1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-12958
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
MAINE 01-0395131
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation of organization)
66 Main Street, Ellsworth, Maine 04605
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (207) 667-2504
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $12.50 Par Value
Indicate by 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 5, 1999, was approximately $56,603,300.
481,896 shares of the Company's Common Stock, $12.50 par value, were
issued and outstanding on February 16, 1999.
UNION BANKSHARES COMPANY
INDEX TO FORM 10-K
PART I Page No.
Item 1: Business 3-16
Item 2: Properties 16-17
Item 3: Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 18
Item 6: Selected Financial Data 19
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A: Quantitative and Qualitative Disclosures
About Market Risk 20-21
Item 8: Financial Statements and Supplementary Data 21
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 21
PART III
Item 10: Directors and Executive Officers of the Registrant 21
Item 11: Executive Compensation 21
Item 12: Security Ownership of Certain Beneficial Owners
and Management 21
Item 13: Certain Relationship and Related Transactions 21
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K 22-23
Signatures 24
PART I
ITEM I: Business
Union Bankshares Company is a one-bank holding company, organized under
the laws of the State of Maine. The Company's only subsidiary is Union
Trust Company, established in 1887 and wholly owned. 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
nonprofit organizations in eastern Maine. Union Trust offers a wide
variety of financial services with competitive interest rates; a helpful,
friendly staff; and quick, local decision-making to meet the needs of the
communities it serves. As a complement to the services offered by the
Bank, the Trust and Investment Services Department provides a broad range
of investment options to help meet the needs of our customers. Trust and
Investment Services has served generations of Maine families with estate
planning, investment management, custody, and retirement planning and
employee benefit services.
The long-term goals of Union Trust Company focus on:
becoming a market-driven sales and service organization;
becoming effective users of appropriate technology; and
building the financial strength of the Bank with steady growth of
earnings and assets and controlled risk taking consistent with
shareholder expectations.
We encourage our Relationship Managers to visit customers, listen to them
and respond with appropriate solutions to their needs. Our Relationship
Managers continue to meet with area business owners at their places of
business in an effort to understand their businesses and how the Bank can
play a role in helping them. More visits are being made to more and more
businesses each year. The Bar Harbor branch, now one-and-a-half years
old, has shown tremendous growth during 1998, confirming our commitment
to the Mount Desert Island market area.
As customers increase their demand for electronic banking services, Union
Trust is responding. During 1998, scores of customers discovered the
value of BankLinerPC (our computer banking service) and its cash
management features. For example, we have experienced a significant
increase in ACH transaction volume since 1994. This can be attributed to
the growing appeal of automated services such as direct deposit payroll
services, direct deposit of Government payments and direct debits for
monthly bills.
BankLinerPC is just the most recent 24-hour financial connection that
Union Trust has established to meet its customers' needs. In October
1998, the Jonesport branch became Union Trust's twelfth and newest 24-
hour ATM location. BankLiner (our automated 24-hour telephone banking
service) and Customer Service Call Center (answered by real people)
continue to receive record-breaking numbers of calls year after year.
Customers are wanting more information and more ways to access their
accounts more often.
Union Trust Company has a documented record of consistent earnings
growth, posting an earnings increase in 1998 of 14.4%. Loans grew to
$110 million. Over the years, as we have worked to expand our fee-based
services, Trust and Investment Services has been a major focus. The
department's contribution to net income increases every year. During
1998, trust assets under management grew by 25.6% over 1997.
Union Trust takes pride in delivering personalized, responsive service
and developing quality, innovative products for its customers. Union
Trust also supports the people and communities it serves through a far-
reaching donation program. The program addresses human needs within the
community by contributing to various nonprofit organizations, community
development efforts and environmental groups. It also encourages and
supports the thousands of hours of volunteer time given each year by the
Bank's employees, directors and retirees. During 1998, we elected two
new directors to the Board, Blake "Cubby" Brown and Jim Markos. We are
excited to have their business expertise and community connections at
work for the Bank.
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, credit unions, 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.
As of December 31, 1998, the Bank employed 123 employees of which 16
employees were part time. They are not compensated by the Company for
their service and there are no employees of the Company.
The Bank's primary regulator is the Federal Reserve Bank of Boston and as
a state chartered bank to the Bureau of Banking of the State of Maine.
Please refer to Footnote #15 on page 37 of the 1998 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 reasonably expects will materially impact
future operating results, liquidity, or capital resources or (2)
represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The Company and Bank are not aware of any current recommendations by the
regulatory authorities which if they were to be implemented would have or
would be reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
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.
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 using a tax rate of 34% 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)
1998 1997 1996
Avg Int Yield/ Avg Int Yield/ Avg Int Yield/
Bal Earned/Paid Rate Bal Earned/Paid Rate Bal Earned/Paid Rate
Assets
Interest Earning Assets:
Securities
Available
for Sale $ 77,517 $ 5,278 6.81 $ 72,741 $ 5,182 7.12 $ 80,333 $ 5,256 6.54
Securities Held
to Maturity 23,968 1,510 6.30 22,689 1,437 6.33 3,772 369 9.78
Federal Funds
Sold 6,384 326 5.11 598 41 6.86 1,411 76 5.39
Loans (Net) 108,057 10,241 9.47 100,208 9,660 9.64 94,139 9,192 9.76
Total Interest
Earning
Assets 215,926 $17,355 8.04 196,236 $16,320 8.32 179,655 $14,893 8.28
Other Nonearning
Assets 19,699 18,878 14,926
$235,625 $215,114 $194,581
Liabilities
Interest Bearing Liabilities:
Savings
Deposits $ 69,656 $ 1,131 1.62 $ 65,432 $ 1,119 1.71 $ 65,770 $ 1,172 1.78
Time Deposits 77,545 4,223 5.44 73,419 4,298 5.85 67,294 3,752 5.57
Money Market
Accounts 11,765 560 4.76 12,271 482 3.93 14,107 478 3.39
Borrowings 18,077 1,260 6.97 14,007 835 5.96 4,012 229 5.71
Total Interest
Bearing
Liabilities 177,043 $ 7,174 4.05 165,129 $ 6,734 4.08 151,183 $ 5,631 3.72
Other Noninterest
Bearing Liabilities
& Shareholders'
Equity 58,582 49,985 43,398
$235,625 $215,114 $194,581
Net Interest Income $10,181 $ 9,586 $ 9,262
Net Interest Rate Spread 3.99 4.24 4.56
Net Interest Margin 4.72 4.88 5.16
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest earning assets and interest
bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old
volume), (2) changes in volume (change in volume multiplied by old
rate), and (3) changes in rate/volume (change in rate multiplied by
change in volume).
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
For the years ended December 31, 1998, 1997 and 1996
(In Thousands)
Year Ended December 31, 1998 vs. 1997
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets:
Assets Available for Sale $ 337 $ (488) $ 83 $ (68)
Securities Held to Maturity 80 (37) 74 117
Federal Funds Sold 397 (296) 184 285
Loans, Net 757 (751) 575 581
Total Interest Earning Assets 1,571 (1,572) 916 915
Interest Bearing Liabilities:
Savings Deposits 72 (71) 11 12
Time Deposits 238 (228) (86) (76)
Money Market Accounts (20) 24 74 78
Borrowed Funds 242 (284) 468 426
Total Interest Bearing Liabilities 532 (559) 467 440
Change in Net Interest Income $1,039 $(1,013) $449 $ 475
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 Deposit 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 $(228) $ 316
*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
1998 1997 1996
U.S. Treasury Securities &
Other Government Agencies $ 0 $25,814 $ 995
Obligations of States &
Political Subdivisions 4,376 6,985 3,792
TOTAL $4,376 $32,799 $4,787
The table below shows the relative maturities of held to maturity
securities as of December 31, 1998.
Held to Maturity Securities
Maturity Distribution as of
December 31, 1998
Security Category Due 1 Yr Due 1- Due 5- Due After
or less 5 Yrs 10 yrs 10 Yrs
State and Municipal Bonds $ 150 $1,611 $1,235 $1,380
Average Weighted Yield 8.39% 7.81% 8.26% 7.26%
TOTAL $ 150 $1,611 $1,235 $1,380
Percent of Total Portfolio 3.4% 36.8% 28.3% 31.5%
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
1998 1997 1996
US Treasury Notes and
Other Government Agencies $ 93,971 $60,105 $73,322
Obligations of State and
Political Subdivisions 8,769 0 1,513
Other Securities 4,189 3,160 1,946
TOTAL $106,929 $63,265 $76,781
The table below shows the relative maturities and carrying value of
available for sale debt securities as of December 31, 1998 (excludes
other securities).
Securities Available for Sale
Maturity Distribution as of
December 31, 1998
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 $ 3,153 $13,959 $46,532 $39,096
Average Weighted Yield 6.93% 6.62% 6.67% 7.01%
TOTAL $ 3,153 $13,959 $46,532 $39,096
Percent of Total Portfolio: 2.9% 13.1% 43.5% 36.5%
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.
1998 1997 1996 1995 1994
(In Thousands)
Real Estate Loans
A. Construction & Land
Development $ 6,431 $ 5,925 $ 4,073 $ 2,023 $ 2,168
B. Secured by 1-4 Family
Residential Properties 36,944 33,528 30,457 27,402 25,528
C. Secured by Multi Family
(5 or more) Residential
Properties 0 0 0 2 4
D. Secured by Non-Farm,
Non-Residential
Properties 30,550 28,386 30,134 28,273 26,500
Commercial & Industrial Loans 15,979 18,566 16,582 13,778 12,975
Loans to Individuals for Household,
Family & Other Consumer
Expenditures 15,327 15,806 15,133 14,335 12,844
All Other Loans 5,168 4,852 4,664 7,430 4,189
Total Gross Loans $110,399 $107,063 $101,043 $93,243 $84,208
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:
1998 1997 1996 1995 1994
Real Estate 67.0% 63.4% 64.0% 61.9% 64.4%
Commercial & Industrial -
Including single
payment loans to individuals 14.5% 17.3% 16.4% 14.8% 15.4%
Consumer Loans 13.9% 14.8% 15.0% 15.4% 15.3%
All Other Loans 4.6% 4.5% 4.6% 7.9% 4.9%
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, 1998
Due 1 Year Due 1-5 Years Due 5 Years +
or Less
Real Estate $37,349 $19,262 $17,314
Commercial & Industrial 11,246 3,106 1,627
Consumer 7,469 2,485 5,373
Municipal 3,032 1,554 582
Total $59,096 $26,407 $24,896
Note: Real estate loans in the 1-5 category have $2,846,353 at a fixed
interest rate and $16,415,647 at a variable interest rate.
Commercial loans in the 1-5 year category have $3,052,000 at a
fixed interest rate and $54,000 at a variable interest rate.
Real estate loans in the 5+ category have $15,851,148 at a fixed
interest rate and $1,462,852 at a variable interest rate.
Commercial loans in the 5+ category have $1,253,695 at a fixed
interest rate and $373,305 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,
1998 1997 1996 1995 1994
Amt % Amt % Amt % Amt % Amt %
Real Estate $3,079 2.8 $3,003 2.8 $2,649 2.6 $ 867 0.9 $ 479 0.6
Installment $ 153 0.1 $ 128 0.1 $ 197 0.2 $ 95 0.1 $ 95 0.1
All Others $ 134 0.1 $ 151 0.1 $ 220 0.2 $ 35 0.0 $ 189 0.2
TOTAL $3,366 3.0 $3,282 3.0 $3,066 3.0 $ 997 1.0 $ 763 0.9
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 $534,000, $503,000 and $491,000 as of December 31,
1998, 1997 and 1996, respectively, of loans on a non-accrual status.
LOAN CONCENTRATIONS
As of December 31, 1998 and 1997, the Company did not have any
concentration of loans in one particular industry that exceeded 10% of
its total loan portfolio.
