-----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, T34prYUN+U9blzZEMPO+QrMkSUdWVmHZnlN9AqT4iYJ7rOlFk8UeD5gpyHUt9MV2 PsHRYmK8eVWfwAlYeBRY3w== 0000745083-00-000005.txt : 20000411 0000745083-00-000005.hdr.sgml : 20000411 ACCESSION NUMBER: 0000745083-00-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: 582260 BUSINESS ADDRESS: STREET 1: 66 MAIN ST STREET 2: PO BOX 479 CITY: ELLSWORTH STATE: ME ZIP: 04605 BUSINESS PHONE: 2076672504 10-K 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 0-12958 UNION BANKSHARES COMPANY (Exact name of registrant as specified in its charter) MAINE 01-0395131 (State or other jurisdiction (IRS Employer Identification No.) of incorporation of organization) 66 Main Street, Ellsworth, Maine 04605 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (207) 667-2504 Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12 (g) of the Act: Common Stock $12.50 Par Value Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XXX NO _______ Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 4, 2000, was approximately $56,587,356. 577,848 shares of the Company's Common Stock, $12.50 par value, were issued and outstanding on February 15, 2000. UNION BANKSHARES COMPANY INDEX TO FORM 10-K PART I Page No. Item 1: Business 3-13 Item 2: Properties 13-14 Item 3: Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 15 Item 6: Selected Financial Data 16 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 16-18 Item 8: Financial Statements and Supplementary Data 18 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10: Directors and Executive Officers of the Registrant 18-22 Item 11: Executive Compensation 22-24 Item 12: Security Ownership of Certain Beneficial Owners and Management 24 Item 13: Certain Relationship and Related Transactions 24 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 24-26 Signatures 27 PART I ITEM I: Business Union Bankshares Company is a one-bank holding company, organized under the laws of the State of Maine. The Company's only subsidiary is Union Trust Company, wholly owned and established in 1887. 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. Union Trust is a full-service, independent, community bank that is locally owned and operated. Through its eleven offices, Union Trust serves the financial needs of individuals, businesses, municipalities and nonprofit organizations in eastern Maine. Union Trust offers a wide variety of financial services with competitive interest rates, a helpful, friendly staff, and quick, local decision-making to meet the needs of the communities it serves. As a complement to the services offered by the Bank, the Trust and Investment Services Department provides a broad range of investment options to help meet the needs of our customers. Trust and Investment Services has served generations of Maine families with estate planning, investment management and custody, and retirement planning and employee benefit services. As a market driven sales and service organization, Union Trust is focused on the needs of its customers. Our employees are listening to customers' needs, suggesting solutions, answering their questions and making it easy for them to purchase and use our services. It is through our team of dedicated and knowledgeable employees that outstanding customer service is delivered. That is why Union Trust continues to hire quality individuals, invest in their continuing education and training, and reward them for the significant contribution they make to the overall success of the organization. There is no better example of this than in our Trust and Investment Services department. Because of their commitment to personalized service and professional knowledge, they continue to experience over 20% growth in revenue and assets under management from 1998 to 1999. To support this growth, five additional staff members were added during 1999. Two others received advanced degrees/professional designations in their areas of expertise. Another example of excellent customer service is that delivered by our Relationship Managers to loan customers. Again and again, customers are saying how extremely satisfied they are with the service they receive from Union Trust and would recommend Union Trust to a friend or family member. A "Mortgage Think Tank" was formed during 1999 to focus this market segment. Their task is to discover new ways to better serve these customers. Many of their ideas were implemented in 1999 with positive results. Technology continues to allow us to conduct business in new ways, never before possible. Access channels have evolved from the branches to ATM's, Customer Service Call Center, BankLiner telephone banking, BankLinePCr computer banking and new for 1999, NetBankingr on the Internet. To provide customer support for NetBankingr and future technological initiatives, the call center staff was increased by 100% this year. The latest in telephone technology was installed, with all calls to the Bank now being answered through the call center to facilitate customer service. More than anything else, the Y2K challenge, which is now successfully behind us, proved the strength of Union Trust and the teamwork that exists among its employees. It also served as a testing ground of technology as a whole, helping to instill public confidence and enhancing the public's acceptance of this new delivery channel. This gives Union Trust the "green light" for continued investment in the latest financial services technology. As customer service expectations increase, Union Trust will continue to anticipate customers' needs and pursue the appropriate strategic initiatives. Union Trust's service to its customers goes beyond the walls of the Bank, out into the community. During 1999, our employees and directors contributed over 9,000 hours of volunteer time to over 115 organizations. The Bank competes actively with other commercial banks and other financial institutions in its service areas. In the Bank's immediate market area, there are two other independent community banks, one savings and loan association, three savings bank branch offices and three commercial banks owned outside of the state of Maine. Strong competition exists among commercial banks in efforts to obtain new deposits, in the scope and type of services offered, in interest rates on time deposits and interest rates charged on loans, and in other aspects of banking. In Maine, savings banks are major competitors of commercial banks as a result of broadened powers granted to savings banks. In addition, the Bank like other commercial banks, encounters substantial competition from other financial institutions engaged in the business of either making loans or accepting deposit accounts, such as savings and loan associations, credit unions, insurance companies, certain mutual funds, and certain governmental agencies. Furthermore, the large banks located in Boston, New York and Providence are active in servicing some of the large Maine based companies. As of December 31, 1999, the Bank employed 127 employees of which 13 employees were part time. They are not compensated by the Company for their service and there are no employees of the Company. The Bank's primary regulator is the Federal Reserve Bank of Boston and as a state chartered bank to the Bureau of Banking of the State of Maine. Please refer to Footnote #15 on pages 32 and 33 of the 1999 Annual Report of Union Bankshares Company, regarding compliance with capital requirements. Any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that were not disclosed under Item III of Industry Guide 3 do not (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources or (2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. The Company and Bank are not aware of any current recommendations by the regulatory authorities which if they were to be implemented would have or would be reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. Loans, other than credit card loans, are placed on non accrual status when, in the opinion of management, there are doubts as to the collectibility of interest or principal, or when principal or interest is past due 90 days or more, and the loan is not well secured and in the process of collection. Interest previously accrued but not collected is reversed and charged against interest income at the time the related loan is placed on non-accrual status. Principal and accrued interest on credit card loans are charged to the allowance for credit losses when 180 days past due. Payments received on non-accrual loans are recorded as reductions of principal if principal payment is doubtful. Loans are considered to be restructured when the yield on the restructured assets is reduced below the current market rates by an agreement with the borrower. Generally this occurs when the cash flow of the borrower is insufficient to service the loan under its original terms. In the Bank's market area, the banking business is somewhat seasonal due to an influx of tourists and seasonal residents returning to the area each spring and summer. As a result, the Bank has an annual deposit swing, from a high point in mid October to a low point in June. The deposit swing is predictable and does not have a material adverse effect on the Bank and its operations. STATISTICAL PRESENTATION The Supplemental Financial Data presented on the following pages contains information to facilitate analysis and comparison of sources of income and exposure to risk. A. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME The following table sets forth the information related to changes in net interest income. For purposes of the table and the following discussion, information is presented regarding (1) the total dollar amount of interest income of the Company from interest earning assets and the resulting average yields; (2) the total dollar amount of interest expense on interest bearing liabilities and the resulting average cost; (3) net interest income; (4) interest rate spread; and (5) net interest margin. Information is based on average daily balances during the indicated periods. For the purposes of the table and the following discussion, (1) income from interest earning assets and net interest income are presented on a tax equivalent basis and (2) 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) 1999 1998 1997 Avg Int Yield/ Avg Int Yield/ Avg Int Yield/ Bal Earn/Pd Rate Bal EarnPd Rate Bal Earn/Pd Rate Assets Interest Earning Assets: Securities available for sale $105,663 $ 6,913 6.54 $ 77,517 $ 5,278 6.81 $ 72,741 $ 5,182 7.12 Securities held to maturity 4,311 333 7.72 23,968 1,510 6.30 22,689 1,437 6.33 Federal funds sold 5,705 294 5.15 6,384 326 5.11 598 41 6.86 Loans (net) 115,825 10,237 8.83 108,057 10,241 9.47 100,208 9,660 9.64 Total interest earning assets 231,504 $17,777 7.68 215,926 $17,355 8.04 196,236 $16,320 8.32 Other nonearning assets 20,069 19,699 18,878 $251,573 $235,625 $215,114 Liabilities Interest Bearing Liabilities: Savings deposits $ 67,766 $ 1,082 1.60 $ 69,656 $ 1,131 1.62 $ 65,432 $ 1,119 1.71 Time deposits 77,139 3,784 4.91 77,545 4,223 5.44 73,419 4,298 5.85 Money market accounts 21,262 728 3.42 11,765 560 4.76 12,271 482 3.93 Borrowings 20,969 1,502 7.16 18,077 1,260 6.97 14,007 835 5.96 Total interest bearing liabilities 187,136 $ 7,096 3.79 177,043 $ 7,174 4.05 165,129 $ 6,734 4.08 Other noninterest bearing liabilities & shareholders' equity 64,437 58,582 49,985 $251,573 $235,625 $215,114 Net interest income $10,681 $10,181 $ 9,586 Net interest rate spread 3.89 3.99 4.24 Net interest margin 4.61 4.72 4.88 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, 1999, 1998 and 1997 (In Thousands) Year Ended December 31, 1999 vs. 1998 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets Securities available for sale $1,918 $(1,787) $1,465 $1,596 Securities held to maturity (1,238) 1,044 (997) (1,191) Federal funds sold (34) 35 (33) (32) Loans, net 728 (674) (263) (209) Total interest earning assets 1,374 (1,382) 172 164 Interest Bearing Liabilities Savings deposits 33 32 (114) (49) Time deposits (27) 23 (435) (439) Money market accounts 452 (326) 42 168 Borrowed funds 202 (208) 248 242 Total interest bearing liabilities 660 (479) (259) (78) Net change in net interest income $ 714 $ (903) $ 431 $ 242 Year Ended December 31, 1998 vs. 1997 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets Securities available for sale $ 337 $ (488) $ 83 $ (68) Securities held to maturity 80 (37) 74 117 Federal funds sold 397 (296) 184 285 Loans, net 757 (751) 575 581 Total interest earning assets 1,571 (1,572) 916 915 Interest Bearing Liabilities Savings deposits 72 (71) 11 12 Time deposit 238 (228) (86) (76) Money market accounts (20) 24 74 78 Borrowed funds 242 (284) 468 426 Total interest bearing liabilities 532 (559) 467 440 Net change in net interest income $1,039 $(1,013) $ 449 $ 475 *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 1999 1998 1997 U.S. Treasury Securities & Other Government Agencies $ 0 $ 0 $25,814 Obligations of States & Political Subdivisions 4,237 4,376 6,985 TOTAL $4,237 $4,376 $32,799 The table below shows the relative maturities of held to maturity securities as of December 31, 1999. Held to Maturity Securities Maturity Distribution as of December 31, 1999 Security Category Due 1 Yr Due 1- Due 5- Due After or less 5 Yrs 10 yrs 10 Yrs State and Municipal Bonds $ 422 $1,909 $ 591 $1,315 Average Weighted Yield 8.79% 7.83% 8.08% 6.83% TOTAL $ 422 $1,909 $ 591 $1,315 Percent of Total Portfolio 10.0% 45.1% 13.9% 31.0% 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 1999 1998 1997 Mortgage Backed Securities $34,000 $ 34,336 $ 0 US Treasury Notes and Other Government Agencies 54,403 59,635 60,105 Obligations of State and Political Subdivisions 8,067 8,769 0 Other Securities 3,245 631 3,160 TOTAL $99,715 $103,371 $63,265 The table below shows the relative maturities and carrying value of available for sale debt securities as of December 31, 1999 (excludes other securities). Securities Available for Sale Maturity Distribution as of December 31, 1999 Security Category Due 1 Yr Due 1- Due 5- Due After or less 5 Yrs 10 Yrs 10 yrs Mortgage Backed Securities $ 0 $ 0 $ 751 $22,012 US Treasury Notes and Other Government Agencies 3,005 24,286 32,005 17,186 TOTAL $3,005 $24,786 $32,756 $39,198 Average Weighted Yield 6.46% 6.90% 5.91% 6.49% Percent of Total Portfolio: 3.0% 24.5% 33.0% 39.5% The Company's net unrealized loss on available for sale securities (net of tax) of $2,128,324 at December 31, 1999 is largely attributable to the current interest rate environment. The unrealized loss has no effect on regulatory capital or current earnings of the Company. The Company would sell these securities only if it was consistent with the Bank's asset/liability management strategies. 