.6% (well above the state's average) by
December 31, 1997 compared to a $1,964,000 or 1.2% increase over the same
period in 1996.
Growth was primarily in certificates of deposit due directly to
special promotions and competitive rates.
In the Banks market area, the banking business is somewhat seasonal
due to an influx of tourists and seasonal residents returning to the area
each spring and summer. As a result, the Bank has 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 material adverse effect
on the bank.
As of December 31, 1997 the deposit mix and growth trends are
illustrated in the graphs below:
DEPOSIT GROWTH TRENDS BAR CHART
DEPOSIT MIX PIE CHART
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
The Federal Reserve Board's capital requirement generally calls for
an 8% total capital ratio, of which 4% must be comprised of Tier I
capital. Risk based capital ratios are calculated by weighing assets and
off balance sheet instruments according to the relative credit risk. As
of December 31, 1997, the Company's Tier I ratio of 18.5% far exceeds the
Federal Reserve Board's guidelines.
Total shareholders' equity increased $2,289,382 in 1997, primarily
as a result of net income of $2,700,472, offset by dividends paid of
$885,940 and a $609,209 change in the category of unrealized gains
(losses) on securities available for sale net of applicable income taxes.
During 1997, the Company declared a 20 percent stock dividend and a
2 for 1 stock split. Dividends of $885,940 were declared on the
Company's common stock and represented a 9.7% increase over 1996. The
dividend payouts for 1997, 1996, and 1995 were 32.8%, 32.9%, and 31.3% of
net income, respectively. In 1995, the Company declared a 33 1/3 percent
stock dividend.
Union Bankshares Company stock, $12.50 par value, is not listed on
any national exchange, nor is it actively traded. Since the Company is
not aware of all trades, the market price is established by determining
what a willing buyer will pay a willing seller. Based upon the trades
that the Company had knowledge of (per quotes from local brokerages),
high and low bids for each quarter for 1997 and 1996 are listed in the
following table. Prices have been adjusted to reflect a 20 percent stock
dividend and a two for one stock split distributed in August 1997.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1997 93.00 to 104.00 93.00 to 97.00 88.00 to 100.00 100.00 to 110.00
1996 75.00 to 80.00 80.00 to 93.00 88.00 to 93.00 88.00 to 104.00
As of December 31, 1997, there were 679 holders of record of Union
Bankshares Company common stock.
Quarterly dividends per share (adjusted for a 20 percent stock
dividend and a two for one stock split) paid by the Company in 1997 and
1996 were as follows:
1997 1996
1st Quarter $ .41 $ .42
2nd Quarter $ .42 $ .42
3rd Quarter $ .50 $ .42
4th Quarter $ .50 $ .41
Total $1.83 $1.67
RISK MANAGEMENT
The Company's continued success is primarily dependent upon its
ability to strategically manage financial and nonfinancial risks.
Nonfinancial risks facing the Company include:
Competition from banks and nonbank financial service companies
Changing regulatory and political environments
Rapid change in technology
Demographic changes
Economic changes
Financial risks managed by the Company include:
Credit risk
Interest rate risk (including asset/liability management)
Liquidity risk
Off balance sheet risks/commitments
CREDIT RISK MANAGEMENT
The Company's net loan portfolio as of December 31, 1997 accounted
for 47.1% of total assets and represents its primary source of credit
risk. Substantial amounts of time and resources have been dedicated to
the management of credit risk within the Bank's loan portfolio. Future
emphasis will be applied toward enhancing the already proven systems of
checks and balances to manage the origination, processing and collection
of loans. Additional information relating to credit risk may be found on
page 15, "Provision for Loans Losses" and Note 16 to the consolidated
financial statements.
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
Interest rate risk can be defined as the exposure of the Company's
net income or financial position to adverse movements in interest rates.
Changes in the level of interest rates also can affect:
The amount of loans originated/sold by an institution
The ability of the borrower to repay his/her loan
The average maturity of mortgage loans
Value of the Company's interest earning assets
Market value of available for sale securities
The Company, through management of the relationship of interest rate
sensitive assets to interest rate sensitive liabilities, reduces the
volatility of its net income.
To accomplish this, the Company has undertaken various steps to
increase the percentage of fixed rate assets and to increase the average
maturity of such assets, in particular through the loan products offered
and its security portfolio.
Net interest income sensitivity to movements in interest rates is
measured through the use of a simulation model that analyzes resulting
net income under various interest rate scenarios established by
regulators. Projected net interest income is modeled based on both an
immediate rise or fall in interest rates ("rate shock"). The model is
based on the actual maturity and repricing characteristics of interest
rate sensitive assets and liabilities and factors in projections for
activity levels by product lines of the Company. Assumptions are made as
to the changing relationship between different interest rates as interest
rates increase/decrease (basis risk) and the customer's ability to prepay
loans and withdraw deposit balances or transfer them to a higher yielding
account (embedded option).
Based on the information and assumptions in effect on December 31,
1997, under five rate simulations used, the Company's net interest income
and net income remain strong, with the return on assets ratio remaining
above 1% under all simulations.
LIQUIDITY RISK MANAGEMENT
Liquidity management is the process by which the Bank structures its
liquidity to meet the cash flow requirements of its customers as well as
day to day operating expenses. Many factors affect the Company's ability
to meet its liquidity needs, including its mix of assets and liabilities,
interest rates, and local economic conditions. The Company's actual
inflow and outflow of funds is detailed in the Consolidated Statement of
Cash Flows on page 24-25 .
Liquidity comes from both assets and liabilities. The assets of the
balance sheet provide liquidity through prepayment and maturities of
outstanding loans, investments and mortgage backed securities and the
sale of mortgage loans. The liability side provides liquidity through
deposits and borrowings from Federal Home Loan Bank of Boston. During
1997 and 1996, the Company used its sources of funds primarily to meet
ongoing commitments to pay maturing certificates of deposits and savings
withdrawals, fund loan originations and maintain a substantial securities
portfolio.