The Bank grants residential, commercial and consumer loans to customers
principally located in Hancock and Washington Counties of the State of
Maine. Although the loan portfolio is diversified, a substantial
portion of its debtor's ability to honor their contracts is dependent
upon the economic conditions in the area, especially in the real estate
sector. There are currently no borrowers whose total indebtedness to
the Bank exceeds 10% of the Bank's shareholders' equity at December 31,
1998.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses for the past five years were
as follows:
(Dollars in thousands)
December 31,
1998 1997 1996 1995 1994
Balance at beginning of period:$ 2,213 $ 2,084 $ 1,878 $ 1,929 $ 1,802
Charge-offs:
Commercial & Industrial Loans 2 5 15 44 30
Real Estate Loans 0 123 0 48 256
Loans to Individuals 111 97 73 104 34
113 225 88 196 320
Recoveries:
Commercial & Industrial Loans 11 118 138 43 5
Real Estate Loans 0 67 12 1 390
Loans to Individuals 39 49 24 71 52
50 234 174 115 447
Net Charge-offs (recoveries) 63 (9) (86) 81 (127)
Provision for loan losses 285 120 120 30 0
Balance at end of period $ 2,435 $ 2,213 $ 2,084 $ 1,878 $ 1,929
Average Loans Outstanding $110,321 $102,321 $97,143 $88,725 $82,600
Ratio of Net Charge-offs (Recoveries) to
average loans outstanding .057% (.009%) (.09%) .09% (.15%)
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31,
1998 1997 1996 1995 1994
Amt % of Amt % Amt % Amt % Amt %
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 $ 374 67.0% $ 356 63.4% $ 318 64.0% $ 647 61.9% $ 665 64.4%
Commercial &
Industrial 1,780 14.5% 1,558 17.3% 1,405 16.4% 1,024 14.8% 1,051 15.4%
Consumer 153 13.9% 158 14.8% 151 15.0% 207 15.4% 213 15.3%
Municipal 58 4.2% 49 4.1% 60 4.5% 0 7.9% 0 4.9%
Identified 62 .4% 67 .4% 100 .1% 0 .0% 0 .0%
Unallocated 8 .0% 25 .0% 50 .0% 0 .0% 0 .0%
TOTAL $2,435 100.0% $2,213 100.0% $2,084 100.0% $1,878 100.0% $1,929 100.0%
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, 1998, the Company had impaired loans totaling
$207,686, which consisted of real estate loans. The fair value of the
loans' collateral was used to evaluate the adequacy of the Allowance
for Loans Losses allocated to these loans.
A loan is considered impaired by management when it is probable that
the creditor will be unable to collect all amounts due under the
contractual terms of the loan, including principal and interest. 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
1998 1997 1996 1995 1994
Loans accounted for on a
non accrual basis $534 $503 $491 $614 $151
Accruing loans contractually
past due 90 days or more $ 47 $209 $196 $388 $ 86
In accordance with Industry Guide 3 Item III. C (1), the gross interest
income that would have been recorded in 1998 if nonaccrual and
restructured loans had been current in accordance with their original
terms and had been outstanding throughout the period or since
origination approximates $40,000. There was approximately $2,000
included in the gross interest income on non-accrual and restructured
loans for 1998.
D. DEPOSITS
The following schedule summarizes the time remaining to maturity of
Certificates of Deposit $100,000 or greater at December 31, 1998.
Amount
(In Thousands)
3 Months or Less $ 5,886
Over 3 Through 6 $ 1,569
Over 6 Through 12 Months $ 3,032
Over One Year $ 993
Total $11,480
E. SHORT-TERM BORROWINGS
December 31
1998 1997
Weighted Weighted
Average Average
Interest Rate Amount Interest Rate Amount
Fixed advances 6.45 $451,250 6.52 $273,250
Variable advances 5.29 $20,000,000 5.35 $9,000,000
Securities sold
under agreement 3.70 $8,965,977 4.00 $5,690,975
1998 1997
Fixed Variable Securities Fixed Variable Securities
Maximum amount $451,250 $20,142,352 $9,512,901 $273,250 $22,903,225 $7,890,521
outstanding of any
month end during the year
Average amount $407,584 $18,077,448 $6,485,367 $206,143 $12,569,863 $3,950,415
outstanding during
the year
Weighted average 6.53% 5.30% 4.05% 6.74% 5.86% 4.17%
interest rate for the year
Advances at December 31, 1998 mature as follows:
2002 2005 2007 2008 2010 2012 2013
$4,000,000 $55,000 $84,250 $16,089,000 $55,000 $79,000 $89,000
F. 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.
*1998 *1997 *1996
Deposits 15.1% 14.9% 14.4%
Loans 25.4% 24.6% 24.6%
Total Assets 11.6% 12.0% 12.1%
Earning Assets 12.8% 13.0% 13.3%
*Excluding net unrealized gain (loss) net of deferred taxes on
available for sale securities of $1,162,032, $437,749 and ($171,460) at
December 31, 1998, 1997 and 1996, respectively.
G. 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.
1998 1997 1996
Return on Average Shareholders' Equity 11.6% 10.9% 10.6%
Return on Average Assets 1.3% 1.3% 1.2%
Return on Average Earning Assets 1.4% 1.4% 1.4%
H. 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, 1998, the Bank's ratio of rate sensitive assets to
rate sensitive liabilities at the one year horizon was 102%, its one
year GAP (measurement of interest sensitivity of interest earning
assets and interest bearing liabilities at a given point in time) was
101%, and $116,522,000 in assets and $114,396,000 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, 1998, the Company's
interest rate GAP analysis:
Interest Rate GAP Analysis
As of December 31, 1998 (000's omitted)
0-3 4-12 1-5 Over 5
Months Months Years Years Total
Interest earning assets
Loans:
Real estate
Fixed rate $ 677 $ 1,983 $ 8,052 $ 8,385 $ 19,097
Variable rate 17,921 21,982 14,312 0 54,215
Commercial 9,562 1,844 2,672 1,898 15,976
Municipal 20 3,003 2,198 577 5,798
Consumer 11,433 755 3,148 0 15,336
Securities available
for sale 15,426 15,884 48,892 21,204 101,406
Held to maturity securities 0 626 2,360 1,390 4,376
Loans held for sale 6,138 0 0 0 6,138
Other earning assets 9,268 0 3,558 0 12,826
TOTAL $70,445 $46,077 $85,192 $33,454 $235,168
Interest bearing liabilities
Deposits:
Savings $ 3,405 $10,215 $16,061 $22,823 $52,504
NOW 3,093 9,279 24,743 0 37,115
Money market 3,153 9,459 6,139 0 18,751
Time 29,738 37,088 12,832 0 79,658
Borrowings 8,966 0 13,000 7,451 29,417
TOTAL $48,355 $66,041 $72,775 $30,274 $217,445
Rate sensitivity GAP $22,090 $(19,964) $12,417 $ 3,180
Rate sensitivity GAP as a
percentage of total assets 8.80% (7.95%) 4.94% 1.27%
Cumulative GAP $22,090 $ 2,126 $14,543 $17,723
Cumulative GAP as a
percentage of total assets 8.80% 0.09% 5.79% 7.06%
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, 1998 1997
Net cash provided from operations $ 4,266,014 $ 3,106,220
Net cash used by investing activities (17,797,165) (19,134,989)
Net cash provided from financing activities 20,743,318 16,327,780
Net increase in cash and cash equivalents $ 7,212,167 $ 299,011
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 2000.
(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 1998 and 1997 are listed in the
following table.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1998 120.00 to 125.00 125.00 to 136.50 126.00 to 130.00 130.00 to 130.00
1997 93.00 to 104.00 93.00 to 97.00 88.00 to 100.00 100.00 to 110.00
B. HOLDER
As of March 1, 1999 there were approximately 698 stockholders of
record.
C. DIVIDENDS
1. History
The following table shows the cash dividends per share declared by
Union Bankshares Company on its common stock, $12.50 par value:
1998 1997
1st Quarter $ .50 $ .41
2nd Quarter $ .50 $ .42
3rd Quarter $ .50 $ .50
4th Quarter $ .50 $ .50
Cash dividends declared
per common share $2.00 $1.83
Item 6: SELECTED FINANCIAL DATA (in thousands, except for per share
amounts)
Years Ended December 31,
1998 1997 1996 1995 1994
SUMMARY OF OPERATIONS
Operating Income $ 3,155 $ 2,608 $ 2,207 $ 1,989 $ 2,080
Operating Expense 8,413 8,016 7,723 7,459 7,420
Net Interest Income 9,927 9,452 9,137 8,803 8,490
Provision for Loan Losses 285 120 120 30 0
Net Income 3,090 2,700 2,452 2,418 2,354
PER COMMON SHARE DATA
Net Income $ 6.41 $ 5.59 $ 5.07 $ 5.00 $ 4.86
Cash Dividends Declared 2.00 1.83 1.67 1.56 1.25
Book Value (2) 57.21 52.93 49.34 45.87 42.45
Market Value 130.00 110.00 104.00 75.00 71.00
FINANCIAL RATIOS
Return on Average
Equity (2) 11.6% 10.9% 10.6% 11.4% 11.9%
Return on Average Assets 1.3% 1.3% 1.2% 1.3% 1.3%
Return on Average
Earning Assets 1.4% 1.4% 1.4% 1.4% 1.4%
Net Interest Margin 4.72% 4.88% 5.16% 5.37% 5.46%
Dividend Payout Ratio 31.2% 32.8% 32.9% 31.3% 25.8%
Allowance for Loan
Losses/Total Loans .02 .02 .02 .02 .02
Non Performing Loans
to Total Loans .005 .007 .007 .007 .003
Non Performing Assets
to Total Assets .004 .005 .008 .010 .006
Efficiency Ratio 64.3% 66.5% 67.2% 67.2% 69.1%
Loan to Deposit Ratio 58.7% 60.4% 60.7% 56.7% 52.5%
BALANCE SHEET
Deposits $188,029 $177,386 $166,445 $164,481 $160,249
Loans 110,399 107,062 101,044 93,242 84,208
Securities (1) 111,304 96,065 81,568 76,578 83,391
Shareholders' Equity (2) 27,577 25,565 23,885 22,227 20,570
Total Assets 251,195 222,560 202,066 191,353 181,597
(1) Carrying value. Includes available for sale securities with cost
of $101,610, $59,983, $75,095 and $70,938 at December 31, 1998, 1997,
1996 and 1995, respectively.
(2) Excluding net unrealized gain (loss) net of deferred taxes on
available for sale securities of $1,162,032, $437,749, ($171,460),
$567,810 and ($1,389,168) at December 31, 1998, 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, 1998, 1997, 1996, 1995 and 1994, and with Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1998 annual Report is incorporated herein
by reference.
ITEM 7A: QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. The
Company's primary market risk exposure is interest rate risk. The
ongoing monitoring and management of this risk is an important
component of the Company's asset/liability management process which is
governed by policies established by its Board of Directors that are
reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies
to the Asset/Liability Committee (ALCO). In this capacity ALCO
develops guidelines and strategies impacting the Company's
asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate
levels/trends.
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 table below
presents the potential adverse impact on the Bank's current earnings
due to changes in interest rates. This measure is based on the Bank's
interest rate sensitivity position at December 31, 1998 and 1997, which
reflects a view on future interest rate movements relative to the
current yield curve. As indicated in the table, the Bank's interest
rate sensitivity position would increase 400 bp from 1998 over 1997 in
a 200 bp upward interest rate shift and decrease 500 bp in a downward
interest rate shift for the same period.
Estimated
Rate Change NII Sensitivity
1998 1997
+200 bp +6.0% +2.0%
-200 bp -8.0% -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
1998 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 26, 1999 for its regular annual meeting of
shareholders to be held April 15, 1999, 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, 1998 (a
copy of which is being filed as Exhibit 13 hereto), and are
incorporated herein by reference.
Consolidated Balance Sheets
December 31, 1998 and 1997 22
Consolidated Statements of Income
For the years ended December 31, 1998, 1997 and 1996 23
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flow
For the years ended December 31, 1998, 1997 and 1996 25-26
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, 1998,
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 22 of the 1998
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'forits fiscal year ended
December 31, 1998. 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.
*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
Date: March 25, 1999
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
Blake B. Brown, 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
James L. Markos, Jr., 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
1
UNION BANKSHARES COMPANY
1998 ANNUAL REPORT
We Dedicate this Report to
THOMAS R. PERKINS AND THE LATE LAWRENCE W. FLETCHER
Tom Perkins was a loyal member of the Board of Directors who retired this
year. Tom served the shareholders well for many years. We also salute
him as an outstanding legislator and business owner.
Lawrence W. Fletcher was born December 29, 1909, and died June 12, 1998.
He is remembered for his 50 years of service at Union Trust Company.
After graduating from Ellsworth High School in June 1927, he started his
career at Union Trust Company as a bookkeeper and teller, retiring as
Treasurer in June 1977.
