-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IV2A6aYFqsaj1oY5GGXoiH2Zw3yJA8QhQ8joAhZxMEDCd3yxLrY4+p+goB5Z1jHY gTc92mryBLj5WcnPGvs7rA== 0000745083-96-000006.txt : 19960329 0000745083-96-000006.hdr.sgml : 19960329 ACCESSION NUMBER: 0000745083-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION BANKSHARES CO/ME CENTRAL INDEX KEY: 0000745083 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 010395131 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12958 FILM NUMBER: 96539791 BUSINESS ADDRESS: STREET 1: 66 MAIN ST STREET 2: PO BOX 479 CITY: ELLSWORTH STATE: ME ZIP: 04605 BUSINESS PHONE: 2076672504 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1995. Commission File Number 0-12958 UNION BANKSHARES COMPANY (Exact name of registrant as specified in its charter) MAINE 01-0395131 (State or other jurisdiction (I.R.S. 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: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock $25 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 check mark 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 [ ](Amended by Exch Act Rel No. 28869, eff. 5/1/91) The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 7, 1996, was approximately $31,670,320. 201,818 shares of the Company's Common Stock, $25 Par Value, were issued and outstanding on February 17, 1996. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to stockholders of the registrant for the year ended December 31, 1995, are incorporated by reference into Parts I and II. 2. Portions of the registrant's definitive Proxy Statement dated March 29, 1996 for its regular Annual Meeting of stockholders to be held April 18, 1996 are incorporated by reference into Part III. 1 of 23 UNION BANKSHARES COMPANY INDEX TO FORM 10-K PART I Page No. Item 1: Business 3-14 Item 2: Properties 15-16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 18-19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationship and Related Transactions 20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21-22 Signatures 23 2 of 23 PART I ITEM I: Business Union Bankshares Company is a one-bank holding company, organized under the laws of the State of Maine, which has acquired 99.928% of the common stock of the Union Trust Company (the Bank). The Company's only subsidiary is the Bank. The Company's holding company structure can be utilized to engage in permitted banking-related activities, either directly or through newly formed subsidiaries, or by acquiring companies already established in such activities. The Company has no immediate plans for such activities, but could do so, if such action should appear desirable. Union Trust is a full-service, independent commercial bank with ten offices in coastal Maine, serving the financial needs of individuals, businesses, and municipalities in Hancock and Washington Counties. Commitment to outstanding service, quality products and the ability to anticipate and respond to the customers financial needs, Union Trust, now in its 107th year, is proud to have earned the reputation as one of New England's preeminent community banks. Union Trust supports the people and communities it serves and believes that reinvesting local money locally builds strong communities. The Bank's charitable contribution program supports a broad range of local charities, community development efforts and the volunteerism of its employees and retirees. Union Trust Company offers a full range of banking services, at competitive rates, at convenient banking hours and locations and is accessible to our customers 24 hours a day through physical locations and electronic means. This year the Bank introduced "BankLine" which provides 24 hour access by phone, whereby customers may check the balance of their checking account, check recent account activity, verify interest paid and earned, transfer funds and make loan payments. Union Trust's deposit services include: regular and basic checking accounts, NOW accounts, Money Market accounts, savings accounts, Certificates of Deposits, IRA accounts, KEOGH Plans, ATM Convenience Card, Convenience Check Card, Reserve Checking, credit cards, BankLine, Unlimited Club membership and safe deposit boxes. The Bank also provides the following loan services: installment loans, student loans, mortgages, lines of credit, commercial loans, home equity loans and Visa credit cards. Union Trust also offers a full range of investment and trust services. Our professional trust advisors design and administer personal trusts, individual retirement accounts, self-employed retirement accounts, company retirement plans (pension, simplified employee pension, 401(k), profit sharing), and estate plans. In addition, our trust staff will help people of all ages and income levels analyze their savings and retirement needs and plan customized investment strategies to meet the customer's goal. In 1995, the trust department introduced "Mutual Partners", an Asset Allocation Program that offers a balanced investment mechanism for our customer. Using mutual funds and creating portfolios designed to meet each person's individual situation and risk level, the Bank hopes to appeal to a broad range of potential trust customers, many of whom might otherwise think that they don't have enough savings to qualify for a trust. 3 of 23 The Bank competes actively with other commercial banks and other financial institutions in its service areas. Strong competition exists among commercial banks in efforts to obtain new deposits, in the scope and type of services offered, in interest rates on time deposits and interest rates charged on loans, and in other aspects of banking. In Maine, savings banks are major competitors of commercial banks as a result of broadened powers granted to savings banks. In addition, the Bank like other commercial banks, encounters substantial competition from other financial institutions engaged in the business of either making loans or accepting deposit accounts, such as savings and loan associations, insurance companies, certain mutual funds, and certain governmental agencies. Furthermore, the large banks located in Boston, New York, and Providence are active in servicing some of the large Maine based companies. As of December 31, 1995 the Bank employed 120 employees of which 14 employees were part-time. The primary regulator of the Company and the Bank is the Federal Reserve Bank of Boston. Please refer to Management's Discussion and Analysis, on page 6 of the 1995 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 nonaccrual status when, in the opinion of management, there are doubts as to 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 nonaccrual status. Principal and accrued interest on credit card loans are charged to the allowance for credit losses when 180 days past due. Interest payments received on nonaccrual 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. 4 of 23 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. INVESTMENT PORTFOLIO The following table shows the book value of the Company's held to maturity and investment securities at the end of each of the last three years. (In Thousands) December 31 1995 1994 1993 U. S. Treasury Securities & Other Government Agencies $ -0- $ 0- $ -0- Obligations of States and Political Subdivisions 4,120 6,725 7,357 Other Investments Securities 0 0 0 TOTAL $4,120 $6,725 $7,357 The table below shows the relative maturities of investment and held to maturity securities as of December 31, 1995. Held to Maturity Securities Maturity Distribution As Of December 31, 1995 Security Category Due 1 Yr Due 1- Due 5- Due 10- or less 5 Yrs 10 Yrs 15 Yrs State and Municipal Bonds $ 817 $2,600 $ 653 $ 50 Average Weighted Yield 7.50% 6.08% 5.96% 8.38% TOTAL $ 817 $2,600 $ 653 $ 50 Percent of Total Portfolio 19.8% 63.2% 15.8% 1.20% NOTE: Average Weighted Yields on tax exempt obligations have been computed on a tax equivalent basis 5 of 23 A. 1. AVAILABLE FOR SALE SECURITIES The following table shows the carrying value of the Company's Available for Sale Securities at the end of each of the last three years. (In Thousands) December 31 1995 1994 1993 U S Treasury Notes/Bills and Other Government Agencies $71,799 $73,901 $70,276 Other Securities 659 659 113 TOTAL $72,458 $74,560 $70,389 The table below shows the relative maturities and carrying value of available for sale securities as of December 31, 1995. Securities Available For Sale Maturity Distribution As Of December 31, 1995 Security Due 1 Yr Due 1- Due 5- Category or Less 5 Yrs 10 Yrs U S Treasury Notes/Bills and Other Government Agencies $12,367 $30,717 $28,085 Average Weighted Yield 6.19% 6.60% 7.20% Other Securities -0- 630 -0- Average Weighted Yield -0- 6.25% -0- TOTAL $12,367 $31,347 $28,085 Percent of Total Portfolio: 17.2% 43.7% 39.1% 6 of 23 B. LOANS The following table reflects the composition of the Company's consolidated loan portfolio at the end of each of the last five years. 1995 1994 1993 1992 1991 (In Thousands) Real Estate Loans A. Construction and Land Development $ 2,023 $ 2,168 $ 1,568 $ 2,504 $ 2,693 B. Secured by 1-4 Family Residential Properties 27,402 25,528 26,129 25,373 36,203 C. Secured by Multi-Family (5 or more) Residential Properties 2 4 7 12 27 D. Secured by Non-Farm, Non-Residential Properties 28,273 26,500 24,553 26,560 28,250 Commercial & Industrial Loans 13,778 12,975 12,834 15,564 16,651 Loans to Individuals for Household, Family & Other Consumer Expenditures 14,335 12,844 12,463 12,139 8,569 All Other Loans 7,430 4,189 3,439 2,825 2,255 Total Gross Loans $93,243 $84,208 $80,993 $84,977 $94,648 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: 1995 1994 1993 1992 1991 Real Estate 61.9% 64.4% 64.5% 64.1% 71.0% Commercial & Industrial Including single payment loans to individuals 14.8% 15.4% 15.9% 18.3% 17.6% Consumer Loans 15.4% 15.3% 15.4% 14.3% 9.1% All Other Loans 7.9% 4.9% 4.2% 3.3% 2.3% Total Loans 100.0% 100.0% 100.0% 100.0% 100.0% 7 of 23 Maturities and Sensitivities of Loans to Changes in Interest Rates As of December 31, 1995 Due 1 Year or Less Due 1-5 Yrs Due 5 yrs + Real Estate $ 36,806 $ 15,337 $ 5,557 Commercial & Industrial 10,525 3,253 0 Consumer 11,660 2,675 0 Municipal 4,222 1,902 1,306 Total $ 63,213 $ 23,167 $ 6,863 Note: Real Estate Loans in the 1-5 year category have $1,449,000 at a fixed interest rate and $13,888,000 at a variable interest rate. Commercial Loans in the 1-5 year category have $536,000 at a fixed interest rate and $2,717,000 at a variable interest rate. Real Estate Loans in the 5+ category have $5,015,000 at a fixed interest rate and $542,000 at a variable interest rate. Commercial Loans in the 5+ category have $0 at a fixed interest rate and $0 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 1995 1994 1993 1992 1991 Amt % Amt % Amt % Amt % Amt % Real Estate $867 0.9 $479 0.6 $1,659 2.0 $1,523 1.8 $2,058 2.2 Installment $ 95 0.1 $ 95 0.1 $ 96 0.1 $ 371 0.4 $ 278 0.3 All Others $ 35 0.0 $189 0.2 $ 102 0.2 $ 296 0.4 $ 759 0.8 TOTAL $997 1.0 $763 0.9 $1,857 2.3 $2,190 2.6 $3,095 3.3 It is the policy of the Company to discontinue the accrual of interest on loans when, in the opinion of the management, the ultimate collectibility of principal or interest becomes doubtful. The principal amount of loans which have been placed on non-accrual status were comprised primarily of certain installment loans. For each of these loans, management has evaluated the collectibility of the principal based on its best estimate of the realizable collateral value of the loans and does not anticipate that any losses from liquidation of these loans will have a material effect on future operations. There were approximately $614,000, $151,000, and $486,000 as of December 31, 1995, 1994 and 1993, respectively, of loans on a non-accrual status. 8 of 23 LOANS CONCENTRATIONS As of December 31, 1995 and 1994, 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, 1995. 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, 1995 1994 1993 1992 1991 Balance at beginning of period: $ 1,929 $ 1,802 $ 2,325 $ 1,623 $ 971 Charge-Offs Commercial & Industrial Loans 44 30 62 27 44 Real Estate Loans 48 256 837 92 187 Loans to Individuals 104 4 87 421 206 196 320 986 540 437 Recoveries: Commercial & Industrial Loans 43 5 84 11 62 Real Estate Loans 1 390 47 26 21 Loans to Individuals 71 52 302 130 106 115 447 433 167 189 Net Charge-Offs (recoveries) 81 (127) 553 373 248 Provision for loan losses 30 0 30 1,075 900 Balance at end of period $ 1,878 $ 1,929 $ 1,802 $ 2,325 $ 1,623 Average Loans Outstanding $88,725 $82,600 $83,104 $89,813 $89,117 Ratio of Net Charge-Offs (Recoveries) to average loans outstanding .09% (.15%) .67% .42% .28% 9 of 23 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES December 31, 1995 1994 1993 1992 1991 Amt % of LN Amt % Amt % Amt % Amt % Categories To Total Loans Balance at end of Period: Applicable To: Real Estate $ 647 61.9% $ 665 64.4% $ 621 64.5% $ 621 64.1% $ 560 71.0% Commercial & Industrial 1,024 14.8% 1,051 15.4% 983 15.9% 768 17.5% 884 17.3% Consumer 207 15.4% 213 15.3% 198 15.4% 246 14.3% 179 9.1% Municipal -0- 7.9% -0- 4.9% -0- 4.2% -0- 3.3% -0- 2.6% Identified -0- -0- -0- -0- -0- -0- 690 .8% -0- -0- $1,878 100.0 $1,929 100.0 $1,802 100.0 $2,325 100.0 $1,623 100.0 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, 1995, the Company had impaired loans totaling some $59,000, which consisted of commercial and real estate loans. The fair value of the loan's collateral was used in all instances to determine present value. 