The Company's liquidity policy currently includes requirements that
the Company maintain liquidity as a percentage of total assets at a
minimum of 5%. Access to Federal Home Loan Bank advances allows the Bank
to maintain a lower liquidity level than might otherwise be required. As
of December 31, 1997, the Bank had a 9.5% liquidity ratio.
OFF BALANCE SHEET RISKS AND COMMITMENTS
As of December 31, 1997 and 1996, the total approved loan
commitments outstanding, the commitment under unused lines of credit and
the unadvanced portion of loans amounted to $28,230,000 and $28,153,000,
respectively.
REGULATORY ENVIRONMENT
REGULATORY CAPITAL REQUIREMENTS
Under Federal Reserve Board guidelines, the Company is required to
maintain capital based on "risk adjusted" assets. Under risk based
capital guidelines, categories of assets with potentially higher credit
risk require more capital than assets with lower risk. In addition to
balance sheet assets, the Company is required to maintain capital, on a
risk adjusted basis, to support off balance sheet activities, such as
loan commitments. The Federal Reserve guidelines classify capital into
two tiers, Tier I and Total Capital. Tier I risk based capital consists
primarily of shareholders' equity. Total risk based capital consists of
Tier I capital plus a portion of the general Allowance for Loan Losses.
In addition to risk based capital requirements, the Federal Reserve
requires the Company to maintain a minimum leverage capital ratio of Tier
I capital to total assets.
The Company as of December 31, 1997 and 1996 exceeds all applicable
Federal and state laws and regulations and is in fact categorized as a
well capitalized bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes presented in
this Annual Report have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars
without consideration of changes in the relative purchasing power of
money over time due to inflation.
Unlike many industrial companies, substantially all of the assets
and virtually all of the liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on
the Company's performance than has the general level of inflation. Over
short periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as inflation.
RECENT ACCOUNTING DEVELOPMENTS
During 1997, the Company adopted Statements of Financial Accounting
Standards (SFAS) No. 125 and No. 127, which relate to the accounting for
transfers and servicing of financial assets and extinguishment of certain
liabilities. The adoption of these standards did not have a material
effect on the financial statements.
The Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards during 1997:
SFAS No. 128 Earnings per Share
SFAS No. 129 Disclosure of Information about Capital Structure
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information
These four statements do not change the measurement or recognition
methods used in the financial statements but rather deal with disclosure
and presentation requirements.
The financial statements for 1997 and all prior periods include the
disclosure requirements relating to earnings per share that are required
under SFAS No. 128. Financial statement disclosures also comply with
SFAS No. 129, which summarizes but does not change the Company's
requirements to disclose information about capital structure.
SFAS No. 130 and No. 131 are effective for periods beginning after
December 15, 1997. Management expects unrealized gains and losses on
available for sale securities to be the only item reported as other
comprehensive income under SFAS No. 130. The effect, if any, of SFAS No.
131 on disclosure requirements on the Company has not been determined.
YEAR 2000 RISK ASSESSMENT AND ACTION PLAN
It has been widely publicized that many computer applications will
not operate as intended past the year 1999 without modifications. This
potential problem results from the fact that computers store dates in two-
digit format (i.e., 97) instead of four-digit format (1997). On January
1, 2000, it is possible that some systems with time sensitive software
programs will recognize the year as "00" and may incorrectly interpret
the year as "1900".
During 1997, the Company adopted a plan of action to minimize the
risk of the Year 2000 event. The plan includes the formation of a
Technology Steering Committee to assess, monitor and review vendor
compliance and certification and to identify clearly all systems and
equipment used in the day to day operations of the Bank that might be
affected. Management believes the Bank is adequately addressing the Year
2000 issue and that the current planning and preparations, and the
testing to be conducted throughout the organization during 1998 and 1999,
all seek to minimize any potential adverse effects on the Bank or its
customers.
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
ASSETS
Cash and due from banks (note 2) $ 7,650,086 $ 9,458,971
Federal funds sold 2,251,105 143,209
Available for sale securities, at market
value (note 3) 60,646,731 74,835,300
Held to maturity securities at cost (note 4)
(market value $33,242,473 and $4,861,061 at
December 31, 1997 and 1996, respectively) 32,799,686 4,786,800
Other investment securities at cost, which
approximates market value 2,618,700 1,946,200
Loans held for sale 3,138,218 3,241,054
LOANS (note 5):
Real estate 67,839,337 64,663,964
Commercial and industrial 18,565,543 16,582,761
Municipal 4,851,637 4,663,900
Consumer 15,805,611 15,133,300
107,062,128 101,043,925
Less deferred loan fees 24,160 73,534
Less Allowance for Loan Losses (note 6) 2,212,740 2,083,831
Net loans 104,825,228 98,886,560
Premises, furniture and equipment (note 8) 2,842,151 2,917,112
Other assets (notes 7, 9, 13 and 14) 5,787,926 5,851,051
Total Assets $222,559,831 $202,066,257
LIABILITIES
DEPOSITS
Demand deposits $ 20,574,024 $ 19,185,504
Savings deposits (including NOW deposits
totaling $36,185,785 in 1997 and
$34,423,418 in 1996) 65,161,440 63,736,332
Money market accounts 15,008,720 15,793,806
Time deposits (note 10) 76,641,681 67,729,825
Total deposits 177,385,865 166,445,467
Advances from Federal Home Loan Bank (note 11) 9,273,250 6,173,000
Other borrowed funds (note 12) 5,690,975 2,383,544
Other liabilities (notes 13 and 14) 4,206,501 3,350,388
Total Liabilities 196,556,591 178,352,399
Contingent liabilities and commitments
(notes 16 and 17)
SHAREHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized
1,200,000 shares, issued 485,544 in 1997 and 1996
(note 1) $ 6,069,300 $ 6,069,300
Surplus 3,948,797 3,948,797
Retained earnings (note 15) 15,708,089 13,923,256
Net unrealized gain (loss) on available
for sale securities net of deferred
tax asset of $225,507 and ($88,328) at
1997 and 1996, respectively (note 3) 437,749 (171,460)