"What's Past Is Prologue" - William Shakespeare
Much of the work we have undertaken within the Bank during the past
five years has been preparation for the new world of financial services.
Shareholders' earnings and price per share, as documented in this Report,
are the outward manifestations of these efforts.
We have undergone tremendous change in every area of the Bank. Our
staff members' knowledge and productivity have risen dramatically through
increased education, hard work and improved information. A sense of
urgency has developed, and the entire organization is infused with a
desire to listen and work with our customers and provide solutions to
their financial needs.
We have introduced many new products and services and strengthened
our capabilities in more traditional services. We were the first bank
downeast to offer asset allocation accounts for investors. We introduced
PC Banking. We provided access to the Bank through our site on the World
Wide Web. Through automation, we reduced our mortgage underwriting time
from days to literally minutes. We expanded our cash management
offerings. We introduced 24-hour telephone banking, and we became the
first to open a customer service call center.
At Union Trust, everything we do is carefully planned and executed.
Several years ago, we created a strategic planning process to help us
chart our course, and we were among the first banks in Maine to devise a
technology plan to guide our decision making and investments over a multi-
year period. We will continue to plan for the future and build on what
has been done.
"The Future Ain't What It Used To Be" - Yogi Berra
Over the next five years, we will see major changes in banking. As a
community bank, we must compete not only with other local banks, but with
national and global players as well. The pace they set as they vie for
competitive advantage affects all of us, from the biggest to the
smallest. Increasingly, we compete with nonbank financial service
providers - such as insurance companies and brokerage houses - that act
increasingly like banks. We all begin at different places on the
financial landscape, yet we converge on the same point: providing our
customers with comprehensive financial services.
While Maine has taken the lead in regulatory reform, Congress will
continue to scramble to catch up with developments in the marketplace.
Absent a serious economic downturn, the regulatory environment should
continue to encourage the broadening of bank powers to allow us to
compete with less regulated nonbank financial services companies and
offer the kind of products and services our customers demand.
The use of electronic technology in financial service transactions
will continue to grow by leaps and bounds. The channels through which
customers bank will evolve as the capabilities of cards, ATMs, telephones
and PCs expand and assume larger roles than the more traditional paper-
based formats.
Most important of all, the needs of our customers are changing.
People are not so much savers as they are investors. Maine's population
is aging, and while the total population is not expected to grow over the
next decade, experts predict its composition and distribution will shift.
The precise way in which all of this will play out remains
uncertain. But for us, the basics remain the same. With motivated
people, the right technology, adequate capital and a clear sense of what
will be needed, we will succeed. Your Bank's Board, management and
employees are optimistic about the opportunities, energized by the
challenges and prepared for the future.
January 25, 1999
Dear Shareholder:
Nineteen ninety-eight was another year of improved performance for
your Bank. Net income rose 14.4 percent, and we ended the year with a
net income of $3,090,028. Net interest income rose 5 percent while non-
interest income increased 19 percent. Expenses, while up 4.9 percent,
were only slightly ahead of planned levels. Nonrecurring expenses, such
as those associated with preparing the Bank to deal with the Y2K problem,
drove some of that growth.
The direct expenses associated with preparing for potential Y2K
problems do appear as an expense in the Bank's income statement. What is
not as evident is the amount of time and energy that the Board,
management and staff have devoted in recent years to avoiding problems
associated with the Year 2000. Our goal has always been to ensure that
the century date change is as uneventful for our customers as is humanly
possible. While much of the work is behind us, we will continue working
throughout 1999 to achieve our goal.
The local economy continues to show signs of strengthening. Retail
sales figures for 1998 were up, and construction activity continues
strong. We had an active year in mortgage underwriting as the drop in
interest rates encouraged many people to refinance their mortgages. Our
loan portfolio grew by $3.3 million, and deposits rose by $10.6 million.
As a reflection of our attention to the trust business, assets under
management grew by more than $29 million. Our hope is that the nation's
current economic expansion will continue, and that downeast Maine will
continue to benefit.
We have worked hard over the last several years to expand our
business development capabilities and will continue to do so. With all of
the competition we face in our marketplace, it is important to focus on
the needs of our customers. We want to understand them, their businesses
and their financial requirements. Only by fully understanding their
needs can we be responsive in terms of the services we offer. We believe
that, while the downeast region will continue to show modest economic
growth, competition for financial services will intensify. Our capital,
our employees and our technological capabilities position us to succeed;
yet we also recognize the need to evolve along with the needs and
expectations of our customers.
During 1998, we were pleased to welcome the following individuals
who joined our staff:
Dodi Austin..........Teller
Kristina Bishop.........Teller
Lisa Carver..........Teller
Kathy Czlapinski.........Teller
Maria Hall...........Teller
Scott Hinkel.......Bookkeeping
Robin Hennigan..........Teller
Bonnie Rollins..........Teller
Donna Sawyer....Branch Supervisor
Dana Servetas.........Teller
Two new directors were elected in October: Blake "Cubby" Brown,
president and owner of Brown's Appliance and TV, and James L. Markos,
Jr., general manager of Maine Shellfish Company, Incorporated. We are
very excited about the skills and experience they both bring to Union
Trust.
In November, Thomas Perkins retired as director. Tom had served
this Bank as a director since 1979. In appreciation for his years of
service, we dedicate this Annual Report to him.
We thank you, our shareholders, directors, officers and employees
for your interest and support.
Sincerely, Sincerely,
John V. Sawyer, II Peter A. Blyberg
Chairman of the Board President and
Chief Executive Officer
Five-Year Summary (000's Omitted)
1998 1997 1996 1995 1994
Deposits $188,029 $177,386 $166,445 $164,481 $160,249
Loans 110,399 107,062 101,044 93,242 84,208
Securities *111,304 *96,065 *81,568 *76,578 *83,391
Shareholders' equity **27,577 **25,565 **23,885 **22,227 **20,570
Total assets 251,195 222,560 202,066 191,353 181,597
Net earnings 3,090 2,700 2,452 2,418 2,354
Earnings per share 6.41 5.59 5.07 5.00 4.86
Equity Ratios
Equity expressed as a percentage of average:
**1998 **1997 **1996 **1995 **1994
Deposits 15.1% 14.9% 14.4% 13.7% 12.8%
Loans 25.4% 24.6% 24.6% 25.1% 24.9%
Total assets 11.6% 12.0% 12.1% 11.9% 11.3%
Earning assets 12.8% 13.0% 13.3% 12.9% 12.8%
Other Financial Highlights
1998 1997 1996 1995 1994
Return on average
shareholders' equity** 11.6% 10.9% 10.6% 11.4% 11.9%
Return on average assets 1.3% 1.3% 1.2% 1.3% 1.3%
Return on average
earning assets 1.4% 1.4% 1.4% 1.4% 1.4%
*Carrying value. Includes available for sale securities with cost of
$101,610, $59,983, $75,095 and $70,938 at December 31, 1998, 1997, 1996
and 1995, respectively.
**Excluding net unrealized gain (loss) net of deferred taxes on available
for sale securities of $1,162,032, $437,749, ($171,460), $567,810 and
($1,389,168) at December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
Insert the following 5 year bar charts:
Earnings Per Share
Book Value Per Share
Dividends Per Share
Total Assets
Net Income
Shareholders' Equity
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
December 31, 1998
Union Bankshares Company is a one-bank holding company, organized
under the laws of the State of Maine. The Company's only subsidiary is
Union Trust Company, established in 1887 and wholly owned. 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
nonprofit organizations in eastern Maine. Union Trust offers a wide
variety of financial services with competitive interest rates; a helpful,
friendly staff; and quick, local decision-making to meet the needs of the
communities it serves. As a complement to the services offered by the
Bank, the Trust and Investment Services Department provides a broad range
of investment options to help meet the needs of our customers. Trust and
Investment Services has served generations of Maine families with estate
planning, investment management, custody, and retirement planning and
employee benefit services.
The long-term goals of Union Trust Company focus on:
becoming a market-driven sales and service organization;
becoming effective users of appropriate technology; and
building the financial strength of the Bank with steady growth of
earnings and assets and controlled risk taking consistent with
shareholder expectations.
We encourage our Relationship Managers to visit customers, listen to
them and respond with appropriate solutions to their needs. Our
Relationship Managers continue to meet with area business owners at their
places of business in an effort to understand their businesses and how
the Bank can play a role in helping them. More visits are being made to
more and more businesses each year. The Bar Harbor branch, now one-and-a-
half years old, has shown tremendous growth during 1998, confirming our
commitment to the Mount Desert Island market area.
As customers increase their demand for electronic banking services,
Union Trust is responding. During 1998, scores of customers discovered
the value of BankLinerPC (our computer banking service) and its cash
management features. For example, we have experienced a significant
increase in ACH transaction volume since 1994. This can be attributed to
the growing appeal of automated services such as direct deposit payroll
services, direct deposit of Government payments and direct debits for
monthly bills.
INSERT 5 YEAR BAR CHART
ACH ANNUAL TRANSACTION VOLUME
INSERT 3 YEAR BAR CHART
BANKLINE ANNUAL CALL VOLUME
BankLinerPC is just the most recent 24-hour financial connection
that Union Trust has established to meet its customers' needs. In
October 1998, the Jonesport branch became Union Trust's twelfth and
newest 24-hour ATM location. BankLiner (our automated 24-hour telephone
banking service) and Customer Service Call Center (answered by real
people) continue to receive record-breaking numbers of calls year after
year. Customers are wanting more information and more ways to access
their accounts more often.
Union Trust Company has a documented record of consistent earnings
growth, posting an earnings increase in 1998 of 14.4%. Loans grew to
$110 million. Over the years, as we have worked to expand our fee-based
services, Trust and Investment Services has been a major focus. The
department's contribution to net income increases every year. During
1998, trust assets under management grew by 25.6% over 1997.
Union Trust takes pride in delivering personalized, responsive
service and developing quality, innovative products for its customers.
Union Trust also supports the people and communities it serves through a
far-reaching donation program. The program addresses human needs within
the community by contributing to various nonprofit organizations,
community development efforts and environmental groups. It also
encourages and supports the thousands of hours of volunteer time given
each year by the Bank's employees, directors and retirees. During 1998,
we elected two new directors to the Board, Blake "Cubby" Brown and Jim
Markos. We are excited to have their business expertise and community
connections at work for the Bank.
REVIEW OF FINANCIAL STATEMENTS
The following discussion and analysis focus on the factors affecting
Union Bankshares Company's (the "Company") financial condition at
December 31, 1998 and 1997, and the financial results of operations
during 1998, 1997 and 1996. The consolidated financial statements and
related notes beginning on page 22 of this report should be read in
conjunction with this review.
RESULTS OF OPERATIONS
The operating results of the Company depend primarily on its net
interest income, which is the difference between interest income on
earning assets (primarily loans and investments) and interest expense
(primarily deposits and borrowings). The Company's results are also
affected by the provision for loan losses, which reflects management's
assessment of the adequacy of the allowance for loan losses; noninterest
income, including gains and losses on the sales of loans and securities;
noninterest expenses; and income tax expense. Each of these major
components of the Company's operating results is highlighted below.
NET INCOME
The Company reported net income in 1998 of $3,090,028, an increase
of $389,556 or 14.4% over 1997, as compared to an increase of $248,500 or
10.1% and $33,915 or 1.4% for 1997 and 1996, respectively.
The following table summarizes the status of the Company's earnings
and performance for the periods stated.