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 managements periodic review of loans on non-accrual status, impairment is based on a loan by loan analysis and not set by a defined period of delinquency before a loan is considered impaired. The adoption of Statement 114 has had no material affect on the comparability of prior reporting periods. Risk Elements 1995 1994 1993 1992 1991 Loans accounted for on a non-accrual basis $614 $151 $486 $353 $623 Accruing loans contractually past due 90-days or more $388 $ 86 $237 $134 $ 88 10 of 23 In accordance with Industry Guide 3 Item III. c (2), the gross interest income that would have been recorded in 1995 if non-accrual and restructured loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination approximates $28,000. There was some $2,000 included in the gross interest income on non-accrual and restructured loans for 1995. C. DEPOSITS The following table presents the components of total deposits for the last three years. (Dollars in Thousands) 1995 1994 1993 Demand Deposits $ 19,327 $ 20,257 $ 17,237 Savings Deposits 63,621 66,236 66,041 Money Market Accounts 17,420 20,346 22,815 Time Deposits 58,104 49,939 49,705 Certificates of Deposits of $100,000 or more 6,886 3,471 5,438 TOTAL DEPOSITS $165,358 $160,249 $161,236 Interest Bearing Deposits to Total 89.4% 87.4% 89.3% The following schedule summarizes the time remaining to maturity of Certificates of Deposit $100,000 or greater at December 31, 1995. Amount (In Thousands) 3 Months or Less 2,176 3 Through 12 Months 3,679 Over One Year 1,031 D. CAPITAL RATIOS The following table presents, for the last three years, the Company's capital expressed as a percentage of average deposits, loans, total assets, and earning assets. *1995 *1994 1993 Deposits 13.7% 12.8% 11.8% Loans 25.1% 24.9% 22.7% Total Assets 11.9% 11.3% 10.5% Earning Assets 12.9% 12.8% 11.2% * Excluding net unrealized gain/(loss) on available for sale securities of $567,810 and ($1,389,168) at December 31, 1995 and 1994, respectively. 11 of 23 E. RETURN ON STOCKHOLDERS' EQUITY The following table presents, for each of the last three years, the Company's return on stockholders' equity, return on assets, and return on average earning assets. 1995 1994 1993 Return on Average Stockholders' Equity 11.4% 11.9% 11.8% Return on Average Assets 1.3% 1.3% 1.2% Return on Average Earning Assets 1.4% 1.4% 1.3% F. FIVE YEAR SUMMARY (in Thousands) 1995 1994 1993 1992 1991 Deposits $165,358 $160,249 $161,236 $158,674 $149,623 Loans 93,243 84,208 80,993 84,977 94,648 Securities *75,716 *83,391 *73,821 76,704 56,981 Shareholders' Equity **22,227 **20,570 18,875 17,391 15,923 Total Assets 191,353 181,597 182,129 177,767 167,138 Net Earnings 2,418 2,354 2,134 1,920 1,300 Interest Income 13,855 12,677 12,393 13,698 14,902 Net Interest Income 8,803 8,490 7,666 7,548 6,732 Actual Cash Dividend Declared*** 4.00 3.00 3.00 2.41 2.41 Dividend Payout Ratio 31.3% 25.8% 28.4% 23.8% 35.1% Average Equity to Average Asset Ratio 11.5% 10.8% 10.1% 8.44% 9.43% Earnings Per Share*** $12.78 $11.65 $10.55 $10.15 $6.87 Loans to Deposits Ratio 56.4% 52.5% 50.2% 53.6% 63.3% * Stated at amortized cost. Includes available for sale securities with cost of $70,939 and $76,007 and securities held for sale with cost of $65,816 at December 31, 1995, 1994, and 1993, respectively. ** Excluding net unrealized gain/(loss) on available for sale securities of $567,810 and ($1,389,168) at December 31, 1995 and 1994, respectively, due to impact of FAS 115. *** Earnings per share have been restated to reflect a stock split effected in the form of a 33 1/3 stock dividend in 1995. 12 of 23 The following table sets forth, for the periods indicated, information 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 not presented on a tax equivalent basis primarily by adjusting income and yields earned on tax exempt interest received on loans and certain investments to make them equivalent to income and yields earned on fully taxable investments - assuming federal income tax rates of 34% in 1995, 1994 and 1993, respectively, 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 Balances/Interest Earned - Paid/Rates 1995, 1994 and 1993 (In Thousands) 1995 1994 1993 Balance Int Rate Balance Int Rate Balance Int Rate Earned/Paid Earned/Paid Earned/Paid Assets Interest Earning Assets: Securities Available for Sale $65,896 $ 4,231 6.42 $ 70,584 $ 4,447 6.30 $ 55,575 $4,199 7.56 State and Municipal 5,926 419 7.07 7,155 520 7.27 9,050 607 6.71 Federal Funds Sold 7,409 424 5.72 5,490 209 3.81 5,358 263 4.91 Loans(Net) 88,588 8,781 9.91 82,570 7,501 9.08 91,710 7,324 7.99 Total Interest Earning Assets 167,819 $13,855 8.26 165,799 $12,677 7.65 $161,693 $12,393 7.66 Other non-earning assets 14,685 15,503 12,213 $182,504 $181,302 $173,906 Interest Bearing Liabilities: Savings Deposits $ 65,690 $ 1,302 1.98 $ 66,290 $ 1,341 2.02 $ 64,915 $ 1,631 2.51 Time Dep 59,544 3,198 5.37 54,668 2,279 4.17 54,668 2,451 4.48 Money Market Accounts 15,142 552 3.65 21,275 567 2.67 22,649 645 2.84 Total Interest Bearing Deposits 140,376 $ 5,052 3.60 142,233 $ 4,187 2.94 142,232 $ 4,727 3.33 Other non-interest bearing liabilities & shareholders' equity 42,128 39,069 31,674 $182,504 $181,302 $173,906 Interest Spread 8,803 4.66 8,907 4.71 8,062 4.40 Interest Revenue/Earning Assets 167,819 13,855 8.26 165,799 12,677 7.65 161,693 12,393 7.66 Interest Expense/Earning Assets 167,819 5,052 3.01 165,799 4,187 2.53 161,693 4,727 2.92 Net Yield on Earning Assets 5.25 5.12 4.74 13 of 23 Volume and Rate Analysis of Net Interest Income Taxable Equivalent in Thousands Year Ended December 31, 1995 vs 1994 Increase(Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets: Assets Available for Sale (296) 84 (4) (216) State and Political Obligation (135) (282) 48 (369) Federal Funds Sold 73 105 37 215 Loans, Net 553 533 45 1,131 Total Interest Earning Assets 195 440 126 761 Interest Bearing Liabilities: Savings Deposits (14) (28) 3 (39) Time Deposit 204 657 58 919 Money Market Accounts (163) 209 (61) (15) Total Interest Bearing Deposits 27 838 0 865 Increase (Decrease) 168 (398) 126 (104) Volume and Rate Analysis of Net Interest Income Taxable Equivalent in Thousands Year Ended December 31, 1994 vs 1993 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets: Assets Held for Sale 1,137 (698) (191) 248 State and Municipal (190) 90 (18) (118) Federal Funds Sold 7 (59) (2) (54) Loans, Net (741) 1,071 (101) 229 Total Interest Earning Assets 213 404 (312) 305 Interest Bearing Liabilities: Savings Deposits 33 (320) (3) (290) Time Deposits (2) (171) 1 (172) Money Market Accounts 37 (40) (75) (78) Total Interest Bearing Deposits 68 (531) (77) (540) Increase (Decrease) 145 935 (235) 845 The above table reconciles changes in interest and dividend income on a tax equivalent basis and interest expense of the Company for the period indicated due to changes in average balances, rates or a combination of both. *Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. 14 of 23 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 October, 1985, our new branch in Somesville, Maine opened. The site is a high traffic area and holds excellent promise for attracting new accounts and servicing existing ones. 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. There are no plans for construction at this time. All of the Bank's offices include drive-up facilities. 15 of 23 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 May of 1997. (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 1996. 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 it 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. 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. 16 of 23 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. MARKET INFORMATION The common stock, $25 par value of the Company, is not listed on any exchange nor actively traded. Since the Company is not aware of the price of all trades, the price is established by determining what a willing buyer will pay a willing seller. The stock prices shown below are based upon trades that the Bank has knowledge of from Paine Webber and represent a range of the high and low bids for each quarter ended in 1994 and 1995. 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 1994 $155.00/160.00 $160.00/160.00 $160.00/160.00 $160.00/160.00 1995 $160.00/175.00 $125.00/169.26 $150.00/167.00 $167.00/170.00 B. HOLDER As of March 1, 1996 there were approximately 677 stockholders of record. C. DIVIDENDS 1. History The following table shows the cash dividends declared by Union Bankshares Company on its common stock, $25 par value: 1995 *1994 First Quarter $1.00 $ .75 Second Quarter 1.00 .75 Third Quarter 1.00 .75 Fourth Quarter 1.00 .75 Total $4.00 $3.00 Cash dividends declared per common share $4.00 $3.00 *Dividends per share have been restated to reflect a stock split effected in the form of a 33 1/3 percent stock dividend in 1995. 17 of 23 Item 6: Selected FINANCIAL DATA (in thousands) Set forth below is a Consolidated Summary of Operations for the Company for each of the last five years. 1995 1994 1993 1992 1991 INTEREST AND DIVIDEND INCOME Interest and Fees on Loans $ 8,781 $ 7,501 $ 7,324 $ 8,824 $ 9,984 Interest on Federal Funds Sold 424 209 263 176 377 Interest on Available for Sale Securities 4,230 4,447 0 0 0 Interest on Held for Sale Securities 0 0 4,199 4,025 3,643 Interest on Held to Maturity Securities 420 520 607 674 899 Total Interest Earned $13,855 $12,677 $12,393 $13,699 $14,903 INTEREST EXPENSE Interest on Deposits 4,767 4,084 4,556 5,876 7,658 Interest on C/D's $100,000 and Over 274 101 169 273 511 Interest on Short-term Borrowings 11 2 1 1 1 Total Interest Expense 5,052 4,187 4,726 6,150 8,170 NET INTEREST INCOME 8,803 8,490 7,667 7,549 6,733 Provision for loan losses 30 0 30 1,075 900 Net Interest Income after Loan Provision 8,773 8,490 7,637 6,474 5,833 NONINTEREST INCOME Net Securities Gains 3 98 267 1,098 330 Trust Department 444 400 413 381 331 Service Charges on Deposit Accounts 310 311 324 331 276 Other Income 1,232 1,271 1,255 1,189 964 Total Noninterest Income 1,989 2,080 2,259 2,999 1,901 Income Before Non-Interest Expenses 10,762 10,570 9,896 9,473 7,734 NONINTEREST EXPENSE Salaries and Employee Benefits 4,019 3,967 3,497 3,239 2,947 Net Occupancy Expense 777 767 780 712 673 Equipment Expense 201 180 173 190 165 18 of 23 FDIC Insurance 185 345 349 387 360 Other Expenses 2,277 2,161 2,235 2,430 1,952 Total Noninterest Expense 7,459 7,420 7,034 6,958 6,097 INCOME BEFORE TAXES 3,303 3,150 2,862 2,515 1,637 Income Taxes 885 796 797 595 337 Income Before Cumulative Effect 2,418 2,354 2,065 1,920 1,300 of Change in Accounting Principle Cumulative Effect of Change 0 0 68 0 0 in Accounting for Income Taxes NET INCOME $2,418 $2,354 $2,133 $1,920 $1,300 Net Income Per Common Share $12.78 $11.65 $10.55 $10.15 $ 6.87 Cash Dividends Declared Per Common Share $ 4.00 $ 3.00 $ 3.00 $ 2.41 $ 2.41 The above summary should be read in conjunction with the related consolidated financial statements and notes thereto for the years ended December 31, 1995, 1994, 1993, 1992, and 1991, and with Management's discussion and analysis of financial condition. 19 of 23 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 Annual Report is incorporated herein by reference. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) The financial statements required are contained in the Company's 1995 Annual Report and are incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In May, 1995, the Audit Committee of the Company voted to engage Berry, Dunn, McNeil & Parker as independent auditors of the Company. The Company's former auditors, Baker, Newman & Noyes (which was the successor firm as of 1/2/95 to the Portland, Maine office of KPMG Peat Marwick) was dismissed on the same date. Each of the auditors' report on the financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion and were not qualified as to uncertainty, audit scope or accounting principles. In connection with the audits of the two most recent fiscal years preceeding the change in accountants, there were no disagreements of any type with the Company's former auditor on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. During the Company's two fiscal years preceeding the change in accountants, no reportable event which would require disclosure under federal securities laws, occured. 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 28, 1996 for its regular annual meeting of stockholders to be held April 18, 1996, 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. 20 of 23 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 stockholders for its fiscal year ended December 31, 1995 (a copy of which is being filed as Exhibit 13 hereto), and are incorporated herein by reference. Exhibit 13 Page Number Consolidated Balance Sheets December 31, 1995 and 1994 16 - 17 Consolidated Statements of Income For the years ended December 31, 1995, 1994, 1993 18 - 19 Consolidated Statements of Changes in Stockholders' Equity For the years ended December 31, 1995, 1994, 1993 20 Consolidated Statements of Cash Flow For the years ended December 31, 1995, 1994, 1993 21 - 23 Notes to Consolidated Financial Statements 24 - 44 Independent Auditors Opinion 45 Supplementary schedules are omitted as they are not required or included in the Annual Report to shareholders. (2) Exhibits required by Item 601 - see Item 14(c) (b) Reports on Form 8-K During the registrant's fiscal quarter ended December 31, 1995, the registrant was not required to and did not file any Reports on Form 8-K. (c) Exhibits Exhibit# Description * 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 21 of 23 11 Computation of earnings per share, is incorporated herein by reference to Note 1 to the Consolidated Financial Statements on page 16 of the 1995 Annual Report to Stockholders attached hereto as Exhibit 13. 12 Statement for computation of ratios is incorporated herein by reference to "Part I, Item 1-Five Year Summary." 