Treasury stock, at cost (2,621 shares in
1997 and 1,468 shares in 1996 (160,695) (56,035)
Total Shareholders' Equity 26,003,240 23,713,858
Total Liabilities and Shareholders' Equity $222,559,831 $202,066,257
The accompanying notes are an integral part of these Consolidated
Financial Statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 9,659,971 $ 9,191,876 $ 8,780,734
Interest on securities
available for sale 5,182,071 5,256,042 4,230,639
Interest on securities
held to maturity 1,303,582 244,561 419,829
Interest on Federal funds sold 40,728 75,889 424,146
Total interest income 16,186,352 14,768,368 13,855,348
INTEREST EXPENSE:
Interest on savings deposits 1,119,098 1,171,987 1,302,644
Interest on money market accounts 481,714 477,720 552,417
Interest on time deposits 4,028,905 3,525,114 2,912,040
Interest on certificates of
deposit $100,000 and over 269,264 226,589 274,069
Interest on short-term borrowings 835,212 229,434 10,937
Total interest expense 6,734,193 5,630,844 5,052,107
Net interest income 9,452,159 9,137,254 8,803,241
Provision for Loan Losses (note 6) 120,000 120,000 30,000
Net interest income after
Provision for Loan Losses 9,332,159 9,017,524 8,773,241
NON INTEREST INCOME:
Net securities gains/(losses) (note 3) (1,463) 2,718 3,103
Trust Department income 594,961 488,498 443,661
Service charges on deposit accounts 343,272 337,625 310,381
Visa income 611,239 495,203 431,338
Loan Department income 352,534 360,475 323,657
Other income 707,663 522,612 477,145
Total non interest income 2,608,206 2,207,131 1,989,285
Income before non interest expenses 11,940,365 11,224,655 10,762,526
NON INTEREST EXPENSE:
Salaries and wages 3,040,454 2,972,682 3,124,862
Pension and other employee
benefits (note 13) 977,292 1,036,792 894,706
Insurance 112,761 95,310 97,809
FDIC insurance 20,312 1,500 184,630
Net occupancy expenses 888,014 845,255 776,703
Equipment expenses 278,267 233,617 201,516
Advertising 211,180 266,544 248,510
Supplies 212,258 214,975 283,510
Postage 161,254 131,246 147,947
Telephone 143,499 142,971 155,120
Other professional fees 347,608 235,280 156,570
Other expenses 1,622,994 1,546,511 1,187,403
Total non interest expenses 8,015,893 7,722,683 7,459,206
Income before income taxes 3,924,472 3,501,972 3,303,320
Income taxes (note 14) 1,224,000 1,050,000 885,263
Net income $2,700,472 $2,451,972 $2,418,057
Net income per common share $ 5.59 $ 5.07 $ 5.00
Cash dividends declared per
common share $ 1.83 $ 1.67 $ 1.56
Weighted average common
shares outstanding 483,022 484,067 483,880
The accompanying notes are an integral part of these consolidated
financial statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
NET UNREALIZED
GAIN (LOSS) ON SHARE-
COMMON TREASURY RETAINED AVAILABLE FOR HOLDER'S
STOCK SURPLUS STOCK EARNINGS SALE SECURITIES EQUITY
Balance at December 31,
1994 $5,062,875 $3,948,680 $ (94,968) $11,653,962 $(1,389,168) $19,181,381
Net income,
1995 0 0 0 2,418,057 0 2,418,057
Sale of 380 shares
Treasury stock 0 (195) 24,955 0 0 24,760
Effect of the August
20, 1997 stock split
effected in the form
of a 20% stock dividend
(40,257
shares) 1,006,425 0 0 (1,006,425) 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 $6,069,300 $3,948,485 $ (70,013) $12,278,912 $ 567,810 $22,794,494
Net income,
1996 0 0 0 2,451,972 0 2,451,972
Sale of 222 shares
Treasury stock 0 312 15,498 0 0 15,810
Repurchase of 18 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 $6,069,300 $3,948,797 $ (56,035) $13,923,256 $ (171,460) $23,713,858
Net income,
1997 0 0 0 2,700,472 0 2,700,472
Sale of 97 shares Treasury
stock 0 0 8,780 0 0 8,780
Repurchase of 1,250
shares Treasury
stock 0 0 (113,440) 0 0 (113,440)
Payment for fractional
shares totaling 245.81
shares 0 0 0 (29,699) 0 (29,699)
Cash dividends
declared 0 0 0 (885,940) 0 (885,940)
Change in net unrealized
gain (loss) on available
for sale securities,
net of tax of
$313,835 0 0 0 0 609,209 609,209
Balance at December 31,
1997 $ 6,069,300 $3,948,797 $(160,695) $15,708,089 $ 437,749 $26,003,240
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, 1997, 1996 and 1995
1997 1996 1995
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 2,700,472 $ 2,451,972 $ 2,418,057
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, amortization and accretion (44,744) 441,931 477,744
Provision for loan losses 120,000 120,000 30,000
Net gain (loss) on sale of available
for sale securities 1,463 (2,718) (3,103)
Net (gain) loss on sale of equipment 944 (3,778) 0
(Gain) loss on sale of other real
estate owned 22,390 (16,918) 0
Provision for other real estate owned 15,000 15,000 60,000
Originations of loans held for sale (8,526,648) (11,993,334) (8,593,440)
Proceed from loans held for sale 8,629,484 9,979,727 7,936,912
Net change in other assets (315,375) (455,947) (151,224)
Net change in other liabilities 553,860 526,397 522,499
Net change in deferred loan
origination fees 49,374 (129,963) (74,370)
Provision for deferred income
tax (benefit) expense (100,000) (91,529) 9,666
Net cash provided by operating
activities $ 3,106,220 $ 840,840 $ 2,632,741
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for
sale securities $ 41,170,105 $ 3,001,060 $ 16,933,182
Purchase of available for
sale securities (41,533,761) (35,337,132) (38,702,639)
Proceeds from maturities and principal
payments on available for
sale securities 14,856,692 26,876,205 26,734,617
Purchase of held to maturity
securities (29,663,803) (1,605,000) 0
Proceeds from maturities and principal
payments on held to maturity
securities 2,082,547 945,192 2,619,748
Proceeds from sales of other real
estate owned 429,528 380,000 0
Net increase in loans to customers (6,108,042) (7,715,503) (9,035,126)
Proceeds from sales of fixed assets 0 16,541 4,000
Capital expenditures (368,255) (207,087) (537,227)
Net cash used by investing activities $(19,134,989) $(13,645,724) $ (1,983,445)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in demand, savings
and money market accounts 2,028,542 (1,652,257) (6,470,836)
Increase in time deposits 8,911,856 2,739,855 11,580,018
Net changes in short term
borrowed funds 6,407,681 8,446,544 0
Payment to eliminate fractional shares (29,699) 0 (29,821)
Purchase of Treasury stock (113,440) (1,520) 0
Sale of Treasury stock 8,780 15,810 24,760
Dividends paid (885,940) (807,628) (756,860)
Net cash provided by financing
activities $ 16,327,780 $ 8,740,804 $ 4,347,261
Net (decrease) increase in cash
and cash equivalents 299,011 (4,064,080) 4,996,557
Cash and cash equivalents at
beginning of year 9,602,180 13,666,260 8,669,703
Cash and cash equivalents at
end of year $ 9,901,191 $ 9,602,180 $ 13,666,260
The accompanying notes are an integral part of these consolidated financial
statements.