December 31, 1998 1997 1996
Earnings per share $ 6.41 $ 5.59 $ 5.07
Return on average shareholders' equity 11.6% 10.9% 10.6%
Return on average assets 1.3% 1.3% 1.2%
Return on average earning assets 1.4% 1.4% 1.4%
The improved results were due to expense control efforts, increases
in noninterest income and moderate increases in net interest income,
which amounted to $9,926,607, $9,452,159 and $9,137,524 for the years
ended 1998, 1997 and 1996, 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 nonearning
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 balances during the
indicated periods. For the purposes of the table and the following
discussion, (1) income from interest earning assets and net interest
income are presented on a tax equivalent basis and (2) nonaccrual loans
have been included in the appropriate average balance loan category, but
unpaid interest on nonaccrual loans has not been included for purposes of
determining interest income.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
(In Thousands)
(On a Tax Equivalent Basis)
1998 1997 1996
Avg Interest Yield/ Avg Interest Yield/ Avg Interest Yield/
Bal Earned/Pd Rate Bal Earned/Pd Rate Bal Earned/Paid Rate
Assets
Interest Earning Assets:
Securities available
for sale $ 77,517 $ 5,278 6.81 $ 72,741 $ 5,182 7.12 $ 80,333 $ 5,256 6.54
Securities held to
maturity 23,968 1,510 6.30 22,689 1,437 6.33 3,772 369 9.78
Federal funds
sold 6,384 326 5.11 598 41 6.86 1,411 76 5.39
Loans (net) 108,057 10,241 9.47 100,208 9,660 9.64 94,139 9,192 9.76
Total interest earning
assets 215,926 $17,355 8.04 196,236 $16,320 8.32 179,655 $14,893 8.28
Other nonearning
assets 19,699 18,878 14,926
$235,625 $215,114 $194,581
Liabilities
Interest Bearing Liabilities:
Savings
deposits $ 69,656 $ 1,131 1.62 $ 65,432 $ 1,119 1.71 $ 65,770 $ 1,172 1.78
Time deposits 77,545 4,223 5.44 73,419 4,298 5.85 67,294 3,752 5.57
Money market
accounts 11,765 560 4.76 12,271 482 3.93 14,107 478 3.39
Borrowings 18,077 1,260 6.97 14,007 835 5.96 4,012 229 5.71
Total interest bearing
liabilities 177,043 $ 7,174 4.05 165,129 $ 6,734 4.08 151,183 $ 5,631 3.72
Other noninterest bearing
liabilities & shareholders'
equity 58,582 49,985 43,398
$235,625 $215,114 $194,581
Net interest income $10,181 $9,586 $9,262
Net interest rate spread 3.99 4.24 4.56
Net interest margin 4.72 4.88 5.16
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest earning assets and interest
bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old
volume), (2) changes in volume (change in volume multiplied by old rate),
and (3) changes in rate/volume (change in rate multiplied by change in
volume).
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
For the years ended December 31, 1998, 1997 and 1996
(In Thousands)
Year Ended December 31, 1998 vs. 1997
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets
Securities available for sale $337 $(488) $83 $(68)
Securities held to maturity 80 (37) 74 117
Federal funds sold 397 (296) 184 285
Loans, net 757 (751) 575 581
Total interest earning assets 1,571 (1,572) 916 915
Interest Bearing Liabilities
Savings deposits 72 (71) 11 12
Time deposits 238 (228) (86) (76)
Money market accounts (20) 24 74 78
Borrowed funds 242 (284) 468 426
Total interest bearing liabilities 532 (559) 467 440
Net change in net interest income $1,039 $(1,013) $449 $475
Year Ended December 31, 1997 vs. 1996
Increase (Decrease)
Due to Change In
Volume Rate Rate/Volume* Total
Interest Earning Assets
Securities 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 $(228) $ 316
*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 $474,448 or 5.0% during 1998. 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 money
market accounts, certificates of deposit and borrowed funds. During
1997, net interest income increased by $314,635 or 3.4% compared to 1996.
This increase was attributed to higher loan and investment volumes,
offset by a higher cost of funds (interest on deposits and borrowings).
In 1996, net interest income increased $334,013 or 3.8% due mainly to
higher loan volumes offset by interest expense on certificates of
deposit. The weighted average yield on a tax equivalent basis on
interest earning assets was 8.15% for 1998, down slightly over 1997 of
8.32%. In 1996, the weighted average yield was 8.28%. The Company's net
interest margin was 4.72%, 4.88% and 5.16% for 1998, 1997 and 1996,
respectively, and the net interest income spread was 3.99% in 1998, 4.24%
in 1997 and 4.56% in 1996.
Interest and dividend income increased $914,358 or 5.7% during 1998,
primarily due to increased interest on loans and investments. Loan
increases, particularly in real estate loans, 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 available for sale 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
$1,417,984 or 9.6% in 1997 and $913,020 or 6.6% in 1996.
The amount of nonaccrual loans can also affect the average yield
earned on all outstanding loans. Nonaccrual loans for 1998, 1997 and
1996 were insignificant, and therefore did not have a material effect on
the average loan yield.
Interest expense on deposits and borrowings increased $439,910 or
6.5% in 1998 compared to 1997. This increase is attributable both to
increases in borrowings and deposits and the interest rates paid on those
borrowings and deposits. 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 1997 increased $1,103,349 or 19.6%
over 1996. This increase was primarily driven by the expense of short-
term borrowings and certificates of deposit.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $285,000 in 1998. This level was
set reflecting increased loan volume, estimated credit losses for
specifically identified loans, as well as estimated probable credit
losses inherent on the remainder of the loan portfolio, local economic
conditions and loan trends. There was a $120,000 provision in 1997 and
1996, respectively.
The process of evaluating the adequacy of the allowance for loan
losses involves a high degree of management judgment, based, in part, on
systematic methods. These methods include a loan by loan analysis of all
larger commercial and commercial real estate loans as well as those that
were nonperforming 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 nonperforming loans, delinquent loans and
net charge-offs; new loan originations; and other asset quality
considerations. During 1998, the Company implemented an independent loan
review program that supports the Company's lending strategies, monitors
compliance with established loan policies and procedures and identifies
credit trends.
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 judgments 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,
1998 1997
Nonaccrual loans $ 534 $ 503
Loans past due 90 days and accruing 47 209
Other real estate owned
(including insubstance foreclosure) 376 376
Total nonperforming assets 957 1,088
Ratio of total nonperforming loans to capital and the
allowance for loan losses (Texas ratio) .019 .025
Ratio of net recoveries (charge-offs) to loans .001 .001
Ratio of allowance for loan losses to loans .02 .02
Coverage ratio (allowance for loan losses divided by
nonperforming assets) 2.543 2.034
Ratio of nonperforming assets to total assets .004 .005
Ratio of nonperforming loans to total loans .005 .007
NONINTEREST INCOME
Total noninterest income was $3,155,412, $2,608,206 and $2,207,131
for the years ended December 31, 1998, 1997 and 1996, respectively. The
$507,206 or 19.4% increase in noninterest income during 1998 was
primarily attributable to a $131,219 or 22.1% increase in trust
department income, a $201,586 or 57.2% increase in loan department income
and a $161,936 or 22.8% increase in other income, primarily due to
mortgage servicing rights, which increased other income by $147,910. The
$401,075 or 18.2% increase during 1997 was primarily due to increases in
trust department income, VISA income and mortgage servicing rights. The
$217,846 or 10.9% increase during 1996 was primarily due to increases in
virtually all noninterest income categories.
The following table summarizes information relating to the Company's
noninterest income:
Year Ended December 31,
1998 1997 1996
Net security gains (losses) $ 31,842 $ (1,463) $ 2,718
Trust department income 726,180 594,961 488,498
Service income 331,574 343,272 337,625
VISA income 642,097 611,239 495,203
Loan department income 554,120 352,534 360,475
Other noninterest income 869,599 707,663 522,612
Total noninterest income $3,155,412 $2,608,206 $2,207,131
NONINTEREST EXPENSE
Total noninterest expenses, which consist primarily of employee
compensation and benefits, occupancy and equipment expenses and other
general operating expenses, increased $397,098 or 4.9% during 1998,
$293,210 or 3.8% during 1997 and $263,477 or 3.5% during 1996. The
increase in noninterest expenses in 1998 was attributable to salary and
staffing increases, depreciation, taxes and rent expenses related to our
newest branch in Bar Harbor and expenses related to strategic
initiatives. The increase in 1997 was attributable to net occupancy and
equipment expenses 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.
Salaries and wages and employee benefits, one of the largest
components of non interest expenses, remained relatively flat during 1997
and 1996 due to the strategic plan to grow the Bank with the current
resources available.
INCOME TAXES
The Company recognized $1,294,000, $1,224,000 and $1,050,000 in
income tax expense for the years ended December 31, 1998, 1997 and 1996,
respectively. The effective tax rate was 29.5% for 1998, 31.2% for 1997
and 30.0% for 1996. The Bank has sufficient refundable taxes paid in
available carry back years to fully realize its recorded deferred tax
asset of $1,490,796 at December 31, 1998.
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 $28,634,974 or 12.9% in 1998, primarily due
to increased loan volume and growth in the securities portfolio, compared
to an increase of $20,493,574 or 10.1% in 1997.
Securities available for sale, which include U.S. Government
securities, callable agency bonds, municipals and mortgage backed
securities, increased $42,723,673 or 70.4%, due primarily to a transfer
from held to maturity investments of $28,502,694 and planned portfolio
growth. The overall increase in securities available for sale is
consistent with the Company's investment strategy for 1998. In
particular, during 1998, the Bank elected to maintain the level of the
securities portfolio to enhance its contribution to net interest income,
maximize yields, reduce exposure of continuously callable agencies,
manage cash flow, increase municipals as part of the Bank's overall tax
strategy and control risk. As of December 31, 1998, the Company has a
net unrealized gain of $1,760,656 in this portfolio.
In 1997, securities available for sale decreased $14,188,569 or
19.0%. In particular, the Bank elected to restructure 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. As of December
31, 1997, the Company had a net unrealized gain of $663,257 in this
portfolio.
Securities held to maturity, which include in-state municipals,
decreased $28,423,705 or 86.7% in 1998, primarily due to a transfer to
securities available for sale compared to a $28,012,886 increase in 1997.
The changes in the securities portfolio reflect the Company's
efforts to meet asset and liability objectives and otherwise manage its
liquidity and funding needs within the parameters of the Company's
policies. For further discussion, see the Risk Management section, page
17.
LOANS
Total loans reached a record high of $114,293,312 during 1998 and,
as of December 31, 1998, had increased $3,337,081 or 3.1% over 1997,
primarily due to a $5,455,399 or 8.0% increase in real estate loans. As
of December 31, 1997, loans increased $6,018,203 or 6.0% over 1996.
There has been no material change in the Bank's loan mix, and as of
December 31, 1998, the loan portfolio remains diversified with a total of
66% secured by real estate of which consumer loans were 33% and
commercial real estate were 33%. Loans to individuals for household,
family and other personal expenditures were 9%, home equities were 5%,
commercial loans accounted for 15% and 5% was invested in municipal
loans.
Loan mix and growth trends, as of December 31, 1998, are illustrated
in the graphs below:
INSERT 5 YEAR BAR CHART
LOAN GROWTH TRENDS
INSERT PIE CHART
LOAN MIX
DEPOSITS
During 1998, deposits peaked at a record level of $191,457,944 and
increased $10,643,151 or 6.0% by December 31, 1998, compared to a
$10,940,398 or 6.6% increase over the same period in 1997.
Growth was primarily in certificates of deposit and money market
accounts, due directly to special promotions, competitive rates and
market volatility.
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. This
deposit swing is predictable and does not have a material adverse effect
on the Bank.
Deposit mix and growth trends, as of December 31, 1998, are
illustrated in the graphs below:
INSERT 5 YEAR BAR CHART
DEPOSIT GROWTH TRENDS
INSERT PIE CHART
DEPOSIT MIX
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
The Federal Reserve Board's capital requirement generally calls for
an 8% total capital ratio, of which 3% must be comprised of Tier I
capital. Risk based capital ratios are calculated by weighing assets and
off balance sheet instruments according to the relative credit risk. As
of December 31, 1998, the Company's Tier I ratio of 20.5% far exceeds the
Federal Reserve Board's guidelines.
Total shareholders' equity increased $2,736,478 in 1998, primarily
as a result of net income of $3,090,028, offset by dividends paid of
$964,144 and a $724,283 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% 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 1998, 1997 and 1996 were 31.2%, 32.8% and 32.9% of net income,
respectively.
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 1998 and 1997 are listed in the
following table.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1998 120.00 to 125.00 125.00 to 136.50 126.00 to 130.00 130.00 to 130.00
1997 93.00 to 104.00 93.00 to 97.00 88.00 to 100.00 100.00 to 110.00
As of December 31, 1998, there were 691 holders of record of Union
Bankshares Company common stock.
Quarterly dividends per share paid by the Company in 1998 and 1997
were as follows:
1998 1997
1st Quarter $ .50 $ .41
2nd Quarter $ .50 $ .42
3rd Quarter $ .50 $ .50
4th Quarter $ .50 $ .50
Total $2.00 $1.83
RISK MANAGEMENT
The Company's continued success is primarily dependent upon its
ability to strategically manage financial and nonfinancial risks.