13 The registrant's Annual Report to Stockholders for its fiscal year ended December 31, 1995. 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. 16 A letter from the registrant's former independent accountant regarding its concurrence with the statements made by the registrant in the current report concerning the dismissal of the registrant's principal accountant. *21 Subsidiary information is incorporated herein by reference to "Part I, Item 1- Business". 99.1 Report of Berry, Dunn, McNeil & Parker. 99.2 Report of Baker, Newman and Noyes 99.3 Report of KPMG Peat Marwick *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. 22 of 23 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: Robert S. Boit, President Peter A. Blyberg and Chief Executive Officer Executive Vice President and Treasurer Date: March 27, 1996 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Arthur J Billings, Director Peter A Blyberg, Director Robert S Boit, Director Richard C Carver, Director Peter A Clapp, Director Sandra H Collier, Director Robert B Fernald, Director Douglas A Gott, Director David E Honey, Director Delmont N Merrill, Director Thomas R Perkins, Director Casper G Sargent, Director John V Sawyer, II, Director Stephen C Shea, Director Richard W Teele, Director Paul L Tracy, Director Richard W Whitney, Director 24 of 23 EX-99 2 Exhibit 99.1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Union Bankshares Company We have audited the accompanying consolidated balance sheet of Union Bankshares Company and Subsidiary as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Union Bankshares Company and Subsidiary as of and for the year ended December 31, 1994 were audited by other auditors whose report thereon dated January 20, 1995, included an explanatory paragraph that described the Company's change in its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at January 1, 1994, as discussed Notes 3 and 4 to the financial statements. The financial statements of Union Bankshares Company and Subsidiary as of and for the year ended December 31, 1993 were audited by other auditors whose report thereon dated January 13, 1994, included an explanatory paragraph that described the Company's adoption of SFAS No. 106, Employers' Accounting for Post Retirement Benefits Other Than Pensions in 1993, as discussed in Note 9 to the financial statements, and the Company's change in its method of accounting for income taxes in 1993 to adopt provisions of SFAS No. 109, Accounting for Income Taxes on January 1, 1993, as discussed in Note 10 to the financial statements. We have conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Union Bankshares Company and Subsidiary as of December 31, 1995, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. BERRY, DUNN, MCNEIL & PARKER Portland, Maine January 19, 1996 EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Union Bankshares Company: We have audited the accompanying consolidated balance sheet of Union Bankshares Company and Subsidiary as of December 31, 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flow for the year ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares Company and Subsidiary at December 31, 1994, and the results of their operations and their cash flow for the year ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in note 1, the Company changed its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at January 1, 1994. Baker Newman & Noyes Limited Liability Company January 20, 1995 EXHIBIT 99.3 The Board of Directors and Stockholders Union Bankshares Company: We have audited the accompanying consolidated statements of income, changes in shareholders' equity and cash flow of Union Bankshares Company and Subsidiary for the year ended December 31, 1992. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation,. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Union Bankshares Company and Subsidiary for the year ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in note 1, the Company changed its method of accounting for income taxes to adopt the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, on January 1, 1993. As discussed in note 10, the Company also adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Post Retirement Benefits Other Than Pensions, on January 1, 1993. KPMG Peat Marwick LLP January 14, 1994 EX-27 3
9 0000745083 UNION TRUST COMPANY 1000 YEAR DEC-31-1995 DEC-31-1995 7343489 0 6322771 0 71799295 4119546 4119546 93242760 1878169 191353166 165357869 0 3200803 0 0 0 5062875 0 191353166 8780734 4650468 424146 13855348 5041170 5052107 8803241 30000 3895 1187403 3303320 3303320 0 0 2418057 12.07 0 0 614000 388000 0 0 1878169 268000 187000 0 0 0 0
EX-13 4 EXHIBIT 13 UNION BANKSHARES COMPANY 1995 ANNUAL REPORT Insert photo of the following: Eugene Grindle, Teller at the Blue Hill Branch Rebecca Sargent, AVP Trust Officer Lisa Holmes, AVP Machias Office Branch Manager John Lynch, Senior Vice President, Loans Insert graphic of our Union Trust Clock Logo Dedication J. Roy Barrett July 8, 1897 - April 30, 1995 Director of Union Trust Company for 31 Years David J. Kennedy February 11, 1907 - July 11, 1995 Director of Union Trust Company for 38 Years Sharon R. Carter June 13, 1946 - January 17, 1996 Teller - Machias Branch for 9 1/2 Years 2 Can a loan officer install hope in a cancer patient? Can an accounting clerk rescue people from a burning building? As your community bank, we believe in sharing our success--not only by investing in the people and businesses of Downeast Maine, but by encouraging our employees to use their abundant skills, compassion and intelligence to make life better for all. Look within to discover some of the many ways our people are, as our Mission Statement says, "actively and positively contributing to the quality of life in our communities." We're proud of the inspiring contributions of the men and women of your Bank, and hope you will be, too. Insert photo of the following: Eugene Grindle,Teller at the Blue Hill Branch Rebecca Sargent, AVP Trust Officer Lisa Holmes, AVP Machias Office Branch Manager John Lynch, Senior Vice President, Loans 3 February 16, 1996 Dear Shareholder: While 1995 was a satisfactory year in some respects for your Bank, it was disappointing in others. Earnings reached an all time high of $2,418,057 or $12.78 per share, a modest increase of 2.7 percent over the previous year. A rapid decrease in interest rates on the lending side and inability to offset such decreases as quickly in our cost of funds contributed to a general squeeze in our interest rate margins. Consequently, our earnings did not increase as much as originally planned. Also, noninterest expenses increased, due largely to wages, and costs associated with new product development, both of which unfortunately stunted the gains which otherwise would have been achieved through lower Federal Deposit Insurance Premiums. Steps being taken to correct this situation are discussed elsewhere in this letter. On a more positive note, we call your attention to various ratios of performance. Your Bank continued to earn 1.3 percent on average assets and 11.4 percent on average capital. Capital ratios also remained strong. At year end, capital was a record 13.7 percent of deposits and 11.9 percent of total assets. Despite a slow economy, a strong sales and new business development effort by lenders, branch managers and customer service personnel produced solid gains in both loans and deposits. Loans increased by 10.7 percent to $93,242,760, while deposits grew by a more modest 3.2 percent to $165,357,869. During the year, after careful thought, the Board of Directors decided to employ John Floyd Associates, banking consultants and specialists in bank operations, to study all the Bank s operations and the manner in which our products and services are sold, processed, and delivered to our customers. We expect this study will help us achieve operational efficiencies and cost savings going forward, resulting in a positive impact both on our ability to more effectively compete in our market place and on our net operating profits. In April, the Board voted to declare a stock dividend of 33 1/3 percent which was paid in May and the cash dividend in accordance with past practice was maintained at $4.00 per share per year. This was the fourth such increase in the past 10 years and represents an increase in dividends paid of 2.77 times that paid in 1985. During the year, the following promotions and appointments were made: Dawn L. Lacerda Operations Officer Teresa L. Linscott Electronic Service Officer Gayle A. Norton Assistant Vice President, Human Resources Marsha L. Osgood Assistant Trust Officer Deborah F. Preble Assistant Controller Stephen L. Tobey Assistant Vice President, Operations and Security Julie C. Vittum Senior Auditor 5 We note with sorrow the passing of two Honorary Directors, J. Roy Barrette, Director for 31 years and David J. Kennedy, who served 38 years; and Sharon R. Carter, teller at our Machias branch for 9 1/2 years, to whom this report is dedicated. In September, Richard W. Teele, Executive Vice President and Treasurer, elected to retire after 18 years of service. Dick made many contributions to the Bank and while his daily presence will be missed, we are pleased that he will remain as a Director and Secretary of the Corporation. Two new Directors were named during 1995: Peter Clapp, President, Blue Hill Garage and Paul L. Tracy, President/Owner, Winter Harbor Agency and Vice President, Schoodic Insurance Services. On April 1, 1996, Robert S. Boit, having reached mandatory retirement age, will step down as President and Chief Executive Officer. Having served the Bank for 23 years, Mr. Boit will remain as a Director on both the General Board and the Executive Board. In February, the Board elected Peter A. Blyberg, currently Executive Vice President, to the position of President and Chief Executive Officer, to take effect on April 1, 1996. Mr. Blyberg joined the Bank in 1993 having been with Chemical Bank of New York for 18 years. The economy is more likely to grow at a slow pace for the balance of 1996, and we expect eastern Maine to be no exception. Despite all the talk about potential reforms in government spending, deficit reductions and alterations in the tax code, experience indicates that any changes will be less dramatic than current expectations suggest. We extend our sincerest thanks to you, our Shareholders, and our Directors, Officers and Employees for your support. Sincerely, John V. Sawyer, II Robert S. Boit Chairman of the Board President and Chief Executive Officer Five-Year Summary (000's Omitted) 1995 1994 1993 1992 1991 Deposits $165,358 $160,249 $161,236 $158,674 $149,623 Loans 93,242 84,208 80,993 84,977 94,648 Securities *75,716 *83,391 *73,821 76,704 56,981 Shareholders' Equity **22,227 **20,570 18,875 17,391 15,923 Total assets 191,353 181,597 182,129 177,767 167,138 Net earnings 2,418 2,354 2,134 1,920 1,300 ***Earnings per share 12.78 11.65 10.55 10.15 6.87 Equity Ratios Equity expressed as a percentage of average: **1995 **1994 1993 1992 1991 Deposits 13.7% 12.8% 11.8% 11.3% 10.8% Loans 25.1% 24.9% 22.7% 19.4% 17.2% Total assets 11.9% 11.3% 10.5% 10.1% 9.7% Earning assets 12.9% 12.8% 11.2% 10.8% 10.4% Other Financial Highlights 1995 1994 1993 1992 1991 **Return on average Shareholders' equity 11.4% 11.9% 11.8% 11.5% 8.4% Return on average assets 1.3% 1.3% 1.2% 1.1% 0.8% Return on average earning assets 1.4% 1.4% 1.3% 1.2% 0.9% ***Earnings per share have been restated to reflect a stock split effected in the form of a 33 1/3% stock dividend in 1995. *Stated at amortized cost. Includes available for sale securities with cost of $70,939 and $76,007 and securities held for sale with cost of $65,816 at December 31, 1995, 1994 and 1993, respectively. **Excluding net unrealized gain (loss) on available for sale securities of $567,810 and ($1,389,168) at December 31, 1995 and 1994, respectively. 