1997 1996 1995
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 6,501,460 $ 5,665,358 $ 4,752,751
Income taxes paid $ 1,425,987 $ 1,077,250 $ 927,610
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Net transfer from loans held for
sale to loans $ 0 $ 0 $ 80,272
Net increases (decreases) required
by Statement of Financial Accounting
Standards No. 115 Available for
Sale Securities $ 923,044 $(1,121,390) $ 2,966,401
Deferred income tax assets $ (313,835) $ 382,120 $(1,009,423)
Net unrealized gain (loss) on
available for sale securities $ 609,209 $ (739,270) $ 1,956,978
The accompanying notes are an integral part of these consolidated financial
statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the future relate to the determination of the Allowance for Loan
Losses. 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 might be necessary based on changes in economic
conditions, particularly in northern New England. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's Allowance for Loan Losses. These agencies
may require the Company to recognize additions to the allowances based on
their judgements about information available to them at the time of their
examination.
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
At December 31, 1997, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", and No. 129,
"Disclosure of Information About Capital Structure." These standards have no
effect on the financial statements as the Company has no dilution of earnings
per share and the Company's capital disclosures meet the requirements of SFAS
No. 129.
Earnings per share is based upon the average number of common shares
outstanding during each year. In 1997, the Company declared a stock split
effected in the form of a 20 percent stock dividend and a two for one stock
split. In July 1997, the shareholders of the Company approved an amendment to
the Articles of Incorporation that increased the authorized common stock from
600,000 shares, par value $25 per share, to 1,200,000 shares, par value
$12.50 per share. Common share amounts, per share earnings and dividends and
common stock and retained earnings for all years presented have been adjusted
to reflect these transactions.
Investments
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, is excluded from earnings and is
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. Gains and losses on the sale of available
for sale securities are determined using the specific identification method.
Held to Maturity Securities
Held to maturity securities consist of 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,
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, 1997 and 1996.
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, 1997 and 1996. 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. Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights," requires
capitalization of mortgage servicing rights for loans originated after
January 1, 1996. Effective January 1, 1997, the Company adopted SFAS No.
125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities." The impact of adoption of SFAS No. 122 and
No. 125 was not material to the Company's financial statement.
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
maintain the allowance at a level adequate to absorb anticipated future
losses.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating
a portion of the Allowance for Loan Losses to such loans. If these
allocations cause the allowance to increase, the increase is reported as loan
loss provision.
Other Real Estate Owned
Other real estate owned, which is included in other assets, is recorded
at the lower of cost or fair value less estimated costs to sell at the time
the Company takes possession of the property. Losses arising from the
acquisition of such properties are charged against the Allowance for Loan
Losses. Operating expenses and any subsequent provisions to reduce the
carrying value are charged to operations. Gains and losses upon disposition
are reflected in earnings as realized.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
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 on hand, amounts due from banks and Federal funds sold. Generally,
Federal funds are purchased and sold for one day periods.
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, 1997 was
$2,139,000. In the normal course of business, the Bank has funds on deposit
at other financial institutions in amounts in excess of the $100,000 insured
by FDIC.
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, 1997 and 1996 are as follows:
Gross Gross
Amortized Unrealized Unrealized Carrying &
Cost Gains Losses Market Value
1997 1997 1997 1997
U S Treasury Securities and other
U S Government agencies $59,510,645 $637,037 $(42,176) $60,105,506
Other Securities 472,829 68,396 0 541,225
Totals $59,983,474 $705,433 $(42,176) $60,646,731
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 $382,985 $(642,773) $74,835,300
The amortized cost and market value of available for sale debt
securities at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Market
Cost Value
Due in one year or less $ 501,189 $ 501,866
Due in one year through five years 10,088,723 10,245,885
Due after five years through ten years 48,367,304 48,806,313
Due after ten years 553,429 551,442
Totals $59,510,645 $60,105,506
Proceeds from the sale of securities were $41,170,105, $3,001,060 and
$16,933,182 in 1997, 1996 and 1995, respectively. Gross realized gains were
$116,446, $8,638 and $90,066 in 1997, 1996 and 1995, respectively. Gross
realized losses were $117,909, $5,920 and $86,510 in 1997, 1996 and 1995,
respectively.
