-----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, Jh0VlVnA9r44s6PI217uhoQrtjlfMh/PB9HU1Vo2d46LfBf2eihH2tzuBTAQBIvP zUaHomfvuahLS0iNq6XMYg== 0000745083-98-000003.txt : 19980327 0000745083-98-000003.hdr.sgml : 19980327 ACCESSION NUMBER: 0000745083-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 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: SEC FILE NUMBER: 000-12958 FILM NUMBER: 98574389 BUSINESS ADDRESS: STREET 1: 66 MAIN ST STREET 2: PO BOX 479 CITY: ELLSWORTH STATE: ME ZIP: 04605 BUSINESS PHONE: 2076672504 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________ to _________ Commission File Number 0-12958 UNION BANKSHARES COMPANY (Exact name of registrant as specified in its charter) MAINE 01-0395131 (State or other jurisdiction (IRS Employer Identification No.) of incorporation of organization) 66 Main Street, Ellsworth, Maine 04605 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (207) 667-2504 Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12 (g) of the Act: Common Stock $12.50 Par Value Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XXX NO _______ Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 6, 1998, was approximately $54,272,125. 482,767 shares of the Company's Common Stock, $12.50 par value, were issued and outstanding on February 17, 1998. UNION BANKSHARES COMPANY INDEX TO FORM 10-K PART I Page No. Item 1: Business 3-15 Item 2: Properties 15-16 Item 3: Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6: Selected Financial Data 18 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 19-20 Item 8: Financial Statements and Supplementary Data 20 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III Item 10: Directors and Executive Officers of the Registrant 20 Item 11: Executive Compensation 20 Item 12: Security Ownership of Certain Beneficial Owners and Management 20 Item 13: Certain Relationship and Related Transactions 20 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 21-22 Signatures 23 PART I ITEM I: Business Union Bankshares Company is a one-bank holding company incorporated in July 1984, organized under the laws of the State of Maine, that has acquired 99.928% of the common stock of Union Trust Company. The Company's only subsidiary is the Bank. Union Bankshares' holding company structure can be used to engage in permitted banking related activities, either directly, through newly formed subsidiaries, or by acquiring companies already established in those activities. The Company has no immediate plans to engage in such activities, but could do so if such action should appear desirable. Union Trust is a full-service, independent, community bank that is locally owned and operated. Through its eleven offices, Union Trust serves the financial needs of individuals, businesses, municipalities and organizations in Hancock and Washington Counties. Union Trust offers a full range of consumer, commercial, trust and investment services. Now in its 110th year, Union Trust is committed to providing outstanding personalized service and maintaining and expanding its position as one of Maine's preeminent community banks. Union Trust Company supports the people and communities it serves by contributing to programs that address human needs within the community. It also supports the volunteerism of the Bank's employees, directors and retirees. Reinvesting local money locally builds strong communities. Through these programs, Union Trust is able to give back to the community it serves. On a continual basis, the Bank introduces new services and makes improvements to current offerings that will add value to customer relationships. Some of the service additions and improvements made during 1997 include: Implemented new procedures to handle Federal government electronic payment requirements, both making and receiving payments. Opened a new branch in Bar Harbor with Saturday hours during the summer. Introduced BankLine PC, 24-hour computer banking. Conducted four seminars and two adult education classes and held eight Business Round Table luncheons for area professionals to discuss business issues. Union Trust's deposit services include: regular and basic checking accounts, small business checking, NOW accounts, money market accounts, Unlimited Club membership, savings accounts, Christmas Club, certificates of deposit, IRAs and Simplified Employee Pension (SEP) Plans. The Bank also provides the following loan products: personal loans, commercial loans, municipal loans, real estate loans, home equity loans, VISA and MasterCard credit cards, student loans, reserve checking and overdraft protection, and lines of credit. The following cash management services are also available at Union Trust: coin and currency exchange, merchant card services, cash concentration, direct debit, electronic Federal tax payment services (EFTPS), direct deposit payroll services, ACH and wire transfers. Union Trust also provides many convenient banking services: ATM and Convenience Check Cards, BankLine telephone banking and BankLine PC computer banking, night deposit and safe deposit boxes. Trust and Investment Services provides three distinct services: (1) custody and investment management, (2) retirement accounts and planning and (3) trust services, including estate planning. Investment services include investment management and advisory services, MutualPARTNERS (an asset allocation account using mutual funds), custodial services and safekeeping. The following retirement savings vehicles are available: IRAs, Simplified Employee Pension (SEP) plans, SIMPLE IRAs, profit sharing and 401(k) plans, and money purchase pension plans. Trust services include trust administration, personal representative and fiduciary services and estate planning. Union Trust's services are offered through our eleven convenient locations and Customer Service Call Center. Customers can also access their accounts 24 hours a day through our network of eleven ATMs, BankLine telephone banking and BankLine PC computer banking. The Bank competes actively with other commercial banks and other financial institutions in its service areas. In the Bank's immediate market area, there are two other independent community banks, one savings and loan association, three savings bank branch offices and three commercial banks owned outside of the state of Maine. Strong competition exists among commercial banks in efforts to obtain new deposits, in the scope and type of services offered, in interest rates on time deposits and interest rates charged on loans, and in other aspects of banking. In Maine, savings banks are major competitors of commercial banks as a result of broadened powers granted to savings banks. In addition, the Bank like other commercial banks, encounters substantial competition from other financial institutions engaged in the business of either making loans or accepting deposit accounts, such as savings and loan associations, insurance companies, certain mutual funds, and certain governmental agencies. Furthermore, the large banks located in Boston, New York and Providence are active in servicing some of the large Maine based companies. The Bank has not made any material changes in its manner of conducting business during the past five years. As of December 31, 1997, the Bank employed 129 employees of which 16 employees were part time. The President, Senior Vice President, Vice President-Treasurer, Vice President-Deposit Services and Vice President- Trust are employed by the Bank as well as serve as officers of the Company. They are not compensated by the Company for their service and there are no employees of the Company. The primary regulator of the Company and the Bank is the Federal Reserve Bank of Boston and the Bureau of Banking of the State of Maine. Please refer to Footnote #15 on page 37 of the 1997 Annual Report of Union Bankshares Company, regarding compliance with capital requirements. Any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that were not disclosed under Item III of Industry Guide 3 do not (1) represent or result from trends or uncertainties which management reasonable expects will materially impact future operating results, liquidity, or capital resources or (2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. The Company and Bank are not aware of any current recommendations by the regulatory authorities which if they were to be implemented would have or would be reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. Loans, other than credit card loans, are placed on non accrual status when, in the opinion of management, there are doubts as to the collectibility of interest or principal, or when principal or interest is past due 90 days or more, and the loan is not well secured and in the process of collection. Interest previously accrued but not collected is reversed and charged against interest income at the time the related loan is placed on non-accrual status. Principal and accrued interest on credit card loans are charged to the allowance for credit losses when 180 days past due. Payments received on non-accrual loans are recorded as reductions of principal if principal payment is doubtful. Loans are considered to be restructured when the yield on the restructured assets is reduced below the current market rates by an agreement with the borrower. Generally this occurs when the cash flow of the borrower is insufficient to service the loan under its original terms. In the Bank's market area, the banking business is somewhat seasonal due to an influx of tourists and seasonal residents returning to the area each spring and summer. As a result, the Bank has an annual deposit swing, from a high point in mid October to a low point in June. The deposit swing is predictable and does not have a material adverse effect on the Bank and its operations. In July 1997, the Company declared a stock split effected in the form of a 20 percent stock dividend and a two for one stock split. Common share amounts, per share earnings and dividends and common stock and retained earnings for all years presented in this report have been adjusted to reflect these transactions. STATISTICAL PRESENTATION The Supplemental Financial Data presented on the following pages contains information to facilitate analysis and comparison of sources of income and exposure to risk. A. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME The following table sets forth the information related to changes in net interest income. For purposes of the table and the following discussion, information is presented regarding (1) the total dollar amount of interest income of the Company from interest earning assets and the resulting average yields; (2) the total dollar amount of interest expense on interest bearing liabilities and the resulting average cost; (3) net interest income; (4) interest rate spread; and (5) net interest margin. Information is based on average daily balance during the indicated periods. For the purposes of the table and the following discussion, (1) income from interest earning assets and net interest income are presented on a tax equivalent basis and (2) non accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non accrual loans has not been included for purposes of determining interest income. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (In Thousands) (On a Tax Equivalent Basis) 1997 1996 1995 Average Int Yield/ Average Int Yield/ Average Int Yield/ Balance Earned/ Rate Balance Earned/ Rate Balance Earned/ Rate Paid Paid Paid Assets Interest Earning Assets: Securities Available for Sale $ 72,741 $ 5,182 7.12 $ 80,333 $ 5,256 6.54 $ 65,896 $ 4,231 6.42 Securities Held to Maturity 22,689 1,437 6.33 3,772 369 9.78 5,926 635 10.70 Federal Funds Sold 598 41 6.86 1,411 76 5.39 7,409 424 5.72 Loans (Net) 100,208 9,660 9.64 94,139 9,192 9.76 88,588 8,781 9.91 Total Interest Earning Assets 196,236 $16,320 8.32 179,655 $14,893 8.28 167,819 $14,071 8.38 Other Non Earning Assets 18,878 14,926 14,685 $215,114 $194,581 $182,504 Liabilities Interest Bearing Liabilities: Savings Deposits $ 65,432 $ 1,119 1.71 $ 65,770 $ 1,172 1.78 $ 65,690 $ 1,302 1.98 Time Deposits 73,419 4,298 5.85 67,294 3,752 5.57 59,544 3,187 5.35 Money Market Accounts 12,271 482 3.93 14,107 478 3.39 15,142 552 3.65 Borrowings 14,007 835 5.96 4,012 229 5.71 96 11 11.40 Total Interest Bearing Liabilities 165,129 $ 6,734 4.08 151,183 $ 5,631 3.67 140,472 $ 5,052 3.59 Other Non Interest Bearing Liabilities & Shareholders' Equity 49,985 43,398 42,032 $215,114 $194,581 $182,504 Net Interest Income 9,586 9,262 9,019 Net Interest Rate Spread 4.24 4.61 4.79 Net Interest Margin 4.88 5.16 5.37 The following table presents certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in rate/volume (change in rate multiplied by change in volume). ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE For the years ended December 31, 1997, 1996 and 1995 (In Thousands) Year Ended December 31, 1997 vs. 1996 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets: Assets Available for Sale (499) 463 (38) (74) Securities Held to Maturity 1,223 (27) (136) 1,060 Federal Funds Sold (44) 21 (12) (35) Loans, Net 588 (118) (2) 468 Total Interest Earning Assets 1,268 339 (188) 1,419 Interest Bearing Liabilities: Savings Deposits (7) (47) 1 (53) Time Deposits 337 185 24 546 Money Market Accounts (62) 76 (10) 4 Borrowed Funds 571 10 25 606 Total Interest Bearing Liabilities 839 224 40 1,103 Change in Net Interest Income 429 115 (148) 316 Year Ended December 31, 1996 vs. 1995 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets: Assets Available for Sale 926 78 21 1,025 Securities Held to Maturity (152) (36) 13 (175) Federal Funds Sold (343) (25) 20 (348) Loans, Net 548 135 (272) 411 Total Interest Earning Assets 979 152 (218) 913 Interest Bearing Liabilities: Savings Deposits 0 (133) 3 (130) Time Deposit 416 327 (178) 565 Money Market Accounts (37) (39) 2 (74) Borrowed Funds 446 (6) (222) 218 Total Interest Bearing Liabilities 825 149 (395) 579 Change in Net Interest Income 154 3 177 334 *Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. B. INVESTMENT PORTFOLIO HELD TO MATURITY SECURITIES The following table shows the book value of the Company's held to maturity securities at the end of each of the last three years. (In Thousands) December 31 1997 1996 1995 U.S. Treasury Securities & Other Government Agencies $25,814 $ 995 $ 0 Obligations of States & Political Subdivisions 6,985 3,792 4,120 TOTAL $32,799 $4,787 $4,120 The table below shows the relative maturities of investment and held to maturity securities as of December 31, 1997. Held to Maturity Securities Maturity Distribution as of December 31, 1997 Security Category Due 1 Yr Due 1- Due 5- Due After or less 5 Yrs 10 yrs 10 Yrs State and Municipal Bonds $ 297 $3,066 $1,865 $ 1,757 Average Weighted Yield 8.07% 9.22% 7.74% 7.69% U.S. Government Agencies $ 0 $ 0 $1,384 $24,430 Average Weighted Yield 0% 0% 7.00% 7.26% TOTAL $ 297 $3,066 $3,249 $26,187 Percent of Total Portfolio .9% 9.4% 9.9% 79.8% NOTE: Average Weighted Yields on tax exempt obligations have been computed on a tax equivalent basis AVAILABLE FOR SALE SECURITIES The following table shows the carrying value of the Company's Available for Sale Securities and other investment securities at the end of each of the last three years. (In Thousands) December 31 1997 1996 1995 US Treasury Notes and Other Government Agencies $60,105 $73,322 $71,799 Other Corporate Securities 541 1,513 0 Other Securities 2,619 1,946 659 TOTAL $63,265 $76,781 $72,458 The table below shows the relative maturities and carrying value of available for sale debt securities as of December 31, 1997. Securities Available for Sale Maturity Distribution as of December 31, 1997 Security Category Due 1 Yr Due 1- Due 5- Due After or less 5 Yrs 10 Yrs 10 yrs US Treasury Notes and Other Government Agencies $ 502 $10,246 $48,806 $ 551 Average Weighted Yield 5.88% 6.29% 6.67% 7.06% TOTAL $ 502 $10,246 $48,806 $ 551 Percent of Total Portfolio: .8% 17.0% 81.3% .9% C. LOANS The following table reflects the composition of the Company's consolidated loan portfolio at the end of each of the last five years. 