7 Insert: Three 10 year bar charts referencing the following: Earnings Per Share Book Value Per Share Dividends Per Share 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS December 31, 1995 Union Bankshares Company is a one-bank holding company, organized under the laws of the State of Maine, which has acquired 99.928% of the common stock of Union Trust Company. The Company's only subsidiary is the Bank. The Company's holding company structure can be utilized to engage in permitted banking-related activities, either directly or through newly formed subsidiaries, or by acquiring companies already established in such activities. The Company has no immediate plans for such activities, but could do so if such action should appear desirable. Union Trust is a full-service, independent commercial bank with ten offices in coastal Maine, serving the financial needs of individuals, businesses, and municipalities in Hancock and Washington Counties. With its commitment to outstanding service, quality products and the ability to anticipate and respond to the customers' financial needs, Union Trust, now in its 108th year, is proud to have earned the reputation as one of New England's preeminent community banks. Union Trust supports the people and communities it serves and believes that reinvesting local money locally builds strong communities. The Bank's charitable contribution program supports a broad range of local charities, community development efforts and the volunteerism of its employees and retirees. Union Trust Company offers a full range of banking services, at competitive rates and at convenient banking hours and locations and is accessible to customers 24 hours a day through physical locations and electronic means. This year the Bank introduced BankLine which provides 24-hour access by phone, whereby customers may check the balance of their accounts, check recent account activity, verify interest paid and earned, transfer funds between accounts and make loan payments. Union Trust's deposit services include: regular and basic checking accounts, NOW accounts, money market accounts, savings accounts, certificate of deposits, IRA accounts, KEOGH Plans, ATM Convenience Cards, Convenience Check Cards, reserve checking, credit cards, BankLine, Unlimited Club membership and safe deposit boxes. The Bank also provides the following loan services: installment loans, student loans, mortgages, lines of credit, commercial loans, home equity loans and Visa credit cards. Union Trust Company also offers a full range of 9 investment and trust services. Our professional trust advisors design and administer personal trusts, individual retirement accounts, self-employed retirement accounts, company retirement plans (pension, simplified employee pension, 401(k), profit sharing), and estate plans. In addition, our trust staff will help people of all ages and income levels analyze their savings and retirement needs and plan customized investment strategies to meet the customer's goal. In 1995, the Trust Department introduced MutualPARTNERS, an asset allocation program that offers a balanced investment mechanism for our customers. Using mutual funds and creating portfolios designed to meet each person's individual situation and risk level, the Bank hopes to appeal to a broad range of potential trust customers, many of whom might otherwise think that they don't have enough savings to qualify for a trust. Insert photo of the following: Sandra Salsbury, Administrative Assistant Supervisor; Foster Mathews, AVP Manager of Cherryfield Branch; Phyllis Harmon, AVP Loan Officer and Harry Vickerson, AVP Manager of Stonington Branch RESULTS OF OPERATIONS The operating results of the Bank depend primarily on its net interest income, which is the difference between interest income on earning assets (which consists primarily of loans and investments) and interest expense (which consist primarily of deposits and borrowings). The Bank's results are also affected by the Provision For Loan Losses, which reflects management's assessment of the adequacy of the Allowance For Loan Losses; noninterest income, including gains and losses on the sales of loans and securities; noninterest expenses; and income tax expense. Each of these major components of the Bank's operating results are highlighted below. NET INCOME Net income in 1995 of $2,418,057 increased from 1994 by $64,094 or 2.7%. Net income in 1994 represented an increase of $220,326 or 10.3% from 1993. The following table summarizes the status of the Bank's earnings and performance for the periods stated. 10 December 31, 1995 1994 1993 Earning Per Share $12.78 $12.44 $11.28 Return on average Shareholder's equity * 11.4% 11.9% 11.8% Return on average assets 1.3% 1.3% 1.2% Return on average earning assets 1.4% 1.4% 1.3% * Excluding net unrealized gain (loss) on available for sale securities of $567,810 and ($1,389,168) at December 31, 1995 and 1994, respectively. In 1995, the Company declared a 33 1/3 percent stock dividend, and therefore earnings and cash dividends per share have been retroactively restated for 1994 and 1993 to reflect the stock dividend. NET INTEREST INCOME Net interest income continues to be the most significant determinant of the Company's earning performance. The management of interest rate risk has become increasingly important to ensure the continued profitability of the Bank. Interest rate risk results from volatile interest rates, increased competition and changes in the regulatory environment. The Bank's exposure to interest rate movements is controlled by a careful balancing of interest earned and interest paid as well as the maturities of assets and liabilities. Net interest income in 1995 was $8,803,241, an increase of $312,848 or 3.7% from 1994. The increase was primarily due to higher loan levels in 1995, up $9,034,924 on December 31, 1995 or 10.7% over December 31, 1994. Loans generally represent higher yielding assets than securities. Loan increases were primarily the result of a loan calling program instituted in late 1995 and a recovering local economy. Interest and fees earned on loans in 1995 amounted to $8,800,000, up $1,300,000 or 17.1% over the year ended December 31, 1994. Variable rate loans amounting to $54,000,000 represent approximately 58.0% of the total loan portfolio. Despite falling interest rates, loan yields improved by 34 basis points in 1995 compared to the 1994 increase of 89 basis points. Moderate balance increases were experienced in real estate, commercial, municipal and consumer categories, and the loan mix remains consistent with prior years. Interest expense on deposits in 1995 increased 20.5% or $856,185 from 1994. The increase was primarily due to a change in the Bank's deposit mix to higher costing deposits, which reflected the customer's desire to invest more in high-yielding 11 certificates of deposit. In 1994, interest expense on deposits decreased 11.5% or $541,355 from 1993. Interest margin, the percentage difference between interest earned on loans and investments and interest paid to depositors, declined 23 basis points in 1995 over 1994. Your Bank's net interest margin is among the highest of all Maine banks. The Bank continues to monitor short- and long-term interest rates, balance sheet volumes and maturities in order to optimize its net interest margin. The following table illustrates the Bank's net interest margin for the years indicated: December 31, 1995 1994 1993 Yield on earning assets 8.330% 8.042% 7.328% Cost of all funds 3.104% 2.586% 2.539% Net interest margin 5.226% 5.456% 4.789% PROVISION FOR LOAN LOSSES The provision for loan losses increased by $30,000 in 1995. This increase was due to increased loan volume and the desire to maintain the Allowance for Loan Losses at 2.0% of gross loans. There was no provision made in 1994 and a $30,000 increase in 1993. The process of evaluating the adequacy of the Allowance for Loan Losses involves a high degree of management judgement. Such judgement is based, in part, on systematic methods. These methods include a loan-by-loan analysis of all larger commercial loans and commercial real estate loans as well as those that were nonperforming or were being closely monitored by management for potential problems, and a quantitative analysis of residential real estate and consumer loans. The analysis also incorporates all relevant matters that affect loan collectibility. Based on this analysis, an estimation of potential loss exposure was made and an allowance determined. Management believes that the Allowance for Loan Losses and the carrying value of real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions, particularly in northern New England. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's Allowance for Loan Losses. Such agencies may require the Company to recognize additions to the allowance based on their judgements about information available 12 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, 1995 1994 Non-accrual loans $ 614 $ 151 Loans past due 90 days and accruing 388 86 Restructured loans 0 0 Other real estate owned (including insubstance foreclosure) 1,316 908 Total nonperforming assets 2,318 1,145 Ratio of total nonperforming loans to capital and the Allowance for Loan Losses (Texas ratio) .041 .011 Ratio of net recoveries (charge-offs) to loans (.001) .002 Ratio of Allowance for Loan Losses to loans .02 .023 Coverage of ratio (Allowance for Loan Losses divided by nonperforming assets) .845 1.689 Ratio of nonperforming assets to total assets .01 .006 Ratio of nonperforming loans to total loans .007 .003 NONINTEREST INCOME The Company receives noninterest income from trust fees, service charges on deposit accounts and income comprised of fees earned from a variety of other banking services. Security gains or losses are another major component of this category. Noninterest income, excluding securities gains, remained relatively stable for the years 1995 and 1994. In 1993, an increase of $92,525, or 4.9% was experienced. The primary reason for the change in 1995 was a $75,927 or 21.4% increase in Visa income, offset by a decrease of $81,802 or 20.2% of Loan Department income. Major efforts were made in 1995 to increase Visa accounts in conjunction with the loan calling program. The decrease in Loan Department income in 1995 is primarily a result of a major slowdown in the volume of residential mortgages. This slowdown impacted the volume of processed loans sold to the secondary market in both 1994 and 1995. Origination of loans held for sale were $8,593,440, $10,813,150, and $18,846,144 for 1995, 1994, and 1993, respectively. Trust Department income increased $43,352, or 10.8% in 1995 compared with $12,722 or 3.1% decrease in 1994. The increase is primarily a result of new business in 1995 and an improved stock market. Net security gains amounted to $3,103, $98,009 13 and $266,664 for the years 1995, 1994, and 1993, respectively. NONINTEREST EXPENSE Noninterest expense consists of employee compensation and benefits, occupancy and equipment expenses and other general operating expenses. In an effort to enhance the Bank's management process and operating procedures and to improve efficiencies, the Bank, in the fall of 1995, employed the services of John M. Floyd and Associates, Inc., of Bellaire, Texas. As a result of the work done with this firm, we expect to achieve more efficient use of resources, increased income opportunities, improved delivery of products and services and reduced expense. Management anticipates implementation of many of the study's recommendations in 1996 and 1997. Noninterest expenses increased .53% to $7,459,206 in 1995 and 5.5% in 1994. The increases in 1995 were centered primarily in salaries and wages, advertising new product development and supplies. These increases were offset, to some extent, by decreases in pension and employee benefits, as well as an FDIC insurance premium rebate and rate reduction, which occurred during the year. Salaries and wages increased 5.7% in 1995, down from a 10.2% increase in 1994 over 1993. Pension and employee benefits (current and post- retirement) decreased 11.5% in 1995 following a 24.2% increase in 1994 due to the implementation of deferred compensation agreements. The periodic post-retirement benefit costs under Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pension" were $148,646, $154,800 and $148,700 for 1995, 1994, and 1993, respectively. Future changes in the discount rates applied to the actuarial analysis will have a corresponding impact on the Company's pension and post-retirement liabilities. INCOME TAXES The status of the Bank's income tax expense is as follows: Twelve Months Ended December 31, Tax Expense Percentage of Pre-tax Earnings 1995 1994 1993 1995 1994 1993 $885,000 $797,000 $797,000 28.0% 25.3% 27.8% 14 Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", was adopted by the Company in 1993 and resulted in a positive cumulative effect of $68,000 to net income. The Bank has sufficient refundable taxes paid in available carry-back years to fully realize its recorded deferred tax asset of $1,072,636 at December 31, 1995. SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES The Federal Reserve Board's capital requirements generally call for an 8% total capital ratio, of which 4% must be comprised of Tier 1 capital. Risk-based capital ratios are calculated by weighing assets and off-balance sheet instruments according to their relative credit risks. The Company's Tier 1 capital ratio of 20.4% far exceeds the Federal Reserve Board's guidelines. Total shareholders' equity increased $3,613,113 in 1995 primarily as a result of net income of $2,418,057, as well as a $1,956,978 change in the category of "Unrealized Gains (Losses)on Securities Available for Sale", net of applicable income taxes, from the adoption of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments on Debt and Equity Securities." Dividends of $756,860 were declared on the Company's common stock and represented a 24.8% increase over 1994. Dividend payout for 1995, 1994, and 1993 was 31.3%, 25.8%, and 28.4% of net income, respectively. In 1995, the Company declared a 33 1/3 percent stock dividend. LIQUIDITY MANAGEMENT Liquidity management is the process by which the Bank structures its cash flow to meet requirements of its customers as well as day-to-day operating expenses. Liquidity is provided from both assets and liabilities. The asset side of the balance sheet provides liquidity through the regular maturities on our securities portfolio, as well as the interest received on these assets. In addition, U.S. Government securities may be readily converted to cash by sale in the open market. On the liability side, liquidity comes from deposit growth and the Bank's accessibility to other sources of borrowed funds. In this respect, liquidity is enhanced by a significant amount of core demand and savings deposits from a broad customer base. As a part of the Bank's asset and liability management and liquidity needs, management actively 15 evaluates its funding resource and strategies to reduce and manage the vulnerability of its operation to changes in interest rates. When a Company's ability to reprice interest- bearing liabilities exceeds its ability to reprice interest-earning assets within shorter time periods, material and prolonged increases in interest rates generally adversely affect net interest income, while material and prolonged decreases in interest rates generally have the opposite effect. A principal objective of the Company is to reduce and manage the vulnerability of its operations to changes in interest rates by managing the ratio of interest-rate sensitive assets to interest-rate sensitive liabilities within specified maturities or repricing dates. Union Trust Company is asset-sensitive as a result of its variable-rate loan portfolio and its short-term investment portfolio. Bank earnings may be negatively affected, should interest rates fall. As of December 31, 1995, the Bank's ratio of rate-sensitive assets to rate-sensitive liabilities at the one-year horizon was 95%, its one-year GAP (measurement of interest sensitivity of interest- earning assets and interest-bearing liabilities at a point in time) was -3%, and $82,000,000 in assets and $75,000,000 in liabilities will be repricable in one year. 