4. HELD TO MATURITY SECURITIES
The carrying amounts of held to maturity securities for 1997 and 1996 as
shown in the Company's consolidated balance sheets, and their approximate
market values at December 31, are as follows:
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
1997 1997 1997 1997
Obligations of state and
political subdivisions $ 6,985,439 $113,508 $ (2,565) $ 7,096,382
US Government agencies 25,814,247 334,905 (3,061) 26,146,091
Totals $32,799,686 $448,413 $ (5,626) $33,242,473
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
The amortized cost and market value of held to maturity securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Market
Cost Value
Due in one year or less $ 297,053 $ 298,105
Due after one year through five years 3,065,818 3,143,071
Due after five years through ten years 3,249,138 3,263,785
Due after 10 years 26,187,677 26,537,512
Totals $32,799,686 $33,242,473
5. LOANS
At December 31, 1997 and 1996, loans on nonaccrual status totaled
approximately $503,000 and $491,000, respectively. If interest had been
accrued on such loans, interest income on loans would have been approximately
$39,000, $32,000 and $28,000 higher in 1997, 1996, and 1995, respectively.
Loans delinquent by 90 days or more that were still on accrual status at
December 31, 1997 and 1996 totaled approximately $209,000 and $196,000,
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 $3,655,081 and
$3,834,777 at December 31, 1997 and 1996, respectively. New loans granted to
related parties in 1997 totaled $2,199,082; payments and reductions amounted
to $2,378,778.
6. ALLOWANCE FOR LOAN LOSSES
Analysis of the Allowance for Loan Losses is as follows for the years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Balance, beginning of year $2,083,831 $1,878,169 $1,928,644
Provision for loan losses 120,000 120,000 30,000
Balance before loan losses 2,203,831 1,998,169 1,958,644
Loans charged off 225,365 87,823 195,912
Less recoveries on loans charged off 234,274 173,485 115,437
Net loan charge off (recoveries) (8,909) (85,662) 80,475
Balance, end of year $2,212,740 $2,083,831 $1,878,169
Impairment of loans having recorded investments of $21,728 at December
31, 1997 and $21,776 at December 31, 1996 has been recognized in conformity
with SFAS No. 114, as amended by SFAS No. 118. The average recorded
investment in impaired loans during both 1997 and 1996 was $21,000. The
total allowance for loan losses related to these loans was $217 and $225 on
December 31, 1997 and 1996, respectively. There was no interest income
recognized on impaired loans in 1997 and 1996.
7. LOAN SERVICING
Mortgage servicing rights of $149,153 were capitalized in 1997, have
been written down to their fair value of $91,096 through a valuation
allowance at December 31, 1997, and are included in other assets.
Amortization of mortgage servicing rights was $28,227 in 1997.
8. PREMISES, FURNITURE AND EQUIPMENT
Detail of Bank premises, furniture and equipment is as follows:
1997 1996
Land $ 133,378 $ 133,378
Buildings and improvements 3,432,891 3,425,892
Furniture and equipment 3,269,618 3,088,902
Leasehold improvements 469,221 413,604
$7,305,108 $7,061,776
Less accumulated depreciation 4,462,957 4,144,664
$2,842,151 $2,917,112
At December 31, 1997, 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 $114,168 in 1997, $80,144 in 1996 and $83,068 in
1995.
The minimum annual lease commitments under noncancellable leases in
effect at December 31, 1997 are as follows:
Year Ending December 31, Amount
1998 $124,783
1999 $126,905
2000 $129,062
2001 $131,256
2002 $133,487
9. OTHER REAL ESTATE OWNED
Other real estate owned is included in other assets and amounts to
$375,506 and $842,424 at December 31, 1997 and 1996, respectively. Activity
in the allowance for losses on other real estate owned for the years ended
December 31, is as follows:
1997 1996
Balance, beginning of year $ 93,082 $ 95,000
Provisions charged to income 15,000 15,000
Adjustment to market (108,082) (16,918)
Balance, end of year $ 0 $ 93,082
10. DEPOSITS
The aggregate amount of short term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $10,757,741 and $6,554,857 in
1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
1998 $65,697,652
1999 6,553,809
2000 2,218,690
2001 2,171,530
Total $76,641,681
11. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank are summarized as follows:
Interest Rates at
December 31, 1997 1997 1996
Fixed advances 6.25% to 7.23% $ 273,250 $ 110,000
Variable advances 5.71% to 6.01% 9,000,000 2,000,000
Line of credit N/A 0 4,063,000
$9,273,250 $6,173,000
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, 1997 mature as follows:
1998 2002 2005 2007 2010 2012
$5,000,000 $4,000,000 $55,000 $64,250 $55,000 $99,000
12. OTHER BORROWED FUNDS
Securities sold under agreements to repurchase generally mature within
one day from the transaction date. At December 31, 1997, securities with a
fair value of $5,000,000 were pledged to secure other borrowed funds.
Information concerning securities sold under agreements to repurchase at
December 31, 1997 is summarized as follows:
Average balance during the year $3,950,415
Average interest rate during the year 4.17%
Maximum month end balance during the year $7,890,521
13. EMPLOYEE BENEFITS
Pension Plan
The Company's subsidiary has a noncontributory defined benefit pension
plan covering substantially all permanent full time employees. The benefits
are based on employees' years of service and the average of their three
highest consecutive rates of annual salary proceeding 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 $124,079, $122,702 and $126,219 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31,
1997 and 1996.
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
1997 1996
Accumulated benefit obligation including
vested benefits of $3,412,619 in 1997 and
$3,327,705 in 1996 $ (3,464,314) $ (3,427,498)
Projected benefit obligation for service
rendered to date (4,262,973) (4,347,390)
Plan assets at fair value (cash and equivalent,
U.S. Government securities and other investments) 4,782,945 4,157,524
Plan assets in excess of (less than) projected
benefit obligation 519,972 (189,866)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions (78,907) 639,608
Unrecognized prior service cost (33,396) (35,942)
Unrecognized net asset at January 1, being
recognized over 17 years (132,042) (155,820)
Prepaid pension cost included in other assets $ 275,627 $ 257,980
1997 1996 1995
NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS:
Service cost - benefits earned during
the period $177,524 $165,142 $158,055
Interest cost on projected benefit obligation 293,016 281,514 253,278
Actual return on plan assets (663,994) (274,912) (550,892)
Net amortization and deferral 317,533 (49,042) 265,778
Net periodic pension cost $124,079 $122,702 $126,219
NET AMORTIATION AND DEFERRAL INCLUDED THE FOLLOWING COMPONENTS:
Amortization of unrecognized net obligations
existing at January 1 $(23,778) $(23,778) $ (23,778)
Asset (loss) deferred 337,073 (34,436) 289,222
Amortization of unrecognized prior service cost (2,546) (2,546) (2,546)
Amortization of net gain from earlier periods 6,784 11,718 2,880
$317,533 $(49,042) $(265,778)
The weighted average discount rate of 7.0% was used in determining the
projected benefit in 1997 and 1996, respectively. The increase in salary
levels was 4% in 1997 and 5% for 1996 and 1995. Expected long term rates of
return on assets were 8.0% for 1997, 1996, and 1995.