1997 1996 1995 1994 1993 (In Thousands) Real Estate Loans A. Construction & Land Development $ 5,925 $ 4,073 $ 2,023 $ 2,168 $ 1,568 B. Secured by 1-4 Family Residential Properties 33,528 30,457 27,402 25,528 26,129 C. Secured by Multi Family (5 or more) Residential Properties 0 0 2 4 7 D. Secured by Non-Farm, Non-Residential Properties 28,386 30,134 28,273 26,500 24,553 Commercial & Industrial Loans 18,566 16,582 13,778 12,975 12,834 Loans to Individuals for Household, Family & Other Consumer Expenditures 15,806 15,133 14,335 12,844 12,463 All Other Loans 4,852 4,664 7,430 4,189 3,439 Total Gross Loans $107,063 $101,043 $93,243 $84,208 $80,993 The above data is gathered from loan classifications established by the Federal Reserve Call Report 033. The percentages of loans by lending classification to total loans outstanding at December 31 was as follows: 1997 1996 1995 1994 1993 Real Estate 63.4% 64.0% 61.9% 64.4% 64.5% Commercial & Industrial - Including single payment loans to individuals 17.3% 16.4% 14.8% 15.4% 15.9% Consumer Loans 14.8% 15.0% 15.4% 15.3% 15.4% All Other Loans 4.5% 4.6% 7.9% 4.9% 4.2% Total Loans 100.0% 100.0% 100.0% 100.0% 100.0% Maturities and Sensitivities of Loans To Changes in Interest Rates As of December 31, 1997 Due 1 Year or Less Due 1-5 Years Due 5 Years + Real Estate $8,809 $6,828 $52,201 Commercial & Industrial 3,089 1,895 13,582 Consumer 1,616 5,829 8,361 Municipal 2,331 1,507 1,014 Total $15,845 $16,059 $75,158 Note:Real estate loans in the 1-5 category have $2,662,712 at a fixed interest rate and $4,165,288 at a variable interest rate. Commercial loans in the 1-5 year category have $67,688 at a fixed interest rate and $1,827,312 at a variable interest rate. Real estate loans in the 5+ category have $13,607,403 at a fixed interest rate and $38,593,597 at a variable interest rate. Commercial loans in the 5+ category have $1,448,041 at a fixed interest rate and $12,133,959 at a variable rate. Delinquent Loans The following schedule is a summary of loans with principal and/or interest payments over 30 days past due: December 31, 1997 1996 1995 1994 1993 Amt % Amt % Amt % Amt % Amt % Real Estate $3,003 2.8 $2,649 2.6 $ 867 0.9 $ 479 0.6 $1,659 2.0 Installment $ 128 .1 $ 197 0.2 $ 95 0.1 $ 95 0.1 $ 96 0.1 All Others $ 151 .1 $ 220 0.2 $ 35 0.0 $ 189 0.2 $ 102 0.2 TOTAL $3,282 3.0 $3,066 3.0 $ 997 1.0 $ 763 0.9 $1,857 2.3 It is the policy of the Company to discontinue the accrual of interest on loans when, in the opinion of the management, the ultimate collectibility of principal or interest becomes doubtful. The principal amount of loans which have been placed on non-accrual status were comprised primarily of certain installment loans. For each of these loans, management has evaluated the collectibility of the principal based on its best estimate of the realizable collateral value of the loans and does not anticipate that any losses from liquidation of these loans will have a material effect on future operations. There were approximately $503,000, $491,000 and $614,000 as of December 31, 1997, 1996 and 1995, respectively, of loans on a non-accrual status. LOAN CONCENTRATIONS As of December 31, 1997 and 1996, the Company did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio. The Bank grants residential, commercial and consumer loans to customers principally located in Hancock and Washington Counties of the State of Maine. Although the loan portfolio is diversified, a substantial portion of its debtor's ability to honor their contracts is dependent upon the economic conditions in the area, especially in the real estate sector. There are currently no borrowers whose total indebtedness to the Bank exceeds 10% of the Bank's shareholders' equity at December 31, 1997. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES Analysis of the allowance for loan losses for the past five years were as follows: (Dollars in thousands) December 31, 1997 1996 1995 1994 1993 Balance at beginning of period: $ 2,084 $ 1,878 $ 1,929 $ 1,802 $ 2,325 Charge-offs: Commercial & Industrial Loans 5 15 44 30 62 Real Estate Loans 123 0 48 256 837 Loans to Individuals 97 73 104 34 87 225 88 196 320 986 Recoveries: Commercial & Industrial Loans 118 138 43 5 84 Real Estate Loans 67 12 1 390 47 Loans to Individuals 49 24 71 52 302 234 174 115 447 433 Net Charge-offs (recoveries) (9) (86) 81 (127) 553 Provision for loan losses 120 120 30 0 30 Balance at end of period $ 2,213 $ 2,084 $ 1,878 $ 1,929 $ 1,802 Average Loans Outstanding $102,321 $ 97,143 $ 88,725 $ 82,600 $ 83,104 Ratio of Net Charge-offs (Recoveries) to average loans outstanding (.009%) (.09%) .09% (.15%) .67% ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES December 31, 1997 1996 1995 1994 1993 Amt % of Amt % of Amt % of Amt % of Amt % of Loan Loan Loan Loan Loan Categories Categories Categories Categories Categories To Total To Total To Total To Total To Total Loans Loans Loans Loans Loans Balance At End of Period: Applicable To: Real Estate $ 413 63.4% $ 418 64.0% $ 647 61.9% $ 665 64.4% $ 621 64.5% Commercial & Industrial 1,473 17.0% 1,312 16.4% 1,024 14.8% 1,051 15.4% 983 15.9% Consumer 211 14.7% 194 15.0% 207 15.4% 213 15.3% 198 15.4% Municipal 49 4.5% 60 4.5% 0 7.9% 0 4.9% 0 4.2% Identified 67 .4% 100 .1% 0 0 0 0 0 0 TOTAL $2,213 100.0% $2,084 100.0% $1,878 100.0% $1,929 100.0% $1,802 100.0% The allowance for loan losses is a general allowance established by management to absorb possible loan losses as they may exist in the loan portfolio. This allowance is increased by provisions charged to operating expenses and by recoveries on loans previously charged-off. Management determines the adequacy of the allowance from continuous reviews of the quality of new and existing loans, from the results of independent reviews of the loan portfolio by regulatory agency examiners, evaluation of past and anticipated loan loss experience, the character and size of the loan portfolio and anticipated economic conditions. As of December 31, 1997, the Company had impaired loans totaling $21,728, which consisted of a real estate loan. The fair value of the loan's collateral was used to evaluate the adequacy of the Allowance for Loans Losses allocated to this loan. A loan is considered impaired by management when it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan, including principal and interest. Loans on a non-accrual status that are deemed collectable are not classified as impaired. Based upon management's periodic review of loans on non- accrual status, impairment is based on a loan by loan analysis and not set by a defined period of delinquency before a loan is considered impaired. Risk Elements 1997 1996 1995 1994 1993 Loans accounted for on a non accrual basis $503 $491 $614 $151 $486 Accruing loans contractually past due 90 days or more $209 $196 $388 $ 86 $237 In accordance with Industry Guide 3 Item III. C (2), the gross interest income that would have been recorded in 1997 if non accrual and restructured loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination approximates $39,000. There was approximately $1,900 included in the gross interest income on non-accrual and restructured loans for 1997. D. DEPOSITS The following schedule summarizes the time remaining to maturity of Certificates of Deposit $100,000 or greater at December 31, 1997. Amount (In Thousands) 3 Months or Less $5,819 Over 3 Through 6 $4,195 Over 6 Through 12 Months $ 535 Over One Year $ 209 E. CAPITAL RATIOS The following table presents, for the last three years, the Company's average capital expressed as a percentage of average deposits, loans, total assets, and earning assets. *1997 *1996 *1995 Deposits 14.9% 14.4% 13.7% Loans 24.6% 24.6% 25.1% Total Assets 12.0% 12.1% 11.9% Earning Assets 13.0% 13.3% 12.9% *Excluding net unrealized gain (loss) on available for sale securities of $437,749, ($171,460), and $567,810 at December 31, 1997, 1996 and 1995, respectively. F. RETURN ON SHAREHOLDERS' EQUITY The following table presents, for each of the last three years, the Company's return on shareholders' equity, return on assets, and return on average earning assets. 1997 1996 1995 Return on Average Shareholders' Equity 10.9% 10.6% 11.4% Return on Average Assets 1.3% 1.2% 1.3% Return on Average Earning Assets 1.4% 1.4% 1.4% G. LIQUIDITY MANAGEMENT Liquidity management is the process by which the Bank structures its cash flow to meet the requirements of its customers as well as day to day operating expenses. Liquidity comes from both assets and liabilities. The asset side of the balance sheet provides liquidity through the regular maturities on our securities and loan portfolios, as well as interest received on these assets. In addition, U.S. government securities may be readily converted to cash by sale on the open market. On the liability side, liquidity comes from deposit growth and the Bank's access to other sources of borrowed funds. In this respect, liquidity is enhanced by a significant amount of core demand and savings deposits from a broad customer base. As a part of the Bank's asset and liability management and liquidity needs, management actively evaluates its funding resources and strategies to manage and reduce its vulnerability to changes in interest rates. A principal objective of the Company is to manage and reduce its vulnerability to changes in interest rates by managing the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. As of December 31, 1997, the Bank's ratio of rate sensitive assets to rate sensitive liabilities at the one year horizon was 106%, its one year GAP (measurement of interest sensitivity of interest earning assets and interest bearing liabilities at a given point in time) was 3%, and $102,233,000 in assets and $98,338,000 in liabilities will be repriceable in one year. The Bank becomes asset sensitive between 25 and 36 months. Bank earnings may be negatively affected, should interest rates fall. In addition to the "traditional" GAP calculation, the Company analyzes future net interest income based on budget projections including anticipated business activity, anticipated changes in interest rates and other variables, which are adjusted periodically by management to take into account current economic conditions, the current interest rate environment, and other factors. The following table presents, as of December 31, 1997, the Company's interest rate GAP analysis: Interest Rate GAP Analysis As of December 31, 1997 (000's omitted) 0-3 4-12 1-5 Over Months Months Years Years Total Interest earning assets Loans: Real estate Fixed rate $ 567 $ 1,982 $ 7,753 $ 6,110 $ 16,412 Variable rate 19,991 24,177 7,259 0 51,427 Commercial 10,614 4,465 3,487 0 18,566 Municipal 437 1,795 1,516 1,104 4,852 Consumer 11,692 751 3,363 0 15,806 Securities available for sale 9,855 5,500 44,628 0 59,983 Held to maturity securities 1,247 3,771 15,904 11,878 32,800 Loans held for sale 3,138 0 0 0 3,138 Other earning assets 2,251 0 2,619 0 4,870 TOTAL $59,792 $42,441 $86,529 $19,092 $207,854 Interest bearing liabilities Deposits: Savings $ 3,117 $ 9,918 $15,902 $20,613 $49,550 NOW 0 0 36,186 0 36,186 Money market 2,280 6,840 5,888 0 15,008 Time 31,126 34,354 11,162 0 76,642 Borrowings 10,694 9 4,065 196 14,964 TOTAL $47,217 $51,121 $73,203 $20,809 $192,350 Rate sensitivity GAP $12,575 $(8,680) $13,32 6 $(1,717) Rate sensitivity GAP as a percentage of total assets 5.65% (3.90%) 5.99% .77% Cumulative GAP $12,575 $ 3,895 $17,221 $15,504 Cumulative GAP as a percentage of total assets 5.65% 1.75% 7.74% 6.97% The distribution in the Interest Rate GAP Analysis is based on a combination of maturities, call provisions, repricing frequencies, prepayment patterns, historical data and management judgment. Variable rate assets and liabilities are distributed based on the repricing frequency of the investment. Management has estimated the rate sensitivity of money market and savings deposits based on a historical analysis of the Bank and industry data. The status of the Bank's sources of cash to fund its operations are as follows: As of December 31, 1997 1996 Net cash provided from operations $ 3,106,220 $ 840,840 Net cash used by investing activities (19,134,989) (13,645,724) Net cash provided from financing activities 16,327,780 8,740,804 Net (decrease) increase in cash and cash equivalents $ 299,011 $ (4,064,080) BANK'S PROPERTIES ITEM 2: PROPERTIES The Bank's principal office is located at 66 Main Street in Ellsworth, Maine. The main office building consists of three floors, all of which are utilized by the Bank for banking facilities and administrative offices. The principal office includes a separate drive-up facility and parking lot. In August 1981, plans were finalized for the construction of an 8,000 square foot addition to our existing building. Completed in November of 1982, it provided new and enlarged customer service/teller area with street level access. During 1982 and 1983, the existing building also received extensive renovation and remodeling, tying it in to the new addition. The project was completed in July of 1983. In April 1985, the Bank opened the first automated drive-up in Downeast Maine. The automated teller machine is adjacent to its drive-up facility located at 66 Main Street, in Ellsworth, Maine. In 1988, the Main Office began construction of an addition to its existing building that would house loan operations. In September 1989, construction was completed on the addition. In May 1992, the Bank opened a trust office in Bangor (Penobscot County) to serve trust customers in that city and surrounding areas. In May 1995, the Bank elected not to renew its lease for its Bangor office. In addition, the Bank owns the following properties: (a) The Bank's Cherryfield office located on Church Street in Cherryfield, Maine. A major renovation was undertaken at Cherryfield in 1983, approximately doubling its size. These alterations were completed in January of 1984. (b) The Bank's Jonesport office located on Main Street in Jonesport, Maine. (c) The Bank's Blue Hill office located on Main Street in Blue Hill, Maine. During 1989, the branch was renovated to include an office for the Assistant Manager. (d) The Bank's Stonington office located on Atlantic Avenue in Stonington, Maine. The Stonington office was renovated and expanded in 1980. (e) The Bank's Milbridge office located on Main Street in Milbridge, Maine. In 1987, management decided to replace the Milbridge Branch with a larger up to date facility, located at the same site. The new branch is now completed and has been open for business since April 1988. (f) The Bank purchased in 1989 a parcel of land located on Route 3 in Ellsworth with the possible intention of constructing a new branch. This property is currently unoccupied and is available for sale. All of the Bank's offices include drive-up facilities. In addition to the above properties, which are owned by the Bank, the Bank leases the following properties: (a) The Bank leases its branch office at the Ellsworth Shopping Center, High Street, Ellsworth, Maine, from Ellsworth Shopping Center, Inc., a Maine Corporation with principal offices in Ellsworth, Maine. The current lease will expire in March of 1998. (b) The Bank leases its Machias office which is located on Dublin Street in Machias, Maine. The premises are owned by Hannaford Bros., Inc. of South Portland, Maine, and are leased to Gay's Super Markets, Inc., under a lease dated July 26, 1975. The Bank subleased the premises from Gay's Super Markets, Inc., under a sublease which expires in April of 2001. The Bank has the right to extend the sublease for three additional five year terms. (c) The Bank leases its Somesville branch office which is located on Route 102 in Somesville, Maine. The land and premises are owned by A. C. Fernald Sons, Inc., Mount Desert, Maine. The current lease expires on March 24, 2005, with an option to renew for an additional 20 years. (d) The Bank leases its Castine branch office located on Main Street from Michael Tonry, Castine, Maine. The current lease expires on February 1, 1999 with the right to extend the lease for an additional 4 year term. (e) The Bank leases its Bar Harbor branch office located on Cottage Street from the Swan Agency, a Maine Corporation with a principal office in Bar Harbor, Maine. The current lease will expire in April of 2002. All premises are considered to be in good condition and currently adequate for the purposes for which they are utilized. ITEM 3: LEGAL PROCEEDINGS There are no material pending legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS A. MARKET INFORMATION Union Bankshares stock, $12.50 par value, is not listed on any national exchange, nor is it actively traded. Since the Company is not aware of all trades, the market price is established by determining what a willing buyer will pay a willing seller. Based upon the trades that the Company had knowledge of (per quotes from local brokerages), high and low bids for each quarter for 1997 and 1996 are listed in the following table. Prices have been adjusted to reflect a two for one stock split distributed in August 1997. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1997 93.00 to 104.00 93.00 to 97.00 88.00 to 100.00 100.00 to 110.00 1996 75.00 to 80.00 80.00 to 93.00 88.00 to 93.00 88.00 to 104.00 B. HOLDER As of March 1, 1998 there were approximately 679 stockholders of record. C. DIVIDENDS 1. History The following table shows the cash dividends per share (adjusted for the stock split) declared by Union Bankshares Company on its common stock, $12.50 par value: 1997 1996 1st Quarter $ .41 $ .42 2nd Quarter $ .42 $ .42 3rd Quarter $ .50 $ .42 4th Quarter $ .50 $ .41 Cash dividends declared per common share $1.83 $1.67 Item 6: SELECTED FINANCIAL DATA (in thousands, except for per share amounts) Years Ended December 31, 1997 1996 1995 1994 1993 SUMMARY OF OPERATIONS Operating Income $ 2,608 $ 2,207 $ 1,989 $ 2,080 $ 2,259 Operating Expense 8,016 7,723 7,459 7,420 7,034 Net Interest Income 9,452 9,137 8,803 8,490 7,667 Provision for Loan Losses 120 120 30 0 30 Net Income 2,700 2,452 2,418 2,354 2,065 PER COMMON SHARE DATA (1) Net Income $ 5.59 $ 5.07 $ 5.00 $ 4.86 $ 4.41 Cash Dividends Declared 1.83 1.67 1.56 1.25 1.25 Book Value (3) 52.93 49.34 45.87 42.45 38.93 Market Value 110.00 104.00 75.00 71.00 68.00 FINANCIAL RATIOS Return on Average Equity (3) 10.9% 10.6% 11.4% 11.9% 11.8% Return on Average Assets 1.3% 1.2% 1.3% 1.3% 1.2% Return on Average Earning Assets 1.4% 1.4% 1.4% 1.4% 1.3% Net Interest Margin 4.88% 5.16% 5.37% 5.46% 4.79% Dividend Payout Ratio (1) 32.8% 32.9% 31.3% 25.8% 28.4% Allowance for Loan Losses/Total Loans .02% .02% .02% .02% .02% Non Performing Loans to Total Loans .007% .007% .007% .003% .009% Non Performing Assets to Total Assets .005% .008% .010% .006% .009% Efficiency Ratio 66.5% 67.2% 67.2% 69.1% 71.2% Loan to Deposit Ratio 60.4% 60.7% 56.7% 52.5% 50.2% BALANCE SHEET Deposits $177,386 $166,445 $164,481 $160,249 $161,236 Loans 107,062 101,044 93,242 84,208 80,993 Securities (2) 96,065 81,568 76,578 83,391 73,821 Shareholder's Equity (3) 25,565 23,885 22,227 20,570 18,875 Total Assets 222,560 202,066 191,353 181,597 182,129 (1) Restated for effect of a 20% stock dividend effected in the form of a stock split and a two for one stock split declared in 1997. (2) Carrying value. Includes available for sale securities with cost of $59,983, $75,095 and $70,938 at December 31, 1997, 1996 and 1995, respectively. Includes securities held for sale with cost of $65,816 at December 31, 1993. (3) Excluding net unrealized gain (loss) on available for sale securities of $437,749, ($171,460), $567,810 and ($1,389,168) at December 31, 1997, 1996, 1995 and 1994, respectively. The above summary should be read in conjunction with the related consolidated financial statements and notes thereto for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, and with Management's discussion and analysis of financial conditions. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 annual Report is incorporated herein by reference. ITEM 7A: QUANTATIVE AND QUALATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. INTEREST RATE RISK Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change the interest income and expense streams associated with the Company's financial instruments also change thereby impacting net interest income (NII), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two year horizon, it also utilizes additional tools to monitor potential longer term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given both a 200 point basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the Company's NII sensitivity analysis as of December 31, 1997. Estimated Rate Change NII Sensitivity +200 bp +2.0% - 200 bp -3.0% The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (A) The financial statements required are contained in the Company's 1997 Annual Report and are incorporated herein by reference. (See item 14 (a) ) ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Previously reported in 8K filing in 1995. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this Item (and Items 11, 12, and 13 below) is incorporated by reference from the registrant's definitive Proxy Statement dated March 27, 1998 for its regular annual meeting of shareholders to be held April 16, 1998, where it appears under the headings "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF AND ELECTION OF DIRECTORS." ITEM 11: EXECUTIVE COMPENSATION See Item 10. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Item 10. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 10. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Exhibits (1) The financial statements listed below are filed as part of this report; such financial statements (including report thereon and notes thereto) are included in the registrant's Annual Report to shareholders for its fiscal year ended December 31, 1997 (a copy of which is being filed as Exhibit 13 hereto), and are incorporated herein by reference. Consolidated Balance Sheets December 31, 1997 and 1996 21 Consolidated Statements of Income For the years ended December 31, 1997, 1996 and 1995 22 Consolidated Statements of Changes in Shareholders' Equity For the years ended December 31, 1997, 1996 and 1995 23 Consolidated Statements of Cash Flow For the years ended December 31, 1997, 1996 and 1995 24-25 Notes to Consolidated Financial Statements 27 Independent Auditors Opinion 43 (2) Financial statement schedules are omitted as they are not required or included in the Annual Report to shareholders. (3) Exhibits required by Item 601 - see Item 14(c) (b) Reports on Form 8-K During the registrant's fiscal quarter ended December 31, 1997, the registrant was not required to and did not file any reports on Form 8-K. (c) Exhibits * 3 Articles of Incorporation and By-laws of Union Bankshares Company * 10.1 Employee Benefit Plan for the employees of Union Trust Company Pension Plan for the employees of Union Trust Company 401 (k) Profit Sharing Plan for the employees of Union Trust Company Stock Purchase Plan for the employees of Union Trust Company 11 Computation of earnings per share, is incorporated herein by reference to Note 1 to the Consolidated Financial Statements on page 21 of the 1997 Annual Report to Shareholders' attached hereto as Exhibit 13. 12 Statement for computation of ratios is incorporated herein by reference to "Part II, Item 6 - Selected Financial Data." 13 The registrant's Annual Report to Shareholders' for its fiscal year ended December 31, 1997. This exhibit, except for those portions thereof expressly incorporated by reference into the Form 10 K annual report, is furnished for the information of the Commission only and is not to be "filed" as part of the report. *21 Subsidiary information is incorporated herein by reference to "Part I, Item 1 - Business". 27 Financial Data Schedule 99.1 Report of Berry, Dunn, McNeil & Parker. 99.2 Report of Baker, Newman and Noyes *Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, initially filed on June 15, 1984, Registration No. 2-90679. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY By: ___________________________ By:____________________________ Peter A. Blyberg, President Sally J. Hutchins and Chief Executive Officer Vice President, Treasurer and Controller March 25, 1998 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Arthur J. Billings, Director Peter A. Blyberg, Director Robert S. Boit, Director Richard C. Carver, Director Peter A. Clapp, Director Sandra H. Collier, Director Robert B. Fernald, Director Douglas A. Gott, Director David E. Honey, Director Thomas R. Perkins, Director Casper G. Sargent, Director John V. Sawyer, II, Director Stephen C. Shea, Director Richard W. Teele, Director Paul L. Tracy, Director Richard W. Whitney, Director EX-13 2 UNION BANKSHARES COMPANY 1997 ANNUAL REPORT We dedicate this Report to and Delmont N. Merrill and the late Emery B. Dunbar. These two gentlemen served on our Board of Directors for many years. As directors, they cared about the bank, its employees, and its shareholders. The role of a director is a difficult one and they both did an excellent job of representing the interest of the shareholders and were wonderful advisors to management. February 11, 1998 Dear Shareholder: The past year has seen an improvement in our earnings. Net income was $2,700,472, an increase of 10.1 percent over 1996. We had strong growth in both net interest income as well as fee revenues. Expenses remain under control, and despite opening a new branch in Bar Harbor, non- interest expenses came in only 3.8 percent higher than the previous year. Balance sheet growth was driven by a 6 percent increase in the loan portfolio as well as higher levels of investment securities. Deposits grew by $10.9 million or 6.6 percent. Our focus over the last few years on sales and revenue generation is showing results. We have seen a strong business development effort in all of our markets. Customer visits by our relationship managers in 1997 were up more than 30 percent over 1996. Strong growth in loan and deposit volumes as well as trust assets under management are a testament to the efforts of our staff in meeting with and responding to the needs of our customers and prospects. These efforts will continue going forward. The addition of Catherine Planchart, as director of marketing, brings much needed focus to our marketing efforts. As part of our efforts to make the Bank more accessible to our customers, we not only opened a new branch in Bar Harbor but also introduced BankLine PC, our computer based banking service. We now have as full a range of banking options as any bank anywhere. You can now access your Bank around the corner or around the world, from your local branch to the Internet. We will continue developing services that help our customers manage their financial lives, at the same time seeking to retain the qualities that make a community bank successful. We will continue to provide friendly, personal service. We will work to understand every customer as an individual. We will continue to help build our communities. During 1997, we expanded our trust assets under management by over $10 million. This reflects the commitment on the part of the Bank and our professional staff members to this business. As part of this growth, we are pleased to have added Joseph Connors to our team of trust administrators. Joe is a graduate of the Maine Maritime Academy and has family on Deer Isle. We are proud to put his skills and ties to the area to work for our customers. We're also pleased to welcome the following, who joined our staff in 1997: Glen Carter Financial Analysis Clerk Andrew Crosthwaite Teller Johna Driscoll Bookkeeping Shelly Gray Teller Jill Havey Teller Beth Jewell Teller Debra Kalloch Teller Tyra Letendre Administrative Assistant Susan Saunders Project Management Officer Stephanie Wilson Teller In August, Delmont Merrill retired as Director. We thank him for his service and miss his wise counsel. Emery Dunbar, a Director from 1973 to 1981, passed away in 1997. This Annual Report is respectfully dedicated to Del and Emery. Your Directors are a dedicated, caring group of individuals and these two individuals represented your interests extremely well. We thank you, our shareholders, directors, officers and employees for your support. Sincerely, Sincerely, John V. Sawyer, II Peter A. Blyberg Chairman of the Board President and Chief Executive Officer Does Community Banking have a Future? Absolutely! In a world where size and global reach have become buzzwords in corporate America, the need for community banks just keeps on growing. Why? We know our customers. One of the primary guidelines by which banks should operate is "Know Thy Customer." As a community bank, we live and die by this dictum. We know each and every one of our customers as individuals. We believe that if we know our customers, then we can help them achieve their financial goals. At Union Trust, you're not just an account number, and you won't get a recording when you call. We serve our customers one at a time, person to person. We've managed that way for generations. You, your family, and your business will always be vitally important to us. We care. Some people wonder why the Bank and its employees put so much time and effort into our communities. It's because the health of our Bank depends upon the financial well being of our citizens, businesses, and communities. Our corporate headquarters is here, not in some other state. We live and work close to the people we serve; as they prosper, we prosper. We support and encourage the volunteer efforts of our employees. We contribute to numerous organizations that make our communities better places to live and work. The money we receive from our customers goes back to our communities. It does not leave the area. Our shareholders, by and large, live and work in Maine, and they care about the same towns and villages our customers and employees call home. All of the people who have a stake in our Bank have a stake in our community. We're here. As a community bank serving downeast Maine, we are committed to understanding and meeting the financial needs of the consumers, businesses, and municipalities of Hancock and Washington County. That's all we do. We are focused on helping our region grow and prosper. We have no interest in becoming part of a larger institution that would not serve this area well. We think there is a great future in being an independent community bank; we have been doing it since 1887. Our interest is in serving our customers when and where they want and with the services they need to manage their lives better. Does Union Trust have the resources to succeed? Definitely. Capital. With over $26 million in capital and reserves, we are among the strongest banks in the State of Maine. While our strong capital position may help depositors sleep better at night, it provides other benefits as well. With the rapidly increasing pace of change, the ability to reinvest will be one of the keys to the future for community banks. Each year, we reinvest a portion of our earnings in new technology and education for our employees. Such investments ensure that we keep up with change in the marketplace and the evolving needs of our customers. When opportunities arise, and they fit with our strategic plan, we are prepared to make investments to strengthen our market position or broaden our product offerings. Our strong capital position gives us the flexibility to act quickly when the time is right. People. Your bank has an extremely loyal, hardworking group of employees. Average tenure on our staff is about ten years - an unusually high figure in banking - but time in grade does not necessarily guarantee success. More important is the extent to which employees are willing to learn, to grow and to change. The employees of Union Trust devote a significant amount of time to learning new skills and new ways of doing their jobs. In many cases, they perform jobs that didn't even exist a few years ago. Their skills are sharper, their ability to deal with change is stronger and their dedication to their customers is unwavering. Technology. The evolution of technology in banking is truly a double- edged sword. On the one hand, banking technology is changing so fast that you have to run faster and faster just to keep up; on the other, the cost of particular technologies is rapidly declining. We are dealing with this situation in several ways. First, in order to sort through all available options, we have developed a technology plan. During the past two years, this has allowed us to set priorities, schedule new products and control the direction and pace of our own technological change. We review the plan each year and make necessary adjustments. We see no need to be first with the latest fad. We want to do the right thing, at the right time, for the right price. We dedicate substantial dollars to technological improvements, and we want to ensure that they are well spent. Second, we are taking advantage of the falling cost of technology to offer products and services that just a few years ago were the exclusive province of big banks. We feel we should be able to compete with anyone in the range of services we offer. Third, we are dealing with the Year 2000 computer issue. Last year, we began a systematic effort to address any and all related challenges that might affect your Bank. Our goal is to guarantee a smooth transition into the next millenium. Union Trust, its customers, and shareholders have much to look forward to in the next century. Together, we are a growing community. Five Year Summary (000's Omitted) 1997 1996 1995 1994 1993 Deposits $177,386 $166,445 $164,481 $160,249 $161,236 Loans 107,062 101,044 93,242 84,208 80,993 Securities *96,065 *81,568 *76,578 *83,391 *73,821 Shareholders' Equity **25,565 **23,885 **22,227 **20,570 18,875 Total Assets 222,560 202,066 191,353 181,597 182,129 Net Earnings 2,700 2,452 2,418 2,354 2,134 Earnings Per Share (1) 5.59 5.07 5.00 4.86 4.41 Equity Ratios Equity expressed as a percentage of average: **1997 **1996 **1995 **1994 1993 Deposits 14.9% 14.4% 13.7% 12.8% 11.8% Loans 24.6% 24.6% 25.1% 24.9% 22.7% Total Assets 12.0% 12.1% 11.9% 11.3% 10.5% Earning Assets 13.0% 13.3% 12.9% 12.8% 11.2% Other Financial Highlights 1997 1996 1995 1994 1993 **Return on Average Shareholders' Equity 10.9% 10.6% 11.4% 11.9% 11.8% Return on Average Assets 1.3% 1.2% 1.3% 1.3% 1.2% Return on Average Earning Assets 1.4% 1.4% 1.4% 1.4% 1.3% *Carrying value. Includes available for sale securities with cost of $59,983, $75,095 and $70,938 at December 31, 1997, 1996 and 1995, respectively. Includes securities held for sale with cost of $65,816 at December 31, 1993. **Excluding net unrealized gain (loss) on available for sale securities of $437,749, ($171,460), $567,810 and ($1,389,168) at December 31, 1997, 1996, 1995 and 1994, respectively. (1) Restated for effect of a 20% stock dividend effected in the form of a stock split and a two for one stock split declared in 1997. Insert the following 5 year bar charts: Earnings Per Share Book Value Per Share Dividends Per Share Total Assets (in Thousands) Net Income (in Thousands) Shareholders' Equity (in Thousands) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS December 31, 1997 Union Bankshares Company is a one-bank holding company, organized under the laws of the State of Maine, that has acquired 99.928% of the common stock of Union Trust Company. The Company's only subsidiary is the Bank. Union Bankshares' holding company structure can be used to engage in permitted banking related activities, either directly, through newly formed subsidiaries, or by acquiring companies already established in those activities. The Company has no immediate plans to engage in such activities, but could do so if such action should appear desirable. Union Trust is a full-service, independent, community bank that is locally owned and operated. Through its eleven offices, Union Trust serves the financial needs of individuals, businesses, municipalities and organizations in Hancock and Washington Counties. Union Trust offers a full range of consumer, commercial, trust and investment services. Now in its 110th year, Union Trust is committed to providing outstanding personalized service and maintaining and expanding its position as one of Maine's preeminent community banks. Union Trust Company supports the people and communities it serves by contributing to programs that address human needs within the community. It also supports the volunteerism of the Bank's employees, directors and retirees. Reinvesting local money locally builds strong communities. Through these programs, Union Trust is able to give back to the community it serves. On a continual basis, the Bank introduces new services and makes improvements to current offerings that will add value to customer relationships. Some of the service additions and improvements made during 1997 include: Implemented new procedures to handle Federal government electronic payment requirements, both making and receiving payments. Opened a new branch in Bar Harbor with Saturday hours during the summer. Introduced BankLinerPC, 24-hour computer banking. Conducted four seminars and two adult education classes and held eight Business Round Table luncheons for area professionals to discuss business issues. Union Trust's deposit services include: regular and basic checking accounts, small business checking, NOW accounts, money market accounts, Unlimited Club membership, savings accounts, Christmas Club, certificates of deposit, IRAs and Simplified Employee Pension (SEP) Plans. The Bank also provides the following loan products: personal loans, commercial loans, municipal loans, real estate loans, home equity loans, VISA and MasterCard credit cards, student loans, reserve checking and overdraft protection and lines of credit. The following cash management services are also available at Union Trust: coin and currency exchange, merchant card services, cash concentration, direct debit, electronic Federal tax payment services (EFTPS), direct deposit payroll services, ACH and wire transfers. Union Trust also provides many convenient banking services: ATM and Convenience Check Cards, BankLiner telephone banking and BankLinerPC computer banking, night deposit and safe deposit boxes. Trust and Investment Services provides three distinct services: (1) custody and investment management, (2) retirement accounts and planning and (3) trust services, including estate planning. Investment services include investment management and advisory services, MutualPARTNERS (an asset allocation account using mutual funds), custodial services and safekeeping. The following retirement savings vehicles are available: IRAs, Simplified Employee Pension (SEP) plans, SIMPLE IRAs, profit sharing and 401(k) plans and money purchase pension plans. Trust services include trust administration, personal representative and fiduciary services and estate planning. Union Trusts' services are offered through our eleven convenient locations and Customer Service Call Center. Customers can also access their accounts 24 hours a day through our network of eleven ATMs, BankLiner telephone banking and BankLiner PC computer banking. REVIEW OF FINANCIAL STATEMENTS The discussion and analysis that follows focuses on the factors affecting Union Bankshares Company's (the "Company") financial condition at December 31, 1997 and 1996 and the financial results of operations during 1997, 1996 and 1995. The consolidated financial statements and related notes beginning on page 21of this report should be read in conjunction with this review. RESULTS OF OPERATIONS The operating results of the Bank depend primarily on its net interest income, which is the difference between interest income on earning assets (primarily loans and investments) and interest expense (primarily deposits and borrowings). The Bank's results are also affected by the Provision for Loan Losses, which reflects management's assessment of the adequacy of the Allowance for Loan Losses; non interest income, including gains and losses on the sales of loans and securities; non interest expenses; and income tax expense. Each of these major components of the Bank's operating results is highlighted below. NET INCOME The Company reported net income in 1997 of $2,700,472, an increase of $248,500 or 10.1% over 1996, as compared to an increase of $33,915 or 1.4% and $64,094 or 2.7% for 1996 and 1995, respectively. The following table summarizes the status of the Bank's earnings and performance for the periods stated. December 31, 1997 1996 1995 Earnings per share $ 5.59 $ 5.07 $ 5.00 Return on average shareholder's equity 10.9% 10.6% 11.4% Return on average assets 1.3% 1.2% 1.3% Return on average earning assets 1.4% 1.4% 1.4% The improved results were attributable to moderate increases in net interest income, which amounted to $9,452,159, $9,137,524, and $8,803,241 for the years ended 1997, 1996, and 1995, respectively. NET INTEREST INCOME Net interest income continues to be the most significant determinant of the Company's earning performance. Management of interest rate risk has become paramount in ensuring the Bank's continued profitability. Changes in net interest income are the results of interest rate movements, changes in the balance sheet mix of earning assets and interest bearing liabilities, and changes in the level of non earning assets and liabilities. The following table sets forth the information related to changes in net interest income. For purposes of the table and the following discussion, information is presented regarding (1) the total dollar amount of interest income of the Company from interest earning assets and the resulting average yields; (2) the total dollar amount of interest expense on interest bearing liabilities and the resulting average cost; (3) net interest income; (4) interest rate spread; and (5) net interest margin. Information is based on average daily balance during the indicated periods. For the purposes of the table and the following discussion, (1) income from interest earning assets and net interest income are presented on a tax equivalent basis and (2) non accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non accrual loans has not been included for purposes of determining interest income. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (In Thousands) (On a Tax Equivalent Basis) 1997 1996 1995 Average Int Yield/ Average Int Yield/ Average Int Yield/ Balance Earned/ Rate Balance Earned/ Rate Balance Earned/ Rate Paid Paid Paid Assets Interest Earning Assets: Securities Available for Sale $ 72,741 $ 5,182 7.12 $ 80,333 $ 5,256 6.54 $ 65,896 $ 4,231 6.42 Securities Held to Maturity 22,689 1,437 6.33 3,772 369 9.78 5,926 635 10.70 Federal Funds Sold 598 41 6.86 1,411 76 5.39 7,409 424 5.72 Loans (Net) 100,208 9,660 9.64 94,139 9,192 9.76 88,588 8,781 9.91 Total Interest Earning Assets 196,236 $16,320 8.32 179,655 $14,893 8.28 167,819 $14,071 8.38 Other Non Earning Assets 18,878 14,926 14,685 $215,114 $194,581 $182,504 Liabilities Interest Bearing Liabilities: Savings Deposits $ 65,432 $ 1,119 1.71 $ 65,770 $ 1,172 1.78 $ 65,690 $ 1,302 1.98 Time Deposit 73,419 4,298 5.85 67,294 3,752 5.57 59,544 3,187 5.35 Money Market Accounts 12,271 482 3.93 14,107 478 3.39 15,142 552 3.65 Borrowings 14,007 835 5.96 4,012 229 5.71 96 11 11.40 Total Interest Bearing Liabilities 165,129 $ 6,734 4.08 151,183 $ 5,631 3.67 140,472 $ 5,052 3.59 Other Non Interest Bearing Liabilities & Shareholders' Equity 49,985 43,398 42,032 $215,114 $194,581 $182,504 Net Interest Income $9,586 $9,262 $9,019 Net Interest Rate Spread 4.24 4.61 4.79 Net Interest Margin 4.88 5.16 5.37 The following table presents certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in rate/volume (change in rate multiplied by change in volume). ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE For the years ended December 31, 1997, 1996 and 1995 (In Thousands) Year Ended December 31, 1997 vs. 1996 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets: Assets Available for Sale $(499) $463 $ (38) $ (74) Securities Held to Maturity 1,223 (27) (136) 1,060 Federal Funds Sold (44) 21 (12) (35) Loans, Net 588 (118) (2) 468 Total Interest Earning Assets 1,268 339 (188) 1,419 Interest Bearing Liabilities: Savings Deposits (7) (47) 1 (53) Time Deposits 337 185 24 546 Money Market Accounts (62) 76 (10) 4 Borrowed Funds 571 10 25 606 Total Interest Bearing Liabilities 839 224 40 1,103 Net Change in Net Interest Income $429 $115 $(148) $ 316 Year Ended December 31, 1996 vs. 1995 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets: Assets Available for Sale $926 $78 $21 $1,025 Securities Held to Maturity (152) (36) 13 (175) Federal Funds Sold (343) (25) 20 (348) Loans, Net 548 135 (272) 411 Total Interest Earning Assets 979 152 (218) 913 Interest Bearing Liabilities: Savings Deposits 0 (133) 3 (130) Time Deposit 416 327 (178) 565 Money Market Accounts (37) (39) 2 (74) Borrowed Funds 446 (6) (222) 218 Total Interest Bearing Liabilities 825 149 (395) 579 Net Change in Net Interest Income $154 $ 3 $ 177 $334 *Represents the change not solely attributable to change in rate or change in volume but a combination of these two factors. Net interest income increased by $314,905 or 3.4% during 1997. This increase was primarily attributable to increases in the volume of interest earning assets, in particular loans and investments, offset by an increase in volume of interest paying liabilities, in particular certificates of deposit. During 1996, net interest income increased by $334,013 or 3.8% compared to 1995. This increase was attributed to higher loan and investment volumes, offset by a higher cost of funds (interest on deposits and borrowings). In 1995, net interest income increased $312,848 or 3.7% due mainly to higher loan volumes offset by interest expense on certificate of deposits. The weighted average yield on a tax equivalent basis on all categories of interest earning assets was 8.32% for 1997, up slightly over 1996 of 8.28%. In 1995, the weighted average yield was 8.38%. The Company's net interest margin was 4.88%, 5.16% and 5.37% for 1997, 1996, and 1995, respectively and the net interest income spread was 4.24% in 1997, 4.61% in 1996, and 4.79% in 1995. Interest and dividend income increased $1,417,984 or 9.60% during 1997, primarily due to increased interest on loans and investments. Loan increases, particularly in real estate and commercial categories, were primarily the result of the business development program conducted by the Bank's relationship managers, attractive interest rates, and a stable local economy. Investment increases were primarily due to increased volumes, in particular to the securities held to maturity category, with a strategy to grow the portfolio, improve cash flow and offset lagging loan growth to improve net interest income. Interest and dividend income increased $913,020 or 6.6% in 1996 and $1,178,323 or 9.3% in 1995. The primary reason for the decline from 1995 to 1996 was the fact that previously higher yielding investments repriced at lower rates. The amount of non accrual loans can also affect the average yield earned on all outstanding loans. Non accrual loans for 1997, 1996 and 1995 were insignificant, and therefore did not have a material effect on the average loan yield. Interest expense on deposits and borrowings increased $1,103,349 or 19.6% in 1997 compared to 1996. This increase is attributable to both increases in borrowings and deposits and the interest rates paid on those borrowings and certificates of deposit. This type of growth results in a squeeze of the net interest margin that must be offset by higher interest earning assets, increased yields, and control of operating expenses. Interest expense on deposits and borrowings in 1996 increased $578,737 or 11.5% over 1995. This increase was primarily driven by the expense of short term borrowings, rather than high funding costs. PROVISION FOR LOAN LOSSES The Provision for Loan Losses was $120,000 in 1997. This level was set reflecting increased loan volume and the Bank's desire to maintain the Allowance for Loan Losses at 2.0% of gross loans. There was a $120,000 provision in 1996 and a $30,000 provision in 1995. The process of evaluating the adequacy of the Allowance for Loan Losses involves a high degree of management judgement, based, in part, on systematic methods. These methods include a loan by loan analysis of all larger commercial and commercial real estate loans as well as those that were non performing or under close monitoring by management for potential problems. Other factors included in the evaluation of the adequacy of the Allowance for Loan Losses involve the character and mix of the loan portfolio, current trends in non performing loans, delinquent loans and net charge-offs, new loan originations and other asset quality considerations. Management believes that the Allowance for Loan Losses and the carrying value of real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances might be necessary based on changes in economic conditions, particularly in northern New England. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's Allowance for Loan Losses. Such agencies may require the Company to recognize additions to the allowance based on their judgements about information available to them at the time of their examination. The following table reflects the quality of the Bank's loan portfolio and the emphasis placed upon the management of credit risk: (000's omitted) December 31, 1997 1996 Non accrual loans $ 503 $ 491 Loans past due 90 days and accruing 209 196 Other real estate owned (including insubstance foreclosure) 376 842 Total non-performing assets 1,088 1,529 Ratio of total non-performing loans to capital and the Allowance for Loan Losses (Texas ratio) .025 .026 Ratio of net recoveries (charge offs) to loans .001 .001 Ratio of Allowance for Loan Losses to loans .02 .02 Coverage ratio (Allowance for Loan Losses divided by non-performing assets) 2.034 1.361 Ratio of non-performing assets to total assets .005 .008 Ratio of non-performing loans to total loans .007 .007 NON INTEREST INCOME Total non interest income was $2,608,206, $2,207,131, and $1,989,285 for the years ended December 31, 1997, 1996, and 1995, respectively. The $401,075 or 18.2% increase in non interest income during 1997 was primarily attributable to a $106,463 or 21.8% increase in Trust department income, a $116,036 or 23.4% increase in Visa income, and a $185,051 or 35.4% increase in other income, primarily due to the Mortgage Servicing Rights, which increased other income by $127,062. The $217,846 or 10.9% increase during 1996 was primarily due to increases in virtually all non interest income categories. The $90,838 or 4.4% decrease during 1995 was primarily attributable to a decrease in mortgage fee income and security gains. The following table summarizes information relating to the Company's non interest income: Year Ended December 31, 1997 1996 1995 Net Security Gains (Losses) $ (1,463) $ 2,718 $ 3,103 Trust Department Income 594,961 488,498 443,661 Service Income 343,272 337,625 310,381 Visa Income 611,239 495,203 431,338 Loan Department Income 352,534 360,475 323,657 Other Non Interest Income 707,663 522,612 477,145 Total Non Interest Income $2,608,206 $2,207,131 $1,989,285 NON INTEREST EXPENSE Total non interest expenses, which consist primarily of employee compensation and benefits, occupancy and equipment expenses and other general operating expenses, increased $293,210 or 3.8% during 1997, $263,477 or 3.5% during 1996 and $39,389 or .53% during 1995. The increase in non interest expenses in 1997 was attributable to net occupancy and equipment expenses related to the opening of our newest branch in Bar Harbor, cash transactions between the Bank and the Company and bank card expenses incurred due to business development efforts in 1997. In 1996, the increase centered primarily in employee benefits, depreciation expense and consulting fees. In 1995, change was basically flat due to the decline in FDIC insurance premiums offset by increases in general operating expenses. Salaries and wages and employee benefits, one of the largest components of non interest expenses, remained relatively flat during 1997, 1996, and 1995 due to the strategic plan to grow the Bank with the current resources available. INCOME TAXES The Company recognized $1,224,000, $1,050,000 and $885,000 in income tax expense for the years ended December 31, 1997, 1996, and 1995, respectively. The effective tax rate was 31.2% for 1997, 30.0% for 1996, and 28.0% for 1995. The Bank has sufficient refundable taxes paid in available carry back years to fully realize its recorded deferred tax asset of $1,297,759 at December 31, 1997. FINANCIAL CONDITION Set forth below is a discussion of the material changes in the Company's financial condition for the periods indicated. BALANCE SHEET REVIEW Total assets increased $20,493,574 or 10.1% in 1997, primarily due to increased loan volume and growth in the securities portfolio compared to an increase of $10,713,091 or 5.6% in 1996. Securities available for sale, which include US Government securities, callable agency bonds and other securities, decreased $14,188,569 or 19.0% in 1997. In particular during 1997, the Bank elected to reduce the callable agencies portfolio and reinvest in longer term agencies and mortgage backed securities to better control risk of possible calls, and spread interest rate risk exposure within the total portfolio. The overall decrease in securities available for sale is consistent with the Company's investment strategy for 1997. As of December 31, 1997, the Bank has a net unrealized gain of $663,257 in this portfolio. Securities held to maturity, which include municipals and mortgage backed securities increased $28,012,886 compared to an increase of $667,254 in 1996. This increase was primarily in mortgage backed securities, which extended maturities, improved cash flows, and helped improve an overall portfolio yield to just under 7.00%. The changes in the security portfolio reflect the Company's efforts to meet asset and liability objectives, and otherwise manage its liquidity and funding needs within the parameters of the Company's policies. For further discussion, see the Risk Management section. LOANS Total loans reached a record high of $109,112,000 during 1997 and as of December 31, 1997 had increased $6,018,203 or 6.0% over 1996 primarily due to a $3,175,373 or 4.9% increase in real estate loans and a $1,982,782 or 12.0% increase in commercial loans. There has been no material change in the Bank's loan mix, and as of December 31, 1997 the loan portfolio remains diversified with a total of 64% secured by real estate of which consumer loans were 34% and commercial real estate were 30%. Loans to individuals for household, family and other personal expenditures were 9%, home equities were 5%, commercial loans accounted for 17% and 5% was invested in municipal loans. As of December 31, 1997, the loan mix and growth trends are illustrated in the graphs below: LOAN GROWTH TRENDS BAR CHART LOAN MIX PIE CHART Deposits During 1997, deposits peaked at a record level of $177,920,000 and increased $10,940,398 or 6.6% (well above the state's average) by December 31, 1997 compared to a $1,964,000 or 1.2% increase over the same period in 1996. Growth was primarily in certificates of deposit due directly to special promotions and competitive rates. In the Banks market area, the banking business is somewhat seasonal due to an influx of tourists and seasonal residents returning to the area each spring and summer. As a result, the Bank has an annual deposit swing, from a high point in mid October to a low point in June. This deposit swing is predictable and does not have a material adverse effect on the bank. As of December 31, 1997 the deposit mix and growth trends are illustrated in the graphs below: DEPOSIT GROWTH TRENDS BAR CHART DEPOSIT MIX PIE CHART SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES The Federal Reserve Board's capital requirement generally calls for an 8% total capital ratio, of which 4% must be comprised of Tier I capital. Risk based capital ratios are calculated by weighing assets and off balance sheet instruments according to the relative credit risk. As of December 31, 1997, the Company's Tier I ratio of 18.5% far exceeds the Federal Reserve Board's guidelines. Total shareholders' equity increased $2,289,382 in 1997, primarily as a result of net income of $2,700,472, offset by dividends paid of $885,940 and a $609,209 change in the category of unrealized gains (losses) on securities available for sale net of applicable income taxes. During 1997, the Company declared a 20 percent stock dividend and a 2 for 1 stock split. Dividends of $885,940 were declared on the Company's common stock and represented a 9.7% increase over 1996. The dividend payouts for 1997, 1996, and 1995 were 32.8%, 32.9%, and 31.3% of net income, respectively. In 1995, the Company declared a 33 1/3 percent stock dividend. Union Bankshares Company stock, $12.50 par value, is not listed on any national exchange, nor is it actively traded. Since the Company is not aware of all trades, the market price is established by determining what a willing buyer will pay a willing seller. Based upon the trades that the Company had knowledge of (per quotes from local brokerages), high and low bids for each quarter for 1997 and 1996 are listed in the following table. Prices have been adjusted to reflect a 20 percent stock dividend and a two for one stock split distributed in August 1997. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1997 93.00 to 104.00 93.00 to 97.00 88.00 to 100.00 100.00 to 110.00 1996 75.00 to 80.00 80.00 to 93.00 88.00 to 93.00 88.00 to 104.00 As of December 31, 1997, there were 679 holders of record of Union Bankshares Company common stock. Quarterly dividends per share (adjusted for a 20 percent stock dividend and a two for one stock split) paid by the Company in 1997 and 1996 were as follows: 1997 1996 1st Quarter $ .41 $ .42 2nd Quarter $ .42 $ .42 3rd Quarter $ .50 $ .42 4th Quarter $ .50 $ .41 Total $1.83 $1.67 RISK MANAGEMENT The Company's continued success is primarily dependent upon its ability to strategically manage financial and nonfinancial risks. Nonfinancial risks facing the Company include: Competition from banks and nonbank financial service companies Changing regulatory and political environments Rapid change in technology Demographic changes Economic changes Financial risks managed by the Company include: Credit risk Interest rate risk (including asset/liability management) Liquidity risk Off balance sheet risks/commitments CREDIT RISK MANAGEMENT The Company's net loan portfolio as of December 31, 1997 accounted for 47.1% of total assets and represents its primary source of credit risk. Substantial amounts of time and resources have been dedicated to the management of credit risk within the Bank's loan portfolio. Future emphasis will be applied toward enhancing the already proven systems of checks and balances to manage the origination, processing and collection of loans. Additional information relating to credit risk may be found on page 15, "Provision for Loans Losses" and Note 16 to the consolidated financial statements. INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT Interest rate risk can be defined as the exposure of the Company's net income or financial position to adverse movements in interest rates. Changes in the level of interest rates also can affect: The amount of loans originated/sold by an institution The ability of the borrower to repay his/her loan The average maturity of mortgage loans Value of the Company's interest earning assets Market value of available for sale securities The Company, through management of the relationship of interest rate sensitive assets to interest rate sensitive liabilities, reduces the volatility of its net income. To accomplish this, the Company has undertaken various steps to increase the percentage of fixed rate assets and to increase the average maturity of such assets, in particular through the loan products offered and its security portfolio. Net interest income sensitivity to movements in interest rates is measured through the use of a simulation model that analyzes resulting net income under various interest rate scenarios established by regulators. Projected net interest income is modeled based on both an immediate rise or fall in interest rates ("rate shock"). The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities and factors in projections for activity levels by product lines of the Company. Assumptions are made as to the changing relationship between different interest rates as interest rates increase/decrease (basis risk) and the customer's ability to prepay loans and withdraw deposit balances or transfer them to a higher yielding account (embedded option). Based on the information and assumptions in effect on December 31, 1997, under five rate simulations used, the Company's net interest income and net income remain strong, with the return on assets ratio remaining above 1% under all simulations. LIQUIDITY RISK MANAGEMENT Liquidity management is the process by which the Bank structures its liquidity to meet the cash flow requirements of its customers as well as day to day operating expenses. Many factors affect the Company's ability to meet its liquidity needs, including its mix of assets and liabilities, interest rates, and local economic conditions. The Company's actual inflow and outflow of funds is detailed in the Consolidated Statement of Cash Flows on page 24-25 . Liquidity comes from both assets and liabilities. The assets of the balance sheet provide liquidity through prepayment and maturities of outstanding loans, investments and mortgage backed securities and the sale of mortgage loans. The liability side provides liquidity through deposits and borrowings from Federal Home Loan Bank of Boston. During 1997 and 1996, the Company used its sources of funds primarily to meet ongoing commitments to pay maturing certificates of deposits and savings withdrawals, fund loan originations and maintain a substantial securities portfolio. The Company's liquidity policy currently includes requirements that the Company maintain liquidity as a percentage of total assets at a minimum of 5%. Access to Federal Home Loan Bank advances allows the Bank to maintain a lower liquidity level than might otherwise be required. As of December 31, 1997, the Bank had a 9.5% liquidity ratio. OFF BALANCE SHEET RISKS AND COMMITMENTS As of December 31, 1997 and 1996, the total approved loan commitments outstanding, the commitment under unused lines of credit and the unadvanced portion of loans amounted to $28,230,000 and $28,153,000, respectively. REGULATORY ENVIRONMENT REGULATORY CAPITAL REQUIREMENTS Under Federal Reserve Board guidelines, the Company is required to maintain capital based on "risk adjusted" assets. Under risk based capital guidelines, categories of assets with potentially higher credit risk require more capital than assets with lower risk. In addition to balance sheet assets, the Company is required to maintain capital, on a risk adjusted basis, to support off balance sheet activities, such as loan commitments. The Federal Reserve guidelines classify capital into two tiers, Tier I and Total Capital. Tier I risk based capital consists primarily of shareholders' equity. Total risk based capital consists of Tier I capital plus a portion of the general Allowance for Loan Losses. In addition to risk based capital requirements, the Federal Reserve requires the Company to maintain a minimum leverage capital ratio of Tier I capital to total assets. The Company as of December 31, 1997 and 1996 exceeds all applicable Federal and state laws and regulations and is in fact categorized as a well capitalized bank. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related notes presented in this Annual Report have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than has the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. RECENT ACCOUNTING DEVELOPMENTS During 1997, the Company adopted Statements of Financial Accounting Standards (SFAS) No. 125 and No. 127, which relate to the accounting for transfers and servicing of financial assets and extinguishment of certain liabilities. The adoption of these standards did not have a material effect on the financial statements. The Financial Accounting Standards Board issued the following Statements of Financial Accounting Standards during 1997: SFAS No. 128 Earnings per Share SFAS No. 129 Disclosure of Information about Capital Structure SFAS No. 130 Reporting Comprehensive Income SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information These four statements do not change the measurement or recognition methods used in the financial statements but rather deal with disclosure and presentation requirements. The financial statements for 1997 and all prior periods include the disclosure requirements relating to earnings per share that are required under SFAS No. 128. Financial statement disclosures also comply with SFAS No. 129, which summarizes but does not change the Company's requirements to disclose information about capital structure. SFAS No. 130 and No. 131 are effective for periods beginning after December 15, 1997. Management expects unrealized gains and losses on available for sale securities to be the only item reported as other comprehensive income under SFAS No. 130. The effect, if any, of SFAS No. 131 on disclosure requirements on the Company has not been determined. YEAR 2000 RISK ASSESSMENT AND ACTION PLAN It has been widely publicized that many computer applications will not operate as intended past the year 1999 without modifications. This potential problem results from the fact that computers store dates in two- digit format (i.e., 97) instead of four-digit format (1997). On January 1, 2000, it is possible that some systems with time sensitive software programs will recognize the year as "00" and may incorrectly interpret the year as "1900". During 1997, the Company adopted a plan of action to minimize the risk of the Year 2000 event. The plan includes the formation of a Technology Steering Committee to assess, monitor and review vendor compliance and certification and to identify clearly all systems and equipment used in the day to day operations of the Bank that might be affected. Management believes the Bank is adequately addressing the Year 2000 issue and that the current planning and preparations, and the testing to be conducted throughout the organization during 1998 and 1999, all seek to minimize any potential adverse