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, 1995, the Company's interest rate GAP analysis: 16 Interest Rate GAP Analysis as of December 31, 1995 (000's omitted) Interest-earning Assets: 0-3 4-12 1-5 over 5 Total months months years years Loans: Real estate fixed rate $ 319 $ 1,082 $ 7,144 $ 5,557 $14,102 variab 18,322 17,083 8,193 0 43,598 Commercial 9,469 1,056 3,253 0 13,778 Municipal 600 3,622 1,902 1,306 7,430 Consumer 10,501 1,159 2,675 0 14,335 Securities Available for Sale 4,717 31,739 30,967 3,515 70,938 Held to Maturity Securities 0 817 2,600 702 4,119 Loans Held for Sale 1,227 0 0 0 1,227 Other Earning Asset 6,323 0 659 0 6,982 TOTAL $51,478 $56,558 $57,393 $11,080 $176,509 Interest-bearing Liabilities: Deposits: Savings $ 7,860 $21,130 $22,220 $ 0 $ 51,210 NOW 4,281 12,843 17,113 0 34,237 Money Market 7,461 7,460 0 0 14,921 Time 18,545 34,241 12,203 0 64,989 Borrowings 0 110 0 0 110 TOTAL $38,147 $75,784 $51,536 $ 0 $165,467 Rate-sensitivity GAP $ 13,331 $(19,226) $ 5,857 $11,080 Rate-sensitivity GAP as a percentage of total assets 6.97% (10.05%) 3.05% 5.79% Cumulative GAP $ 13,331 $( 5,895) $ 38 $11,042 17 Cumulative GAP as a percentage of total assets 6.97% (3.08%) (.03%) 5.76% The distribution in the Interest Rate GAP Analysis table is based on a combination of maturities, call provisions, repricing frequencies, prepayment patterns, historical data and management judgement. Variable-rate assets and liabilities are distributed based on the repricing frequency of the investment. Management has estimated the rate sensitivity of money market and savings deposits based on an historical analysis of the Bank and industry data. 18 The status of the Bank's sources of cash to fund its operation are as follows: December 31, 1995 1994 Net Cash provided from Operations $ 2,632,741 $ 2,178,779 Net Cash (used) from Investing Activities (1,983,445) (12,169,912) Net Cash (used) provided from Financing Activities 4,347,261 (1,993,878) Net (decrease) increase in cash and cash equivalents $ 4,996,557 $(11,985,011) BALANCE SHEET ANALYSIS Total assets increased $9,800,000 or 5.4%, in 1995, primarily due to increased loan volume, compared to a decrease of approximately $530,000 or .3%, in 1994. The following table gives a general overview and profile of the Company: (000's omitted) as of December 31, 1995 1994 Increase % of (Decrease) Change Total Assets $191,353 $181,597 $ 9,756 5.4% Total Earning Assets 177,369 167,788 9,581 5.7% Loans 93,243 84,208 9,035 10.7% *Securities 75,716 83,391 (7,675) (9.2%) Deposits 165,358 160,249 5,109 3.2% **Shareholder's Equity 22,227 20,570 1,657 8.1% * Stated at amortized cost. Includes available for sale securities with cost of $70,939,000 and $76,000,000 for 1995 and 1994, respectively. ** Excluding net unrealized gains (losses) on available for sale securities of $567,810 and ($1,389,168) at December 31, 1995 and 1994, respectively. SECURITIES The objective of the securities portfolio is to provide for a stable earnings base and the investment of excess liquidity. The carrying value of the portfolio at December 31, 1995, totaled $76,000,000, consisting primarily of U.S. Government and Agency Securities. Approximately 46% of the securities portfolio matures in the one-through-five-year period. The Company has reviewed its investment policy regarding securities. In recognition of current 19 economic conditions and the attendant responsibility of management to consider known liquidity requirements and provide for capital planning, investment securities may be sold as part of prudent asset/liability management. Accordingly, the Bank has classified certain securities (exclusive of tax-free securities) to assets available for sale. Therefore, such assets are recorded at market value. As a result of Statement of Financial Accounting Standards Board Statement (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," unrealized holding gains or losses, net of tax effect, for securities classified as available for sale are recorded as an adjustment of a separate component of equity. LOANS Total loans increased $9,035,000, or 10.7%, primarily due to a $3,499,000, or 6.5%, increase in real estate loans, and a $3,242,000, or 77.4%, increase in municipal loans. On January 1, 1995, the Company adopted Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan", which states that a loan is defined as "impaired" when it is probable that the creditor will be unable to collect all amounts due, including principal and interest, under the contracted terms of the loan. Loans that are reported on nonaccrual, overdue, rated or watch listings are tested for impairment. Management then determines, loan-by-loan based upon the credit history and repayment schedule, whether the loan is impaired or, in all probability, uncollectible by the Bank. Adoption of this standard has had no effect on the level of Allowance for Loan Losses in 1995. DEPOSITS Total deposits increased $5,109,000, or 3.2%, during 1995, primarily due to competitive interest rates on products offered and as a result of the calling program instituted this year. Total deposits decreased .6%, or $987,000, in 1994. The banking business, in the Bank's market area, is somewhat seasonal due to an influx of tourists and summer residents each spring and summer. As a result, the Bank has an annual deposit swing from a high point in mid-October, to a low point in May. This deposit swing is predictable and does not have a materially adverse effect on the Bank. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and related notes presented in this Annual Report have been 20 prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering 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 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. Union Bankshares, $25 par value, is not listed on any national exchange, nor is it actively traded. Since the Company is not aware of all trades, the market price is established by determining what a willing buyer will pay a willing seller. Based upon the trades that the Company had knowledge of (per quotes from Paine, Webber, Inc., and other local brokerages), high and low bids for each quarter for 1995 and 1994 are listed in the following table: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1995 $160.00 to $175.00 $125.00 to $169.26 $150.00 to $167.00 $167.00 to $170.00 1994 $155.00 to $160.00 $160.00 to $160.00 $160.00 to $160.00 $160.00 to $160.00 As of December 31, 1995, there were 654 holders of record of Union Trust Company common stock. Quarterly dividends paid by the Company in 1995 and 1994 were as follows: 1995 1994 1st Quarter $1.00 $.81 2nd Quarter $1.00 $.81 3rd Quarter $1.00 $.81 4th Quarter $1.00 $.81 Total $4.00 $3.21 RECENT ACCOUNTING DEVELOPMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," effective for financial 21 statements for fiscal years beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be held and used by an entity being reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount for an asset may not be recoverable. The Company expects no material impact from adopting SFAS No. 121. In May, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights" (an amendment of FASB Statement No. 65). SFAS No. 122 applies to mortgage banking activities in which a mortgage loan is originated, or purchased, and then sold with the right to service the loan retained by the mortgage banking entity. The Statement amends SFAS No. 65, which provided only for the recognition of purchased mortgage servicing rights. Prior to SFAS No. 122, purchased mortgage servicing rights were capitalized only in circumstances where the right to service loans was acquired from another organization. SFAS No. 122 amends SFAS No. 65 by requiring the capitalization of mortgage servicing rights, whether they were acquired from another organization or originated internally. Additionally, SFAS No. 122 has provisions that require an impairment analysis of the servicing right regardless of whether the servicing right was originated or purchased. The Company has not determined the impact of adopting SFAS No. 122. In October, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based Compensation," effective for financial statements for the fiscal year beginning after December 15, 1995. SFAS No. 123, requires entities to disclose the fair value of their stock options, although they will not have to record the options at fair value in the financial statement. As of December 31, 1995, the Company did not offer stock-based compensation to its employees. 22 UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 1995 1994 ASSETS Cash and due from banks (note 2) $ 7,343,489 $ 7,025,431 Federal funds sold 6,322,771 1,644,272 13,666,260 8,669,703 Available for sale securities, at market value (note 4) 71,799,295 73,901,802 Held to maturity securities at cost (note 3) (market value $4,232,683 and $6,843,871 at December 31, 1995 and 1994, respectively) 4,119,546 6,724,925 Other investment securities at cost, which approximates market value 659,325 659,325 Loans held for sale 1,227,447 651,191 LOANS (note 5): Real estate 57,699,645 54,200,997 Commercial and industrial 13,778,012 12,975,176 Municipal 7,430,234 4,187,860 Consumer 14,334,869 12,843,803 93,242,760 84,207,836 Less deferred loan fees 203,497 277,867 Less allowance for loan losses (note 6) 1,878,169 1,928,644 Net loans 91,161,094 82,001,325 Premises, furniture and equipment (note 7) 3,153,850 3,005,886 Other Assets (notes 10 and 11) 5,566,349 5,982,690 Total Assets $191,353,166 $181,596,847 The accompanying notes are an integral part of these consolidated financial statements. 23 1995 1994 LIABILITIES DEPOSITS: Demand Deposits $ 19,327,213 $ 20,256,577 Savings deposits (including NOW deposits totaling $34,237,051 in 1995 and $33,807,108 in 1994) 63,621,013 66,236,025 Money market accounts 17,419,673 20,346,133 Time deposits 58,103,915 49,938,624 Certificates of deposit $100,000 and over 6,886,055 3,471,328 Total deposits 165,357,869 160,248,687 Other liabilities (note 11) 3,200,803 2,166,779 Total liabilities 168,558,672 162,415,466 Contingent liabilities and commitments (note 13) SHAREHOLDERS' EQUITY Common stock, $25 par value. Authorized 600,000 shares, issued 202,515 in 1995 and 1994 (restated) (notes 1 and 12) $ 5,062,875 $ 3,801,200 Surplus 3,948,485 3,948,680 Retained earnings 13,285,337 12,915,637 Net unrealized gain (loss) on available for sale securities (note 4) 567,810 (1,389,168) Treasury stock, at cost (697 shares in 1995 and 665 shares in 1994) (70,013) (94,968) Total Shareholders' equity 22,794,494 19,181,381 Total liabilities and Shareholders' equity $191,353,166 $181,596,847 The accompanying notes are an integral part of these consolidated financial statements. 24 UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1995 1994 1993 INTEREST AND DIVIDEND INCOME: Interest and fees on loans $ 8,780,734 $ 7,500,694 $ 7,323,880 Interest on securities available for sale 4,230,639 4,446,906 0 Interest on securities held for sale 0 0 4,199,405 Interest on securities held to maturity 419,829 520,215 607,153 Interest on Federal funds sold 424,146 209,210 262,871 Total interest income 13,855,348 12,677,025 12,393,309 INTEREST EXPENSE: Interest on savings deposits 1,302,644 1,341,186 1,630,848 Interest on money market accounts 552,417 567,359 644,790 Interest on time deposits 2,912,040 2,175,936 2,281,342 Interest on certificates of deposit $100,000 and over 274,069 100,504 169,360 Interest on short-term borrowings 10,937 1,647 596 Total interest expense 5,052,107 4,186,632 4,726,936 Net interest income 8,803,241 8,490,393 7,666,373 Provision for loan losses (note 6) 30,000 0 30,000 Net interest income after provision for loan losses 8,773,241 8,490,393 7,636,373 NONINTEREST INCOME: Net securities gains (note 4) 3,103 98,009 266,664 Trust Department income 443,661 400,309 413,031 Service charges on deposit accounts 310,381 311,069 324,167 Visa income 431,338 355,411 341,775 Loan Department income 323,657 405,459 498,401 Other income 477,145 509,866 416,086 Total noninterest income 1,989,285 2,080,123 2,260,124 Income before noninterest expenses 10,762,526 10,570,516 9,896,497 The accompanying notes are an integral part of these consolidated financial statements. 26 1995 1994 1993 NONINTEREST EXPENSE: Salaries and wages 3,124,862 2,955,272 2,681,942 Pension and other employee benefits (note 10) 894,706 1,011,960 814,869 Insurance 97,809 99,286 137,355 FDIC insurance 184,630 345,006 348,732 Net occupancy expenses 776,703 767,400 780,022 Equipment expenses 201,516 180,465 173,289 Advertising 248,510 223,087 155,070 Supplies 283,430 206,047 235,746 Postage 147,947 130,755 127,683 Telephone 155,120 165,357 153,131 Other professional fees 156,570 159,698 100,119 Other expenses 1,187,403 1,175,484 1,325,902 Total noninterest expenses 7,459,206 7,419,817 7,033,860 Income before income taxes 3,303,320 3,150,699 2,862,637 Income taxes (note 11) 885,263 796,736 797,000 Income before cumulative effect of a change in accounting principle 2,418,057 2,353,963 2,065,637 Cumulative effect of change in accounting for income taxes (note 11) 0 0 (68,000) Net income $2,418,057 $2,353,963 $2,133,637 Net income per common share $ 12.78 $ 11.65 $ 10.55 Cash dividends declared per common share $ 4.00 $ 3.00 $ 3.00 Weighted average common shares outstanding 189,204 202,128 202,214 27 The accompanying notes are an integral part of these consolidated financial statements. 