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. 1999 1998 1997 1996 1995 (In Thousands) Real Estate Loans A. Construction & Land Development $ 7,617 $ 6,431 $ 5,925 $ 4,073 $ 2,023 B. Secured by 1-4 Family Residential Properties 47,988 36,944 33,528 30,457 27,402 C. Secured by Multi Family (5 or more) Residential Properties 0 0 0 0 2 D. Secured by Non-Farm, Non-Residential Properties 32,443 30,550 28,386 30,134 28,273 Commercial & Industrial Loans 16,222 15,979 18,566 16,582 13,778 Loans to Individuals for Household, Family & Other Consumer Expenditures 14,508 15,327 15,806 15,133 14,335 All Other Loans 8,845 5,168 4,852 4,664 7,430 Total Gross Loans $127,623 $110,399 $107,063 $101,043 $93,243 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: 1999 1998 1997 1996 1995 Real Estate 69.0% 67.0% 63.4% 64.0% 61.9% Commercial & Industrial - Including single payment loans to individuals 12.7% 14.5% 17.3% 16.4% 14.8% Consumer Loans 11.4% 13.9% 14.8% 15.0% 15.4% All Other Loans 6.9% 4.6% 4.5% 4.6% 7.9% Total Loans 100.0% 100.0% 100.0% 100.0% 100.0% Maturities and Sensitivities of Loans To Changes in Interest Rates As of December 31, 1999 Due 1 Year or Less Due 1-5 Years Due 5 Years + Real Estate $31,721 $27,671 $28,656 Commercial & Industrial 10,339 4,170 1,713 Consumer 8,101 4,169 2,238 Municipal 6,122 1,942 781 Total $56,283 $37,952 $33,388 Note:Real estate loans in the 1-5 category have $2,659,697 at a fixed interest rate and $25,011,301 at a variable interest rate. Commercial loans in the 1-5 year category have $3,033,700 at a fixed interest rate and $1,136,914 at a variable interest rate. Real estate loans in the 5+ category have $28,442,714 at a fixed interest rate and $213,286 at a variable interest rate. Commercial loans in the 5+ category have $1,237,628 at a fixed interest rate and $475,372 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, 1999 1998 1997 1996 1995 Amt % Amt % Amt % Amt % Amt % Real Estate $4,367 3.4 $3,079 2.8 $3,003 2.8 $2,649 2.6 $ 867 0.9 Installment $ 65 0.1 $ 153 0.1 $ 128 0.1 $ 197 0.2 $ 95 0.1 All Others $ 192 0.2 $ 134 0.1 $ 151 0.1 $ 220 0.2 $ 35 0.0 TOTAL $4,624 3.7 $3,366 3.0 $3,282 3.0 $3,066 3.0 $ 997 1.0 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 $437,000, $534,000 and $503,000 as of December 31, 1999, 1998 and 1997, respectively, of loans on a non-accrual status. LOAN CONCENTRATIONS As of December 31, 1999 and 1998, 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 exceeded regulatory limits at December 31, 1999. 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, 1999 1998 1997 1996 1995 Balance at beginning of period: $ 2,435 $ 2,213 $ 2,084 $ 1,878 $ 1,929 Charge-offs: Commercial & Industrial Loans 3 2 5 15 44 Real Estate Loans 5 0 123 0 48 Loans to Individuals 140 111 97 73 104 148 113 225 88 196 Recoveries: Commercial & Industrial Loans 12 11 118 138 43 Real Estate Loans 0 0 67 12 1 Loans to Individuals 130 39 49 24 71 142 50 234 174 115 Net Charge-offs (recoveries) 6 63 (9) (86) 81 Provision for loan losses 200 285 120 120 30 Balance at end of period $ 2,629 $ 2,435 $ 2,213 $ 2,084 $ 1,878 Average Loans Outstanding $118,311 $110,321 $102,321 $97,143 $88,725 Ratio of Net Charge-offs (Recoveries) to average loans outstanding .004% .057% (.009%) (.09%) .09% ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES December 31, 1999 1998 1997 1996 1995 Amt % of Amt % Amt % Amt % Amt % Loan Loan Loan Loan Loan Categories Categories Categories Categories Categories To Total To Total To Total To Total To Total Loans Loans Loans Loans Loans Balance At End of Period: Applicable To: Real Estate $ 500 69.0% $ 374 67.0% $ 356 63.4% $ 318 64.0% $ 647 61.9% Commercial & Indus- trial 1,789 12.7% 1,780 14.5% 1,558 17.3% 1,405 16.4% 1,024 14.8% Consumer 145 11.4% 153 13.9% 158 14.8% 151 15.0% 207 15.4% Municipal 88 6.5% 58 4.2% 49 4.1% 60 4.5% 0 7.9% Identified 57 .4% 62 .4% 67 .4% 100 .1% 0 .0% Unallocated 50 .0% 8 .0% 25 .0% 50 .0% 0 .0% TOTAL $2,629 100.0% $2,435 100.0% $2,213 100.0% $2,084 100.0% $1,878 100.0% 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, 1999, the Company had impaired loans totaling $14,978, which consisted of real estate loans. The fair value of the loans' collateral was used to evaluate the adequacy of the Allowance for Loans Losses allocated to these loans. A loan is considered impaired by management when it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan, including principal and interest. Loans on a non-accrual status that are deemed collectable are not classified as impaired. Based upon management's periodic review of loans on non- accrual status, impairment is based on a loan by loan analysis and not set by a defined period of delinquency before a loan is considered impaired. Risk Elements 1999 1998 1997 1996 1995 Loans accounted for on a non accrual basis $437 $534 $503 $491 $614 Accruing loans contractually past due 90 days or more $313 $ 47 $209 $196 $388 In accordance with Industry Guide 3 Item III. C (1), the gross interest income that would have been recorded in 1999 if nonaccrual and restructured loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination approximates $31,000. There was approximately $31,000 included in the gross interest income on non-accrual and restructured loans for 1999. D. DEPOSITS The following schedule summarizes the time remaining to maturity of Certificates of Deposit $100,000 or greater at December 31, 1999. Amount (In Thousands) 3 Months or Less $ 5,089 Over 3 Through 6 $ 2,076 Over 6 Through 12 Months $ 2,080 Over One Year $ 1,369 Total $10,614 E. SHORT-TERM BORROWINGS December 31 1999 1998 1997 Weighted Weighted Weighted Average Average Average Interest Amount Interest Amount Interest Amount Rate Rate Rate Fixed advances 6.54 $ 451,250 6.45 $ 451,250 6.52 $ 273,250 Variable advances 5.49 $18,000,000 5.29 $20,000,000 5.35 $9,000,000 Securities sold under agreement 3.55 $13,140,423 3.70 $ 8,965,977 4.00 $5,690,975 1999 1998 Fixed Variable Securities Fixed Variable Securities Maximum amount $451,250 $22,863,496 $13,822,285 $451,250 $20,142,352 $9,512,901 outstanding of any month end during the year Average amount $451,250 $20,402,145 $ 9,056,088 $407,584 $18,077,448 $6,485,367 outstanding during the year Weighted average 6.54% 5.36% 3.55% 6.45% 5.30% 4.05% interest rate for the year 1997 Fixed Variable Securities Maximum amount outstanding $273,250 $22,903,225 $7,890,521 of any month end during the year Average amount outstanding $206,143 $12,569,863 $3,950,415 during the year Weighted average interest 6.52% 5.86% 4.17% rate for the year Advances at December 31, 1999 mature as follows: 2005 2006 2007 2008 2009 2010 2012 2013 $55,000 $9,000,000 $84,250 $7,089,000 $2,000,000 $55,000 $79,000 $89,000 F. CAPITAL RATIOS The following table presents, for the last three years, the Company's average capital expressed as a percentage of average deposits, loans, total assets, and earning assets. *1999 *1998 *1997 Deposits 15.6% 15.1% 14.9% Loans 25.0% 25.4% 24.6% Total Assets 11.7% 11.6% 12.0% Earning Assets 12.7% 12.8% 13.0% *Excluding net unrealized gain (loss) net of deferred taxes on available for sale securities of ($2,128,324), $1,162,032 and $437,749 at December 31, 1999, 1998 and 1997, respectively. G. RETURN ON SHAREHOLDERS' EQUITY The following table presents, for each of the last three years, the Company's return on shareholders' equity, return on assets, and return on average earning assets. 1999 1998 1997 Return on average shareholders' equity 11.7% 11.6% 10.9% Return on average assets 1.3% 1.3% 1.3% Return on average earning assets 1.4% 1.4% 1.4% H. LIQUIDITY MANAGEMENT Liquidity management is the process by which the Bank structures its cash flow to meet the requirements of its customers as well as day to day operating expenses. Liquidity comes from both assets and liabilities. The asset side of the balance sheet provides liquidity through the regular maturities on our securities and loan portfolios, as well as interest received on these assets. In addition, U.S. government securities may be readily converted to cash by sale on the open market. On the liability side, liquidity comes from deposit growth and the Bank's access to other sources of borrowed funds. In this respect, liquidity is enhanced by a significant amount of core demand and savings deposits from a broad customer base. As a part of the Bank's asset and liability management and liquidity needs, management actively evaluates its funding resources and strategies to manage and reduce its vulnerability to changes in interest rates. A principal objective of the Company is to manage and reduce its vulnerability to changes in interest rates by managing the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. As of December 31, 1999, the Bank's ratio of rate sensitive assets to rate sensitive liabilities at the one year horizon was 83%, its one year GAP (measurement of interest sensitivity of interest earning assets and interest bearing liabilities at a given point in time) was 93%, and $84,131,000 in assets and $103,366,000 in liabilities will be repriceable in one year. 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, 1999, the Company's interest rate GAP analysis: Interest Rate GAP Analysis As of December 31, 1999 (000's omitted) 0-3 4-12 1-5 Over Months Months Years Years Total Interest earning assets Loans: Real estate Fixed rate $ 750 $ 2,191 $ 10,581 $17,618 $ 31,140 Variable rate 14,128 20,004 22,794 0 56,926 Commercial 8,168 3,044 3,297 1,713 16,222 Municipal 0 6,122 1,946 777 8,845 Consumer 11,177 782 2,541 14 14,514 Securities available for sale 5,854 7,410 68,529 12,242 94,035 Held to maturity securities 0 422 1,908 9,974 12,304 Loans held for sale 594 0 0 0 594 Other earning assets 3,485 0 113 5,620 9,218 TOTAL $44,156 $39,975 $111,709 $47,958 $243,798 Interest bearing liabilities Deposits: Savings $ 1,572 $ 4,716 $ 25,134 $25,429 $ 56,851 NOW 0 0 38,170 0 38,170 Money market 2,307 6,921 13,237 0 22,465 Time 25,481 39,793 10,137 0 75,411 Borrowings 6,644 15,932 9,015 0 31,591 TOTAL $36,004 $67,362 $95,693 $25,429 $224,488 Rate sensitivity GAP $ 8,152 $(27,387) $16,016 $22,529 Rate sensitivity GAP as a percentage of total assets 3.27% (10.97%) 6.42% 9.03% Cumulative GAP $ 8,152 $(19,235) $(3,219) $19,310 Cumulative GAP as a percentage of total assets 3.27% 7.71% (1.29%) 7.74% 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, 1999 1998 Net cash provided from operations $ 5,420,434 $ 991,012 Net cash used by investing activities $(19,291,184) $(17,797,165) Net cash provided from financing activities $ 5,832,171 $ 24,018,320 Net (decrease) increase in cash and cash equivalents $ (8,038,579) $ 7,212,167 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 1999, the Bank sold a parcel of land located on Route 3 in Ellsworth. 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 has been open for business since April 1988. (f) The Bank purchased in 1999 land and buildings located at 92 Main Street in Ellsworth, Maine, adjacent to the Bank's principal office. All of the Bank's offices include drive-up facilities. In addition to the above properties, which are owned by the Bank, the Bank leases the following properties: (a) The Bank leases its branch office at the Ellsworth Shopping Center, High Street, Ellsworth, Maine, from Ellsworth Shopping Center, Inc., a Maine Corporation with principal offices in Ellsworth, Maine. The current lease will expire in March of 2000. (b) The Bank leases its Machias office which is located on Dublin Street in Machias, Maine. The premises are owned by Hannaford Bros., Inc. of South Portland, Maine, and are leased to Gay's Super Markets, Inc., under a lease dated July 26, 1975. The Bank subleased the premises from Gay's Super Markets, Inc., under a sublease which expires in April of 2001. The Bank has the right to extend the sublease for three additional five year terms. (c) The Bank leases its Somesville branch office which is located on Route 102 in Somesville, Maine. The land and premises are owned by A. C. Fernald Sons, Inc., Mount Desert, Maine. The current lease expires on March 24, 2005, with an option to renew for an additional 20 years. (d) The Bank leases its Castine branch office located on Main Street from Michael Tonry, Castine, Maine. The current lease expires on February 1, 2003 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 1999 and 1998 are listed in the following table. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1999 108.33 to 108.33 106.63 to 106.67 106.63 to 108.00 108.00 to 110.00 1998 100.00 to 104.16 104.16 to 113.75 105.00 to 108.33 108.33 to 108.33 B. HOLDER As of March 1, 2000 there were approximately 725 stockholders of record. C. DIVIDENDS 1. History The following table shows the cash dividends per share declared by Union Bankshares Company on its common stock, $12.50 par value: 1999 1998 1st Quarter $ .41 $ .41 2nd Quarter $ .41 $ .41 3rd Quarter $ .50 $ .41 4th Quarter $ .50 $ .41 Cash dividends declared per common share $1.82 $1.64 Item 6: SELECTED FINANCIAL DATA (in thousands, except for per share amounts) Years Ended December 31, 1999 1998 1997 1996 1995 SUMMARY OF OPERATIONS Operating Income $ 3,426 $ 3,155 $ 2,608 $ 2,207 $ 1,989 Operating Expense 8,663 8,413 8,016 7,723 7,459 Net Interest Income 10,169 9,927 9,452 9,137 8,803 Provision for Loan Losses 200 285 120 120 30 Net Income 3,355 3,090 2,700 2,452 2,418 PER COMMON SHARE DATA Net Income $ 5.80 $ 5.34 $ 4.66 $ 4.22 $ 4.17 Cash Dividends Declared 1.82 1.64 1.52 1.39 1.30 Book Value (2) 51.50 47.69 44.13 41.14 38.30 Market Value 108.00 108.33 91.66 73.33 56.66 FINANCIAL RATIOS Return on Average Equity (2) 11.7% 11.6% 10.9% 10.6% 11.4% Return on Average Assets 1.3% 1.3% 1.3% 1.2% 1.3% Return on Average Earning Assets 1.4% 1.4% 1.4% 1.4% 1.4% Net Interest Margin 4.61% 4.72% 4.88% 5.16% 5.37% Dividend Payout Ratio 33.0% 31.2% 32.8% 32.9% 31.3% Allowance for Loan Losses/Total Loans .02 .02 .02 .02 .02 Non Performing Loans to Total Loans .006 .005 .007 .007 .007 Non Performing Assets to Total Assets .003 .004 .005 .008 .010 Efficiency Ratio 63.7% 64.3% 66.5% 67.2% 67.2% Loan to Deposit Ratio 66.2% 58.7% 60.4% 60.7% 56.7% BALANCE SHEET Deposits $192,848 $188,029 $177,386 $166,445 $164,481 Loans 127,623 110,399 107,062 101,044 93,242 Securities (1) 107,509 111,304 96,065 81,568 76,578 Shareholders' Equity (2) 29,771 27,577 25,565 23,885 22,227 Total Assets 257,850 251,195 222,560 202,066 191,353 (1) Carrying value. Includes available for sale securities with cost of $102,488, $101,610, $59,983, $75,095 and $70,938 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (2) Excluding net unrealized gain (loss) net of deferred taxes on available for sale securities of ($2,128,324), $1,162,032, $437,749, ($171,460) and $567,810 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The above summary should be read in conjunction with the related consolidated financial statements and notes thereto for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, and with Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report is incorporated herein by reference. ITEM 7A: QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. INTEREST RATE RISK Interest rate risk can be defined as the exposure of the Company's net income or financial position to adverse movements in interest rates. Changes in the level of interest rates also can affect: The amount of loans originated/sold by an institution The ability of the borrower to repay his/her loan The average maturity of mortgage loans The value of the Company's interest earning assets The market value of available for sale securities The Company, through management of the relationship of interest rate sensitive assets to interest rate sensitive liabilities, reduces the volatility of its net income. To accomplish this, the Company has undertaken various steps to increase the percentage of fixed rate assets and to increase the average maturity of such assets, in particular through the loan products offered and its investment portfolio. Net interest income sensitivity to movements in interest rates is measured through the use of a simulation model that analyzes resulting net income under various interest rate scenarios established by regulators. Projected net interest income (NII) is modeled based on both an immediate rise or fall in interest rates ("rate shock"). The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities and factors in projections for activity levels by product lines of the Company. Assumptions are made as to the changing relationship between different interest rates as interest rates increase/decrease (basis risk) and the customer's ability to prepay loans and withdraw deposit balances or transfer them to a higher yielding account (embedded option). The sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for NII exposure over a one-year horizon, assuming no balance sheet growth, given both a 200 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, 1999 and 1998. Estimated Rate Change NII Sensitivity 1999 1998 +200 bp + 3.3% +4.4% -200 bp - 6.2% -5.9% The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. Based on the information and assumptions in effect on December 31, 1999, 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. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (A) The financial statements required are contained in the Company's 1999 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 DIRECTORS The following table lists, as of February 1, 2000, the number of shares of Common Stock, including directors' qualifying shares, and the corresponding percentage of total Common Stock beneficially owned by each director and nominee for director, including the chief executive officer of the Company, and by all executive officers and directors as a group. The information set forth below is based upon director questionnaires distributed and completed by each director and nominee, and upon stock records maintained by the Company. Name Common Stock Percent Beneficially Owned of Class Arthur J. Billings 274 * Peter A. Blyberg 336 * Robert S. Boit 25,596 4.43 Blake B. Brown 48 * Richard C. Carver 1,367 * Peter A. Clapp 258 * Sandra H. Collier 201 * Robert B. Fernald 730 * Douglas A. Gott 870 * David E. Honey 727 * James L. Markos, Jr. 266 * Casper G. Sargent, Jr. 2,868 * John V. Sawyer, II 3,191 * Stephen C. Shea 14,267 2.47 Richard W. Teele 527 * Paul L. Tracy 639 * Richard W. Whitney 62 * Total ownership of all listed Directors and other officers 53,891 9.33 *Represents ownership of less than 1%. For purposes of the above table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended, under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or to direct the voting of the security or has the power to dispose of, or to direct the disposition of, the security, or if he or she has the right to acquire beneficial ownership of the security within 60 days. SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 (a) of the Securities Exchange Act of 1934 requires executive officers, directors and persons who beneficially own more than ten (10) percent of the stock of the Company to file initial reports of ownership and reports of changes in ownership. Such persons are also required by the Securities and Exchange Commission regulations to furnish the Company with copies of these reports. Based upon copies of Forms 3, 4 and 5 submitted to and retained by the Company, the Company knows of no director, officer or beneficial owner of more than ten percent (10%) of the total outstanding shares of Common Stock who either failed to file an appropriate ownership report with the Securities and Exchange Commission, or who filed such report other than on a timely basis. ELECTION OF DIRECTORS Management recommends that the number of directors for the coming year be set at 17. The Bylaws of the Company provide for not fewer than 10 nor more than 25 directors, with the directors serving "staggered terms" of three years. The Board of Directors has nominated for re-election to three year terms at the 2000 Annual Meeting Messrs. Billings, Carver, Fernald and Shea. Each of the nominees has consented to be named as a nominee and to serve if elected. In the event any nominee shall be unable to serve, discretionary authority is reserved by management to vote for a substitute to be nominated by the Board. There are no arrangements or understandings between any nominee, director, executive officer or associate of any of the foregoing and any other person pursuant to which the nominee was or is to be elected as a director or an executive officer. There is no family relationship among any director, officer or person nominated to become a director or executive officer. The following table sets forth the names, occupations, ages and terms of service of all directors and nominees. Each director is also presently a director of the Company's banking subsidiary, Union Trust Company (the "Bank"). Year First Elected As Principal Occupation Age as ofDirector of Now and for Past 5 years 4/15/00 the Company Term expires in 2000: Arthur J. Billings President, Barter Lumber Company 44 1990 Richard C. Carver Owner and Manager, Carver Oil Company and Carver Shellfish, Inc. 67 1984 Robert B. Fernald Treasurer, A.C. Fernald Sons, Inc. and Jordan-Fernald 66 1986 Stephen C. Shea Treasurer, E.L. Shea, Inc.; President, Shea Leasing 52 1988 Term expires in 2001: Blake B. Brown President and Owner, Brown's Appliance and TV 54 1999 Douglas A. Gott Owner, Douglas A. Gott & Sons, General Contractors 66 1986 David E. Honey Retired; Former Manager, Swans Island Electric Cooperative 71 1984 James L. Markos, Jr. General Manager,Maine Shellfish Company, Inc. 51 1999 Casper G. Sargent, Jr. Owner, Sargent's Real Estate Corporation 70 1984 John V. Sawyer, II Retired, President, Worcester- Sawyer Agency Insurance & 66 1984 Real Estate, Chairman of the Board of the Company and the Bank Paul L. Tracy President and owner of Winter Harbor Agency; Vice President 37 1995 and co-owner of Schoodic Insurance Services; Vice President and co-owner of MDI Insurance Agency; Co-owner of Grindstone Financial Group LLC Richard W. Whitney Dentist 71 1984 Term expires in 2002: Peter A. Blyberg President and CEO of the Company and the Bank since 56 1993 April 1, 1996; former Executive Vice President of the Company and the Bank; former Vice President for Commercial Banking at Chemical Bank Robert S. Boit Retired President and CEO of the Company and the Bank 69 1984 Peter A. Clapp President, Blue Hill Garage 55 1995 Sandra H. Collier Attorney at Law, Sandra Hylander Collier Law Offices 48 1992 Richard W. Teele Retired; Secretary and former Executive Vice President and 68 1984 Treasurer of the Company and the Bank COMMITTEES The Bylaws of the Company provide that, at the annual meeting of the Directors, the Board shall designate from among its members an Executive Committee. The Executive Committee possesses all of the powers of the Board of Directors with regard to ordinary operations of the business of the Company when the Board is not in session, subject to any specific vote of the Board. The Executive Committee currently is comprised of Messrs. Blyberg, Boit, Fernald, Sargent, Sawyer, Shea and Billings. The Bylaws of the Company provide that the Board of Directors may elect or appoint such other committees as it may deem necessary or convenient to the operations of the Company. The Company does not have a standing audit, nominating or compensation committee. No other committees have been appointed. Nominees for election to the Board of Directors are selected by the full Board. The Board of Directors will consider nominees recommended by stockholders if submitted in writing to Sally J. Hutchins, Clerk, Union Bankshares Company, P.O. Box 479, Ellsworth, Maine 04605 not less than three months in advance of the date of the annual meeting. The Board of Directors of the Company met twelve times in 1999. Each director attended at least seventy-five percent of the total number of meetings of the Board of Directors and of committees, of which he or she was a member, held during that year. EXECUTIVE OFFICERS Each executive officer of the Company is identified in the following table, which also sets forth the respective office, age and period served in that office of each person listed. Executive officers are elected annually by the Board of Directors. Elected Name Principal Occupation Now and for Past 5 Years Age to Office John V. Sawyer, II Chairman of the Board of the Bank and the Company since October 66 1984 1, 1988. Director since 1974. Peter A. Blyberg President and CEO of the Bank and the Company since April 1, 56 1993 1996. Formerly Executive Vice President, COO and Treasurer of the Bank and the Company. Former Vice President for Commercial Banking at Chemical Bank. John P. Lynch Executive Vice President of the Company and Executive Vice President, 53 1996 Senior Banking Officer of the Bank since December 8, 1999. Formerly Senior Vice President of the Company and Senior Vice President, Senior Banking Officer of the Bank since 1996. Formerly Senior Vice President - Loans of the Bank. Sally J. Hutchins Senior Vice President and Clerk of the Company and Senior Vice President, 44 1988 Treasurer, Controller and Clerk of the Bank since December 8, 1999. Formerly Vice President and Clerk of the Company since 1993. Formerly Vice President, Treasurer, Controller and Clerk of the Bank since 1996. Formerly Vice President, Controller and Clerk of the Bank. Peter F. Greene Senior Vice President of the Company and Senior Vice President, Senior Bank 40 1996 Services Officer of the Bank since December 8, 1999. Formerly Vice President of the Company since 1996 and Vice President, Senior Bank Services Officer of the Bank since 1997. Formerly Vice President - Bank Services and Vice President - Operations. Rebecca J. Sargent Senior Vice President, Senior Trust Officer of the Bank and the Company since 35 1996 December 8, 1999. Formerly Vice President, Senior Trust Officer of the Company since 1997 and Vice President, Senior Trust Officer of the Bank since 1996. Formerly Vice President, Trust Officer of the Company and Assistant Vice President, Trust Officer of the Bank. Richard W. Teele Secretary of the Company since 1988. Retired in 1995 from the Bank. Formerly 68 1988 Executive Vice President, Treasurer and Secretary. ITEM 11: EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth all annual compensation received during each of the Company's last three fiscal years by Mr. Blyberg who is the only executive officer for whom such compensation exceeded $100,000 in any reported year. Mr. Blyberg serves in comparable positions with both the Bank and the Company. Executive compensation is paid by the Bank. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION Other Annual Year Salary Bonus Compensation ($) Peter A. Blyberg 1997 $132,750 $ 5,150 $0 President and Chief 1998 $140,000 $ 8,375 $0 Executive Officer 1999 $145,725 $11,200 $0 LONG TERM COMPENSATION AWARDS PAYOUTS Restricted LTIP Stock Optional SARs Payouts Year Awards ($) (#) ($) Peter A. Blyberg 1997 $0 0 $0 1998 $0 0 $0 1999 $0 0 $0 ALL OTHER COMPENSATION Other Year Compensation ($) Peter A. Blyberg 1997 $ 5,532 1998 $ 7,653 1999 $ 4,754 Each director of the Bank who is not also an officer is paid a directors' fee in the amount of $250 for each meeting attended, including meetings of the Board committees of which the director is a member. Directors' fees are paid by the Bank and are not separately paid for attendance at meetings of the Board of Directors of the Company. John V. Sawyer, II, who serves as Chairman of the Board, receives a salary of $26,000 per annum from the Bank plus $50 per meeting for attendance at Board and Committee meetings. No director has received any other compensation for Board or committee participation or other special assignments. The Bank maintains a non-contributory defined benefit pension plan funded by a trust (the "Plan"). All full time employees who are at least 21 years of age and have completed one year of service participate in the Plan. Compensation attributable to the Plan has not been included in the Summary Compensation Table set forth above. Annual contributions to the Plan are computed on an actuarial basis to provide a normal retirement benefit of 60% of average annual salary minus 50% of the participant's social security benefit, with a downward adjustment if the participant, at the time of retirement, has completed less than 25 years of service. "Average Annual Salary" is determined by calculating the average basic compensation of the participant exclusive of bonuses for the three highest consecutive years prior to attaining the age of 65; provided, however, that for the purpose of such calculation base compensation in any year may not exceed $160,000. The Plan provides "Normal Retirement Benefits" to participants who terminate their employment after the latter of attaining the age of 65 and after the completion of his/her fifth anniversary. The accrued benefit of a participant who retires prior to normal retirement date is his or her normal benefit adjusted by a fraction which represents his or her Bank employment time divided by the Bank employment time he or she would have had by normal retirement date. Payment options include single life annuities and joint annuities. The Plan provides death benefits to beneficiaries of employees who meet conditions of early retirement (age 55 and 10 years of service) prior to termination of employment. The amount of the benefit is equal to the accrued benefit at date of death paid monthly over a 10 year period. In addition, the spouse of a married employee may elect to receive his or her benefit in the form of a single life annuity. If the employee does not meet conditions for early retirement, a survivor annuity may be payable, if the employee is married. The Plan does not provide a disability benefit. Mr. Blyberg is a participant in the Plan. For purposes of the Plan, Mr. Blyberg has five credited years of service. The table below illustrates retirement compensation for representative salary brackets and years of service with the Bank. The maximum social security offset for 1999 was $16,476. PENSION PLAN TABLE Remuneration Years of Service 15 20 25 30 35 $120,000 $38,257 $51,010 $63,762 $63,762 $63,762 $130,000 $41,857 $55,810 $69,762 $69,762 $69,762 $140,000 $45,457 $60,610 $75,762 $75,762 $75,762 $150,000 $49,057 $65,410 $81,762 $81,762 $81,762 $160,000 $52,657 $70,210 $87,762 $87,762 $87,762 The foregoing table illustrates the value of retirement benefits at the compensation levels indicated. Benefits are expressed in today's dollars. In addition to the foregoing defined benefit pension plan, the Bank has entered into deferred compensation agreements with certain of its executive employees, including Mr. Blyberg, pursuant to which, subject to continued employment with the Bank and certain other conditions, such executive employees are entitled to receive certain retirement and disability benefits. Pursuant to his agreement with the Bank, Mr. Blyberg is entitled to receive monthly payments in the amount $4,152.17, for a period of ten years following the first to occur of death or retirement after reaching the age of 65 years. Under the terms of the agreement, Mr. Blyberg may elect to retire early after reaching the age of 60 years, in which event he would be entitled to receive a proportionately reduced monthly benefit. In addition to the foregoing benefits, under the terms of the agreement, in the event that Mr. Blyberg is permanently disabled prior to attaining the age of 64 years, he would be entitled to receive a disability benefit in the amount of $2,000 per month from the date of his disability until he reached the age of 65. Upon reaching age 65, he would be entitled to receive the deferred compensation benefit described above. The obligations of the Bank under these deferred compensation agreements is unfunded, but the Bank has purchased insurance contracts on the lives of all covered employees, including Mr. Blyberg, in amounts which are estimated to be sufficient to fund all amounts payable under the agreements. The Bank also has entered into salary continuation agreements with certain of its executive officers, including Mr. Blyberg, pursuant to which should he terminate his employment, either voluntarily or involuntarily, within three years of a change of control or other "business combination" as defined in the salary continuation agreements, he would be entitled to receive an amount equal to the lesser of (i) three times the total compensation paid to him in the last full fiscal year prior to termination of his employment, less one dollar, or (ii) the maximum amount permitted without such payment being deemed an "excessive parachute payment" within the meaning of Section 208-g of the Internal Revenue Code. Neither the Bank nor the Company has a formal compensation committee. Mr. Blyberg, in his capacity as President and Chief Executive Officer, has made compensation recommendations to the Executive Committee of the Board of Directors with respect to all employees, other than himself. The recommendations were then considered by the Board of Directors, which also formulated a compensation recommendation with respect to Mr. Blyberg. All compensation recommendations were then considered and voted upon by the full Board of Directors. Mr. Blyberg is a member of the Board of Directors and a member of the Executive Committee. He has abstained from participating in discussions or recommendations regarding his own compensation. REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION The Board of Directors of the Bank has no formal compensation policy applicable to compensation decisions with respect to its executive officers. While there are no objective criteria which specifically relate corporate performance to compensation determinations, in formulating its recommendation with respect to compensation of Mr. Blyberg during the last fiscal year, the Board of Directors considered, among other factors, the seniority and experience of Mr. Blyberg and the relationship of his compensation to that of other executive officers employed by the Bank and to persons holding comparable positions at other similarly situated banks in Maine. In reaching its determination as to the compensation of Mr. Blyberg, the Board of Directors did not use any objective measure of the Bank's performance but considered, in general, the performance of the Bank in relationship to that of other similarly situated banks in Maine. The forgoing report regarding compensation has been submitted by the Board of Directors, including Douglas A. Gott, David E. Honey, Casper G. Sargent, Jr., John V. Sawyer, II, Richard W. Whitney, Peter A. Blyberg, Robert S. Boit, Peter A. Clapp, Sandra H. Collier, Richard W. Teele, Arthur J. Billings, Richard C. Carver, Robert B. Fernald, Stephen C. Shea, Paul L. Tracy, Blake B. Brown and James L. Markos, Jr. PERFORMANCE GRAPH The following graph provides a comparison of total shareholder return on the Common Stock of the Company with that of other comparable issuers. The following graph illustrates the estimated yearly percentage change in the Company's cumulative total shareholder return on its Common Stock for each of the last five years. For purposes of comparison, the graph also illustrates comparable shareholder return of NASDAQ banks as a group as measured by the NASDAQ Banks Stock Index. The graph assumes a $100 investment on December 31, 1995 in the common stock of the Company and NASDAQ banks as a group and measures the amount by which the market value of each, assuming reinvestment of dividends, has increased as of December 31 of each calendar year since the base measurement point of December 31, 1995. Insert 5 year line graph Peer Comparison Common Stock of the Company is not actively traded on any market, and therefore, no market index is available for the purpose of determining the market price of such common stock as of any particular date. The foregoing graph is based upon a good faith determination of approximate market value for each year indicated based on anecdotal information available to the Company as to the value at which its common stock has traded in isolated transactions from time to time. Therefore, although the graph represents a good faith estimate of shareholder return as reflected by market value, the valuations utilized are, of necessity, estimates and may not accurately reflect the actual value at which common stock has traded in particular transactions as of any of the dates indicated. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Item 10. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Bank has had and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates. These transactions comprise of substantially the same terms, including interest rates and collateral on the loans as those prevailing at the same time for comparable transactions with others. Such loans have not and will not involve more than normal risk of collectability or present other unfavorable features. 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, 1999 (a copy of which is being filed as Exhibit 13 hereto), and are incorporated herein by reference. Consolidated Balance Sheets December 31, 1999 and 1998 22 Consolidated Statements of Income For the years ended December 31, 1999, 1998 and 1997 23 Consolidated Statements of Changes in Shareholders' Equity For the years ended December 31, 1999, 1998 and 1997 24 Consolidated Statements of Cash Flow For the years ended December 31, 1999, 1998 and 1997 25-26 Notes to Consolidated Financial Statements 27 Independent Auditors Opinion 45 (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, 1999, 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 27 of the 1999 Annual Report to Shareholders' attached hereto as Exhibit 13. 13 The registrant's Annual Report to Shareholders' for its fiscal year ended December 31, 1999. This exhibit, except for those portions thereof expressly incorporated by reference into the Form 10 K annual report, is furnished for the information of the Commission only and is not to be "filed" as part of the report. *21 Subsidiary information is incorporated herein by reference to "Part I, Item 1 - Business". 27 Financial Data Schedule 99.1 Report of Berry, Dunn, McNeil & Parker. *Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, initially filed on June 15, 1984, Registration No. 2-90679. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY By: ___________________________ By:____________________________ Peter A. Blyberg, President Sally J. Hutchins and Chief Executive Officer Senior Vice President, Treasurer and Controller Date: Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Arthur J. Billings, Director Peter A. Blyberg, Director Robert S. Boit, Director Blake B. Brown, Director Richard C. Carver, Director Peter A. Clapp, Director Sandra H. Collier, Director Robert B. Fernald, Director Douglas A. Gott, Director David E. Honey, Director James L. Markos, Jr., Director Casper G. Sargent, Director John V. Sawyer, II, Director Stephen C. Shea, Director Richard W. Teele, Director Paul L. Tracy, Director Richard W. Whitney, Director EX-13 2 UNION BANKSHARES COMPANY 1999 ANNUAL REPORT Letter to Shareholders January 26, 2000 Your Bank closed 1999 with net income up 8.6 percent at $3,354,722. Competitive pressures held net interest income growth to 2.4 percent while non interest income rose 8.6%. Non interest income growth was driven by increased revenue in the Trust Department, VISA income and a one time gain on real estate sold. Our expenses remain under control showing an increase of 3.0 percent which is less than the 4.9 percent increase in the prior year. Our local economy remains healthy although there are pockets of concern. Home construction in our market area is strong. We saw active demand for mortgage refinances in the first third of the year but this fell off rapidly as interest rates rose. At current interest rate levels there are very few people refinancing. Our loan portfolio grew by $17.2 million and deposits rose $4.8 million. We will continue to seek opportunities to expand our loan portfolio at acceptable risk levels. We have focused considerable attention in recent years on developing strong relationships with our customers. Not only do we want to be able to help them grow and prosper but we would also like to expand the range of services which we provide to them. The financial needs of our customers are many and they are becoming increasingly complex. Our business development efforts in recent years have focused on expanding and strengthening existing relationships as well as establishing new accounts. By listening and offering solutions to problems, by understanding their problems and their dreams, and by helping them achieve their goals we feel we will not only serve our customers, but our Bank as well. We have put considerable efforts into our Trust and Investments area in the past few years and 1999 saw an increase in assets under management of $33.9 million and a 24.9 percent increase in income. We were fortunate to be able to attract five very highly qualified individuals to add to our experienced trust team, Brenda Strout, Geddes Simpson, Sylvia Joy, Rhonda Reardon and Ed Bonenfant. Our goal as we grow the business is to maintain the service levels which are so important to customer relationships. During this coming year, we will be looking to expand the services offered by our Trust Department in keeping with changing customer needs. We weathered the Y2K matter without any problems and this is a reflection of the excellence of our staff of dedicated employees who not only made sure that our internal systems functioned normally, but worked with our customers and communities to reassure them of our readiness. We felt confident enough about our readiness to introduce our Internet banking service, NetBankingr, in September. This allows our customers to access their account information through the Internet, transfer funds, pay bills and check balances. It has proved very popular and if you would like a demonstration, you can access it through www.uniontrust.com. In addition to the Trust staff mentioned above, we were pleased to welcome the following individuals who joined our staff in 1999: Michelle Banister...AVP, Training & Development Manager Richard Cole.....................Call Center Supervisor William Sneed, Jr.......Information