effects on the Bank or its customers. UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 1997 1996 ASSETS Cash and due from banks (note 2) $ 7,650,086 $ 9,458,971 Federal funds sold 2,251,105 143,209 Available for sale securities, at market value (note 3) 60,646,731 74,835,300 Held to maturity securities at cost (note 4) (market value $33,242,473 and $4,861,061 at December 31, 1997 and 1996, respectively) 32,799,686 4,786,800 Other investment securities at cost, which approximates market value 2,618,700 1,946,200 Loans held for sale 3,138,218 3,241,054 LOANS (note 5): Real estate 67,839,337 64,663,964 Commercial and industrial 18,565,543 16,582,761 Municipal 4,851,637 4,663,900 Consumer 15,805,611 15,133,300 107,062,128 101,043,925 Less deferred loan fees 24,160 73,534 Less Allowance for Loan Losses (note 6) 2,212,740 2,083,831 Net loans 104,825,228 98,886,560 Premises, furniture and equipment (note 8) 2,842,151 2,917,112 Other assets (notes 7, 9, 13 and 14) 5,787,926 5,851,051 Total Assets $222,559,831 $202,066,257 LIABILITIES DEPOSITS Demand deposits $ 20,574,024 $ 19,185,504 Savings deposits (including NOW deposits totaling $36,185,785 in 1997 and $34,423,418 in 1996) 65,161,440 63,736,332 Money market accounts 15,008,720 15,793,806 Time deposits (note 10) 76,641,681 67,729,825 Total deposits 177,385,865 166,445,467 Advances from Federal Home Loan Bank (note 11) 9,273,250 6,173,000 Other borrowed funds (note 12) 5,690,975 2,383,544 Other liabilities (notes 13 and 14) 4,206,501 3,350,388 Total Liabilities 196,556,591 178,352,399 Contingent liabilities and commitments (notes 16 and 17) SHAREHOLDERS' EQUITY Common stock, $12.50 par value. Authorized 1,200,000 shares, issued 485,544 in 1997 and 1996 (note 1) $ 6,069,300 $ 6,069,300 Surplus 3,948,797 3,948,797 Retained earnings (note 15) 15,708,089 13,923,256 Net unrealized gain (loss) on available for sale securities net of deferred tax asset of $225,507 and ($88,328) at 1997 and 1996, respectively (note 3) 437,749 (171,460) Treasury stock, at cost (2,621 shares in 1997 and 1,468 shares in 1996 (160,695) (56,035) Total Shareholders' Equity 26,003,240 23,713,858 Total Liabilities and Shareholders' Equity $222,559,831 $202,066,257 The accompanying notes are an integral part of these Consolidated Financial Statements. UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 INTEREST AND DIVIDEND INCOME: Interest and fees on loans $ 9,659,971 $ 9,191,876 $ 8,780,734 Interest on securities available for sale 5,182,071 5,256,042 4,230,639 Interest on securities held to maturity 1,303,582 244,561 419,829 Interest on Federal funds sold 40,728 75,889 424,146 Total interest income 16,186,352 14,768,368 13,855,348 INTEREST EXPENSE: Interest on savings deposits 1,119,098 1,171,987 1,302,644 Interest on money market accounts 481,714 477,720 552,417 Interest on time deposits 4,028,905 3,525,114 2,912,040 Interest on certificates of deposit $100,000 and over 269,264 226,589 274,069 Interest on short-term borrowings 835,212 229,434 10,937 Total interest expense 6,734,193 5,630,844 5,052,107 Net interest income 9,452,159 9,137,254 8,803,241 Provision for Loan Losses (note 6) 120,000 120,000 30,000 Net interest income after Provision for Loan Losses 9,332,159 9,017,524 8,773,241 NON INTEREST INCOME: Net securities gains/(losses) (note 3) (1,463) 2,718 3,103 Trust Department income 594,961 488,498 443,661 Service charges on deposit accounts 343,272 337,625 310,381 Visa income 611,239 495,203 431,338 Loan Department income 352,534 360,475 323,657 Other income 707,663 522,612 477,145 Total non interest income 2,608,206 2,207,131 1,989,285 Income before non interest expenses 11,940,365 11,224,655 10,762,526 NON INTEREST EXPENSE: Salaries and wages 3,040,454 2,972,682 3,124,862 Pension and other employee benefits (note 13) 977,292 1,036,792 894,706 Insurance 112,761 95,310 97,809 FDIC insurance 20,312 1,500 184,630 Net occupancy expenses 888,014 845,255 776,703 Equipment expenses 278,267 233,617 201,516 Advertising 211,180 266,544 248,510 Supplies 212,258 214,975 283,510 Postage 161,254 131,246 147,947 Telephone 143,499 142,971 155,120 Other professional fees 347,608 235,280 156,570 Other expenses 1,622,994 1,546,511 1,187,403 Total non interest expenses 8,015,893 7,722,683 7,459,206 Income before income taxes 3,924,472 3,501,972 3,303,320 Income taxes (note 14) 1,224,000 1,050,000 885,263 Net income $2,700,472 $2,451,972 $2,418,057 Net income per common share $ 5.59 $ 5.07 $ 5.00 Cash dividends declared per common share $ 1.83 $ 1.67 $ 1.56 Weighted average common shares outstanding 483,022 484,067 483,880 The accompanying notes are an integral part of these consolidated financial statements. UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995 NET UNREALIZED GAIN (LOSS) ON SHARE- COMMON TREASURY RETAINED AVAILABLE FOR HOLDER'S STOCK SURPLUS STOCK EARNINGS SALE SECURITIES EQUITY Balance at December 31, 1994 $5,062,875 $3,948,680 $ (94,968) $11,653,962 $(1,389,168) $19,181,381 Net income, 1995 0 0 0 2,418,057 0 2,418,057 Sale of 380 shares Treasury stock 0 (195) 24,955 0 0 24,760 Effect of the August 20, 1997 stock split effected in the form of a 20% stock dividend (40,257 shares) 1,006,425 0 0 (1,006,425) 0 0 Payment for fractional shares totaling 138.49 shares 0 0 0 (29,822) 0 (29,822) Cash dividends declared 0 0 0 (756,860) 0 (756,860) Change in net unrealized gain (loss) on available for sale securities, net of tax of $1,009,423 0 0 0 0 1,956,978 1,956,978 Balance at December 31, 1995 $6,069,300 $3,948,485 $ (70,013) $12,278,912 $ 567,810 $22,794,494 Net income, 1996 0 0 0 2,451,972 0 2,451,972 Sale of 222 shares Treasury stock 0 312 15,498 0 0 15,810 Repurchase of 18 shares Treasury stock 0 0 (1,520) 0 0 (1,520) Cash dividends declared 0 0 0 (807,628) 0 (807,628) Change in net unrealized gain (loss) on available for sale securities, net of tax of $382,120 0 0 0 0 (739,270) (739,270) Balance at December 31, 1996 $6,069,300 $3,948,797 $ (56,035) $13,923,256 $ (171,460) $23,713,858 Net income, 1997 0 0 0 2,700,472 0 2,700,472 Sale of 97 shares Treasury stock 0 0 8,780 0 0 8,780 Repurchase of 1,250 shares Treasury stock 0 0 (113,440) 0 0 (113,440) Payment for fractional shares totaling 245.81 shares 0 0 0 (29,699) 0 (29,699) Cash dividends declared 0 0 0 (885,940) 0 (885,940) Change in net unrealized gain (loss) on available for sale securities, net of tax of $313,835 0 0 0 0 609,209 609,209 Balance at December 31, 1997 $ 6,069,300 $3,948,797 $(160,695) $15,708,089 $ 437,749 $26,003,240 The accompanying notes are an integral part of these consolidated financial statements. UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net Income $ 2,700,472 $ 2,451,972 $ 2,418,057 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, amortization and accretion (44,744) 441,931 477,744 Provision for loan losses 120,000 120,000 30,000 Net gain (loss) on sale of available for sale securities 1,463 (2,718) (3,103) Net (gain) loss on sale of equipment 944 (3,778) 0 (Gain) loss on sale of other real estate owned 22,390 (16,918) 0 Provision for other real estate owned 15,000 15,000 60,000 Originations of loans held for sale (8,526,648) (11,993,334) (8,593,440) Proceed from loans held for sale 8,629,484 9,979,727 7,936,912 Net change in other assets (315,375) (455,947) (151,224) Net change in other liabilities 553,860 526,397 522,499 Net change in deferred loan origination fees 49,374 (129,963) (74,370) Provision for deferred income tax (benefit) expense (100,000) (91,529) 9,666 Net cash provided by operating activities $ 3,106,220 $ 840,840 $ 2,632,741 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of available for sale securities $ 41,170,105 $ 3,001,060 $ 16,933,182 Purchase of available for sale securities (41,533,761) (35,337,132) (38,702,639) Proceeds from maturities and principal payments on available for sale securities 14,856,692 26,876,205 26,734,617 Purchase of held to maturity securities (29,663,803) (1,605,000) 0 Proceeds from maturities and principal payments on held to maturity securities 2,082,547 945,192 2,619,748 Proceeds from sales of other real estate owned 429,528 380,000 0 Net increase in loans to customers (6,108,042) (7,715,503) (9,035,126) Proceeds from sales of fixed assets 0 16,541 4,000 Capital expenditures (368,255) (207,087) (537,227) Net cash used by investing activities $(19,134,989) $(13,645,724) $ (1,983,445) CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) increase in demand, savings and money market accounts 2,028,542 (1,652,257) (6,470,836) Increase in time deposits 8,911,856 2,739,855 11,580,018 Net changes in short term borrowed funds 6,407,681 8,446,544 0 Payment to eliminate fractional shares (29,699) 0 (29,821) Purchase of Treasury stock (113,440) (1,520) 0 Sale of Treasury stock 8,780 15,810 24,760 Dividends paid (885,940) (807,628) (756,860) Net cash provided by financing activities $ 16,327,780 $ 8,740,804 $ 4,347,261 Net (decrease) increase in cash and cash equivalents 299,011 (4,064,080) 4,996,557 Cash and cash equivalents at beginning of year 9,602,180 13,666,260 8,669,703 Cash and cash equivalents at end of year $ 9,901,191 $ 9,602,180 $ 13,666,260 The accompanying notes are an integral part of these consolidated financial statements. 1997 1996 1995 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 6,501,460 $ 5,665,358 $ 4,752,751 Income taxes paid $ 1,425,987 $ 1,077,250 $ 927,610 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Net transfer from loans held for sale to loans $ 0 $ 0 $ 80,272 Net increases (decreases) required by Statement of Financial Accounting Standards No. 115 Available for Sale Securities $ 923,044 $(1,121,390) $ 2,966,401 Deferred income tax assets $ (313,835) $ 382,120 $(1,009,423) Net unrealized gain (loss) on available for sale securities $ 609,209 $ (739,270) $ 1,956,978 The accompanying notes are an integral part of these consolidated financial statements. UNION BANKSHARES COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Union Bankshares Company provides a full range of banking services to individual and corporate customers through its subsidiary and branches in Maine. It is subject to regulations of certain Federal agencies and undergoes periodic examinations by those regulatory authorities. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the future relate to the determination of the Allowance for Loan Losses. In connection with the determination of the Allowance for Loan Losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. Management believes that the Allowance for Loan Losses and the carrying value of real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances might be necessary based on changes in economic conditions, particularly in northern New England. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's Allowance for Loan Losses. These agencies may require the Company to recognize additions to the allowances based on their judgements about information available to them at the time of their examination. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiary, Union Trust Company. All significant intercompany balances and transactions have been eliminated in the accompanying financial statements. Minority interests, which are not significant, are included in other liabilities in the balance sheets and other operating expenses in the consolidated statements of income. Earnings and Cash Dividends Per Share At December 31, 1997, the Company adopted Statements of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", and No. 129, "Disclosure of Information About Capital Structure." These standards have no effect on the financial statements as the Company has no dilution of earnings per share and the Company's capital disclosures meet the requirements of SFAS No. 129. Earnings per share is based upon the average number of common shares outstanding during each year. In 1997, the Company declared a stock split effected in the form of a 20 percent stock dividend and a two for one stock split. In July 1997, the shareholders of the Company approved an amendment to the Articles of Incorporation that increased the authorized common stock from 600,000 shares, par value $25 per share, to 1,200,000 shares, par value $12.50 per share. Common share amounts, per share earnings and dividends and common stock and retained earnings for all years presented have been adjusted to reflect these transactions. Investments Available for Sale Securities Available for sale securities consist of debt securities that the Company anticipates could be made available for sale in response to changes in market interest rates, liquidity needs, changes in funding sources and similar factors. These assets are specifically identified and are carried at fair value. Amortization of premiums and accretion of discounts are recorded as an adjustment to yield. Unrealized holding gains and losses for these assets, net of related income taxes, is excluded from earnings and is reported as a net amount in a separate component of shareholders' equity. When decline in market value is considered other than temporary, the loss is recognized in the consolidated statements of income, resulting in the establishment of a new cost basis. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Held to Maturity Securities Held to maturity securities consist of purchased debt securities that the Company has the positive intent and ability to hold until maturity. Debt securities classified as held to maturity are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts. When decline in market value is considered other than temporary, the loss is recognized in the consolidated statements of income, resulting in the establishment of a new cost basis for the security. Other Investment Securities Other investment securities consist of Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock. These securities are carried at cost, which approximates market value at December 31, 1997 and 1996. Loans Held for Sale Loans held for sale are loans originated for the purpose of potential subsequent sale. These loans are carried at the lower of cost or market at December 31, 1997 and 1996. Gains and losses on the sale of these loans are computed on the basis of specific identification. Loan Servicing Mortgage loans serviced for others are not included in the accompanying balance sheet. The Bank recognizes a loan servicing fee for the difference between the principal and interest payment collected on the loan and the payment remitted to the investor. Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," requires capitalization of mortgage servicing rights for loans originated after January 1, 1996. Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities." The impact of adoption of SFAS No. 122 and No. 125 was not material to the Company's financial statement. Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed by accelerated and straight- line methods over the estimated useful life of each type of asset. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the improvements. Maintenance and repairs are charged to expense as incurred; betterments are capitalized. Allowance for Loan Losses The Allowance for Loan Losses is established by management to absorb charge-offs of loans deemed uncollectible. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. The amount of the provision is based on management's evaluation of the loan portfolio. Considerations include past and anticipated loan loss experience, the character and size of the loan portfolio and the need to maintain the allowance at a level adequate to absorb anticipated future losses. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the Allowance for Loan Losses to such loans. If these allocations cause the allowance to increase, the increase is reported as loan loss provision. Other Real Estate Owned Other real estate owned, which is included in other assets, is recorded at the lower of cost or fair value less estimated costs to sell at the time the Company takes possession of the property. Losses arising from the acquisition of such properties are charged against the Allowance for Loan Losses. Operating expenses and any subsequent provisions to reduce the carrying value are charged to operations. Gains and losses upon disposition are reflected in earnings as realized. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Accrual of Interest Income and Expense Interest on loans and investment securities is taken into income using methods that relate the income earned to the balances of loans outstanding and investment securities. Interest expense on liabilities is derived by applying applicable interest rates to principal amounts outstanding. The recording of interest income on problem loan accounts ceases when collectibility within a reasonable period of time becomes doubtful. Interest income accruals are resumed only when they are brought fully current with respect to principal and interest and when management expects the loan to be fully collectible. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reflected in the loan loss provision. Loan Origination Fees and Costs Loan origination fees and certain direct loan origination costs are recognized over the life of the related loan as an adjustment to or reduction of the loan's yield. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds are purchased and sold for one day periods. Fair Value Estimates The Company has made fair value estimates on its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 2. CASH AND DUE FROM BANK ACCOUNTS The Federal Reserve Board requires the Bank to maintain a reserve balance. The amount of this reserve balance as of December 31, 1997 was $2,139,000. In the normal course of business, the Bank has funds on deposit at other financial institutions in amounts in excess of the $100,000 insured by FDIC. 3. AVAILABLE FOR SALE SECURITIES The Company carries available for sale securities at market value. A summary of the cost and market values of available for sale securities at December 31, 1997 and 1996 are as follows: Gross Gross Amortized Unrealized Unrealized Carrying & Cost Gains Losses Market Value 1997 1997 1997 1997 U S Treasury Securities and other U S Government agencies $59,510,645 $637,037 $(42,176) $60,105,506 Other Securities 472,829 68,396 0 541,225 Totals $59,983,474 $705,433 $(42,176) $60,646,731 1996 1996 1996 1996 U S Treasury Securities and other U S Government agencies $73,633,395 $314,589 $(625,728) $73,322,256 Other Securities 1,461,693 68,396 (17,045) 1,513,044 Totals $75,095,088 $382,985 $(642,773) $74,835,300 The amortized cost and market value of available for sale debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Market Cost Value Due in one year or less $ 501,189 $ 501,866 Due in one year through five years 10,088,723 10,245,885 Due after five years through ten years 48,367,304 48,806,313 Due after ten years 553,429 551,442 Totals $59,510,645 $60,105,506 Proceeds from the sale of securities were $41,170,105, $3,001,060 and $16,933,182 in 1997, 1996 and 1995, respectively. Gross realized gains were $116,446, $8,638 and $90,066 in 1997, 1996 and 1995, respectively. Gross realized losses were $117,909, $5,920 and $86,510 in 1997, 1996 and 1995, respectively. 4. HELD TO MATURITY SECURITIES The carrying amounts of held to maturity securities for 1997 and 1996 as shown in the Company's consolidated balance sheets, and their approximate market values at December 31, are as follows: Gross Gross Book Unrealized Unrealized Market Value Gains Losses Value 1997 1997 1997 1997 Obligations of state and political subdivisions $ 6,985,439 $113,508 $ (2,565) $ 7,096,382 US Government agencies 25,814,247 334,905 (3,061) 26,146,091 Totals $32,799,686 $448,413 $ (5,626) $33,242,473 1996 1996 1996 1996 Obligations of state and political subdivisions $ 3,792,285 $ 91,908 $ 0 $ 3,884,193 US Government agencies 994,515 0 (17,647) 976,868 Totals $ 4,786,800 $ 91,808 $(17,647) $ 4,861,061 The amortized cost and market value of held to maturity securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Market Cost Value Due in one year or less $ 297,053 $ 298,105 Due after one year through five years 3,065,818 3,143,071 Due after five years through ten years 3,249,138 3,263,785 Due after 10 years 26,187,677 26,537,512 Totals $32,799,686 $33,242,473 5. LOANS At December 31, 1997 and 1996, loans on nonaccrual status totaled approximately $503,000 and $491,000, respectively. If interest had been accrued on such loans, interest income on loans would have been approximately $39,000, $32,000 and $28,000 higher in 1997, 1996, and 1995, respectively. Loans delinquent by 90 days or more that were still on accrual status at December 31, 1997 and 1996 totaled approximately $209,000 and $196,000, respectively. In the ordinary course of business, the Company's subsidiary granted loans to the executive officers and directors of the Company and its subsidiary, and to affiliates of directors. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility. The balance of loans to related parties amounted to $3,655,081 and $3,834,777 at December 31, 1997 and 1996, respectively. New loans granted to related parties in 1997 totaled $2,199,082; payments and reductions amounted to $2,378,778. 6. ALLOWANCE FOR LOAN LOSSES Analysis of the Allowance for Loan Losses is as follows for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 Balance, beginning of year $2,083,831 $1,878,169 $1,928,644 Provision for loan losses 120,000 120,000 30,000 Balance before loan losses 2,203,831 1,998,169 1,958,644 Loans charged off 225,365 87,823 195,912 Less recoveries on loans charged off 234,274 173,485 115,437 Net loan charge off (recoveries) (8,909) (85,662) 80,475 Balance, end of year $2,212,740 $2,083,831 $1,878,169 Impairment of loans having recorded investments of $21,728 at December 31, 1997 and $21,776 at December 31, 1996 has been recognized in conformity with SFAS No. 114, as amended by SFAS No. 118. The average recorded investment in impaired loans during both 1997 and 1996 was $21,000. The total allowance for loan losses related to these loans was $217 and $225 on December 31, 1997 and 1996, respectively. There was no interest income recognized on impaired loans in 1997 and 1996. 7. LOAN SERVICING Mortgage servicing rights of $149,153 were capitalized in 1997, have been written down to their fair value of $91,096 through a valuation allowance at December 31, 1997, and are included in other assets. Amortization of mortgage servicing rights was $28,227 in 1997. 8. PREMISES, FURNITURE AND EQUIPMENT Detail of Bank premises, furniture and equipment is as follows: 1997 1996 Land $ 133,378 $ 133,378 Buildings and improvements 3,432,891 3,425,892 Furniture and equipment 3,269,618 3,088,902 Leasehold improvements 469,221 413,604 $7,305,108 $7,061,776 Less accumulated depreciation 4,462,957 4,144,664 $2,842,151 $2,917,112 At December 31, 1997, the Bank was obligated under a number of noncancellable leases for premises and equipment that are accounted for as operating leases. Leases for real property contain original terms from 2 to 20 years with renewal options up to 20 years. Management expects that, in the normal course of business, most leases will be renewed or replaced by other leases, or when available, purchase options may be exercised. Rental expense was $114,168 in 1997, $80,144 in 1996 and $83,068 in 1995. The minimum annual lease commitments under noncancellable leases in effect at December 31, 1997 are as follows: Year Ending December 31, Amount 1998 $124,783 1999 $126,905 2000 $129,062 2001 $131,256 2002 $133,487 9. OTHER REAL ESTATE OWNED Other real estate owned is included in other assets and amounts to $375,506 and $842,424 at December 31, 1997 and 1996, respectively. Activity in the allowance for losses on other real estate owned for the years ended December 31, is as follows: 1997 1996 Balance, beginning of year $ 93,082 $ 95,000 Provisions charged to income 15,000 15,000 Adjustment to market (108,082) (16,918) Balance, end of year $ 0 $ 93,082 10. DEPOSITS The aggregate amount of short term jumbo CDs, each with a minimum denomination of $100,000, was approximately $10,757,741 and $6,554,857 in 1997 and 1996, respectively. At December 31, 1997, the scheduled maturities of time deposits are as follows: 1998 $65,697,652 1999 6,553,809 2000 2,218,690 2001 2,171,530 Total $76,641,681 11. ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank are summarized as follows: Interest Rates at December 31, 1997 1997 1996 Fixed advances 6.25% to 7.23% $ 273,250 $ 110,000 Variable advances 5.71% to 6.01% 9,000,000 2,000,000 Line of credit N/A 0 4,063,000 $9,273,250 $6,173,000 Pursuant to the collateral agreements with the Federal Home Loan Bank (FHLB), advances are collateralized by stock in the FHLB, qualifying first mortgage loans and available for sale securities. Advances at December 31, 1997 mature as follows: 1998 2002 2005 2007 2010 2012 $5,000,000 $4,000,000 $55,000 $64,250 $55,000 $99,000 12. OTHER BORROWED FUNDS Securities sold under agreements to repurchase generally mature within one day from the transaction date. At December 31, 1997, securities with a fair value of $5,000,000 were pledged to secure other borrowed funds. Information concerning securities sold under agreements to repurchase at December 31, 1997 is summarized as follows: Average balance during the year $3,950,415 Average interest rate during the year 4.17% Maximum month end balance during the year $7,890,521 13. EMPLOYEE BENEFITS Pension Plan The Company's subsidiary has a noncontributory defined benefit pension plan covering substantially all permanent full time employees. The benefits are based on employees' years of service and the average of their three highest consecutive rates of annual salary proceeding retirement. It is the subsidiary's policy to fund the plan sufficiently to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Pension expense amounted to $124,079, $122,702 and $126,219 for the years ended December 31, 1997, 1996 and 1995, respectively. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31, 1997 and 1996. ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: 1997 1996 Accumulated benefit obligation including vested benefits of $3,412,619 in 1997 and $3,327,705 in 1996 $ (3,464,314) $ (3,427,498) Projected benefit obligation for service rendered to date (4,262,973) (4,347,390) Plan assets at fair value (cash and equivalent, U.S. Government securities and other investments) 4,782,945 4,157,524 Plan assets in excess of (less than) projected benefit obligation 519,972 (189,866) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (78,907) 639,608 Unrecognized prior service cost (33,396) (35,942) Unrecognized net asset at January 1, being recognized over 17 years (132,042) (155,820) Prepaid pension cost included in other assets $ 275,627 $ 257,980 1997 1996 1995 NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS: Service cost - benefits earned during the period $177,524 $165,142 $158,055 Interest cost on projected benefit obligation 293,016 281,514 253,278 Actual return on plan assets (663,994) (274,912) (550,892) Net amortization and deferral 317,533 (49,042) 265,778 Net periodic pension cost $124,079 $122,702 $126,219 NET AMORTIATION AND DEFERRAL INCLUDED THE FOLLOWING COMPONENTS: Amortization of unrecognized net obligations existing at January 1 $(23,778) $(23,778) $ (23,778) Asset (loss) deferred 337,073 (34,436) 289,222 Amortization of unrecognized prior service cost (2,546) (2,546) (2,546) Amortization of net gain from earlier periods 6,784 11,718 2,880 $317,533 $(49,042) $(265,778) The weighted average discount rate of 7.0% was used in determining the projected benefit in 1997 and 1996, respectively. The increase in salary levels was 4% in 1997 and 5% for 1996 and 1995. Expected long term rates of return on assets were 8.0% for 1997, 1996, and 1995. Post Retirement Benefits Other Than Pensions The Company sponsors a post retirement benefit program that provides medical coverage and life insurance benefits to certain employee and Directors who meet minimum age and service requirements. Active employees and Directors accrue benefits over a 25 year period. The following table sets forth the status of the Company's post retirement obligation at December 31, 1997 and 1996: ACCUMULATED POST RETIREMENT BENEFIT OBLIGATION: 1997 1996 Retirees $ 548,389 $ 552,020 Fully eligible active program participants 127,598 119,250 Other active program participants 737,246 633,434 $1,413,233 $1,304,704 Accumulated post retirement benefit obligation in excess of plan assets $1,413,233 $1,304,704 Unrealized net loss for current year (130,621) (130,630) Unrecognized prior service cost (685,500) (731,100) Accrued post retirement benefit cost included in other liabilities $ 597,112 $ 442,974 Net period post retirement benefit cost for the years ended December 31, 1997, 1996, and 1995, respectively, includes the following components: 1997 1996 1995 Service cost $ 59,472 $ 55,581 $ 30,129 Interest cost 89,543 82,697 74,758 Amortization of accumulated post retirement obligation 45,600 45,600 45,600 Amortization of net (gain) loss 9 615 (1,841) Net periodic post retirement benefit cost $194,624 $184,493 $148,646 For measurement purposes, the assumed annual rates of increase in the per capita cost of covered benefits were 11% and 12% for 1997 and 1996, respectively. Per capita medical costs are assumed to decrease annually by 1% until the year 2002 (which at that time will be 6%) and later. The health care cost trend rate assumption has a significant effect on the amounts reported; however, these amounts are not currently available. The weighted average discount rate and the rate of compensation increase used in determining the accumulated post retirement benefit obligation was 7% and 4% on December 31, 1997 and 7% and 5% on December 31, 1996. 401(k) Plan The Company has a noncontributory 401(k) plan for employees who meet certain service requirements. 14. INCOME TAXES Income tax expense (benefit) consists of the following: Current Deferred Total 1997 Federal $1,176,733 $ 2,267 $1,179,000 State 45,000 0 45,000 $1,221,733 $ 2,267 $1,224,000 1996 Federal $1,101,529 $ (91,529) $1,010,000 State 40,000 0 40,000 $1,141,529 $ (91,529) $1,050,000 1995 Federal $ 835,597 $ 9,666 $ 845,263 State 40,000 0 40,000 $ 875,597 $ 9,666 $ 885,263 Income tax expense amounted to $1,224,000 for 1997, $1,050,000 for 1996 and $885,263 for 1995. The actual tax expense for 1997, 1996 and 1995 differs from the "expected" tax expense for those years (computed by applying the applicable U. S. Federal Corporate Tax Rate to income before income taxes) due to the following: 1997 1996 1995 Amount % of Amount % of Amount % of Pretax Pretax Pretax Earnings Earnings Earnings Computed "expected" tax expense $1,334,320 34.0% $1,190,670 34.0% $1,098,900 34.0% Nontaxable income on obligations of states and political subdivisions (158,781) (4.1%) (143,854) (4.1%) (225,810) (7.0%) Other 48,461 1.3% 3,184 .1% 12,173 1.0% $1,224,000 31.2% $1,050,000 30.0% $ 885,263 28.0% The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented as follows: DEFERRED TAX ASSETS: 1997 1996 Unrealized loss on available for sale securities $ 0 $ 111,582 Allowance for Loan Losses 752,332 708,503 Real estate owned 0 37,400 Deferred loan fees 8,215 25,002 Deferred compensation 287,260 267,963 Post retirement benefits 203,187 149,167 Other 46,765 9,723 Deferred tax assets $1,297,759 $1,309,340 DEFERRED TAX LIABILITIES: Unrealized gain on available for sale securities $225,508 $ 23,255 Allowance for Loan Losses 170,114 169,805 Premises, furniture and equipment, principally due to differences in depreciation 273,499 271,833 Prepaid pension expense 93,985 87,713 Cash surrender value of life insurance 36,386 36,386 Other 5,450 13,699 Deferred tax liabilities $804,942 $602,691 The Bank has sufficient refundable taxes paid in available carry back years to fully realize its recorded deferred tax asset of $1,297,759 at December 31, 1997. The deferred tax asset and liability are included in other assets and other liabilities on the balance sheet at December 31, 1997 and 1996. 15. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators regarding components, risk weightings, and other factors. Quantitive measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Reserve Board categorized the Bank as well capitalized under the regulatory framework. To be so categorized, the Bank must maintain minimum total risk based, Tier I risk based, and Tier I leverage ratios as set forth in the table. Management believes no conditions or events that would alter the Bank's categorization have occurred since the Board's notification. The actual capital amounts and ratios for the Bank and the Company as of December 31, 1997 and 1996 are presented in the table below: December 31, 1997 To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Bank Only: Total capital (to risk weighted assets) $25,793,168 21.8% >$ 9,456,880 >8.0% >$11,821,100 >10.0% Tier I capital (to risk weighted assets) $25,095,168 21.2% >$ 4,728,440 >4.0% >$ 7,092,660 > 6.0% Tier I capital (to average assets) $25,095,168 11.4% >$ 8,836,560 >4.0% >$11,045,700 > 5.0% Consolidated: Total capital (to risk weighted assets) $26,263,491 19.0% >$11,068,560 >8.0% N/A N/A Tier I capital (to risk weighted assets) $25,565,491 18.5% >$ 5,534,280 >4.0% N/A N/A Tier I capital (to average assets) $25,565,491 11.6% >$ 8,836,560 >4.0% N/A N/A December 31, 1996 To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Bank Only: Total capital (to risk weighted assets) $24,832,936 22.0% >$9,041,440 >8.0% >$11.301.800 >10.0% Tier I capital (to risk weighted assets) $23,411,936 20.7% >$4,520,720 >4.0% >$ 6,781,080 > 6.0% Tier I capital (to average assets) $23,411,936 11.8% >$7,949,040 >4.0% >$ 9,936,300 > 5.0% Consolidated: Total capital (to risk weighted assets) $25,216,318 23.7% >$8,522,720 >8.0% N/A N/A Tier I capital (to risk weighted assets) $23,885,318 22.4% >$4,261,360 >4.0% N/A N/A Tier I capital (to average assets) $23,885,318 12.1% >$7,868,388 >4.0% N/A N/A The Company may not declare or pay a cash dividend on or repurchase any of its capital stock if the effect thereof would cause the capital of the Company to be reduced below the capital requirements imposed by the Federal Reserve. 16. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Bank is a party to financial instruments with off balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Statement of Financial Position. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. At December 31, 1997, the following financial instruments, whose contract amounts represent credit risk, were outstanding: Contract Amount 1997 Commitments to extend credit $26,941,000 Standby letters of credit $ 109,000 Unadvanced portions of construction loans $ 1,180,000 Total $28,230,000 The Bank's exposure to credit loss in the event of nonperformance by the other party to the above financial instruments is represented by the contractual amounts of the instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the credit extension, is based on management's credit evaluation of the counterparty. The types of collateral held include residential and commercial real estate and, to a lesser degree, personal property, business inventory and accounts receivable. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank grants residential, commercial and consumer loans principally to customers in Maine's Hancock and Washington counties. Although the loan portfolio is diversified, a substantial portion of the debtors' ability to honor their contracts depends upon local economic conditions, especially in the real estate sector. At December 31, 1997, there were no borrowers whose total indebtedness to the Bank exceeded 10% of the Bank's shareholders' equity. The consolidated balance sheets do not include various contingent liabilities such as liabilities for assets held in trust. Management does not anticipate any loss as a result of these contingencies. 17. LITIGATION At December 31, 1997, the Company was involved in litigation arising from normal banking, financial and other activities of the Bank. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company's financial condition. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods and assumptions are set forth below for the Bank's financial instruments. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value amount could have changed. Cash, Due from Banks and Federal Funds Sold The fair value of cash, due from banks and Federal funds sold approximates their relative book values at December 31, 1997 and 1996, as these financial instruments have short maturities. Available for Sale Securities and Held to Maturity Securities Fair values are estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Management has determined that the fair value approximates book value on all loans with maturities of one year or less or variable interest rates. The fair values of all other loans are estimated based on bid quotations received from securities dealers. The estimates of maturity are based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions and the effects of estimated prepayments. Loans Held for Sale The fair market value of this financial instrument approximates the book value as the instrument has a short maturity. Accrued Interest Receivable The fair market value of this financial instrument approximates the book value as the instrument has a short maturity. It is the Bank's policy to stop accruing interest on loans past due by more than 90 days. Other Investment Securities, Federal Home Loan Bank Stock and Federal Reserve Bank Stock The fair market value of these financial instruments approximates the book value as these instruments do not have a market nor is it practical to estimate their fair value without incurring excessive costs. Deposits Fair value of deposits with no stated maturity, such as non interest bearing demand deposits, savings deposits, NOW accounts and money market and checking accounts, equals the amount payable on demand. The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value was considered, the fair value of the Bank's net assets could increase. Accrued Interest Payable The fair value of this financial instrument approximates the book value as the instrument has a short maturity. Advances from Federal Home Loan Bank The fair values of advances are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Other Borrowed Funds The carrying amount of borrowings under repurchase agreements maturing within 90 days approximates their fair values. Commitment to Extend Credit The Bank has not estimated the fair values of commitments to originate loans due to their short term nature and their relative immateriality. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These values do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The latter may include deferred tax assets, Bank premises and equipment and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. A summary of the fair values of the Company's significant financial instruments at December 31, 1997 and 1996 follows: 1997 1996 Carrying Estimate of Carrying Estimate of Value Fair Value Value Fair Value ASSETS Cash, due from banks and Federal funds sold $ 9,901,191 $ 9,901,191 $ 9,602,180 $ 9,602,180 Available for sale securities 60,646,731 60,646,731 74,835,300 74,835,300 Held to maturity securities 32,799,686 33,242,473 4,786,800 4,861,061 Other investment securities 2,618,700 2,618,700 1,946,200 1,946,200 Loans 104,825,228 105,381,313 98,886,560 99,089,190 Loans held for sale 3,138,218 3,138,218 3,241,054 3,241,054 Accrued interest receivable 2,261,257 2,261,257 2,003,002 2,003,002 LIABILITIES Deposits 177,385,865 178,901,792 166,445,467 168,149,481 Accrued interest payable 1,005,706 1,005,706 773,588 773,588 Advances from Federal Home Loan Bank 9,273,250 9,273,250 6,173,000 6,173,000 Other borrowed funds 5,690,975 5,690,975 2,383,544 2,383,544 19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS The condensed financial statements of Union Bankshares Company as of December 31, 1997 and 1996 and for each of the years ended December 31, 1997, 1996 and 1995 are presented as follows: BALANCE SHEET December 31, 1997 and 1996 1997 1996 ASSETS Cash $ 18,786 $ 21,044 Investment in subsidiary 25,469,344 23,178,116 Other assets 779,827 739,856 Total assets $26,267,957 $23,939,016 LIABILITIES AND SHAREHOLDER'S EQUITY Dividends payable $ 241,462 $ 201,903 Other liabilities 23,255 23,255 Shareholders' equity 26,003,240 23,713,858 Total liabilities and Shareholders' equity $26,267,957 $23,939,016 STATEMENTS OF INCOME Years ended December 31, 1997, 1996, and 1995 1997 1996 1995 Dividend income $ 887,466 $1,274,684 $ 749,460 Equity in undistributed earnings of subsidiary 1,682,019 1,153,258 1,670,357 Service income 140,804 29,868 0 Total income $2,710,289 $2,457,810 $2,419,817 Operating expenses 9,817 5,839 1,760 Net income $2,700,472 $2,451,971 $2,418,057 STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,700,472 $2,451,971 $2,418,057 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Undistributed earnings of subsidiary $(1,682,019) $(1,153,258) $(1,670,357) Increase in other assets (39,970) (471,604) (49,963) Increase (decrease) in other liabilities 0 (29,868) 29,868 Increase in dividends payable 39,558 85 50,434 Net cash provided by operating activities $ 1,018,041 $ 797,326 $ 778,039 CASH FLOWS FROM FINANCING ACTIVITIES: Payment to eliminate fractional shares $ (29,699) $ 0 $ 0 Dividends paid (885,940) (807,628) (786,681) Purchase of Treasury stock (113,440) (1,520) 0 Sale of Treasury stock 8,780 15,810 24,759 Net cash used by financing activities (1,020,299) (793,338) (761,922) Net increase (decrease) in cash and cash equivalents (2,258) 3,988 16,117 Cash and cash equivalents, beginning of year 21,044 17,056 939 Cash and cash equivalents, end of year $ 18,786 $ 21,044 $ 17,056 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Net increase (decrease) in net unrealized gain on available for sale securities $ 609,209 $ (739,270) $ 1,956,978 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Union Bankshares Company We have audited the accompanying consolidated balance sheets of Union Bankshares Company and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above represent fairly, in all material respects, the consolidated financial position of Union Bankshares Company and Subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine January 23, 1998 UNION BANKSHARES COMPANY & UNION TRUST COMPANY DIRECTORS Arthur J. Billings Thomas R. Perkins President, Barter Lumber Company Retired Pharmacy Owner, Retired Maine Legislator (Senator), Retired Peter A. Blyberg Legislative Liaison MSHA President Casper G. Sargent, Jr. Robert S. Boit Owner, Sargent's Real Estate Corp. Retired, former President John V. Sawyer II Richard C. Carver Chairman of the Board Owner, Carver Oil Co. President, Worcester-Sawyer Agency & Carver Shellfish Stephen C. Shea Peter A. Clapp Treasurer, E.L. Shea, Inc., President, Blue Hill Garage President, Shea Leasing Sandra H. Collier Richard W. Teele Attorney at Law Secretary, Retired former Executive Sandra Hylander Collier Law Offices Vice President & Treasurer Robert B. Fernald Paul L. Tracy Treasurer, A.C. Fernald Sons, Inc. President, Owner, Winter Harbor Agency; & Jordan Fernald Vice President, Co-Owner, Schoodic Insurance Agency Douglas A. Gott Richard W. Whitney Owner, Douglas A. Gott & Sons Dentist David E. Honey Retired, Former Manager, Swan's Island Electric Coop INSERT PHOTO OF UNION BANKSHARES COMPANY BOARD OF DIRECTORS UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY DIRECTORY OF OFFICERS & UNION TRUST COMPANY HONORARY DIRECTORS John V. Sawyer II Chairman of the Board Franklin L. Beal Retired Peter A. Blyberg President Carroll V. Gay Retired Sally J. Hutchins Vice President & Clerk Delmont N. Merrill President, Merrill Blueberry Farms, Inc. Richard W. Teele Secretary John E. Raymond President, Bimbay, Inc. John P. Lynch Senior Vice President Mary T. Slaven Realtor Peter F. Greene Vice President Douglas N. Smith Retired Rebecca J. Sargent Vice President - Senior Trust Officer I. Frank Snow President, Snow's Plumbing & Heating UNION TRUST COMPANY DIRECTORY OF OFFICERS John V. Sawyer II Catherine M. Planchart Chairman of the Board Marketing Officer Peter A. Blyberg Deborah F. Preble President, Chief Executive Officer AVP, Assistant Controller John P. Lynch Sandy D. Salsbury Sr. Vice President, Sr. Banking Officer Human Resources Officer Peter F. Greene Stephen L. Tobey Vice President, Sr. Bank Services Officer AVP, Cash Management & Security Officer Sally J. Hutchins Julie C. Vittum Vice President, Treasurer, AVP, Senior Auditor Controller & Clerk Christopher H. Keefe Joseph M. Connors Vice President, Sr. Relationship Manager Assistant Trust Officer David A. Krech Patti S. Herrick Vice President, Sr. Investment Officer Information Services Officer Bette B. Pierson Dawn L. Lacerda Vice President, Mortgage Loan Officer Loan Services Officer Rebecca J. Sargent Mary Lou Lane Vice President - Senior Trust Officer Mortgage Underwriter James M. Callnan Marsha L. Osgood AVP, Sr. Information Services Officer Trust Officer Nancy E. Domagala Susan A. Saunders AVP, Mortgage Underwriter Project Management Officer Laurence D. Fernald, Jr. Cynthia D. West AVP, Relationship Mgr. and Customer Services Officer Appraisal Review Officer Janis M. Guyette AVP, Trust Operations Officer Lynda C. Hamblen AVP, Relationship Manager Phyllis C. Harmon AVP, Relationship Manager Harold L. Metcalf AVP, Relationship Manager Peter C. O'Brien AVP, Loan Support Manager and CRA Officer Lorraine S. Ouellette AVP, Trust Officer UNION TRUST COMPANY BRANCH OFFICES Bar Harbor Harriman, Barbara Christopher H. Keefe, VP, Havey, Jill Sr. Relationship Manager Hills, Darlene Blue Hill Hinckley, Wayne Pamela G. Hutchins, AVP, Hutchins, Rebecca Relationahip Manager Hutchinson, Elwell Castine Ingalls, Laurea Pamela G. Hutchins, AVP, Jewell, Beth Relationship Manager Johnson, Mindy Cherryfield Joy, Michelle C. Foster Mathews, AVP, Kalloch, Debra Branch Manager Kelley, Cindy Ellsworth Shopping Center Leach, Gail Melody L. Wright, Branch Manager Look, Cheryl Look, Lisa Jonesport Lounder, Lorraine Wendy W. Beal, AVP, MacLaughlin, Wendy Relationship Manager Madden, Anita Machias Marshall, Carol Lisa A. Holmes, AVP, McCormick, Bernadette Relationship Manager Mitchell, Stacie Milbridge Murphy, Forrest James E. Haskell, AVP, Norton, Clifford III Relationship Manager Owen, Doris Somesville Page, Deborah William R. Weir, Jr., AVP, Perry, Ann Relationship Manager Pineo, Muriel Stonington Podlubny, Helene Harry R. Vickerson III, AVP, Robbins, Nancy Relationship Manager Rose, Brenda Sackett, Jacqueline UNION TRUST COMPANY PERSONNEL Salisbury, Jane Alexander, Jennifer Scott, Marsha Allen, Deborah Scoville, Clark Armstrong, Rebecca Sinford, Nicole Babson, William Sinford, Stacey Bayrd, Rona Smith, Katherine Billings, Holly Smith, Ronald Bonville, Melissa Snow, Christie Boyce, Katrina Spaulding, Virginia Carter, Linda Spizio, Barbara Chisholm, Catherine Sprague, Donna Church, Tammy Sproul, Bonnie Condon, Helen St. Pierre, Bettina Crosthwaite, Andrew Swett, Andrea Curtis, Kristen Thompson, Dianne Dearborn, Trevor Treadwell, Mattie Douglass, Joanne Wallace, Jayne Driscoll, Johna Wenger, April Dunbar, Patricia White, Tammy Elliott, Linda Wilson, Stephanie Faulkner, Kathy Woodward, Cheryl Gommo, Heidi York, Caroline Grant, Victoria Gray, Jenny Gray, Shelly Grindle, Eugene Handy, Louise Union Trust Company is committed to offering equal opportunity in regard to employment, training, benefits, salary administration and promotional opportunities to all employees, regardless of race, color, religion, sex, age or national origin. The Bank has implemented an Affirmative Action Plan. Upon written request, the Company will provide, without charge, a copy of its Annual Report on SEC Form 10K for 1997, including the financial statements and schedules required to be filed with the Securities and Exchange Commission. Interested persons should write to: Sally J. Hutchins, Vice President Union Bankshares Company PO Box 479 Ellsworth, Maine 04605 Annual Shareholder Meeting 11:00 a.m. Thursday, April 16, 1998 White Birches Restaurant Route 1 Hancock, Maine EX-27 3
9 12-MOS DEC-31-1997 DEC-31-1997 7650086 0 2251105 0 60646731 32799686 33242473 107062128 2212740 222559831 177385865 14690975 4206501 273250 0 0 6069300 0 222559831 9659971 6526381 0 16186352 5898981 6734193 9452159 120000 (1463) 1622994 3924472 0 0 0 2700472 5.59 0 0 503000 209000 0 0 2212740 511000 520000 0 0 0 0
EX-99 4 Exhibit 99.1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Union Bankshares Company We have audited the accompanying consolidated balance sheets of Union Bankshares Company and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above represent fairly, in all material respects, the consolidated financial position of Union Bankshares Company and Subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. BERRY, DUNN, MCNEIL & PARKER Portland, Maine January 23, 1998 EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Union Bankshares Company We have audited the accompanying consolidated statements of income, changes in shareholders' equity and cash flow of Union Bankshares Company and Subsidiary for the year ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flow of Union Bankshares Company and Subsidiary for the year ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in note 1, the Company changed its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at January 1, 1994. Baker Newman & Noyes Limited Liability Company January 20, 1995 -----END PRIVACY-ENHANCED MESSAGE-----