Nonfinancial risks facing the Company include:
Competition from banks and nonbank financial service companies
Changing regulatory and political environments
Rapid change in technology
Demographic changes
Economic changes
Financial risks managed by the Company include:
Credit risk
Interest rate risk (including asset/liability management)
Market risk
Liquidity risk
Off balance sheet risks/commitments
CREDIT RISK MANAGEMENT
The Company's net loan portfolio as of December 31, 1998 accounted
for 43.0% 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 13, "Provision for Loan Losses," and Note 16 to the consolidated
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising
from adverse changes in market rates/prices such as interest rates,
foreign currency exchange rates, commodity prices and equity prices. The
Company's primary market risk exposure is interest rate risk. The
ongoing monitoring and management of this risk is an important component
of the Company's asset/liability management process, which is governed by
policies established by its Board of Directors that are reviewed and
approved annually. The Board of Directors delegates responsibility for
carrying out the asset/liability management policies to the
Asset/Liability Committee (ALCO). In this capacity ALCO develops
guidelines and strategies impacting the Company's asset/liability
management-related activities based upon estimated market risk
sensitivity, policy limits and overall market interest rate
levels/trends.
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
Interest rate risk can be defined as the exposure of the Company's
net income or financial position to adverse movements in interest rates.
Changes in the level of interest rates also can affect:
The amount of loans originated/sold by an institution
The ability of the borrower to repay his/her loan
The average maturity of mortgage loans
The value of the Company's interest earning assets
The market value of available for sale securities
The Company, through management of the relationship of interest rate
sensitive assets to interest rate sensitive liabilities, reduces the
volatility of its net income.
To accomplish this, the Company has undertaken various steps to
increase the percentage of fixed rate assets and to increase the average
maturity of such assets, in particular through the loan products offered
and its 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 (NII) is modeled based on both
an immediate rise or fall in interest rates ("rate shock"). The model is
based on the actual maturity and repricing characteristics of interest
rate sensitive assets and liabilities and factors in projections for
activity levels by product lines of the Company. Assumptions are made as
to the changing relationship between different interest rates as interest
rates increase/decrease (basis risk) and the customer's ability to prepay
loans and withdraw deposit balances or transfer them to a higher yielding
account (embedded option). The sensitivity analysis is compared to ALCO
policy limits, which specify a maximum tolerance level for NII exposure
over a one-year horizon, assuming no balance sheet growth, given both a
200-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, 1998 and 1997.
Estimated
Rate Change NII Sensitivity
1998 1997
+200 bp +6.0% +2.0%
-200 bp -8.0% -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 cash flows and others.
While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions, including how customer
preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the
sensitivity analysis, actual results will also differ due to:
prepayment/refinancing levels likely deviating from those assumed, the
potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes and other internal/external variables. Furthermore, the
sensitivity analysis does not reflect actions that ALCO might take in
responding to or anticipating changes in interest rates.
Based on the information and assumptions in effect on December 31,
1998, 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 Company structures
its liquidity to meet the cash flow requirements of its customers as well
as day to day operating expenses. Many factors affect the Company's
ability to meet its liquidity needs, including its mix of assets and
liabilities, interest rates and local economic conditions. The Company's
actual inflow and outflow of funds is detailed in the Consolidated
Statement of Cash Flows on pages 25-26.
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
1998 and 1997, the Company used its sources of funds primarily to meet
ongoing commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan originations and maintain a substantial securities
portfolio.
The Company's liquidity policy currently includes requirements that
the Company maintain liquidity as a percentage of total assets at a
minimum of 5%. Access to Federal Home Loan Bank advances allows the
Company to maintain a lower liquidity level than might otherwise be
required. As of December 31, 1998, the Company had a 6.6% liquidity
ratio.
OFF BALANCE SHEET RISKS AND COMMITMENTS
As of December 31, 1998 and 1997, the total approved loan
commitments outstanding, the commitment under unused lines of credit and
the unadvanced portion of loans amounted to $32,528,000 and $28,230,000,
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, 1998 and 1997 exceeds all applicable
federal and state laws and regulations regarding minimum regulatory
capital and is categorized as a well-capitalized bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes presented in
this Annual Report have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars
without consideration of changes in the relative purchasing power of
money over time due to inflation.
Unlike many industrial companies, substantially all of the assets
and virtually all of the liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on
the Company's performance than has the general level of inflation. Over
short periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as inflation.
RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards during 1997 and 1998:
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
SFAS No. 132 Employer's Disclosure about Pension and Other Post-Retirement
Benefits
SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities
SFAS No. 130 is effective for periods beginning after December 15,
1997. The Company implemented SFAS No. 130 in 1998, and its required
disclosures are included in the consolidated statements of changes in
shareholders' equity.
SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company's operations include only banking activities.
Therefore, SFAS No. 131 imposes no additional disclosure requirements.
SFAS No. 132, which revises employers' disclosures about pension and
other post-retirement benefits, is effective for years beginning after
December 31, 1997. The Company implemented SFAS No. 132 in 1998. The
required disclosures have been made in the Company's consolidated
financial statements.
SFAS No. 133, which establishes accounting and reporting standards
for derivative instruments and for hedging activity, is effective for
fiscal years beginning after June 15, 1999. The Company adopted SFAS No.
133 effective July 1, 1998. During the three-year period ended December
31, 1998, the Company did not hold any derivative instruments, and
management does not expect to enter into derivative transactions in the
near future. The effect of adopting SFAS No. 133 on the consolidated
financial statements of the Company is limited to the transfer of
securities from held to maturity to available for sale.
YEAR 2000 READINESS
It has been widely publicized that many computer software
applications and hardware will not operate past the year 2000 without
modifications. This problem results from the fact that some computer
systems store dates in two-digit format (i.e., 98) instead of four-digit
format (1998). 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."
Union Trust, recognizing the importance of this issue, has been
working on this problem for some time. The Company adopted a plan of
action in 1997 to minimize the risks to the Company's operations posed by
the Year 2000 event. The plan included the formation of a Technology
Steering Committee to assess, monitor and review vendor compliance and
certification. The committee's charter also called for it to identify
clearly all systems and equipment used in the day to day operations of
the Company that might be affected and to oversee the remediation of any
date recognition problems thus identified.
During 1998, guided by the stringent requirements of federal and
state banking regulators and a comprehensive plan of action developed by
the Technology Steering Committee, the Company completed the assessment
phase, identified mission critical systems, tested all those internal
systems and worked on contingency plans. It has also taken steps to
verify that all third party vendors, suppliers and other related business
parties are adequately prepared for the year 2000. Primarily for
operational reasons, Union Trust replaced its mainframe operating system
in 1995. The system vendor has certified to the Company that the system
is Year 2000 compliant, and the Company has completed the validation of
the system's readiness. Union Trust is currently on track with the
Federal Financial Institutions Examination Council's (FFIEC) required
time frames for compliance, and the Company's efforts have been examined
by the bank regulators. The Company has also embarked upon an awareness
program to educate its employees and customers regarding Year 2000
issues. During 1998, the Company participated in several seminars to
educate the public about this issue. The Company also hosted discussion
groups with area professionals to review potential areas of concern.
This program will be expanded during 1999 to include more customer
communications and public seminars.
The Company has estimated that the total costs directly relating to
fixing Year 2000 issues, such as hardware purchases, software
modification and system testing, will not have a material effect on the
performance of the Company. The Company estimates that the total costs
for evaluation, remediation and testing could amount to as much as
$100,000, of which $25,000 was expensed in 1998. In addition, it is
estimated that approximately 2,500 employee-hours were utilized during
1998 for related activities, which are not reflected in the above
figures.
The Company's most reasonable, likely, worst case Year 2000
scenarios may include the failure of a vendor or third party provider -
which is beyond the Company's control. In the event a failure occurs,
the Company will implement manual contingency systems without serious
impact on the Company's financial condition. The Company has created
contingency plans for all mission critical functions. These plans will
be tested in 1999 based on the latest FFIEC guidelines.
Management believes the Company is adequately addressing the Year
2000 issue and that the current preparations and testing being conducted
throughout the organization seek to minimize any potential adverse
effects on the Company or its customers.
UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
ASSETS
Cash and due from banks (note 2) $ 7,845,223 $ 7,650,086
Federal funds sold 9,268,135 2,251,105
Available for sale securities, at market
value (note 3) 103,370,494 60,646,731
Held to maturity securities, at cost (note 4)
(market value $4,503,123 and $33,242,473 at
December 31, 1998 and 1997, respectively) 4,375,981 32,799,686
Other investment securities at cost, which
approximates market value 3,557,700 2,618,700
Loans held for sale 6,137,956 3,138,218
LOANS (note 5):
Real estate 73,294,736 67,839,337
Commercial and industrial 15,979,032 18,565,543
Municipal 5,798,085 4,851,637
Consumer 15,327,356 15,805,611
110,399,209 107,062,128
Deferred loan costs (fees) 23,222 (24,160)
Less allowance for loan losses (note 6) 2,434,636 2,212,740
Net loans 107,987,795 104,825,228
Premises, furniture and equipment, net (note 8) 2,653,775 2,842,151
Other assets (notes 7, 9, 13 and 14) 5,997,746 5,787,926
Total assets $251,194,805 $222,559,831
LIABILITIES
DEPOSITS
Demand deposits $ 22,823,763 $ 20,574,024
Savings deposits (including NOW deposits
totaling $37,114,944 in 1998 and
$36,185,785 in 1997) 66,796,459 65,161,440
Money market accounts 18,751,256 15,008,720
Time deposits (note 10) 79,657,538 76,641,681
Total deposits 188,029,016 177,385,865
Advances from Federal Home Loan Bank (note 11) 20,451,250 9,273,250
Other borrowed funds (note 12) 8,965,977 5,690,975
Other liabilities (notes 13 and 14) 5,008,844 4,206,501
Total liabilities 222,455,087 196,556,591
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 1998 and 1997 $ 6,069,300 $ 6,069,300
Surplus 3,963,432 3,948,797
Retained earnings (note 15) 17,833,973 15,708,089
Net unrealized gain on available
for sale securities net of deferred
tax asset of $598,622 and $225,507
at 1998 and 1997, respectively (note 3) 1,162,032 437,749
Treasury stock, at cost (3,648 shares in 1998 and
2,621 shares in 1997) (289,019) (160,695)
Total shareholders' equity 28,739,718 26,003,240
Total liabilities and shareholders' equity $251,194,805 $222,559,831
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, 1998, 1997 AND 1996
1998 1997 1996
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $10,240,991 $ 9,659,971 $ 9,191,876
Interest on securities available for sale 5,113,775 5,182,071 5,256,042
Interest on securities held to maturity 1,420,204 1,303,582 244,561
Interest on federal funds sold 325,740 40,728 75,889
Total interest income 17,100,710 16,186,352 14,768,368
INTEREST EXPENSE
Interest on savings deposits 1,131,252 1,119,098 1,171,987
Interest on money market accounts 560,186 481,714 477,720
Interest on time deposits 4,222,178 4,298,169 3,751,703
Interest on short-term borrowings 1,260,487 835,212 229,434
Total interest expense 7,174,103 6,734,193 5,630,844
Net interest income 9,926,607 9,452,159 9,137,524
Provision for loan losses (note 6) 285,000 120,000 120,000
Net interest income after provision
for loan losses 9,641,607 9,332,159 9,017,524
NONINTEREST INCOME
Net securities gains (losses) (note 3) 31,842 (1,463) 2,718