Services Specialist Shari Dyer.......................................Teller Tracy Gellerson..................................Teller Tara Hamilton....................................Teller Jennifer Madore..................Accounts Payable Clerk Dawn Raybourn....................................Teller Mary Thibodeau..........Administrative Assistant, Loans Rhonda Ulichney..................................Teller Cheryl Woodward..................................Teller Mary Youngblood..................Call Center Specialist Harold Batson.................Physical Plant Technician We thank you, our shareholders, directors, officers and employees for your interest and support. Sincerely, Sincerely, John V. Sawyer, II Peter A. Blyberg Chairman of the Board President and Chief Executive Officer A Sea of Challenges Charting the course for the future of Union Trust requires that the many challenges facing us be carefully analyzed, discussed, and appropriate responses developed, not only to individual issues, but to the whole spectrum. In the constantly changing, competitive landscape which is banking in the 21st century it is not enough to succeed in one or two areas. Success requires a constant balancing and rebalancing of responses to the myriad of challenges that we face. Challenges that change from year to year, challenges that only seem to multiply, not shrink. First and foremost are the changing needs of our customers as their personal situations evolve. Developing new products to fill out the array of increasingly complex financial services which they need will be difficult. We must incorporate the appropriate level of technology while continuing to provide the highly personalized service which is one of the distinguishing characteristics of community banking. We have to grow the bank while facing an array of competitors who only get more numerous and more responsive. Our greatest assets, our employees, have been and will be given the opportunity to grow and develop both professionally and personally. The challenges may be legion but we are excited about meeting them. Our goal in all we do is to provide consistently good returns for our shareholders over the long haul. We appreciate their support and their belief and trust in us. A World of Opportunities Looking at our business at the dawn of a new century, no one can say with any certainty what it will look like fifty or a hundred years from now. All we can say is that there are enormous opportunities. The recent passage of the Financial Modernization Bill by Congress was a fitting end to the century and will transform the competitive landscape by opening up numerous areas of business for us to explore. Technology, while it changes at an ever increasing rate, is making whole areas of electronic services more accessible to community banks, not only from a cost point of view, but also from the perspective of the widespread acceptance of technologies which we, as a small institution, can exploit in delivering services to our customers. Our customers need more not less services, our employees are more highly trained and the demand for personal attention in an increasingly impersonal world will only expand. The list of opportunities which this new world presents is seemingly endless and our job will be to navigate a well-plotted course always mindful of the need to adjust to changing conditions. Our aim is to provide financial solutions for the lifetime of our customers and we are optimistic that we will succeed. Five-Year Summary (000's Omitted) 1999 1998 1997 1996 1995 Deposits $192,848 $188,029 $177,386 $166,445 $164,481 Loans 127,623 110,399 107,062 101,044 93,242 Securities *107,509 *111,304 *96,065 *81,568 *76,578 Shareholders' equity **29,771 **27,577 **25,565 **23,885 **22,227 Total assets 257,850 251,195 222,560 202,066 191,353 Net earnings 3,355 3,090 2,700 2,452 2,418 Earnings per share (A) 5.80 5.34 4.66 4.22 4.17 Equity Ratios Equity expressed as a percentage of average: **1999 **1998 **1997 **1996 **1995 Deposits 15.6% 15.1% 14.9% 14.4% 13.7% Loans 25.0% 25.4% 24.6% 24.6% 25.1% Total assets 11.7% 11.6% 12.0% 12.1% 11.9% Earning assets 12.7% 12.8% 13.0% 13.3% 12.9% Other Financial Highlights 1999 1998 1997 1996 1995 Return on average shareholders' equity** 11.7% 11.6% 10.9% 10.6% 11.4% Return on average assets 1.3% 1.3% 1.3% 1.2% 1.3% Return on average earning assets 1.4% 1.4% 1.4% 1.4% 1.4% *Carrying value. Includes available for sale securities with cost of $102,488, $101,610, $59,983, $75,095 and $70,938 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. **Excluding net unrealized gain (loss) net of deferred taxes on available for sale securities of ($2,128,324), $1,162,032, $437,749, ($171,460) and $567,810 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (A) Restated for the effect of a 20% stock dividend effected in the form of a stock split in 1999. Insert the following 5 year bar charts: Earnings Per Share Book Value Per Share Dividends Per Share Total Assets Net Income Shareholders' Equity MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 1999 Union Bankshares Company is a one-bank holding company, organized under the laws of the State of Maine. The Company's only subsidiary is Union Trust Company, wholly owned and established in 1887. 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. Union Trust is a full-service, independent, community bank that is locally owned and operated. Through its eleven offices, Union Trust serves the financial needs of individuals, businesses, municipalities and nonprofit organizations in eastern Maine. Union Trust offers a wide variety of financial services with competitive interest rates, a helpful, friendly staff, and quick, local decision-making to meet the needs of the communities it serves. As a complement to the services offered by the Bank, the Trust and Investment Services department provides a broad range of investment options to help meet the needs of our customers. Trust and Investment Services has served generations of Maine families with estate planning, investment management and custody, and retirement planning and employee benefit services. As a market driven sales and service organization, Union Trust is focused on the needs of its customers. Our employees are listening to customers' needs, suggesting solutions, answering their questions and making it easy for them to purchase and use our services. It is through our team of dedicated and knowledgeable employees that outstanding customer service is delivered. That is why Union Trust continues to hire quality individuals, invest in their continuing education and training, and reward them for the significant contribution they make to the overall success of the organization. There is no better example of this than in our Trust and Investment Services department. Because of their commitment to personalized service and professional knowledge, they continue to experience over 20% growth in revenue and assets under management from 1998 to 1999. To support this growth, five additional staff members were added during 1999. Two others received advanced degrees/professional designations in their areas of expertise. Another example of excellent customer service is that delivered by our Relationship Managers to loan customers. Again and again, customers are saying how extremely satisfied they are with the service they receive from Union Trust and would recommend Union Trust to a friend or family member. A "Mortgage Think Tank" was formed during 1999 to focus on this market segment. Their task is to discover new ways to better serve these customers. Many of their ideas were implemented in 1999 with positive results. Technology continues to allow us to conduct business in new ways, never before possible. Access channels have evolved from the branches to ATM's, Customer Service Call Center, BankLiner telephone banking, BankLinePCr computer banking and new for 1999, NetBankingr on the Internet. To provide customer support for NetBankingr and future technological initiatives, the Call Center staff was increased by 100% this year. The latest in telephone technology was installed, with all calls to the Bank now being answered through the Call Center to facilitate customer service. More than anything else, the Y2K challenge, which is now successfully behind us, proved the strength of Union Trust and the teamwork that exists among its employees. It also served as a testing ground of technology as a whole, helping to instill public confidence and enhancing the public's acceptance of this new delivery channel. This gives Union Trust the "green light" for continued investment in the latest financial services technology. As customer service expectations increase, Union Trust will continue to anticipate customers' needs and pursue the appropriate strategic initiatives. Union Trust's service to its customers goes beyond the walls of the Bank, out into the community. During 1999, our employees and directors contributed over 9,000 hours of volunteer time to over 115 organizations. REVIEW OF FINANCIAL STATEMENTS The following discussion and analysis focus on the factors affecting Union Bankshares Company's (the "Company") financial condition at December 31, 1999 and 1998, and the financial results of operations during 1999, 1998 and 1997. The consolidated financial statements and related notes beginning on page 22 of this report should be read in conjunction with this review. RESULTS OF OPERATIONS The operating results of the Company depend primarily on its net interest income, which is the difference between interest income on earning assets (primarily loans and investments) and interest expense (primarily deposits and borrowings). The Company's results are also affected by the provision for loan losses, which reflects management's assessment of the adequacy of the allowance for loan losses; noninterest income, including gains and losses on the sales of loans and securities; noninterest expenses; and income tax expense. Each of these major components of the Company's operating results is highlighted below. NET INCOME The Company reported net income in 1999 of $3,354,722, an increase of $264,694 or 8.6% over 1998, as compared to an increase of $389,556 or 14.4% and $248,500 or 10.1% for 1998 and 1997, respectively. The following table summarizes the status of the Company's earnings and performance for the periods stated. December 31, 1999 1998 1997 Earnings per share $ 5.80 $ 5.34 $ 4.66 Return on average shareholders' equity* 11.7% 11.6% 10.9% Return on average assets 1.3% 1.3% 1.3% Return on average earning assets 1.4% 1.4% 1.4% *Excluding net unrealized gain (loss) net of deferred taxes on available for sale securities of ($2,128,324), $1,162,032 and $437,749 at December 31, 1999, 1998 and 1997, respectively. The improved results were due to expense control efforts, developing new business, generating higher fee based income and a slight increase in net interest income, which amounted to $10,168,831, $9,926,607 and $9,452,159 for the years ended 1999, 1998 and 1997, respectively. NET INTEREST INCOME Net interest income continues to be the most significant determinant of the Company's earnings performance. Management of interest rate risk has become paramount in ensuring the Bank's continued profitability. Changes in net interest income are the results of interest rate movements, changes in the balance sheet mix of earning assets and interest bearing liabilities, and changes in the level of nonearning assets and liabilities. The following table sets forth the information related to changes in net interest income. For purposes of the table and the following discussion, information is presented regarding (1) the total dollar amount of interest income of the Company from interest earning assets and the resulting average yields; (2) the total dollar amount of interest expense on interest bearing liabilities and the resulting average cost; (3) net interest income; (4) interest rate spread; and (5) net interest margin. Information is based on average daily balances during the indicated periods. For the purposes of the table and the following discussion, (1) income from interest earning assets and net interest income are presented on a tax equivalent basis and (2) nonaccrual loans have been included in the appropriate average balance loan category, but unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (In Thousands) (On a Tax Equivalent Basis) 1999 1998 1997 Avg Int Yield/ Avg Int Yield/ Avg Int Yield/ Balance Earn/Pd Rate Balance Earn/Pd Rate Balance Earn/Pd Rate Assets Interest Earning Assets: Securities available for sale $105,663 $ 6,913 6.54 $ 77,517 $ 5,278 6.81 $72,741 $ 5,182 7.12 Securities held to maturity 4,311 333 7.72 23,968 1,510 6.30 22,689 1,437 6.33 Federal funds sold 5,705 294 5.15 6,384 326 5.11 598 41 6.86 Loans (net) 115,825 10,237 8.83 108,057 10,241 9.47 100,208 9,660 9.64 Total interest earning assets 231,504 $17,777 7.68 215,926 $17,355 8.04 196,236 $16,320 8.32 Other nonearning assets 20,069 19,699 18,878 $251,573 $235,625 $215,114 Liabilities Interest Bearing Liabilities: Savings deposits $ 67,766 $ 1,082 1.60 $ 69,656 $ 1,131 1.62 $ 65,432 $ 1,119 1.71 Time deposits 77,139 3,784 4.91 77,545 4,223 5.44 73,419 4,298 5.85 Money market accounts 21,262 728 3.42 11,765 560 4.76 12,271 482 3.93 Borrowings 20,969 1,502 7.16 18,077 1,260 6.97 14,007 835 5.96 Total interest bearing liabilities 187,136 $ 7,096 3.79 177,043 $ 7,174 4.05 165,129 $ 6,734 4.08 Other noninterest bearing liabilities & shareholders' equity 64,437 58,582 49,985 $251,573 $235,625 $215,114 Net interest income $10,681 $10,181 $9,586 Net interest rate spread 3.89 3.99 4.24 Net interest margin 4.61 4.72 4.88 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, 1999, 1998 and 1997 (In Thousands) Year Ended December 31, 1999 vs. 1998 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets Securities available for sale $1,918 $(1,787) $1,465 $1,596 Securities held to maturity (1,238) 1,044 (997) (1,191) Federal funds sold (34) 35 (33) (32) Loans, net 728 (674) (263) (209) Total interest earning assets 1,374 (1,382) 172 164 Interest Bearing Liabilities Savings deposits 33 32 (114) (49) Time deposits (27) 23 (435) (439) Money market accounts 452 (326) 42 168 Borrowed funds 202 (208) 248 242 Total interest