28 UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1995, 1994 and 1993 NET UNREALIZED GAIN(LOSS)ON SHARE- COMMON TREASURY RETAINED AVAILABLE FOR HOLDER'S STOCK SURPLUS STOCK EARNINGS SALE SECURITIES EQUITY Balance at December 31, 1992 3,801,175 2,448,576 (33,968) 11,174,901 0 17,390,684 Net income, 1993 0 0 0 2,133,637 0 2,133,637 Additional stock sold, 1 share 25 122 0 0 0 147 Payment for fractional shares totaling 219.66 shares 0 0 0 (33,491) 0 (33,491) Transfer to surplus 0 1,500,000 0 (1,500,000) 0 0 Sale of 76 shares Treasury stock 0 (18) 11,418 0 0 11,400 Repurchase of 138 shares Treasury stock 0 0 (20,918) 0 0 (20,918) Cash dividends declared 0 0 0 (606,882) 0 (606,882) Balance at December 31, 1993 3,801,200 3,948,680 (43,468) 11,168,165 0 18,874,577 Net income, 1994 0 0 0 2,353,963 0 2,353,963 Repurchase of 322 shares Treasury stock 0 0 (51,500) 0 0 (51,500) Effect from implementation of SFAS 115 0 0 0 0 1,545,654 1,545,654 Change in net unrealized gain (loss) on available for sale securities 0 0 0 0 (2,934,822)(2,934,822) Cash dividends declared 0 0 0 (606,491) 0 (606,491) Balance at December 31, 1994 3,801,200 3,948,680 (94,968) 12,915,637 (1,389,168)19,181,381 Net income, 1995 0 0 0 2,418,057 0 2,418,057 Sale of 159 shares Treasury stock 0 (195) 24,955 0 0 24,760 Stock split effected in the form of a 33 1/3% stock dividend (50,467 shares) 1,261,675 0 0 (1,261,675) 0 0 Payment for fractional shares totaling 138.49 shares 0 0 0 (29,822) 0 (29,822) Cash dividends declared 0 0 0 (756,860) 0 (756,860) Change in net unrealized gain (loss) on available for sale securities 0 0 0 0 1,956,978 1,956,978 Balance at December 31, 1995 $5,062,875 $3,948,485 $(70,013) $13,285,337 $567,810 $22,794,494 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, 1995, 1994 and 1993 1995 1994 1993 NET CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net income $ 2,418,057 $ 2,353,963 $ 2,133,637 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Cumulative effect of implementation of FASB No. 109 0 0 (68,000) Depreciation, amortization and accretion 477,744 252,783 589,130 Provision for loan losses 30,000 0 30,000 Gain on sale of available for sale securities (3,103) (98,009) 0 Net securities gains 0 0 (266,664) Net loss on sale of equipment 0 0 14,060 Purchase of securities held for resale 0 0 (18,991,461) Proceeds from maturities of securities held for sale 0 0 14,083,420 Proceeds from sale of securities held for sale 0 0 6,432,216 Provision for other real estate owned 60,000 0 35,000 Originations of loans held for sale (8,593,440) (10,813,150) (18,846,144) Proceeds from loans held for sale 7,936,912 11,042,763 18,961,740 Net change in other assets (151,224) (588,825) 870,447 Net change in other liabilities 522,499 132,523 (445,211) Net change in deferred loan origination fees (74,370) 60,471 22,285 Provision for deferred income tax (benefit) expense 9,666 (163,740) 113,794 Net cash provided by operating activities $2,632,741 $2,178,779 $4,668,249 The accompanying notes are an integral part of these consolidated financial statements. 31 Continued 32 CONSOLIDATED STATEMENTS OF CASH FLOW CONTINUED 1995 1994 1993 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of available for sale securities $16,933,182 $10,010,376 $ 0 Purchase of available for sale securities (38,702,639) (49,678,400) 0 Proceeds from maturities and principal payments on available for sale securities 26,734,617 29,700,344 0 Purchase of held to maturity securities 0 (725,000) 0 Proceeds from maturities and principal payments on held to maturity securities 2,619,748 1,355,000 0 Purchase of investments 0 (12,300) (100,000) Proceeds from called and matured investments 0 0 1,539,275 Proceeds from sales of other real estate owned 0 37,000 0 Net decrease (increase) in loans to customers (9,035,126) (2,547,926) 3,371,588 Proceeds from sales of fixed assets 4,000 0 3,034 Capital expenditures (537,227) (309,006) (304,528) Net cash (used) provided by investing activities $(1,983,445) $(12,169,912) $ 4,509,369 CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) Increase in demand, savings and money market accounts (6,470,836) 746,169 4,961,190 (Decrease) Increase in time deposits 11,580,018 (1,733,145) (2,399,218) Net increase in cash surrender value of life insurance policies 0 (348,911) 0 Proceeds from issuance of common stock 0 0 147 Payment to eliminate fractional shares (29,821) 0 (33,491) Purchase of Treasury stock 0 (51,500) (20,918) Sale of Treasury stock 24,760 0 11,400 Dividends paid (756,860) (606,491) (606,882) Net cash (used) provided by financing activities $ 4,347,261 $(1,993,878) $ 1,912,228 Net (decrease) increase in cash and cash equivalents 4,996,557 (11,985,011) 11,089,846 Cash and cash equivalents at beginning of year 8,669,703 20,654,714 9,564,868 Cash and cash equivalents at end of year $13,666,260 $ 8,669,703 $20,654,714 The accompanying notes are an integral part of these consolidated financial statements. 34 1995 1994 1993 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 4,752,751 $4,264,239 $ 4,948,559 Income taxes paid $ 927,610 $1,049,000 $ 636,904 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net transfer of securities held for sale to available for sale securities $ 0 $65,816,445 $ 0 Net transfer of investment securities to assets held for sale $ 0 $ 0 $ 100,000 Net transfer from loans to other real estate owned and insubstance foreclosure $ 0 $ 39,850 $ 247,427 Net transfer from loans held for sale to loans $ 80,272 $ 701,917 $ 0 Net (decreases) increases required by Statement of Financial Accounting Standards No. 115 available for sale securities $ 2,966,401 $(2,104,799) $ 0 Deferred income tax assets $(1,009,423) $ 715,631 $ 0 Net unrealized gain (loss) on available for sale securities $ 1,956,978 $(1,389,168) $ 0 The accompanying notes are an integral part of these consolidated financial statements. 35 UNION BANKSHARES COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 and 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Union Bankshares Company provides a full range of banking services to individual and corporate customers through its subsidiary and branches in Maine. The Company is subject to competition from other financial institutions. The Company is subject to regulations of certain Federal agencies and undergoes periodic examinations by those regulatory authorities. Basis of Consolidated Financial Statement Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of continuing assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiary, Union Trust Company. All significant intercompany balances and transactions have been eliminated in the accompanying financial statements. Minority interests, which are not significant, are included in other liabilities in the balance sheets and other operating expenses in the consolidated statements of income. Earnings and Cash Dividends Per Share Earnings per share is based upon the average number of common shares outstanding during each year. In 1995, the Company declared a 33-1/3 percent stock dividend. Earnings and cash dividends per share have been retroactively restated for 1994 and 1993 to reflect the stock dividend. Investments The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. The adoption resulted in the reclassification of certain investment securities as of January 1, 1994. The scope of the Statement did not encompass loans. The Company s investment accounting policies are as follows: 36 Trading Account Securities Trading account securities, consisting of securities purchased with the intent that they will be subsequently sold to provide net securities gains, are carried at market value. Realized and unrealized gains and losses on trading account securities are recognized in the consolidated statements of income as they occur. There were no trading securities at December 31, 1995 and 1994. Insert photo of 1995 Christmas is for Kids volunteers and photo of Michelle Joy, Accounting Clerk and Jayne Wallace, Branch Supervisor at our Somesville Branch. 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 other similar factors. These assets are specifically identified and are carried at fair value. Amortization of premiums and accretion of discounts are recorded as an adjustment to yield. Unrealized holding gains and losses for these assets, net of related income taxes, are excluded from earnings and are reported as a net amount in a separate component of Shareholders equity. When decline in market value is considered other than temporary, the loss is recognized in the consolidated statements of income, resulting in the establishment of a new cost basis for the security. Held to Maturity Securities Held to maturity securities consist of purchased debt securities that the Company has the positive intent and ability to hold until maturity. Debt securities classified as held to maturity are carried at amortized cost, 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 at December 31, 1995 and 1994. Insert photo of Foster Mathews, AVP and Branch Manager of Cherryfield Branch Loans Held for Sale Loans held for sale are loans originated for the purpose of potential subsequent sale. These loans 37 are carried at lower of cost or market at December 31, 1995 and 1994. Gains and losses on the sale of these loans are computed on the basis of specific identification. Loan Servicing Mortgage loans serviced for others are not included in the accompanying balance sheet. The Bank recognizes a loan servicing fee for the difference between the principal and interest payment collected on the loan and the payment remitted to the investor. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," which requires capitalization of mortgage servicing rights for loans originated after January 1, 1996. 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 in this evaluation include past and anticipated loan loss experience, the character and size of the loan portfolio and maintenance of the allowance at a level adequate to absorb anticipated future losses. Statement of Financial Accounting Standards No. 114, "Accounting by Creditor for Impairment of a Loan," was adopted on January 1, 1995. Under this standard, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the Allowance for Loan Losses to such loans. If these allocations cause the Allowance for Loan Losses to increase, such increase is reported as loan loss provision. There was no effect on the financial statement in adopting this standard for 1995. 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 38 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. Accounting Estimates Material estimates that are particularly susceptible to significant change in the future relate to the determination of the Allowance for Loan Losses. In connection with the determination of the Allowance for Loan Losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. Management believes that the allowance for losses on loans and the carrying value of real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions, particularly in northern New England. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company s Allowance for Loan Losses. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Income Taxes The Bank accounts for income taxes in accordance with Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes." Under the asset and liability method of Statement 109, 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. Under Statement 109, 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. Effective January 1, 1993, the Company adopted Statement 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statements of income. 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 39 investment securities. Interest expense on liabilities is derived by applying applicable interest rates to principal amounts outstanding. The recording of interest income on problem loan accounts ceases when collectibility within a reasonable period of time becomes doubtful. Interest income accruals are resumed only when they are brought fully current with respect to principal and interest and when management expects the loan to be fully collectible. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reflected in the loan loss provision. Loan Origination Fees and Costs Loan origination fees and certain direct loan origination costs are recognized over the life of the related loan as an adjustment to or reduction of the loan s yield. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds are purchased and sold for one-day periods. Fair Value Estimates The Company has made fair value estimates on its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 2. CASH AND DUE FROM BANK ACCOUNTS The Federal Reserve Board requires the Bank to maintain a reserve balance. The amount of this reserve balance as of December 31, 1995 was $100,000. 