Post Retirement Benefits Other Than Pensions
The Company sponsors a post retirement benefit program that provides
medical coverage and life insurance benefits to certain employee 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, 1997 and 1996:
ACCUMULATED POST RETIREMENT BENEFIT OBLIGATION:
1997 1996
Retirees $ 548,389 $ 552,020
Fully eligible active program participants 127,598 119,250
Other active program participants 737,246 633,434
$1,413,233 $1,304,704
Accumulated post retirement benefit obligation in
excess of plan assets $1,413,233 $1,304,704
Unrealized net loss for current year (130,621) (130,630)
Unrecognized prior service cost (685,500) (731,100)
Accrued post retirement benefit cost included
in other liabilities $ 597,112 $ 442,974
Net period post retirement benefit cost for the years ended December 31,
1997, 1996, and 1995, respectively, includes the following components:
1997 1996 1995
Service cost $ 59,472 $ 55,581 $ 30,129
Interest cost 89,543 82,697 74,758
Amortization of accumulated post
retirement obligation 45,600 45,600 45,600
Amortization of net (gain) loss 9 615 (1,841)
Net periodic post retirement benefit cost $194,624 $184,493 $148,646
For measurement purposes, the assumed annual rates of increase in the
per capita cost of covered benefits were 11% and 12% for 1997 and 1996,
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 the rate of compensation increase used in
determining the accumulated post retirement benefit obligation was 7% and 4%
on December 31, 1997 and 7% and 5% on December 31, 1996.
401(k) Plan
The Company has a noncontributory 401(k) plan for employees who meet
certain service requirements.
14. INCOME TAXES
Income tax expense (benefit) consists of the following:
Current Deferred Total
1997
Federal $1,176,733 $ 2,267 $1,179,000
State 45,000 0 45,000
$1,221,733 $ 2,267 $1,224,000
1996
Federal $1,101,529 $ (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
Income tax expense amounted to $1,224,000 for 1997, $1,050,000 for 1996 and
$885,263 for 1995. The actual tax expense for 1997, 1996 and 1995 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:
1997 1996 1995
Amount % of Amount % of Amount % of
Pretax Pretax Pretax
Earnings Earnings Earnings
Computed "expected"
tax expense $1,334,320 34.0% $1,190,670 34.0% $1,098,900 34.0%
Nontaxable income
on obligations of
states and political
subdivisions (158,781) (4.1%) (143,854) (4.1%) (225,810) (7.0%)
Other 48,461 1.3% 3,184 .1% 12,173 1.0%
$1,224,000 31.2% $1,050,000 30.0% $ 885,263 28.0%
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: 1997 1996
Unrealized loss on available for sale securities $ 0 $ 111,582
Allowance for Loan Losses 752,332 708,503
Real estate owned 0 37,400
Deferred loan fees 8,215 25,002
Deferred compensation 287,260 267,963
Post retirement benefits 203,187 149,167
Other 46,765 9,723
Deferred tax assets $1,297,759 $1,309,340
DEFERRED TAX LIABILITIES:
Unrealized gain on available for sale securities $225,508 $ 23,255
Allowance for Loan Losses 170,114 169,805
Premises, furniture and equipment, principally
due to differences in depreciation 273,499 271,833
Prepaid pension expense 93,985 87,713
Cash surrender value of life insurance 36,386 36,386
Other 5,450 13,699
Deferred tax liabilities $804,942 $602,691
The Bank has sufficient refundable taxes paid in available carry back
years to fully realize its recorded deferred tax asset of $1,297,759 at
December 31, 1997. The deferred tax asset and liability are included in
other assets and other liabilities on the balance sheet at December 31, 1997
and 1996.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that could have a direct material effect
on the Bank's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative 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, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Board categorized the Bank as well capitalized under the regulatory
framework. To be so categorized, the Bank must maintain minimum total risk
based, Tier I risk based, and Tier I leverage ratios as set forth in the
table. Management believes no conditions or events that would alter the
Bank's categorization have occurred since the Board's notification.
The actual capital amounts and ratios for the Bank and the Company as of
December 31, 1997 and 1996 are presented in the table below:
December 31, 1997
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Bank Only:
Total capital
(to risk weighted
assets) $25,793,168 21.8% >$ 9,456,880 >8.0% >$11,821,100 >10.0%
Tier I capital
(to risk weighted
assets) $25,095,168 21.2% >$ 4,728,440 >4.0% >$ 7,092,660 > 6.0%
Tier I capital
(to average
assets) $25,095,168 11.4% >$ 8,836,560 >4.0% >$11,045,700 > 5.0%
Consolidated:
Total capital
(to risk weighted
assets) $26,263,491 19.0% >$11,068,560 >8.0% N/A N/A
Tier I capital
(to risk weighted
assets) $25,565,491 18.5% >$ 5,534,280 >4.0% N/A N/A
Tier I capital
(to average
assets) $25,565,491 11.6% >$ 8,836,560 >4.0% N/A N/A
December 31, 1996
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Bank Only:
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
The Company may not declare or pay a cash dividend on or repurchase any
of its capital stock if the effect thereof would cause the capital of the
Company to be reduced below the capital requirements imposed by the Federal
Reserve.
16. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK AND 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, 1997, the following financial instruments,
whose contract amounts represent credit risk, were outstanding:
Contract Amount
1997
Commitments to extend credit $26,941,000
Standby letters of credit $ 109,000
Unadvanced portions of construction loans $ 1,180,000
Total $28,230,000
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 the loan
portfolio is diversified, a substantial portion of the debtors' ability to
honor their contracts depends upon local economic conditions, especially in
the real estate sector. At December 31, 1997, 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.
17. LITIGATION
At December 31, 1997, the Company was involved in litigation arising
from normal banking, financial and other activities of the Bank. Management,
after consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect
on the Company's financial condition.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for
the Bank's financial instruments. Fair values are calculated based on the
value of one unit without regard to any premium or discount that may result
from concentrations of ownership of a financial instrument, possible tax
ramifications or estimated transaction costs. If these considerations had
been incorporated into the fair value estimates, the aggregate fair value
amount could have changed.
Cash, Due from Banks and Federal Funds Sold
The fair value of cash, due from banks and Federal funds sold
approximates their relative book values at December 31, 1997 and 1996, 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.
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 non interest
bearing demand deposits, savings deposits, NOW accounts and money market and
checking accounts, equals the amount payable on demand. The fair values of
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from
the low cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market. If that value was considered, the fair
value of the Bank's net assets could increase.
Accrued Interest Payable
The fair value of this financial instrument approximates the book value
as the instrument has a short maturity.
Advances from Federal Home Loan Bank
The fair values of advances are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for similar
types of borrowing arrangements.
Other Borrowed Funds
The carrying amount of borrowings under repurchase agreements maturing
within 90 days approximates their fair values.
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, 1997 and 1996 follows:
1997 1996
Carrying Estimate of Carrying Estimate of
Value Fair Value Value Fair Value
ASSETS
Cash, due from banks and Federal
funds sold $ 9,901,191 $ 9,901,191 $ 9,602,180 $ 9,602,180
Available for sale
securities 60,646,731 60,646,731 74,835,300 74,835,300
Held to maturity
securities 32,799,686 33,242,473 4,786,800 4,861,061
Other investment
securities 2,618,700 2,618,700 1,946,200 1,946,200
Loans 104,825,228 105,381,313 98,886,560 99,089,190
Loans held for sale 3,138,218 3,138,218 3,241,054 3,241,054
Accrued interest
receivable 2,261,257 2,261,257 2,003,002 2,003,002
LIABILITIES
Deposits 177,385,865 178,901,792 166,445,467 168,149,481
Accrued interest payable 1,005,706 1,005,706 773,588 773,588
Advances from Federal
Home Loan Bank 9,273,250 9,273,250 6,173,000 6,173,000
Other borrowed funds 5,690,975 5,690,975 2,383,544 2,383,544
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Union Bankshares Company as of
December 31, 1997 and 1996 and for each of the years ended December 31, 1997,
1996 and 1995 are presented as follows:
BALANCE SHEET
December 31, 1997 and 1996 1997 1996
ASSETS
Cash $ 18,786 $ 21,044
Investment in subsidiary 25,469,344 23,178,116
Other assets 779,827 739,856
Total assets $26,267,957 $23,939,016
LIABILITIES AND SHAREHOLDER'S EQUITY
Dividends payable $ 241,462 $ 201,903
Other liabilities 23,255 23,255
Shareholders' equity 26,003,240 23,713,858
Total liabilities and
Shareholders' equity $26,267,957 $23,939,016
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
Dividend income $ 887,466 $1,274,684 $ 749,460
Equity in undistributed
earnings of subsidiary 1,682,019 1,153,258 1,670,357
Service income 140,804 29,868 0
Total income $2,710,289 $2,457,810 $2,419,817
Operating expenses 9,817 5,839 1,760
Net income $2,700,472 $2,451,971 $2,418,057
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,700,472 $2,451,971 $2,418,057
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Undistributed earnings of
subsidiary $(1,682,019) $(1,153,258) $(1,670,357)
Increase in other assets (39,970) (471,604) (49,963)
Increase (decrease) in other liabilities 0 (29,868) 29,868
Increase in dividends payable 39,558 85 50,434
Net cash provided by operating
activities $ 1,018,041 $ 797,326 $ 778,039
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment to eliminate fractional
shares $ (29,699) $ 0 $ 0
Dividends paid (885,940) (807,628) (786,681)
Purchase of Treasury stock (113,440) (1,520) 0
Sale of Treasury stock 8,780 15,810 24,759
Net cash used by financing
activities (1,020,299) (793,338) (761,922)
Net increase (decrease) in cash and
cash equivalents (2,258) 3,988 16,117
Cash and cash equivalents,
beginning of year 21,044 17,056 939
Cash and cash equivalents,
end of year $ 18,786 $ 21,044 $ 17,056
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Net increase (decrease) in net
unrealized gain on available
for sale securities $ 609,209 $ (739,270) $ 1,956,978
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, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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.
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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
January 23, 1998
UNION BANKSHARES COMPANY &
UNION TRUST COMPANY DIRECTORS
Arthur J. Billings Thomas R. Perkins
President, Barter Lumber Company Retired Pharmacy Owner, Retired
Maine Legislator (Senator), Retired
Peter A. Blyberg Legislative Liaison MSHA
President
Casper G. Sargent, Jr.
Robert S. Boit Owner, Sargent's Real Estate Corp.
Retired, former President
John V. Sawyer II
Richard C. Carver Chairman of the Board
Owner, Carver Oil Co. President, Worcester-Sawyer Agency
& Carver Shellfish
Stephen C. Shea
Peter A. Clapp Treasurer, E.L. Shea, Inc.,
President, Blue Hill Garage President, Shea Leasing
Sandra H. Collier Richard W. Teele
Attorney at Law Secretary, Retired former Executive
Sandra Hylander Collier Law Offices Vice President & Treasurer
Robert B. Fernald Paul L. Tracy
Treasurer, A.C. Fernald Sons, Inc. President, Owner, Winter Harbor Agency;
& Jordan Fernald Vice President, Co-Owner, Schoodic
Insurance Agency
Douglas A. Gott Richard W. Whitney
Owner, Douglas A. Gott & Sons Dentist
David E. Honey
Retired, Former Manager,
Swan's Island Electric Coop
INSERT PHOTO OF UNION BANKSHARES COMPANY BOARD OF DIRECTORS
UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY
DIRECTORY OF OFFICERS & UNION TRUST COMPANY
HONORARY DIRECTORS
John V. Sawyer II
Chairman of the Board Franklin L. Beal
Retired
Peter A. Blyberg
President Carroll V. Gay
Retired
Sally J. Hutchins
Vice President & Clerk Delmont N. Merrill
President, Merrill Blueberry Farms, Inc.