bearing liabilities 660 (479) 259 (78) Net change in net interest income $ 714 $ (903) $ 431 $ 242 Year Ended December 31, 1998 vs. 1997 Increase (Decrease) Due to Change In Volume Rate Rate/Volume* Total Interest Earning Assets Securities available for sale $ 337 $ (488) $ 83 $ (68) Securities held to maturity 80 (37) 74 117 Federal funds sold 397 (296) 184 285 Loans, net 757 (751) 575 581 Total interest earning assets 1,571 (1,572) 916 915 Interest Bearing Liabilities Savings deposits 72 (71) 11 12 Time deposits 238 (228) (86) (76) Money market accounts (20) 24 74 78 Borrowed funds 242 (284) 468 426 Total interest bearing liabilities 532 (559) 467 440 Net change in net interest income $1,039 $(1,013) $449 $ 475 *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 $242,224 or 2.4% during 1999. This increase was primarily due to increases in interest earning assets, in particular loans of $17,223,368, offset in part by a decrease in investments of $3,795,339 and an increase in volume of interest paying liabilities, in particular savings and money market accounts. During 1998, net interest income increased by $474,448 or 5.0% compared to 1997. This increase was attributed to higher loan and investment volumes, offset by a higher cost of funds (interest on deposits and borrowings). In 1997, net interest income increased $314,635 or 3.4% due mainly to higher loan volumes offset by interest expense on certificates of deposit. The weighted average yield on a tax equivalent basis on interest earning assets was 7.68% for 1999, down slightly over 1998 of 8.04%. In 1997, the weighted average yield was 8.32%. The Company's net interest margin was 4.62%, 4.72% and 4.88% for 1999, 1998 and 1997, respectively, and the net interest income spread was 3.89% in 1999, 3.99% in 1998 and 4.24% in 1997. Interest and dividend income increased slightly by $164,574 or 1.0% during 1999, primarily due to the extremely competitive banking market in Hancock and Washington counties. Profit margins continue to be compressed. The squeeze is part of a long term trend and one aspect of the increasing competitive nature of the national and local economy. Loan increases, particularly in real estate loans, were primarily the result of the business development program conducted by the Bank's Relationship Managers, attractive interest rates, a one time transfer of loans classified as available for sale of approximately $5,000,000 and a strong local economy. Interest and dividend income increased $914,358 or 5.7% in 1998 and $1,417,984 or 9.6% in 1997, primarily due to increased interest on loans and investments due to volume growth and wider margins. The amount of nonaccrual loans can also affect the average yield earned on all outstanding loans. Nonaccrual loans for 1999, 1998 and 1997 were insignificant, and therefore did not have a material effect on the average loan yield. Interest expense on deposits and borrowings decreased $77,650 or 1.1% in 1999 compared to 1998. The cost of borrowings increased by $242,000 or .19 basis points on average during the year. The overall cost of deposits decreased by $319,000. The cost of deposits increased by $458,000 based on increased deposit volumes and decreased by $271,000 due to rate reductions to reflect the current interest rate environment. Interest expense on deposits and borrowings in 1998 increased $439,910 or 6.5% over 1997. This increase was primarily driven by the expense of short-term borrowings and certificates of deposit. PROVISION FOR LOAN LOSSES The provision for loan losses was $200,000 in 1999. There was a $285,000 provision in 1998 and a $120,000 provision in 1997. The process of evaluating the adequacy of the allowance for loan losses involves a high degree of management judgment, based, in part, on systematic methods. These methods include a loan by loan analysis of all larger commercial and commercial real estate loans as well as those that were nonperforming or under close monitoring by management for potential problems. Other factors included in the evaluation of the adequacy of the allowance for loan losses involve overall loan growth; the character and mix of the loan portfolio; current trends in nonperforming loans, delinquent loans and net charge-offs; new loan originations; and other asset quality considerations. During 1998, the Company implemented an independent loan review program that supports the Company's lending strategies, monitors compliance with established loan policies and procedures and identifies credit trends. Management believes that the allowance for loan losses and the carrying value of real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances might be necessary based on changes in economic conditions, particularly in northern New England. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. 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, 1999 1998 Nonaccrual loans $ 437 $ 534 Loans past due 90 days and accruing 314 47 Other real estate owned (including insubstance foreclosure) 0 376 Total nonperforming assets 751 957 Ratio of total nonperforming loans to capital and the allowance for loan losses (Texas ratio) .025 .019 Ratio of net recoveries (charge-offs) to loans 0 .001 Ratio of allowance for loan losses to loans .02 .02 Coverage ratio (allowance for loan losses divided by nonperforming assets) 3.501 2.543 Ratio of nonperforming assets to total assets .003 .004 Ratio of nonperforming loans to total loans .006 .005 NONINTEREST INCOME Total noninterest income was $3,426,328, $3,155,412 and $2,608,206 for the years ended December 31, 1999, 1998 and 1997, respectively. The $270,916 or 8.6% increase in noninterest income during 1999 was primarily attributable to a $180,816 or 24.9% increase in trust department income, a $153,984 gain on other real estate owned and a $69,458 or 10.8% increase in VISA income. The $547,206 or 21.0% increase during 1998 was primarily due to increases in trust department income, loan department income, and mortgage servicing rights. The $401,075 or 18.2% increase during 1997 was primarily due to increases in trust department income, VISA income and mortgage servicing rights. The following table summarizes information relating to the Company's noninterest income: Year Ended December 31, 1999 1998 1997 Net security gains (losses) $ (15,728) $ 31,842 $ (1,463) Trust department income 906,996 726,180 594,961 Service income 314,268 331,574 343,272 VISA income 711,555 642,097 611,239 Loan department income 514,351 554,120 352,534 Gain on other real estate owned 153,984 0 0 Other noninterest income 840,902 869,599 707,663 Total noninterest income $3,426,328 $3,155,412 $2,608,206 NONINTEREST EXPENSE Total noninterest expenses, which consist primarily of employee compensation and benefits, occupancy and equipment expenses and other general operating expenses, increased $250,090 or 3.0% during 1999, $397,098 or 4.9% during 1998 and $293,210 or 3.8% during 1997. The increase in noninterest expenses in 1999 was attributable to salary and staffing increases, in particular in the Trust and Investment Services department and expenses related to new technology and access channels to the Bank and its services. The increase in 1998 was attributable to salary and staffing increases, depreciation, taxes and rent expenses related to our newest branch in Bar Harbor and expenses related to strategic initiatives. The increase in 1997 was attributable to net occupancy and equipment expenses and bank card expenses incurred due to business development efforts in 1997. INCOME TAXES The Company recognized $1,377,355, $1,294,000 and $1,224,000 in income tax expense for the years ended December 31, 1999, 1998 and 1997, respectively. The effective tax rate was 29.1% for 1999, 29.5% for 1998 and 31.2% for 1997. The Bank has sufficient refundable taxes paid in available carry back years to fully realize its recorded deferred tax asset of $2,587,204 at December 31, 1999. 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 $6,654,860 or 2.6% in 1999, primarily due to increased loan volume offset by decreased securities and cash volumes used to fund loan growth and Y2K year end transition needs, compared to an increase of $28,634,974 or 12.9% in 1998. Securities available for sale, which include U.S. Government securities, callable agency bonds, municipals and mortgage backed securities, decreased $3,655,862 or 3.5%. During 1999, the Bank elected to maintain the level of the securities portfolio to enhance its contribution to net interest income, maximize yields, reduce exposure of continuously callable agencies, manage cash flow, control risk and to provide diversification. As of December 31, 1999, the Company has a net unrealized loss of $3,224,735 in this portfolio. In 1998, securities available for sale increased $42,723,673 or 70.4% due primarily to a transfer from held to maturity investments of $28,502,694 and planned portfolio growth. As of December 31, 1998, the Company had a net unrealized gain of $1,760,656 in this portfolio. Securities held to maturity, which include in-state municipals, decreased $139,477 or 3.2% in 1999, compared to a $28,423,705 or 86.7% decrease in 1998 primarily due to a transfer to securities available for sale. The changes in the securities portfolio reflect the Company's efforts to meet asset and liability objectives and otherwise manage its liquidity and funding needs within the parameters of the Company's policies. For further discussion, see the Risk Management section, page 17. LOANS Total loans reached a record high of $129,633,426 during 1999 and, as of December 31, 1999, had increased $17,223,368 or 15.6% over 1998, primarily due to a $14,752,901 or 20.1% increase in real estate loans. As of December 31, 1998, loans increased $3,337,081 or 3.1% over 1997. There has been no material change in the Bank's loan mix, and as of December 31, 1999, the loan portfolio remains diversified with a total of 69% secured by real estate of which consumer loans were 39% and commercial real estate were 30%. Loans to individuals for household, family and other personal expenditures were 8%, home equities were 3%, commercial loans accounted for 13% and 7% was invested in municipal loans. Loan mix and growth trends, as of December 31, 1999, are illustrated in the graphs below: INSERT 5 YEAR BAR CHART LOAN GROWTH TRENDS INSERT PIE CHART LOAN MIX DEPOSITS During 1999, deposits peaked at a record level of $203,632,917 and increased $4,818,818 or 2.6% by December 31, 1999, compared to a $10,643,151 or 6.0% increase over the same period in 1998. Growth was primarily in savings and money market accounts, due to competitive rates and customer's desire to place their funds in short term deposit accounts. In the Bank's market area, the banking business is somewhat seasonal due to an influx of tourists and seasonal residents returning to the area each spring and summer. As a result, the Bank has an annual deposit swing, from a high point in mid October to a low point in June. This deposit swing is predictable and does not have a material adverse effect on the Bank. Deposit mix and growth trends, as of December 31, 1999, are illustrated in the graphs below: INSERT 5 YEAR BAR CHART DEPOSIT GROWTH TRENDS INSERT PIE CHART DEPOSIT MIX SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES The Federal Reserve Board's capital requirement generally calls for an 8% total capital ratio, of which 3% must be comprised of Tier I capital. Risk based capital ratios are calculated by weighting assets and off balance sheet instruments according to the relative credit risk. As of December 31, 1999, the Company's Tier I ratio of 19.97% far exceeds the Federal Reserve Board's guidelines. Total shareholders' equity, excluding a net unrealized gain/(loss) on available for sale securities of ($2,128,324) in 1999 and $1,162,032 in 1998, increased $2,193,629 in 1999, primarily as a result of net income of $3,354,722, offset by dividends declared of $1,107,916. During 1999, the Company declared a 20% stock dividend. Dividends of $1,107,916 were declared on the Company's common stock and represented a 14.9% increase over 1998. The dividend payouts for 1999, 1998, and 1997 were 33.0%, 31.2% and 32.8% of net income, respectively. Union Bankshares Company stock, $12.50 par value, is not listed on any national exchange, nor is it actively traded. Since the Company is not aware of all trades, the market price is established by determining what a willing buyer will pay a willing seller. Based upon the trades that the Company had knowledge of (per quotes from local brokerages), high and low bids for each quarter for 1999 and 1998 are listed in the following table. Prices have been adjusted to reflect a 20% stock dividend distributed in May 1999. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1999 108.33 to 108.33 106.63 to 106.67 106.63 to 108.00 108.00 to 110.00 1998 100.00 to 104.16 104.16 to 113.75 105.00 to 108.33 108.33 to 108.33 As of December 31, 1999, there were 725 holders of record of Union Bankshares Company common stock. Quarterly dividends per share, adjusted for a 20% stock dividend, paid by the Company in 1999 and 1998 were as follows: 1999 1998 1st Quarter $ .41 $ .41 2nd Quarter $ .41 $ .41 3rd Quarter $ .50 $ .41 4th Quarter $ .50 $ .41 Total $1.82 $1.64 RISK MANAGEMENT The Company's continued success is primarily dependent upon its ability to strategically manage financial and nonfinancial risks. Nonfinancial risks facing the Company include: Competition from banks and nonbank financial service companies Changing regulatory and political environments Rapid change in technology Demographic changes Economic changes Financial risks managed by the Company include: Credit risk Interest rate risk (including asset/liability management) Market risk Liquidity risk Off balance sheet risks/commitments CREDIT RISK MANAGEMENT The Company's net loan portfolio as of December 31, 1999 accounted for 49% of total assets and represents its primary source of credit risk. Substantial amounts of time and resources have been dedicated to the management of credit risk within the Bank's loan portfolio. Future emphasis will be applied toward enhancing the already proven systems of checks and balances to manage the origination, processing and collection of loans. Additional information relating to credit risk may be found on page 13, "Provision for Loan Losses," and Note 16 to the consolidated financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT Interest rate risk can be defined as the exposure of the Company's net income or financial position to adverse movements in interest rates. Changes in the level of interest rates also can affect: The amount of loans originated/sold by an institution The ability of the borrower to repay his/her loan The average maturity of mortgage loans The value of the Company's interest earning assets The market value of available for sale securities The Company, through management of the relationship of interest rate sensitive assets to interest rate sensitive liabilities, reduces the volatility of its net income. To accomplish this, the Company has undertaken various steps to increase the percentage of fixed rate assets and to increase the average maturity of such assets, in particular through the loan products offered and its investment portfolio. Net interest income sensitivity to movements in interest rates is measured through the use of a simulation model that analyzes resulting net income under various interest rate scenarios established by regulators. Projected net interest income (NII) is modeled based on both an immediate rise or fall in interest rates ("rate shock"). The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities and factors in projections for activity levels by product lines of the Company. Assumptions are made as to the changing relationship between different interest rates as interest rates increase/decrease (basis risk) and the customer's ability to prepay loans and withdraw deposit balances or transfer them to a higher yielding account (embedded option). The sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for NII exposure over a one-year horizon, assuming no balance sheet growth, given both a 200 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, 1999 and 1998. Estimated Rate Change NII Sensitivity 1999 1998 +200 bp + 3.3% + 4.4% -200 bp - 6.2% - 5.9% The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. Based on the information and assumptions in effect on December 31, 1999, under five rate simulations used, the Company's net interest income and net income remain strong, with the return on assets ratio remaining above 1% under all simulations. LIQUIDITY RISK MANAGEMENT Liquidity management is the process by which the Company structures its liquidity to meet the cash flow requirements of its customers as well as day to day operating expenses. Many factors affect the Company's ability to meet its liquidity needs, including its mix of assets and liabilities, interest rates and local economic conditions. The Company's actual inflow and outflow of funds is detailed in the Consolidated Statement of Cash Flows on pages 25-26. Liquidity comes from both assets and liabilities. The assets of the balance sheet provide liquidity through prepayment and maturities of outstanding loans, investments and mortgage backed securities and the sale of mortgage loans. The liability side provides liquidity through deposits and borrowings from Federal Home Loan Bank of Boston. During 1999 and 1998, the Company used its sources of funds primarily to meet ongoing commitments to pay maturing certificates of deposit and savings withdrawals, fund loan originations and maintain a substantial securities portfolio. The Company's liquidity policy currently includes requirements that the Company maintain liquidity as a percentage of total assets at a minimum of 5%. Access to Federal Home Loan Bank advances allows the Company to maintain a lower liquidity level than might otherwise be required. As of December 31, 1999, the Company had a 8.5% liquidity ratio. OFF BALANCE SHEET RISKS AND COMMITMENTS As of December 31, 1999 and 1998, the total approved loan commitments outstanding, the commitment under unused lines of credit and the unadvanced portion of loans amounted to $35,990,000 and $32,528,000, 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, 1999 and 1998 exceeds all applicable federal and state laws and regulations regarding minimum regulatory capital and is categorized as a well-capitalized bank. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related notes presented in this Annual Report have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than has the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. RECENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board issued the following Statements of Financial Accounting Standards during 1998 and 1999: SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities SFAS No. 134 Accounting for Mortgage Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise SFAS No. 135 Rescission of FASB Statement No. 75 and Technical Corrections SFAS No. 136 Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities SFAS No. 133, which establishes accounting and reporting standards for derivative instruments and for hedging activity, is effective for fiscal years beginning after June 15, 1999. The Company adopted SFAS No. 133 effective July 1, 1998. During the three-year period ended December 31, 1999, the Company did not hold any derivative instruments, and management does not expect to enter into derivative transactions in the near future. The effect of adopting SFAS No. 133 on the consolidated financial statements of the Company is limited to the transfer of securities from held to maturity to available for sale. SFAS No. 134, 135 and 136 have no effect on the consolidated financial condition and results of operations of the Company. SFAS No. 137, which amends SFAS No. 133 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect this statement to have any material impact to its consolidated financial condition and results of operations. YEAR 2000 READINESS As of December 31, 1999, the Bank experienced no significant operational or financial impact from the year 2000 transition. Union Trust, recognizing the importance of this issue, started working on this problem several years ago. The Company adopted a plan of action back in 1997 to minimize the risks to the Company's operations and financial condition posed by the Year 2000 event. The plan included the formation of a Technology Steering Committee to assess, monitor and review vendor compliance and certification. The committee's charter also called for it to identify clearly all systems and equipment used in the day to day operations of the Company that might be affected and to oversee the remediation of any date recognition problems thus identified. During 1999 and 1998, guided by the stringent requirements of federal and state banking regulators and a comprehensive plan of action developed by the Technology Steering Committee, the Company completed the assessment phase, identified mission critical systems, tested all those internal systems and worked on contingency plans. It has also taken steps to verify that all third party vendors, suppliers and other related business parties are adequately prepared for the Year 2000. Primarily for operational reasons, Union Trust replaced its mainframe operating system in 1995. As of December 31, 1999, Union Trust met the Federal Financial Institutions Examination Council's (FFIEC) required time frames for compliance, and the Company's efforts have been examined by the bank regulators. The Company also embarked upon an awareness program to educate its employees and customers regarding Year 2000 issues. During 1998, the Company participated in several seminars to educate the public about this issue. The Company also hosted discussion groups with area professionals to review potential areas of concern. During 1999, the Bank joined an inter bank Y2K group to address the issues of the Year 2000 event, in particular, addressing cash reserves, security and customer communication and public seminars. The Company has estimated that the total costs directly relating to fixing Year 2000 issues, such as hardware purchases, software modification and system testing, will not have a material effect on the performance of the Company. The Company estimates that the total costs for evaluation, remediation and testing have amounted to as much as $110,000, of which $85,000 and $25,000 was expensed in 1999 and 1998, respectively. In addition, it is estimated that approximately 3,500 employee-hours were utilized during the period for related activities, which are not reflected in the above figures. Management believes the Company has and will continue to adequately address the Year 2000 event and that testing will be conducted throughout the organization during year 2000 to minimize any potential adverse effects on the Company and its customers. UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 1999 1998 ASSETS Cash and due from banks (note 2) $ 9,035,081 $ 7,845,223 Federal funds sold 39,698 9,268,135 Available for sale securities, at market value (note 3) 99,714,632 103,370,494 Held to maturity securities, at cost (note 4) (market value $4,142,076 and $4,503,123 at December 31, 1999 and 1998, respectively) 4,236,504 4,375,981 Other investment securities at cost, which approximates market value 3,557,700 3,557,700 Loans held for sale 594,464 6,137,956 LOANS (note 5): Real estate 88,047,637 73,294,736 Commercial and industrial 16,221,882 15,979,032 Municipal 8,845,000 5,798,085 Consumer 14,508,058 15,327,356 127,622,577 110,399,209 Deferred loan costs 26,574 23,222 Less allowance for loan losses (note 6) 2,629,472 2,434,636 Net loans 125,019,679 107,987,795 Premises, furniture and equipment, net (note 8) 2,987,572 2,653,775 Other assets (notes 7, 9, 13 and 14) 12,664,335 5,997,746 Total assets $257,849,665 $251,194,805 LIABILITIES DEPOSITS Demand deposits $ 25,368,731 $ 22,823,763 Savings deposits (including NOW deposits totaling $38,170,328 in 1999 and $37,114,944 in 1998) 69,602,376 66,796,459 Money market accounts 22,465,087 18,751,256 Time deposits (note 10) 75,411,640 79,657,538 Total deposits 192,847,834 188,029,016 Advances from Federal Home Loan Bank (note 11) 18,451,250 20,451,250 Other borrowed funds (note 12) 13,140,423 8,965,977 Other liabilities (notes 13 and 14) 5,767,167 5,008,844 Total liabilities 230,206,674 222,455,087 Contingent liabilities and commitments (notes 15, 16 and 17) SHAREHOLDERS' EQUITY Common stock, $12.50 par value. Authorized 1,200,000 shares, issued 582,394 shares in 1999 and 1998 $ 7,279,925 $ 7,279,925 Surplus 3,963,533 3,963,432 Retained earnings (note 15) 18,837,028 16,623,348 Net unrealized gain (loss) on available for sale securities net of deferred tax liability (asset) of $(1,096,409) and $598,622 at 1999 and 1998, respectively (note 3) (2,128,324) 1,162,032 Treasury stock, at cost (4,546 shares in 1999 and 4,378 shares in 1998) (309,171) (289,019) Total shareholders' equity 27,642,991 28,739,718 Total liabilities and shareholders' equity $257,849,665 $251,194,805 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, 1999, 1998 AND 1997 1999 1998 1997 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 10,032,349 $ 10,240,991 $ 9,659,971 Interest on securities available for sale 6,709,940 5,113,775 5,182,071 Interest on securities held to maturity 229,221 1,420,204 1,303,582 Interest on federal funds sold 293,774 325,740 40,728 Total interest income 17,265,284 17,100,710 16,186,352 INTEREST EXPENSE Interest on savings deposits 1,082,132 1,131,252 1,119,098 Interest on money market accounts 728,408 560,186 481,714 Interest on time deposits 3,783,922 4,222,178 4,298,169 Interest on borrowings 1,501,991 1,260,487 835,212 Total interest expense 7,096,453 7,174,103 6,734,193 Net interest income 10,168,831 9,926,607 9,452,159 Provision for loan losses (note 6) 200,000 285,000 120,000 Net interest income after provision for loan losses 9,968,831 9,641,607 9,332,159 NONINTEREST INCOME Net securities gains (losses) (note 3) (15,728) 31,842 (1,463) Trust department income 906,996 726,180 594,961 Service charges on deposit accounts 314,268 331,574 343,272 VISA income 711,555 642,097 611,239 Loan department income 514,351 554,120 352,534 Gain on other real estate owned 153,984 0 22,390 Other income 840,901 869,599 685,273 Total noninterest income 3,426,327 3,155,412 2,608,206 Income before noninterest expenses 13,395,158 12,797,019 11,940,365 NONINTEREST EXPENSE Salaries and wages 3,445,803 3,182,478 3,040,454 Pension and other employee benefits (note 13) 909,087 976,522 977,292 Insurance 110,065 97,853 112,761 FDIC insurance 21,414 20,859 20,312 Net occupancy expenses 975,143 955,316 888,014 Equipment expenses 373,208 289,376 278,267 Advertising 179,148 176,649 211,180 Supplies 265,919 272,239 212,258 Postage 175,031 154,161 161,254 Telephone 125,330 141,738 143,499 Other professional fees 297,018 319,975 347,608 Other expenses 1,785,915 1,825,825 1,622,994 Total noninterest expenses 8,663,081 8,412,991 8,015,893 Income before income taxes 4,732,077 4,384,028 3,924,472 Income taxes (note 14) 1,377,355 1,294,000 1,224,000 Net income $3,354,722 $3,090,028 $2,700,472 Net income per common share $ 5.80 $ 5.34 $ 4.66 Cash dividends declared per common share $ 1.82 $ 1.64 $ 1.52 Weighted average common shares outstanding 578,086 578,211 579,368 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, 1999, 1998 and 1997 ACCUMULATED OTHER SHARE- COMMON TREASURY RETAINED COMPREHENSIVE HOLDERS' STOCK SURPLUS STOCK EARNINGS INCOME EQUITY Balance at December 31, 1996 $6,069,300 $3,948,797 $ (56,035) $13,923,256 $ (171,460) $23,713,858 Net income, 1997 0 0 0 2,700,472 0 2,700,472 Change in net unrealized gain (loss) on available for sale securities, net of tax of $313,835 0 0 0 0 609,209 609,209 Total comprehensive income 0 0 0 2,700,472 609,209 3,309,681 Sale of 116 shares treasury stock 0 0 8,780 0 0 8,780 Repurchase of 1,500 shares treasury stock 0 0 (113,440) 0 0 (113,440) Payment for fractional shares totaling 294.97 shares 0 0 0 (29,699) 0 (29,699) Effect of the May 28, 1999 stock split effected in the form of a 20% stock dividend (96,850 shares) 1,210,625 0 0 (1,210,625) 0 0 Cash dividends declared 0 0 0 (885,940) 0 (885,940) Balance at December 31, 1997 $7,279,925 $3,948,797 $(160,695) $14,497,464 $ 437,749 $26,003,240 Net income, 1998 0 0 0 3,090,028 0 3,090,028 Change in net unrealized gain (loss) on available for sale securities, net of