40 3. HELD TO MATURITY SECURITIES The carrying amounts of held to maturity securities for 1995 and 1994 as shown in the consolidated balance sheets of the Company, and their approximate market values at December 31, are as follows: OBLIGATIONS OF STATE AND POLITICAL SUBDIVISION: There were no December 31, pledged held to maturity securities as of 1995 1994 December 31, 1995 Book Value $4,119,546 $6,724,925 and 1994, Gross unrealized gains $ 117,723 $ 181,627 respectively. Gross unrealized losses $ (4,586) $ (62,681) Market Value $4,232,683 $6,843,871 The amortized cost and market value of held to maturity securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Market Cost Value The Company did not sell any held to Due in one year or less $ 816,992 $ 812,406 maturity Due after one year through five years 2,599,963 2,675,776 securities in Due after five years through ten years 652,859 691,720 1995 and 1994. Due after ten years 49,732 52,781 $4,119,546 $4,232,683 Insert photo of Phyllis Harmon, AVP Loan Officer 4. AVAILABLE FOR SALE SECURITIES In accordance with SFAS No. 115, the Company carries available for sale securities at market value. A summary of the cost and market values of available for sale securities at December 31, 1995 and 1994 are as follows: 41 Gross Gross Carrying Unrealized Unrealized & Market Amortized Gains Losses Value Cost 1995 1995 1995 1995 U.S. Treasury Securities and other U.S. Government agencies $70,308,79 $877,088 ($17,220) $71,168,661 Other Securities 628,900 1,734 0 630,634 Totals $70,937,693 $878,822 ($17,220) $71,799,295 1994 1994 1994 1994 U.S. Treasury Securities and other U.S. Government agencies $74,506,809 $ 35,715 $(2,081,667) $72,460,857 Other Securities 1,499,792 0 (58,847) 1,440,945 Totals $76,006,601 $35,715 $(2,140,514) $73,901,802 Pledged available for sale securities totaled $12,000,000 and $8,000,000 at December 31, 1995 and 1994, respectively. The amortized cost and market value of available for sale securities at December 31, 1995, 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. 42 Amortized Cost Market Value Due in one year or less $12,327,678 $12,366,875 Due in one year through five years 31,006,085 31,347,235 Due after five years through ten years 27,603,930 28,085,165 $70,937,693 $71,799,275 Proceeds from the sale of securities were $16,933,183, $10,010,376 and $6,432,216 in 1995, 1994 and 1993, respectively. Gross realized gains were $90,066, $183,825 and $0 in 1995, 1994, and 1993, respectively. Gross realized losses in 1995, 1994, and 1993 were $86,170, $85,816 and $0, respectively. Insert photo of Harry Vickerson AVP Branch Manager of Stonington Branch 5. LOANS At December 31, 1995 and 1994, loans on nonaccrual status totaled approximately $614,000 and $151,000, respectively. If interest had been accrued on such loans, interest income on loans would have been approximately $28,000, $17,000 and $52,000 higher in 1995, 1994, and 1993, respectively. Loans delinquent by 90 days or more that were still on accrual status at December 31, 1995 and 1994 totaled approximately $388,000 and $86,000, 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. Such 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 $1,388,780 and $1,163,540 at December 31, 1995 and 1994, respectively. New loans granted to related parties in 1995 totaled approximately $532,567; payments and reductions amounted to $357,327. 6. Allowance for Loan Losses Analysis of the Allowance for Loan Losses is as follows for the years ended December 31, 1995, 1994 and 1993: 43 1995 1994 1993 Balance, beginning of year $1,928,644 $1,802,443 $2,324,705 Provision for loan losses 30,000 0 30,000 Balance before loan losses 1,958,644 1,802,443 2,354,705 Loans charged-off 195,912 321,002 985,503 Less recoveries on loans charged-off 115,437 447,203 433,241 Net loan charge-off (recoveries) 80,475 (126,201) 552,262 Balance, end of year $1,878,169 $1,928,644 $1,802,443 Information regarding impaired loans is as follows for the year ended December 31, 1995: 1995 Average investment in impaired loans $59,000 Interest income recognized on impaired loans including interest income recognized on cash basis 6,400 Interest income recognized on impaired loans on cash basis 5,500 Information regarding impaired loans at December 31, 1995 is as follows: 1995 Balance of impaired loans $58,874 Less portion for which no Allowance for Loan Losses is allocated 0 Portion of impaired loan balance for which an allowance for credit losses is allocated 58,874 Portion of Allowance for Loan Losses allocated to the impaired loan balance 600 7. PREMISES, FURNITURE AND EQUIPMENT Detail of Bank Premises, Furniture and Depreciation Equipment is as follows: 1995 1994 expense charged Land $ 131,743 $ 131,743 against income was Buildings and improvements 3,375,282 3,353,475 $385,327, $375,115 Furniture and equipment 2,966,160 2,456,474 and $403,060 in Leasehold improvements 412,173 412,173 1995, 1994 and $6,885,358 $6,353,865 1993, Less accumulated depreciation 3,731,508 3,347,979 respectively. $3,153,850 $3,005,886 8. LEASE AND RENTAL EXPENSE At December 31, 1995, the Bank was obligated under a number of noncancellable leases for premises and equipment which are accounted for as operating leases. Leases for real property contain original 44 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 $83,068 in 1995, $90,175 in 1994, and $78,212 in 1993. The minimum annual lease commitments under noncancellable leases in effect at December 31, 1995, are as follows: Year Ending December 31, Amount 1996 $100,311 1997 $102,424 1998 $104,601 1999 $106,845 2000 $109,154 9. OTHER REAL ESTATE OWNED Other real estate owned amounts to $1,315,505 and $907,850 at December 31,1995 and 1994, respectively. Activity in the allowance for losses on other real estate owned for the years ended December 31, is as follows: 1995 1994 Balance at beginning of year $35,000 $ 0 Provisions charged to income 60,000 35,000 Balance at end of year $95,000 $35,000 10. Employee Benefits PENSION PLAN The Company's subsidiary has a noncontributory defined benefit pension plan covering substantially all permanent full-time employees. The benefits are based on employees' years of service and the average of their three highest consecutive rates of annual salary preceding retirement. It is the subsidiary's policy to fund the plan sufficiently to meet the minimum funding 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 $126,219, $124,720 and $94,641 for the years ended December 31, 1995, 1994 and 1993, respectively. 45 The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31, 1995 and 1994: Insert photo of Rebecca Sargent AVP Trust Officer ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: 1995 1994 Accumulated benefit obligation including vested benefits of $3,077,477 in 1995 and $2,483,705 in 1994 $(3,133,283) $(2,505,191) Projected benefit obligation for service rendered to date (4,030,311) (3,188,762) Plan assets at fair value (cash and equivalent, U.S. Government securities and other investments) 3,884,088 3,269,570 Plan assets in excess of projected benefit obligation (146,223) 80,808 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions 608,338 396,093 Unrecognized prior service cost (38,488) (41,034) Unrecognized net asset at January 1, being recognized over 17 years (179,598) (203,376) Prepaid pension cost included in other assets $ 244,029 $ 232,491 NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS: 1995 1994 1993 Service cost - benefits earned during the period $158,055 $170,374 $141,499 Interest cost on projected benefit obligation 253,278 232,087 219,951 Actual return on plan assets (550,892) 95,028 (206,941) Net amortization and deferral 265,778 (372,769) (59,868) Net periodic pension cost $126,219 $124,720 $ 94,641 NET AMORTIZATION AND DEFERRAL INCLUDED THE FOLLOWING COMPONENTS: Amortization of unrecognized net obligations existing at January 1 $(23,778) $(23,778) $(23,778) Asset (loss) deferred 289,222 (357,725) (36,090) Amortization of unrecognized prior service cost (2,546) (2,546) 0 Amortization of net gain (loss) from earlier periods 2,880 11,280 0 $265,778 $(372,769) $(59,868) Insert photo of Sandra Salsbury, Administrative Assistant Supervisor The weighted average discount rates of 7.0% and 8.0% were used in determining the projected benefit in 1995 and 1994, respectively. The increase in salary levels was 5.0%. Expected long-term rates of return on 46 assets were 8.0% for 1995, 1994, and 1993, 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. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers Accounting for Post-retirement Benefits Other Than Pensions." Statement 106 requires the Company to change from the cash basis of accounting for post-retirement benefits, which recognizes costs when paid, to the accrual method, which recognizes costs over the employee s period of active employment. Statement 106 may be adopted through a 20-year transition or by recognizing the entire accumulated post-retirement benefit obligation immediately. The Company decided to amortize the total post-retirement benefit obligation of $915,000 over a 20-year period beginning January 1, 1993. The effect of adopting Statement 106 was a decrease in net income and an increase of the net periodic benefit cost for the years ended December 31, 1995 and 1994 in the amount of $148,646 and $154,800, respectively. The following table sets forth the status of the Company s post-retirement obligation at December 31, 1995 and 1994: ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION: 1995 1994 Retirees $ 457,603 $ 555,789 Fully eligible active program participants 150,412 186,533 Other active program participants 601,411 278,390 Other 19,420 105,088 $1,228,846 $1,125,800 Accumulated post-retirement benefit obligation in excess of plan assets $1,228,846 $1,125,800 Unrecognized prior service cost (776,700) (822,300) Accrued post-retirement benefit cost $ 452,146 $ 303,500 Net period post-retirement benefit cost for the years ended December 31, 1995, 1994, and 1993, respectively, includes the following components: 47 (IN THOUSANDS): 1995 1994 1993 Service cost $ 30,129 $ 29,800 $ 27,400 Interest cost 74,758 79,400 75,700 Amortization of accumulated post-retirement obligation 45,600 45,600 45,600 Amortization of net (gain)/loss (1,841) 0 0 Net periodic post-retirement benefit cost $148,646 $154,800 $148,700 For measurement purposes, the assumed annual rates of increase in the per capita cost of covered benefits were 15% and 14% for 1995 and 1994, respectively. Per capita medical costs are assumed to decrease annually by 1% until the year 2002 and later, which at that time will be 6%. The health care cost trend rate assumption has a significant effect on the amounts reported; however, these amounts are not available at this time. The weighted average discount rate and rate of compensation increase used in determining the accumulated post-retirement benefit obligation were 8.5% and 6.0%, respectively, on December 31, 1995 and 1994. 401(K) PLAN The Company has a 401(k) noncontributory plan for employees who meet certain service requirements. 11. INCOME TAXES Income tax expense (benefit) consists of the following: Current Deferred Total 1995 Federal $835,597 $ 9,666 $845,263 State 40,000 0 40,000 $875,597 $ 9,666 $885,263 1994 Federal $913,476 $(163,740) $749,736 State 47,000 0 47,000 $960,476 $(163,740) $796,736 1993 Federal $642,206 $ 113,794 $756,000 State 41,000 0 41,000 $683,206 $ 113,794 $797,000 Deferred tax expense (benefits) results from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of these differences and the tax effect of each are as follows: 48 1995 1994 1993 Excess of tax over financial statement depreciation $ 15,900 $ 13,368 $ 6,000 Financial statement (over) under tax loan loss provision 48,737 (34,410) 181,700 Effect of deferring loan fees for financial statement purposes 30,885 20,560 (7,500) Deferred compensation accrual (32,724) (153,440) (61,200) FDIC assessment accrual 23,800 20,400 0 Effect of recording real estate owned at market value (20,400) 0 0 Post-retirement benefits accrual (50,539) (35,821) (32,000) Other (5,993) 5,603 26,794 $ 9,666 $(163,740) $ 113,794 Insert photo of Michelle Joy, Accounting Clerk and Jayne Wallace, Somesville Branch Supervisor Income tax expense amounted to $885,263 for 1995 (an effective rate of 28.0%), $796,736 for 1994 (an effective rate of 25.3%) and $797,000 for 1993 (an effective rate of 27.8%). The actual tax expense for 1995, 1994 and 1993 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: 1995 1994 1993 Amount % of Amount % of Amount % of Pretax Pretax Pretax Earnings Earnings Earnings Computed "expected" tax expense $1,098,900 34.0% $1,071,237 34.0% $ 973,825 34.0% Nontaxable income on obligations of states and political subdivisions (225,810) (7.0%) (251,808) (8.0%) (235,411) (8.2%) Other 12,173 1.0% (22,693) (0.7%) 58,586 2.0% $ 885,263 28.0% $796,736 25.3% $797,000 27.8% 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: 49 DEFERRED TAX ASSETS: 1995 1994 Unrealized loss on available for sale securities $ 0 $ 715,632 Allowance for Loan Losses 638,577 519,274 Real Estate owned 32,300 94,475 Deferred loan fees 63,590 0 Accrued FDIC assessment 17,000 40,800 Deferred compensation 186,164 153,440 Post-retirement benefits 118,358 67,819 Other 16,647 18,629 Deferred tax assets $1,072,636 $1,610,069 DEFERRED TAX LIABILITIES: Unrealized gain on available for sale securities $ 293,793 $ 0 Allowance for Loan Losses 168,041 0 Premises, furniture and equipment principally due to differences in depreciation 259,748 243,847 Prepaid pension expense 81,668 77,745 Cash surrender value of life insurance 36,386 36,386 Deferred tax liabilities $ 839,636 $ 357,978 Insert photo of Eugene Grindle, Teller at Blue Hill Branch The Bank has sufficient refundable taxes paid in available carry-back years to fully realize its recorded deferred tax asset of $1,072,636 at December 31, 1995. The deferred tax asset and liability are included in other assets and other liabilities on the balance sheet at December 31, 1995 and 1994, except for the amount attributed to available for sale securities, which is included in Shareholder's equity. 