Trust department income 726,180 594,961 488,498
Service charges on deposit accounts 331,574 343,272 337,625
VISA income 642,097 611,239 495,203
Loan department income 554,120 352,534 360,475
Other income 869,599 707,663 522,612
Total noninterest income 3,155,412 2,608,206 2,207,131
Income before noninterest expenses 12,797,019 11,940,365 11,224,655
NONINTEREST EXPENSE
Salaries and wages 3,182,478 3,040,454 2,972,682
Pension and other employee
benefits (note 13) 976,522 977,292 1,036,792
Insurance 97,853 112,761 95,310
FDIC insurance 20,859 20,312 1,500
Net occupancy expenses 955,316 888,014 845,255
Equipment expenses 289,376 278,267 233,617
Advertising 176,649 211,180 266,544
Supplies 272,239 212,258 214,975
Postage 154,161 161,254 131,246
Telephone 141,738 143,499 142,971
Other professional fees 319,975 347,608 235,280
Other expenses 1,825,825 1,622,994 1,546,511
Total noninterest expenses 8,412,991 8,015,893 7,722,683
Income before income taxes 4,384,028 3,924,472 3,501,972
Income taxes (note 14) 1,294,000 1,224,000 1,050,000
Net income $3,090,028 $2,700,472 $2,451,972
Net income per common share $ 6.41 $ 5.59 $ 5.07
Cash dividends declared per common share $ 2.00 $ 1.83 $ 1.67
Weighted average common shares outstanding 482,061 483,022 484,067
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, 1998, 1997 and 1996
ACCUMULATED
OTHER SHARE-
COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS STOCK EARNINGS INCOME EQUITY
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
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)
Total comprehensive
income 0 0 0 2,451,972 (739,270) 1,712,702
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)
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
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
Total comprehensive
income 0 0 0 2,700,472 609,209 3,309,681
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)
Balance at December
31, 1997 $6,069,300 $3,948,797 $(160,695) $15,708,089 $ 437,749 $26,003,240
Net income,
1998 0 0 0 3,090,028 0 3,090,028
Change in net unrealized gain
(loss) on available for sale
securities, net of tax
of $373,116 0 0 0 0 724,283 724,283
Total comprehensive
income 0 0 0 3,090,028 724,283 3,814,311
Sale of 425 shares
treasury stock 0 0 53,546 0 0 53,546
Repurchase of 1,452 shares
treasury stock 0 0 (181,870) 0 0 (181,870)
Redeem minority interest
shareholders 0 14,635 0 0 0 14,635
Cash dividends
declared 0 0 0 (964,144) 0 (964,144)
Balance at December
31, 1998 $6,069,300 $3,963,432 $(289,019) $17,833,973 $1,162,032 $28,739,718
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, 1998, 1997 and 1996
1998 1997 1996
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income $ 3,090,028 $ 2,700,472 $ 2,451,972
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation, amortization and accretion 469,072 (44,744) 441,931
Provision for loan losses 285,000 120,000 120,000
Net (gain) loss on sale of available
for sale securities (31,842) 1,463 (2,718)
Net (gain) loss on sale of equipment 6,467 944 (3,778)
(Gain) loss on sale of other
real estate owned 0 22,390 (16,918)
Provision for other real estate owned 0 15,000 15,000
Originations of loans held for sale (23,861,002) (8,526,648) (11,993,334)
Proceeds from loans held for sale 20,861,264 8,629,484 9,979,727
Net change in other assets (16,783) (315,375) (455,947)
Net change in other liabilities 3,722,472 553,860 526,397
Net change in deferred loan
origination fees (47,382) 49,374 (129,963)
Provision for deferred income
tax (benefit) expense (211,280) (100,000) (91,529)
Net cash provided by operating
activities $ 4,266,014 $ 3,106,220 $ 840,840
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available
for sale securities $ 13,525,454 $41,170,105 $3,001,060
Purchase of available for
sale securities (54,796,618) (41,533,761) (35,337,132)
Proceeds from maturities and
principal payments on available
for sale securities 28,548,951 14,856,692 26,876,205
Purchase of held to maturity securities (4,804,544) (29,663,803) (1,605,000)
Proceeds from maturities and
principal payments on held to
maturity securities 4,347,687 2,082,547 945,192
Purchase of other investment securities 939,000 0 0
Proceeds from sales of other real estate owned 0 429,528 380,000
Net increase in loans to customers (3,400,185) (6,108,042) (7,715,503)
Proceeds from sales of fixed assets 7,900 0 16,541
Capital expenditures (286,810) (368,255) (207,087)
Net cash used by investing activities $(17,797,165) $(19,134,989) $(13,645,724)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in demand, savings and
money market accounts 7,627,294 2,028,542 (1,652,257)
Increase in time deposits 3,015,857 8,911,856 2,739,855
Net changes in short-term borrowed funds 11,178,000 6,407,681 8,446,544
Payment to eliminate fractional shares 0 (29,699) 0
Purchase of treasury stock (181,870) (113,440) (1,520)
Sale of treasury stock 53,546 8,780 15,810
Elimination of minority shares 14,635 0 0
Dividends paid (964,144) (885,940) (807,628)
Net cash provided by financing
activities $ 20,743,318 $ 16,327,780 $8,740,804
Net (decrease) increase in cash
and cash equivalents 7,212,167 299,011 (4,064,080)
Cash and cash equivalents at
beginning of year 9,901,191 9,602,180 13,666,260
Cash and cash equivalents at
end of year $ 17,113,358 $ 9,901,191 $9,602,180
The accompanying notes are an integral part of these consolidated
financial statements.
1998 1997 1996
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 7,174,676 $ 6,501,460 $ 5,665,358
Income taxes paid $ 1,518,991 $ 1,425,987 $ 1,077,250
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net increases (decreases) required by Statement
of Financial Accounting Standards No. 115
"Available for Sale Securities" $ 1,097,399 $ 923,044 $(1,121,390)
Deferred income tax assets $ (373,116) $ (313,835) $ 382,120
Net unrealized gain (loss) on available
for sale securities $ 724,283 $ 609,209 $ (739,270)
Cost of held to maturity securities transferred
to available for sale $28,502,694 $ 0 $ 0
Unrealized gain on securities transferred to
available for sale, net of deferred taxes
of $138,627 $ 269,100 $ 0 $ 0
The accompanying notes are an integral part of these consolidated
financial statements.
UNION BANKSHARES COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Union Bankshares Company (the Company) provides a full range of
banking services to individual and corporate customers through its
subsidiary and branches in Maine. It is subject to regulations of
certain federal agencies and undergoes periodic examinations by those
regulatory authorities.
Operating Segments
The Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective January 1,
1998. The Company's operations are comprised of a single operating
segment; therefore, SFAS No. 131 imposes no additional disclosure
requirements.
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 judgments 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.
Earnings and Cash Dividends per Share
At December 31, 1997, the Company adopted 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.
Investments
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," on July 1, 1998. The Company does
not hold any derivative instruments or engage in hedging activities,
therefore, adoption of SFAS No. 133 on the financial statements of the
Company is limited to the transfer of held to maturity securities to
available for sale upon adoption of the standard.
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 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, 1998 and 1997.
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, 1998 and 1997. 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. Effective January 1,
1997, the Company adopted SFAS No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities," which
requires capitalization of mortgage servicing rights for loans originated
after January 1, 1996. The impact of adoption of SFAS 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.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. The required disclosures for all periods
presented are included in the consolidated statement of changes in
shareholders' equity. Comprehensive income includes both net income and
other comprehensive income. The only component of other comprehensive
income is net unrealized gains and losses on available for sale
securities, net of deferred taxes.
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, 1998 was
$2,781,000. 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 fair value. A
summary of the cost and fair values of available for sale securities at
December 31, 1998 and 1997 is as follows:
Gross Gross
Amortized Unrealized Unrealized Carrying &
Cost Gains Losses Fair Value
1998 1998 1998 1998
U.S. Treasury securities and other
U.S. Government agencies $ 92,637,535 $1,424,490 $(91,311) $ 93,970,714
Obligations of state and
political subdivisions 8,499,474 272,654 (3,573) 8,768,555
Other securities 472,829 158,396 0 631,225
Totals $101,609,838 $1,855,540 $(94,884) $103,370,494
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
The amortized cost and fair value of available for sale debt
securities at December 31, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $ 3,131,909 $ 3,152,651
Due in one year through five years 13,754,454 13,959,125
Due after five years through ten years 45,558,377 46,531,817
Due after ten years 38,692,269 39,095,676
Totals $101,137,009 $102,739,269
Upon adoption of SFAS No. 133, an entity is allowed to change the
classification of its securities from held to maturity to available for
sale. The Company reclassified certain held to maturity investments to
available for sale with a cost of $28,502,694 and an unrealized gain of
$407,727 upon adoption of SFAS No. 133 on July 1, 1998.
Proceeds from the sale of securities were $13,525,454, $41,170,105
and $3,001,060 in 1998, 1997 and 1996, respectively. Gross realized
gains were $58,719, $116,446 and $8,638 in 1998, 1997 and 1996,
respectively. Gross realized losses were $26,877, $117,909 and $5,920 in
1998, 1997 and 1996, respectively.
4. HELD TO MATURITY SECURITIES
The carrying amounts of held to maturity securities for 1998 and
1997 as shown in the Company's consolidated balance sheets, and their
approximate fair values at December 31, are as follows:
Gross Gross
Book Unrealized Unrealized Fair
Value Gains Losses Value
1998 1998 1998 1998
Obligations of state and
political subdivisions $4,375,981 $140,142 $(13,000) $4,503,123
Totals $4,375,981 $140,142 $(13,000) $4,503,123
1997 1997 1997 1997
Obligations of state and
political subdivisions $ 6,985,439 $113,508 $ (2,565) $ 7,096,382
U.S. Government agencies 25,814,247 334,905 (3,061) 26,146,091
Totals $32,799,686 $448,413 $ (5,626) $33,242,473
The amortized cost and fair value of held to maturity securities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $ 150,110 $ 152,703
Due after one year through five years 1,610,612 1,673,821
Due after five years through ten years 1,235,259 1,289,359
Due after ten years 1,380,000 1,387,240
Totals $4,375,981 $4,503,123
Nontaxable interest income on municipal investments was $507,771,
$274,081 and $235,486 for 1998, 1997 and 1996, respectively.
5. LOANS
At December 31, 1998 and 1997, loans on nonaccrual status totaled
approximately $534,000 and $503,000, respectively. If interest had been
accrued on such loans, interest income on loans would have been
approximately $40,000, $39,000 and $32,000 higher in 1998, 1997 and 1996,
respectively. Loans delinquent by 90 days or more that were still on
accrual status at December 31, 1998 and 1997 totaled approximately
$47,000 and $209,000, 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 $2,258,380 and
$3,655,081 at December 31, 1998 and 1997, respectively. New loans
granted to related parties in 1998 totaled $946,303; payments and
reductions amounted to $2,343,004.
6. ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses is as follows for the
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
Balance, beginning of year $2,212,740 $2,083,831 $1,878,169
Provision for loan losses 285,000 120,000 120,000
Balance before loan losses 2,497,740 2,203,831 1,998,169
Loans charged off 112,810 225,365 87,823
Less recoveries on loans charged off 49,706 234,274 173,485
Net loan charge-off (recoveries) 63,104 (8,909) (85,662)
Balance, end of year $2,434,636 $2,212,740 $2,083,831
Impairment of loans having recorded investments of $207,686 at
December 31, 1998 and $21,728 at December 31, 1997 has been recognized in
conformity with SFAS No. 114, as amended by SFAS No. 118. The average
recorded investment in impaired loans during both 1998 and 1997 was
$69,229 and $21,000, respectively. The total allowance for loan losses
related to these loans was $170 and $217 on December 31, 1998 and 1997,
respectively. There was no interest income recognized on impaired loans
in 1998, 1997 and 1996.
7. LOAN SERVICING
The Bank services loans for others amounting to $57,721,623 at
December 31, 1998. Mortgage servicing rights of $207,659 and $149,153
were capitalized in 1998 and 1997, respectively, and have been written
down to their fair value of $203,504 and $91,096 through a valuation
allowance at December 31, 1998 and 1997, and are included in other
assets. Amortization of mortgage servicing rights were $53,613 and
$28,227 in 1998 and 1997, respectively.
8. PREMISES, FURNITURE AND EQUIPMENT
Detail of bank premises, furniture and equipment is as follows:
1998 1997
Land $ 133,378 $ 133,378
Buildings and improvements 3,462,435 3,432,891
Furniture and equipment 3,432,249 3,269,618
Leasehold improvements 469,221 469,221
$7,497,283 $7,305,108
Less accumulated depreciation 4,843,508 4,462,957
$2,653,775 $2,842,151
At December 31, 1998, 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 $127,953 in 1998, $114,168 in 1997 and $80,144 in
1996.
The minimum annual lease commitments through 2003 under
noncancellable leases in effect at December 31, 1998 are as follows:
Year Ending December 31, Amount
1999 $129,196
2000 $130,723
2001 $132,274
2002 $133,850
2003 $135,452
9. OTHER REAL ESTATE OWNED
Other real estate owned is included in other assets and amounts to
$375,506 at December 31, 1998 and 1997, 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
There was no activity in the allowance for losses on other real
estate owned during 1998.
10. DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $11,479,860 and
$10,757,741 in 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits were
as follows:
1999 $66,777,738
2000 8,547,220
2001 2,868,597
2002 1,463,983
Total $79,657,538
11. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank are summarized as follows:
Interest Rates at
December 31, 1998 1998 1997
Fixed advances 5.84% to 7.23% $ 451,250 $ 273,250
Variable advances 4.89% to 5.71% 20,000,000 9,000,000
$20,451,250 $9,273,250
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, 1998 mature as follows:
2002 2005 2007 2008 2010 2012 2013
$4,000,000 $55,000 $84,250 $16,089,000 $55,000 $79,000 $89,000
12. OTHER BORROWED FUNDS
Securities sold under agreements to repurchase generally mature
within one day from the transaction date. At December 31, 1998,
securities with a fair value of $24,623,031 were pledged to secure other
borrowed funds. Information concerning securities sold under agreements
to repurchase at December 31, 1998 is summarized as follows:
Average balance during the year $6,485,367
Average interest rate during the year 4.05%
Maximum month-end balance during the year $9,512,901
13. EMPLOYEE BENEFITS
The Company adopted SFAS No. 132, "Employer's Disclosure about
Pension and Other Post-Retirement Benefits," in 1998. This statement,
which revises employers' disclosures about pension and post-retirement
benefits, is effective for years beginning after December 31, 1997.
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 preceeding
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 $39,145, $124,079 and $122,702 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Post-Retirement Benefits Other Than Pensions
The Company sponsors a post-retirement benefit program that provides
medical coverage and life insurance benefits to certain employees and
directors who meet minimum age and service requirements. Active
employees and directors accrue benefits over a 25-year period.
The following table sets forth the benefit obligations, fair value
of plan assets and funded status for the Company's pension and other post-
retirement benefit plans at December 31, 1998 and 1997.
1998 1997
Pension Other Pension Other
Benefits Benefits Benefits Benefits
Change in Benefit Obligations
Benefit obligations at
beginning of year $4,262,973 $ 1,413,233 $4,347,390 $ 1,304,704
Service cost 151,631 63,635 177,524 59,472
Interest cost 288,111 97,391 293,016 89,543
Actuarial gain 138,734 64,090 (329,755) 0
Benefits paid (232,314) (40,486) (225,202) (40,486)
Benefit obligations at
end of year $4,609,135 $ 1,597,863 $4,262,973 $ 1,413,233
Change in Plan Assets
Fair value of plan assets
at beginning of year $4,782,945 $ 0 $4,157,524 $ 0
Actual return on plan assets 708,384 0 708,897 0
Employer contributions 0 0 141,726 0
Benefits paid (232,314) 0 (225,202) 0
Fair value of plan assets
at end of year $5,259,015 $ 0 $4,782,945 $ 0
Funded Status $ 649,880 $(1,597,863) $ 519,972 $(1,413,233)
Unrecognized net
actuarial gain (loss) (274,284) 194,711 (78,907) 130,621
Unamortized prior
service cost (30,850) 0 (33,396) 0
Unrecognized transition
(net asset) net obligation (108,264) 639,900 (132,042) 685,500
Prepaid (accrued) benefit cost,
included in other assets
or other liabilities $ 236,482 $ (763,252) $ 275,627 $ (597,112)
Net periodic benefit cost includes the following components:
1998 1997 1996
Pension Other Pension Other Pension Other
Benefits Benefits Benefits Benefits Benefits Benefits
Service cost $151,631 $ 63,635 $177,524 $ 59,472 $165,142 $ 55,581
Interest cost 288,111 97,391 293,016 89,543 281,514 82,697
Expected return on
plan assets (374,273) 0 (326,921) 0 (309,348) 0
Recognized net actuarial
(gain) loss 0 0 6,784 9 11,718 615
Amortization (Accretion) of
unrecognized transition asset
or obligation (23,778) 45,600 (23,778) 45,600 (23,778) 45,600
Amortization of prior
service cost (2,546) 0 (2,546) 0 (2,546) 0
Net periodic benefit
cost $ 39,145 $206,626 $124,079 $194,624 $122,702 $184,493
Weighted-average assumptions as of December 31
Discount rate 6.75% 6.75% 7.00% 7.00% 7.00% 7.00%
Expected return on
plan assets 8.00% - 8.00% - 8.00% -
Rate of compensation
increase 4.00% 5.00% 4.00% 5.00% 5.00% 5.00%
For measurement purposes, the annual rates of increase in the per
capita health care cost of covered benefits were 11%, 11% and 12% for
1998, 1997 and 1996, respectively. The annual rate of increase in per
capita health care costs are assumed to decrease annually by 1% until the
year 2002 (which at that time will be 6%) and later.
The effects of a one-percentage-point change in the assumed health
care cost trend rate on the aggregate service and interest cost
components of the net periodic post-retirement health care benefit cost
would be:
1 Percentage 1 Percentage
Point Increase Point Decrease
1998 1997 1996 1998
Effect on total service and
interest components $ 43,505 $ 39,845 $ 33,254 $ (33,525)
Effect on post-retirement
benefit obligation $344,334 $332,820 $251,772 $(274,276)
The effects of a one-percentage-point decrease in the assumed health care
cost trend rate on the aggregate service and interest cost components of
the net periodic post-retirement benefit cost and the accumulated post-
retirement benefit obligation for health care benefits are not available
for 1997 and 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
1998
Federal $1,023,720 $211,280 $1,235,000
State 59,000 0 59,000
$1,082,720 $211,280 $1,294,000
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
The actual tax expense for 1998, 1997 and 1996 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:
1998 1997 1996
Amount % of Amount % of Amount % of
Pretax Pretax Pretax
Earnings Earnings Earnings
Computed "expected"
tax expense $1,490,570 34.0% $1,334,320 34.0% $1,190,670 34.0%
Nontaxable income on
obligations of states
and political
subdivisions (247,762) (5.7%) (158,781) (4.1%) (143,854) (4.1%)
Other 51,192 1.2% 48,461 1.3% 3,184 .1%
$1,294,000 29.5% $1,224,000 31.2% $1,050,000 30.0%
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 1998 1997
Allowance for loan losses $ 849,232 $ 752,332
Deferred compensation 325,013 287,260
Post-retirement benefits 259,674 203,187
Other 56,877 54,980
Deferred tax assets $1,490,796 $1,297,759
DEFERRED TAX LIABILITIES
Unrealized gain on available for sale securities $ 598,622 $ 225,508
Allowance for loan losses 170,114 170,114
Premises, furniture and equipment, principally due to
differences in depreciation 256,007 273,499
Prepaid pension expense 80,676 93,985
Cash surrender value of life insurance 36,386 36,386
Other 18,010 5,450
Deferred tax liabilities $1,159,815 $ 804,942
The Bank has sufficient refundable taxes paid in available carry
back years to fully realize its recorded deferred tax asset of $1,490,796
at December 31, 1998. The deferred tax asset and liability are included
in other assets and other liabilities on the balance sheet at December
31, 1998 and 1997.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory (and possibly
additional discretionary) actions by regulators that could have a direct
material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off
balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators regarding components, risk
weightings and other factors.
Quantitive measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, 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 as of December
31, 1998 and 1997 are presented in the table below:
December 31, 1998
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital
(to risk weighted
assets) $28,490,327 21.6% >$10,540,400 >8.0% >$13,175,500 >10.0%
Tier I capital
(to risk weighted
assets) $26,833,327 20.4% >$ 5,270,200 >4.0% >$ 7,905,300 > 6.0%
Tier I capital
(to average
assets) $26,833,327 10.7% >$ 7,500,060 >3.0% >$12,500,100 > 5.0%
December 31, 1997
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
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%
The actual capital amounts and ratios for the Company are not
materially different from those for the Bank.
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 consolidated balance sheet. The contract amounts of these
instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments. At December 31, 1998, the following
financial instruments, whose contract amounts represent credit risk, were
outstanding:
Contract Amount
1998
Commitments to extend credit $30,769,000
Standby letters of credit $ 195,000
Unadvanced portions of construction loans $ 1,564,000
Total $32,528,000
The Bank's exposure to credit loss in the event of nonperformance by
the other parties to the above financial instruments is represented by
the contractual amounts of the instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case by case
basis. The amount of collateral obtained, if deemed necessary by the
Bank upon the credit extension, is based on management's credit
evaluation of the counterparty. The types of collateral held include
residential and commercial real estate and, to a lesser degree, personal
property, business inventory and accounts receivable.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. 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, 1998,
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, 1998, 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, 1998 and 1997, 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 noninterest
bearing demand deposits, savings deposits, NOW accounts and money market
and checking accounts, equals the amount payable on demand. The fair
values of certificates of deposit are based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results
from the low cost funding provided by the deposit liabilities compared to
the cost of borrowing funds in the market. If that value was considered,
the fair value of the Bank's net assets could increase.
Accrued Interest Payable
The fair value of this financial instrument approximates the book
value as the instrument has a short maturity.
Advances from Federal Home Loan Bank
The fair values of advances are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Other Borrowed Funds
The carrying amount of borrowings under repurchase agreements
maturing within 90 days approximates their fair 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 Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment, and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. The latter may include
deferred tax assets, bank premises and equipment and other real estate
owned. In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
A summary of the fair values of the Company's significant financial
instruments at December 31, 1998 and 1997 follows:
1998 1997
Carrying Estimate of Carrying Estimate of
Value Fair Value Value Fair Value
ASSETS
Cash, due from banks and federal
funds sold $ 17,113,358 $ 17,113,358 $ 9,901,191 $ 9,901,191
Available for sale
securities 103,370,494 103,370,494 60,646,731 60,646,731
Held to maturity securities 4,375,981 4,503,123 32,799,686 33,242,473
Other investment securities 3,557,700 3,557,700 2,618,700 2,618,700
Loans 107,987,795 108,860,924 104,825,228 105,381,313
Loans held for sale 6,137,956 6,137,956 3,138,218 3,138,218
Accrued interest receivable 2,368,736 2,368,736 2,261,257 2,261,257
LIABILITIES
Deposits 188,029,016 189,881,877 177,385,865 178,901,792
Accrued interest payable 1,005,749 1,005,749 1,005,706 1,005,706
Advances from Federal
Home Loan Bank 20,451,250 20,451,250 9,273,250 9,273,250
Other borrowed funds 8,965,977 8,965,977 5,690,975 5,690,975
19. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Union Bankshares Company as of
December 31, 1998 and 1997 and for each of the years ended December 31,
1998, 1997 and 1996 are presented as follows:
BALANCE SHEET
December 31, 1998 and 1997 1998 1997
ASSETS
Cash $ 70,198 $ 18,786
Investment in subsidiary 28,093,905 25,469,344
Other assets 870,000 779,827
Total assets $29,034,103 $26,267,957
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 240,948 $ 241,462
Other liabilities 53,854 23,255
Shareholders' equity 28,739,301 26,003,240
Total liabilities and
shareholders' equity $29,034,103 $26,267,957
STATEMENTS OF INCOME
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
Dividend income $ 971,354 $ 887,466 $1,274,684
Equity in undistributed earnings
of subsidiary 1,945,460 1,682,019 1,153,258
Other income 181,870 140,804 29,868
Total income $3,098,684 $2,710,289 $2,457,810
Operating expenses 8,656 9,817 5,839
Net income $3,090,028 $2,700,472 $2,451,971
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,090,028 $ 2,700,472 $ 2,451,971
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Undistributed earnings of subsidiary $(1,945,460) $(1,682,019) $(1,153,258)
Increase in other assets (173) (39,970) (471,604)
Decrease in other liabilities 0 0 (29,868)
Increase (decrease) in dividends payable (515) 39,558 85
Net cash provided by operating
activities $ 1,143,880 $ 1,018,041 $ 797,326
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to eliminate fractional shares $ 0 $ (29,699) $ 0
Dividends paid (964,144) (885,940) (807,628)
Purchase of treasury stock (181,870) (113,440) (1,520)
Sale of treasury stock 53,546 8,780 15,810
Net cash used by financing activities (1,092,468) (1,020,299) (793,338)
Net increase (decrease) in cash and cash
equivalents 51,412 (2,258) 3,988
Cash and cash equivalents,
beginning of year 18,786 21,044 17,056
Cash and cash equivalents, end of year $ 70,198 $ 18,786 $ 21,044
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Net increase (decrease) in net unrealized gain
on available for sale securities $ 724,283 $ 609,209 $ (739,270)
Elimination of minority shares 14,635 0 0
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
January 22, 1999
UNION BANKSHARES COMPANY &
UNION TRUST COMPANY DIRECTORS
Arthur J. Billings David E. Honey
President, Barter Lumber Company Retired, Former Manager
Swans Island Electric Coop
Peter A. Blyberg
President James L. Markos, Jr.