Richard W. Teele
Secretary John E. Raymond
President, Bimbay, Inc.
John P. Lynch
Senior Vice President Mary T. Slaven
Realtor
Peter F. Greene
Vice President Douglas N. Smith
Retired
Rebecca J. Sargent
Vice President - Senior Trust Officer I. Frank Snow
President, Snow's Plumbing & Heating
UNION TRUST COMPANY
DIRECTORY OF OFFICERS
John V. Sawyer II Catherine M. Planchart
Chairman of the Board Marketing Officer
Peter A. Blyberg Deborah F. Preble
President, Chief Executive Officer AVP, Assistant Controller
John P. Lynch Sandy D. Salsbury
Sr. Vice President, Sr. Banking Officer Human Resources Officer
Peter F. Greene Stephen L. Tobey
Vice President, Sr. Bank Services Officer AVP, Cash Management &
Security Officer
Sally J. Hutchins Julie C. Vittum
Vice President, Treasurer, AVP, Senior Auditor
Controller & Clerk
Christopher H. Keefe Joseph M. Connors
Vice President, Sr. Relationship Manager Assistant Trust Officer
David A. Krech Patti S. Herrick
Vice President, Sr. Investment Officer Information Services Officer
Bette B. Pierson Dawn L. Lacerda
Vice President, Mortgage Loan Officer Loan Services Officer
Rebecca J. Sargent Mary Lou Lane
Vice President - Senior Trust Officer Mortgage Underwriter
James M. Callnan Marsha L. Osgood
AVP, Sr. Information Services Officer Trust Officer
Nancy E. Domagala Susan A. Saunders
AVP, Mortgage Underwriter Project Management Officer
Laurence D. Fernald, Jr. Cynthia D. West
AVP, Relationship Mgr. and Customer Services Officer
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
Peter C. O'Brien
AVP, Loan Support Manager and CRA Officer
Lorraine S. Ouellette
AVP, Trust Officer
UNION TRUST COMPANY BRANCH OFFICES
Bar Harbor Harriman, Barbara
Christopher H. Keefe, VP, Havey, Jill
Sr. Relationship Manager Hills, Darlene
Blue Hill Hinckley, Wayne
Pamela G. Hutchins, AVP, Hutchins, Rebecca
Relationahip Manager Hutchinson, Elwell
Castine Ingalls, Laurea
Pamela G. Hutchins, AVP, Jewell, Beth
Relationship Manager Johnson, Mindy
Cherryfield Joy, Michelle
C. Foster Mathews, AVP, Kalloch, Debra
Branch Manager Kelley, Cindy
Ellsworth Shopping Center Leach, Gail
Melody L. Wright, Branch Manager Look, Cheryl
Look, Lisa
Jonesport Lounder, Lorraine
Wendy W. Beal, AVP, MacLaughlin, Wendy
Relationship Manager Madden, Anita
Machias Marshall, Carol
Lisa A. Holmes, AVP, McCormick, Bernadette
Relationship Manager Mitchell, Stacie
Milbridge Murphy, Forrest
James E. Haskell, AVP, Norton, Clifford III
Relationship Manager Owen, Doris
Somesville Page, Deborah
William R. Weir, Jr., AVP, Perry, Ann
Relationship Manager Pineo, Muriel
Stonington Podlubny, Helene
Harry R. Vickerson III, AVP, Robbins, Nancy
Relationship Manager Rose, Brenda
Sackett, Jacqueline
UNION TRUST COMPANY PERSONNEL Salisbury, Jane
Alexander, Jennifer Scott, Marsha
Allen, Deborah Scoville, Clark
Armstrong, Rebecca Sinford, Nicole
Babson, William Sinford, Stacey
Bayrd, Rona Smith, Katherine
Billings, Holly Smith, Ronald
Bonville, Melissa Snow, Christie
Boyce, Katrina Spaulding, Virginia
Carter, Linda Spizio, Barbara
Chisholm, Catherine Sprague, Donna
Church, Tammy Sproul, Bonnie
Condon, Helen St. Pierre, Bettina
Crosthwaite, Andrew Swett, Andrea
Curtis, Kristen Thompson, Dianne
Dearborn, Trevor Treadwell, Mattie
Douglass, Joanne Wallace, Jayne
Driscoll, Johna Wenger, April
Dunbar, Patricia White, Tammy
Elliott, Linda Wilson, Stephanie
Faulkner, Kathy Woodward, Cheryl
Gommo, Heidi York, Caroline
Grant, Victoria
Gray, Jenny
Gray, Shelly
Grindle, Eugene
Handy, Louise
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 1997, 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 Shareholder Meeting
11:00 a.m.
Thursday, April 16, 1998
White Birches Restaurant
Route 1
Hancock, Maine
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<EXPENSE-OTHER> 1622994
<INCOME-PRETAX> 3924472
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Exhibit 99.1
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, 1997
and 1996, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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.
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, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of
the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
BERRY, DUNN, MCNEIL & PARKER
Portland, Maine
January 23, 1998
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Union Bankshares Company
We have audited the accompanying consolidated statements of
income, changes in shareholders' equity and cash flow of Union
Bankshares Company and Subsidiary for the year ended December 31,
1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
operations and cash flow of Union Bankshares Company and
Subsidiary for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in note 1, the Company changed its method of
accounting 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.
Baker Newman & Noyes
Limited Liability Company
January 20, 1995