12. SHAREHOLDERS EQUITY The Federal Reserve Board has issued guidelines for a risk-based approach to measuring the capital adequacy of bank holding companies and state-chartered banks that are members of the Federal Reserve System. These capital requirements generally call for an 8% total capital ratio, of which 4% must be comprised of Tier I capital. Risk-based capital ratios are calculated by weighing assets and off-balance sheet instruments according to their relative credit risks. At December 31, 1995, the Company had met the minimum capital ratios. 13. 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 50 involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. At December 31, 1995 and 1994, the following financial instruments, whose contract amounts represent credit risk, were outstanding: Contract Amount 1995 1994 Commitments to extend credit $30,987,000 $27,911,000 Standby letters of credit $ 36,000 $ 127,000 Unadvanced portions of construction loans $ 809,000 $ 459,000 The Bank s exposure to credit loss in the event of nonperformance by the other party to the above financial instruments is represented by the contractual amounts of the instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the credit extension, is based on management s credit evaluation of the counterparty. Collateral held varies but may 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 loan facilities to customers. 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 debtors ability to honor their contracts is dependent upon the economic conditions in the area, especially in the real estate 51 sector. There were no borrowers whose total indebtedness to the Bank exceeded 10% of the Bank s Shareholders equity at December 31, 1995. 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. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Bank s financial instruments. Statement 107 specifies that fair values should be 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 soldapproximates their relative book values at December 31, 1995 and 1994, 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 and 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, lending conditions and the effects of estimated prepayments. 52 Loans Held for Sale The fair market value of this financial instrument approximates the book value as this financial instrument has a short maturity. Accrued Interest Receivable The fair market value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Bank s policy to stop accruing interest on loans past due by more than ninety 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 financial instruments do not have a market nor is it practical to estimate their fair value without incurring excessive costs. Deposits Under Statement 107, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market and checking accounts, is equal to 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 this financial instrument has a short maturity. Insert photo of John Lynch, Senior Vice President Loans Commitment to Extend Credit Under Statement 107, the fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The Bank has not estimated the fair values of commitments to originate loans due to their short-term nature and their relative immateriality. 53 Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These values do not reflect any premium or discount that could result from offering for sale at one time the Bank s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 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. Other significant assets and liabilities that are not considered financial instruments include the deferred tax assets, bank premises and equipment and other real estate owned. In addition, the 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. Insert photo of Lisa Holmes, AVP Branch Manager of Machias Branch A summary of the fair values of the Company s significant financial instruments at December 31, 1995 and 1994 follows: 54 1995 1994 Carrying Estimate Carrying Estimate of Value of Fair Value Fair Value Value ASSETS Cash, due from banks and Federal funds sold $ 13,666,260 $ 13,666,260 $ 8,669,703 $ 8,669,703 Available for sale securities 71,799,295 71,799,295 73,901,802 73,901,802 Held to maturity securities 4,119,546 4,232,683 6,724,925 6,843,871 Other investment securities 659,325 659,325 659,325 659,325 Loans 91,364,591 92,762,722 82,279,192 81,753,215 Loans held for sale 1,227,447 1,227,447 651,191 651,191 Acccrued interest receivable 1,846,149 1,846,149 1,986,543 1,986,543 LIABILITIES Deposits 165,357,869 166,729,943 160,248,687 161,285,635 Accrued interest payable 808,103 808,103 508,747 508,747 15. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS The condensed financial statements of Union Bankshares Company as of December 31, 1995 and 1994 and for each of the years ended December 31, 1995, 1994, and 1993 are presented as follows: BALANCE SHEET December 31, 1995 and 1994 1995 1994 ASSETS: Cash $ 17,056 $ 939 Investment in subsidiary 22,809,268 19,181,934 Other assets 199,856 149,892 Total assets $23,026,180 $19,332,765 LIABILITIES AND SHAREHOLDER'S EQUITY: Dividends payable $ 201,818 $ 151,384 Other liabilities 29,868 0 Shareholders' equity 22,794,494 19,181,381 Total liabilities and Shareholders' equity $23,026,180 $19,332,765 55 STATEMENTS OF INCOME Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 Dividends from subsidiary $ 749,460 $ 599,568 $ 599,568 Equity in undistributed earnings of subsidiary 1,670,357 1,697,344 1,541,878 Service income 0 59,000 0 Total income $2,419,817 $2,355,912 $2,141,446 Operating expenses 1,760 1,949 7,808 Net income $2,418,057 $2,353,963 $2,133,638 STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,418,057 $ 2,353,963 $ 2,133,638 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Undistributed earnings of subsidiary $ (1,670,357) $ (1,697,344) $ (1,542,026) Increase in other assets (49,963) 0 (37,475) Increase in other liabilities 29,868 0 0 Increase (decrease) in dividends payable 50,434 (321) 37,716 Net cash provided by operating activities $ 778,039 $ 656,298 $ 591,853 CASH FLOWS FROM FINANCING ACTIVITIES: Sale of one additional share of stock $ 0 $ 0 $ 147 Payment for fractional shares (29,821) 0 (33,491) Dividends (756,860) (606,491) (606,882) Purchase of Treasury stock 0 (51,500) (20,918) Sale of Treasury stock 24,759 0 11,400 Net cash used by financing activities (761,922) (657,991) (649,744) Net increase (decrease) in cash and cash equivalents 16,117 (1,693) (57,891) Cash and cash equivalents at beginning of year 939 2,632 60,523 Cash and cash equivalents at end of year $ 17,056 $ 939 $ 2,632 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Net unrealized gain (loss) on available for sale securities $ 1,956,978 ($1,389,168) $ 0 56 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Union Bankshares Company We have audited the accompanying consolidated balance sheet of Union Bankshares Company and Subsidiary as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Union Bankshares Company and Subsidiary as of and for the year ended December 31, 1994 were audited by other auditors whose report thereon dated January 20, 1995, included an explanatory paragraph that described the Company's change in its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at January 1, 1994, as discussed in Notes 3 and 4 to the financial statements. The financial statements of Union Bankshares Company and Subsidiary as of and for the year ended December 31, 1993 were audited by other auditors whose report thereon dated January 13, 1994, included an explanatory paragraph that described the Company's adoption of SFAS No. 106, Employers' Accounting for Post Retirement Benefits Other Than Pensions in 1993, as discussed in Note 9 to the financial statements, and the Company's change in its method of accounting for income taxes in 1993 to adopt provisions of SFAS No. 109, Accounting for Income Taxes on January 1, 1993, as discussed in Note 10 to the financial statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Union Bankshares Company and Subsidiary as of December 31, 1995, and the consolidated results of their operations and their 57 consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine January 19, 1996 58 UNION BANKSHARES COMPANY & UNION TRUST COMPANY DIRECTORS Arthur J. Billings Richard W. Whitney President, Barter Lumber Company Dentist Peter A. Blyberg UNION BANKSHARES COMPANY Executive Vice President DIRECTORY OF OFFICERS and Treasurer Robert S. Boit John V. Sawyer II President Chairman of the Board Richard C. Carver Robert S. Boit Owner, Carver Oil Co. President & Carver Shellfish, Inc. Peter A. Blyberg Peter A. Clapp Executive Vice President, Blue Hill Garage President and Treasurer Sandra H. Collier Attorney-at-Law Richard W. Teele Ferm, Collier & Larson Secretary Robert B. Fernald Sally J. Hutchins Treasurer, A.C. Fernald Sons, Inc. Vice President & & Jordan-Fernald Clerk Douglas A. Gott UNION BANKSHARES COMPANY Owner, Douglas A. Gott & UNION TRUST COMPANY & Sons HONORARY DIRECTORS David E. Honey Franklin L. Beal Retired, Former Manager, Retired Swan's Island Electric Coop Emery B. Dunbar Delmont N. Merrill Owner, Edgewater President, Merrill Blueberry Cabins Farms, Inc. Carroll V. Gay Thomas R. Perkins Retired Retired Pharmacy Owner John E. Raymond Casper G. Sargent, Jr. President, Bimbay, Owner, Sargent's Real Estate Corp. Inc. John V. Sawyer II Mary T. Slaven Chairman of the Board Realtor President, Worcester-Sawyer Agency Douglas N. Smith Stephen C. Shea Retired Secretary, E.L. Shea, Inc., President, Shea Leasing I. Frank Snow President, Snow's Richard W. Teele Plumbing and Secretary, Retired Executive Heating Vice President & Treasurer 59 Paul L. Tracy President, Owner, Winter Harbor Agency; Vice President, Co-Owner, Schoodic Insurance Agency UNION TRUST COMPANY DIRECTORY OF OFFICERS John V. Sawyer II Peter C. O'Brien Chairman of the Board AVP, Loan and CRA Officer Robert S. Boit Rebecca J. Sargent President, Chief AVP, Trust Officer Executive Officer Peter A. Blyberg Stephen L. Tobey Executive Vice President, AVP, Operations and Chief Operating Officer Security Officer and Treasurer Patti S. Herrick John P. Lynch Operations Officer Senior Vice President, Loans Dawn L. Lacerda Cynthia W. Cadwalader Operations Officer Vice President, Investment Officer Mary Lou Lane Peter F. Greene Customer Service Officer Vice President, Operations Teresa L. Linscott Sally J. Hutchins Electronic Services Officer Vice President, Controller & Clerk Marsha L. Osgood Christopher H. Keefe Assistant Trust Officer Vice President, Branch Administration Deborah F. Preble Bette B. Pierson Assistant Controller Vice President, Mortgage Loan Officer Lorraine S. Ouellette Leah S. Allen Trust Officer AVP, Deposit Operations Officer Julie C. Vittum James M. Callnan Senior Auditor AVP, Data Processing Officer Nancy E. Domagala AVP, Mortgage Underwriter Laurence D. Fernald, Jr. AVP, Loan and Appraisal Review Officer Janis M. Guyette AVP, Trust Operations Officer Lynda C. Hamblen AVP, Loan Officer 60 Phyllis C. Harmon AVP, Loan Officer Harold L. Metcalf AVP, Loan Officer Gayle A. Norton AVP, Human Resource Officer UNION TRUST COMPANY BRANCH OFFICES Blue Hill Pamela G. Hutchins, AVP, Branch Manager Castine Sherry L. Oliver, Branch Manager Cherryfield C. Foster Mathews, AVP, Branch Manager Ellsworth Shopping Center Melody L. Wright, Branch Manager Jonesport Wendy W. Beal, AVP, Branch Manager Machias Lisa A. Holmes, AVP, Branch Manager Milbridge James E. Haskell, AVP, Branch Manager Somesville William R. Weir, Jr., AVP, Residential Lender 61 Stonington Harry R. Vickerson III, AVP, Branch Manager UNION TRUST COMPANY PERSONNEL Albert, Betty Allen, Deborah Armstrong, Rebecca Babson, William Bayrd, Rona Billings, Holly Boyce, Katrina Bragg, Randy Braun, Tammie Bunker, Corace Carter, Linda Carter, Sharon Chisholm, Catherine Condon, Helen Curtis, Kristen Curtis, Marjorie Dearborn, Trevor Douglass, Joanne Edgecomb, Ann Eldridge, Stacey Elliott, Linda Faulkner, Kathy Fuller, Jackie Gilbert, Jennie Grant, Victoria 62 Grindle, Eugene Handy, Louise Harriman, Barbara Heline, Heidi Hills, Darlene Hinckley, Wayne Hutchins, Rebecca Hutchinson, Elwell Ingalls, Laurea Johnson, Mindy Joy, Michelle Kelley, Cindy Leach, Gail Look, Lisa Lounder, Lorraine MacLaughlin, Wendy Madden, Anita Marshall, Carol McCormick, Bernadette Mitchell, Stacie Murphy, Jill Neale, Debra Owen, Doris Page, Deborah Pierson, June Pineo, Muriel Podlubny, Helene Robbins, Nancy Rose, Brenda Sackett, Jacqueline Salisbury, Jane Salsbury, Sandra Santerre, Tammy Sargent, Lucinda Scott, Marsha Scoville, Clark Smith, Katherine Smith, Ronald Snow, Christie Spaulding, Virginia Spizio, Barbara Sprague, Donna Sproul, Bonnie Sticht, Julie St. Pierre, Bettina Swett, Andrea Thompson, Dianne Thompson, Patricia Treadwell, Mattie Waldron, Marcella Wallace, Jayne West, Cynthia White, Tammy Woodward, Cheryl York, Caroline Young, April Young, Michelle Young, Vicki 63 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. An Affirmative Action Plan has been implemented by the Bank. The Company will provide, without charge, upon written request, a copy of its annual report on SEC Form 10K for 1995, including the financial statements and the schedules required to be filed with the Securities and Exchange Commission. Interested persons should write to: Sally J. Hutchins, Vice President Union Bankshares Company PO Box 479 Ellsworth, Maine 04605 Annual Shareholders Meeting 2:00 pm. Thursday, April 18, 1996 Holiday Inn, High Street Ellsworth, Maine 64 Insert photo of 1995 Christmas is for Kids volunteers: Larry Fernald, Jackie Sackett, Helen Condon, Vickie Grant, Wendy MacLaughlin, Mary Lou Lane, Sandy Salsbury. 65 -----END PRIVACY-ENHANCED MESSAGE-----