General Manager,
Robert S. Boit Maine Shellfish Company, Inc.
Retired, Former President
Blake B. Brown Casper G. Sargent, Jr.
President & Owner, Brown's Appliance and TV Owner, Sargent's Real Estate Corp.
Richard C. Carver John V. Sawyer II
Owner, Carver Oil Co. Chairman of the Board; Retired
& Carver Shellfish President, Worcester-Sawyer Agency
Peter A. Clapp Stephen C. Shea
President, Blue Hill Garage Treasurer, E. L. Shea, Inc.;
President, Shea Leasing
Sandra H. Collier
Attorney at Law, Richard W. Teele
Sandra Hylander Collier Law Offices Secretary; Retired Former
Executive Vice President &
Treasurer
Robert B. Fernald
Treasurer, A. C. Fernald Sons, Inc. Paul L. Tracy
& Jordan Fernald President, Owner, Winter Harbor
Agency; Vice President, Co-Owner,
Schoodic Insurance Agency
Douglas A. Gott
Owner, Douglas A. Gott & Sons Richard W. Whitney
Dentist
INSERT PHOTO OF UNION BANKSHARES COMPANY DIRECTORS BLAKE BROWN AND JAMES
MARKOS JR.
Blake "Cubby" Brown is president and owner of Brown's Appliance and TV in
Ellsworth. A graduate of Ellsworth High School and Husson College, he
worked for 13 years as a food broker before joining Brown's Appliance in
1981. Cubby and his wife, Judy Jordan Brown, have three children and
three grandchildren.
James L. Markos, Jr., is general manager of Maine Shellfish Company,
Inc., of Ellsworth. A graduate of Ellsworth schools, Jim received his
bachelor's degree from Colby College and a law degree from The American
University in Washington, D.C. From 1976 to 1982, he was a partner in the
Ellsworth law firm of Markos and Roy. Jim is a member of the Board of
Directors of the Blue Hill Hospital Foundation and sits on the Finance
Committee of the Bay School in Blue Hill. He lives in Blue Hill with his
wife, Elizabeth Edwards Markos, and their two children.
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
John P. Lynch
Senior Vice President Delmont N. Merrill
President, Merrill Blueberry
Farms, Inc.
Peter F. Greene
Vice President John E. Raymond
President, Bimbay, Inc.
Sally J. Hutchins
Vice President & Clerk Mary T. Slaven
Realtor
Rebecca J. Sargent
Vice President, Senior Trust Officer Douglas N. Smith
Retired
Richard W. Teele
Secretary I. Frank Snow
Retired
UNION TRUST COMPANY
DIRECTORY OF OFFICERS
John V. Sawyer II Lorraine S. Ouellette
Chairman of the Board AVP, Trust Officer
Peter A. Blyberg Catherine M. Planchart
President, Chief Executive Officer AVP, Marketing Officer
John P. Lynch Deborah F. Preble
Sr. VP, Sr. Banking Officer AVP, Assistant Controller
Peter F. Greene Sandy D. Salsbury
VP, Sr. Bank Services Officer Human Resources Officer
Sally J. Hutchins Susan A. Saunders
VP, Treasurer, Controller & Clerk AVP, Project Management Officer
Christopher H. Keefe Stephen L. Tobey
VP, Sr. Relationship Manager AVP, Cash Management & Security Officer
David A. Krech Julie C. Vittum
Vice President, Sr. Investment Officer AVP, Senior Auditor
Bette B. Pierson Helen J. Condon
Vice President, Mortgage Loan Officer Electronic Services Officer
Rebecca J. Sargent Joseph M. Connors
Vice President, Senior Trust Officer Assistant Trust Officer
James M. Callnan Dawn L. Lacerda
AVP, Sr. Information Services Officer Loan Services Officer
Nancy E. Domagala Mary Lou Lane
AVP, Mortgage Underwriter Mortgage Underwriter
Laurence D. Fernald, Jr. Marsha L. Osgood
AVP, Relationship Mgr. and Trust Officer
Appraisal Review Officer
Janis M. Guyette Cynthia D. West
AVP, Trust Operations Officer Customer Services Officer
Lynda C. Hamblen
AVP, Relationship Manager
Phyllis C. Harmon
AVP, Relationship Manager
Patti S. Herrick
AVP, Information Services Officer
Harold L. Metcalf
AVP, Relationship Manager
Peter C. O'Brien
AVP, Loan Support Manager and CRA Officer
UNION TRUST COMPANY BRANCH OFFICES
Bar Harbor
Christopher H. Keefe, VP, Sr. Relationship Manager
Blue Hill
Pamela G. Hutchins, AVP, Relationship Manager
Castine
Pamela G. Hutchins, AVP, Relationship Manager
Cherryfield
C. Foster Mathews, AVP, Branch Manager
Ellsworth Shopping Center
Melody L. Wright, Branch Manager
Jonesport
Wendy W. Beal, AVP, Relationship Manager
Machias
Lisa A. Holmes, AVP, Relationship Manager
Milbridge
James E. Haskell, AVP, Relationship Manager
Somesville
William R. Weir, Jr., AVP, Relationship Manager
Stonington
Harry R. Vickerson III, AVP, Relationship Manager
UNION TRUST COMPANY PERSONNEL
Alexander, Jennifer
Allen, Deborah
Armstrong, Rebecca
Austin, Lois
Babson, William
Bayrd, Rona
Billings, Holly
Bishop, Kristina
Bonville, Melissa
Boyce, Katrina
Carter, Glen
Carter, Linda
Carver, Lisa
Chisholm, Catherine
Crosthwaite, Andrew
Curtis, Kristen
Czlapinski, Kathy
Dillon, Patricia
Dorr, Peggy
Douglass, Joanne
Driscoll, Johna
Elliott, Linda
Faulkner, Kathy
Furrow, Cecila
Gommo, Heidi
Grant, Victoria
Gray, Jenny
Gray, Shelly
Grindle, Eugene
Hall, Maria
Handy, Louise
Harriman, Barbara
Havey, Jill
Hennigan, Robin
Hills, Darlene
Hinckley, Wayne
Hinkel, Scott
Hutchins, Rebecca
Hutchinson, Elwell
Ingalls, Laurea
Jewell, Beth
Johnson, Mindy
Joy, Michelle
Kalloch, Debra
Kelley, Cindy
Look, Cheryl
Look, Lisa
Lounder, Lorraine
MacLaughlin, Wendy
Madden, Anita
Marshall, Carol
McCormick, Bernadette
Murphy, Forrest
Norton, Clifford III
Owen, Doris
Page, Deborah
Perry, Ann
Pineo, Muriel
Podlubny, Helene
Rollins, Bonnie
Rose, Brenda
Sackett, Jacqueline
Salisbury, Jane
Santerre, Tammy
Sawyer, Donna
Scott, Marsha
Scoville, Clark
Servetas, Dana
Sinford, Nicole
Sinford, Stacey
Smith, Ronald
Snow, Christie
Spaulding, Virginia
Sprague, Donna
Sproul, Bonnie
St. Pierre, Bettina
Swett, Andrea
Thompson, Dianne
Treadwell, Mattie
Wallace, Jayne
Wenger, April
Wilson, Stephanie
York, Caroline
Young, Tyra
Investing in You
As downeast Maine's foremost community bank, our investment in the
communities we serve goes far beyond dollars and cents. In 1998, our
employees, officers and directors volunteered a total of 7,401 hours of
their time and talents to the following 96 organizations, building a
better life for us all.
ABA National Trust School George Stevens Academy
Abnaki Girl Scouts Gouldsboro Volunteer FD
Acadia Council Affordable Housing The Grand Auditorium
Alpha Rho Hancock Cty Big Brothers/Big Sisters
AFS, Ellsworth Chapter Hancock Cty Trustees of Public Reservations
American Legion Auxiliary (Colonel Black Mansion)
American Red Cross Henry D. Moore Library and Parish House
Bangor Band Hospice of Hancock County
Bay School International Order of Rainbow for Girls
Beals Island Reg Shellfish Hatchery Jonesport Budget Comm and Board of Appeals
Blue Hill Consolidated School Knowlton School
Blue Hill Fire Relief Loaves and Fishes Food Pantry
Blue Hill Memorial Hospital Maine Assn of REALTORS State Aff Housing
Blue Hill Nursery School Maine Bankers Association
Boy Scouts of America, Katahdin Maine Cancer Society Reach to Recovery Prog
Area Council
Bruce Roberts Christmas Campaign Maine Coast Memorial Hospital Chef's
Gala and Poinsettia Ball
Camp Beech Cliff Maine Planned Giving Council and Leave
a Legacy Program
Cancer Society Daffodil Days Maine Seacoast Missionary Society
Cherryfield Alumni Association Machias Bay Area Chamber of Commerce
Cherryfield Community Benefits Memorial Ambulance Corps
Cherryfield Elementary School Michael Carver Memorial Fund
Cherryfield Fourth of July Milbridge Days
Cherryfield Parent-Teacher Org Mount Desert Chamber of Commerce
City of Ellsworth Tax Abatement Bd Mount Desert Island Lioness Club
Coastal Acadia Development Corp Narraguagus Masonic Lodge #88
Courtland Rehab and Living Center Order of the Eastern Star, Rubie Chapter
Cub Scouts Pack #21 Peabody Memorial Library
Cystic Fibrosis Foundation Penobscot Elementary School
DE AIDS Ntwk Hospice Respite Team Peters Cove Men's Chorus
DE Fairgrounds Association Positively Social
Down East Stampede Rodeo Reorganized Church of Latter Day Saints
Downeast Big Brothers/Big Sisters of Beals and Jonesport
Downeast Fishermen's Wives Assn Ronald McDonald House
Ellsworth Adult Education Route One Corridor Committee
Ellsworth Area Chamber of Commerce St. Francis by the Sea Episcopal Church
Ellsworth Area Economic Devel Comm St. John's Episcopal Church
Ellsworth Business and Prof Women St. Joseph's Catholic Church
Ellsworth High School Alumni Assn Salvation Army Service Unit
Ellsworth High School Booster Club Somesville Fire Company
Ellsworth High School Reunion 2000 Sumner High School Service Learning Comm
Ellsworth Lioness Club Sunrise Opportunities
Ellsworth Middle School Town of Addison Budget Committee
Ellsworth Rotary Club Town of Cherryfield Finance Committee
Emmaus Center Tremont Congregational Church
First Congregational Church of BH Tremont Volunteer Fire Department
First Congr Church of Cherryfield United Cerebral Palsy of Northeastern Maine
Friends of Acadia Washington-Hancock Community Agency
Friends of the BH Public Library WKSQ Christmas is for Kids Program
Friends of Union River YMCA Down East
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 1998 Annual Report on SEC Form 10K, 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
P.O. Box 479
Ellsworth, Maine 04605
Annual Shareholders Meeting
11:00 a.m.
Thursday, April 15, 1999
White Birches Restaurant
Route 1
Hancock, Maine
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7845223
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9268135
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113066150
<INVESTMENTS-CARRYING> 4375981
<INVESTMENTS-MARKET> 4503123
<LOANS> 110422431
<ALLOWANCE> 2434636
<TOTAL-ASSETS> 251194805
<DEPOSITS> 188029016
<SHORT-TERM> 28965977
<LIABILITIES-OTHER> 5008844
<LONG-TERM> 451250
0
0
<COMMON> 6069300
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 251194805
<INTEREST-LOAN> 10240991
<INTEREST-INVEST> 6859719
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17100710
<INTEREST-DEPOSIT> 5913616
<INTEREST-EXPENSE> 7174103
<INTEREST-INCOME-NET> 9926607
<LOAN-LOSSES> 285000
<SECURITIES-GAINS> 31842
<EXPENSE-OTHER> 1825825
<INCOME-PRETAX> 4384028
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3090028
<EPS-PRIMARY> 6.41
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 535000
<LOANS-PAST> 47000
<LOANS-TROUBLED> 2319000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2434636
<CHARGE-OFFS> 366000
<RECOVERIES> 303000
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of
the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
BERRY, DUNN, MCNEIL & PARKER
Portland, Maine
January 22, 1999