tax of $373,116 0 0 0 0 724,283 724,283 Total comprehensive income 0 0 0 3,090,028 724,283 3,814,311 Sale of 510 shares treasury stock 0 0 53,546 0 0 53,546 Repurchase of 1,742 shares treasury stock 0 0 (181,870) 0 0 (181,870) Redeem minority interest shareholders 0 14,635 0 0 0 14,635 Cash dividends declared 0 0 0 (964,144) 0 (964,144) Balance at December 31, 1998 $7,279,925 $3,963,432 $(289,019) $16,623,348 $1,162,032 $28,739,718 Net income, 1999 0 0 0 3,354,722 0 3,354,722 Change in net unrealized gain (loss) on available for sale securities, net of tax of $(1,695,031) 0 0 0 0 (3,290,356) (3,290,356) Total comprehensive income 0 0 0 3,354,722 (3,290,356) 64,366 Sale of 556 shares treasury stock 0 101 60,316 0 0 60,417 Repurchase of 726 shares treasury stock 0 0 (80,468) 0 0 (80,468) Payment for fractional shares totaling 258.80 shares 0 0 0 (33,126) 0 (33,126) Cash dividends declared 0 0 0 (1,107,916) 0 (1,107,916) Balance at December 31, 1999 $7,279,925 $3,963,533 $(309,171) $18,837,028 $(2,128,324) $27,642,991 The accompanying notes are an integral part of these consolidated financial statements. UNION BANKSHARES COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net income $ 3,354,722 $ 3,090,028 $ 2,700,472 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation 478,466 460,820 409,043 Amortization and accretion (62,422) 8,252 (453,787) Provision for loan losses 200,000 285,000 120,000 Net (gain) loss on sale of available for sale securities 15,728 (31,842) 1,463 Net loss on sale of equipment 1,867 6,467 944 (Gain) loss on sale of other real estate owned (153,984) 0 22,390 Provision for other real estate owned 0 0 15,000 Originations of loans held for sale (18,010,986) (23,861,002) (8,526,648) Proceeds from loans held for sale 18,589,135 20,861,264 8,629,484 Net change in other assets (943,556) (16,783) (315,375) Net change in other liabilities 1,954,816 24,910 451,593 Net change in deferred loan origination fees (3,352) (47,382) 49,374 Provision for deferred income tax expense 0 211,280 2,267 Net cash provided by operating activities $ 5,420,434 $ 991,012 $ 3,106,220 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of available for sale securities $ 33,240,067 $ 13,525,454 $ 41,170,105 Purchase of available for sale securities (48,397,100) (54,796,618) (41,533,761) Proceeds from maturities and principal payments on available for sale securities 13,888,678 28,548,951 14,856,692 Purchase of held to maturity securities (100,000) (4,804,544) (29,663,803) Proceeds from maturities and principal payments on held to maturity securities 225,000 4,347,687 2,082,547 Purchase of other investment securities 0 (939,000) 0 Purchase of cash surrender life insurance (5,600,000) 0 0 Proceeds from sales of other real estate owned 529,490 0 429,528 Net increase in loans to customers (12,263,189) (3,400,185) (6,108,042) Proceeds from sales of fixed assets 0 7,900 0 Capital expenditures (814,130) (286,810) (368,255) Net cash used by investing activities $(19,291,184) $(17,797,165) $(19,134,989) CASH FLOWS FROM FINANCING ACTIVITIES Increase in demand, savings and money market accounts $ 9,064,716 $ 7,627,294 $ 2,028,542 Increase (decrease) in time deposits (4,245,898) 3,015,857 8,911,856 Net change in advances from Federal Home Loan Bank (2,000,000) 11,178,000 3,100,250 Net change in other borrowed funds 4,174,446 3,275,002 3,307,431 Payment to eliminate fractional shares (33,126) 0 (29,699) Purchase of treasury stock (80,468) (181,870) (113,440) Sale of treasury stock 60,417 53,546 8,780 Elimination of minority shares 0 14,635 0 Dividends paid (1,107,916) (964,144) (885,940) Net cash provided by financing activities $ 5,832,171 $ 24,018,320 $ 16,327,780 Net (decrease) increase in cash and cash equivalents (8,038,579) 7,212,167 299,011 Cash and cash equivalents at beginning of year 17,113,358 9,901,191 9,602,180 Cash and cash equivalents at end of year $ 9,074,779 $ 17,113,358 $ 9,901,191 The accompanying notes are an integral part of these consolidated financial statements. 1999 1998 1997 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Interest paid $ 7,278,946 $ 7,174,676 $ 6,501,460 Income taxes paid $ 1,431,000 $ 1,518,991 $ 1,425,987 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Net increases (decreases) required by Statement of Financial Accounting Standards No. 115 "Available for Sale Securities" $(4,985,387) $ 1,097,399 $ 923,044 Deferred income tax assets (liabilities) thereon $ 1,695,031 $ (373,116) $ (313,835) Cost of held to maturity securities transferred to available for sale $ 0 $ 28,502,694 $ 0 Unrealized gain on securities transferred to available for sale, net of deferred taxes of $138,627 $ 0 $ 269,100 $ 0 Loans held for sale transferred to loan portfolio $ 4,965,343 $ 0 $ 0 The accompanying notes are an integral part of these consolidated financial statements. UNION BANKSHARES COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Union Bankshares Company (the Company) provides a full range of banking services to individual and corporate customers through its subsidiary and branches in Maine. It is subject to regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. Operating Segments The Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective January 1, 1998. The Company's operations are comprised of a single operating segment; therefore, SFAS No. 131 imposes no additional disclosure requirements. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the future relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. Management believes that the allowance for loan losses and the carrying value of real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances might be necessary based on changes in economic conditions, particularly in northern New England. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. These agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Union Trust Company (the Bank). All significant intercompany balances and transactions have been eliminated in the accompanying financial statements. Earnings and Cash Dividends per Share At December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share," and No. 129, "Disclosure of Information about Capital Structure." These standards have no effect on the financial statements as the Company has no dilution of earnings per share and the Company's capital disclosures meet the requirements of SFAS No. 129. Earnings per share is based upon the average number of common shares outstanding during each year. In 1999, the Company declared a stock split effected in the form of a 20% stock dividend. Common share amounts, earnings per share and dividends per share, common stock and retained earnings for all years presented have been restated to reflect this transaction. Investments The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on July 1, 1998. The Company does not hold any derivative instruments or engage in hedging activities; therefore, adoption of SFAS No. 133 on the financial statements of the Company is limited to the transfer of held to maturity securities to available for sale upon adoption of the standard. Available for Sale Securities Available for sale securities consist of debt securities that the Company anticipates could be made available for sale in response to changes in market interest rates, liquidity needs, changes in funding sources and similar factors. These assets are specifically identified and are carried at fair value. Amortization of premiums and accretion of discounts are recorded as an adjustment to yield. Unrealized holding gains and losses for these assets, net of related income taxes, is excluded from earnings and is reported as a net amount in a separate component of shareholders' equity. When a decline in market value is considered other than temporary, the loss is recognized in the consolidated statements of income, resulting in the establishment of a new cost basis. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Held to Maturity Securities Held to maturity securities consist of debt securities that the Company has the positive intent and ability to hold until maturity. Debt securities classified as held to maturity are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts. When a 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, 1999 and 1998. 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 aggregate cost or market value as determined by current investor yield requirements. Gains and losses on the sale of these loans are computed on the basis of specific identification. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balances. Loan commitments are recorded when funded. Loan Servicing Mortgage loans serviced for others are not included in the accompanying balance sheets. The Bank recognizes a loan servicing fee for the difference between the principal and interest payment collected on the loan and the payment remitted to the investor. Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities," which requires capitalization of mortgage servicing rights for loans originated after January 1, 1996. The impact of adoption of SFAS No. 125 was not material to the Company's financial statements. Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed by accelerated and straight- line methods over the estimated useful life of each type of asset. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the improvements. Maintenance and repairs are charged to expense as incurred; betterments are capitalized. Allowance for Loan Losses The allowance for loan losses is established by management to absorb charge-offs of loans deemed uncollectible. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. The amount of the provision is based on management's evaluation of the loan portfolio. Considerations include past and anticipated loan loss experience, the character and size of the loan portfolio and the need to maintain the allowance at a level adequate to absorb anticipated future losses. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance to increase, the increase is reported as loan loss provision. Other Real Estate Owned Other real estate owned, which is included in other assets, is recorded at the lower of cost or fair value less estimated costs to sell at the time the Company takes possession of the property. Losses arising from the acquisition of such properties are charged against the allowance for loan losses. Operating expenses and any subsequent provisions to reduce the carrying value are charged to operations. Gains and losses upon disposition are reflected in earnings as realized. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Accrual of Interest Income and Expense Interest on loans and investment securities is taken into income using methods that relate the income earned to the balances of loans outstanding and investment securities. Interest expense on liabilities is derived by applying applicable interest rates to principal amounts outstanding. The recording of interest income on problem loan accounts ceases when collectibility within a reasonable period of time becomes doubtful. Interest income accruals are resumed only when they are brought fully current with respect to principal and interest and when management expects the loan to be fully collectible. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reflected in the loan loss provision. Loan Origination Fees and Costs Loan origination fees and certain direct loan origination costs are recognized over the life of the related loan as an adjustment to or reduction of the loan's yield. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective January 1, 1998. The required disclosures for all periods presented are included in the consolidated statement of changes in shareholders' equity. Comprehensive income includes both net income and other comprehensive income. The only component of other comprehensive income is net unrealized gains and losses on available for sale securities, net of deferred taxes. 2. CASH AND DUE FROM BANKS The Federal Reserve Board requires the Bank to maintain a reserve balance. The amount of this reserve balance as of December 31, 1999 was $3,773,000. 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 Federal Deposit Insurance Corporation. 3. AVAILABLE FOR SALE SECURITIES The Company carries available for sale securities at fair value. A summary of the cost and fair values of available for sale securities at December 31, 1999 and 1998 is as follows: Gross Gross Amortized Unrealized Unrealized Carrying & Cost Gains Losses Fair Value 1999 1999 1999 1999 Mortgage-backed securities $ 35,198,891 $ 7,092 $(1,206,514) $ 33,999,469 U.S. Treasury securities and other U.S. Government agencies 55,921,382 21,812 (1,540,225) 54,402,969 Obligations of state and political subdivisions 8,454,47 92,023 (389,361) 8,067,141 Other securities 3,364,615 0 (119,562) 3,245,053 Totals $102,939,367 $ 30,927 $(3,255,662) $ 99,714,632 1998 1998 1998 1998 Mortgage-backed securities $ 34,144,871 $ 250,676 $ (59,988) $ 34,335,559 U.S. Treasury securities and other U.S. Government agencies 58,492,664 1,173,814 (31,323) 59,635,155 Obligations of state and political subdivisions 8,499,474 272,654 (3,573) 8,768,555 Other securities 472,829 158,396 0 631,225 Totals $101,609,838 $1,855,540 $ (94,884) $103,370,494 The amortized cost and fair value of available for sale debt securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value Due in one year or less $ 2,997,392 $ 3,005,938 Due in one year through five years 24,667,129 24,285,653 Due after five years through ten years 34,009,874 32,756,336 Due after ten years 40,792,143 39,197,480 Totals $102,466,538 $ 99,245,407 Upon adoption of SFAS No. 133, an entity is allowed to change the classification of its securities from held to maturity to available for sale. The Company reclassified certain held to maturity investments to available for sale with a cost of $28,502,694 and an unrealized gain of $407,727 upon adoption of SFAS No. 133 on July 1, 1998. Proceeds from the sale of securities were $33,240,067, $13,525,454 and $41,170,105 in 1999, 1998 and 1997, respectively. Gross realized gains were $197,312, $58,719 and $116,446 in 1999, 1998 and 1997, respectively. Gross realized losses were $213,040, $26,877 and $117,909 in 1999, 1998 and 1997, respectively. 4. HELD TO MATURITY SECURITIES The carrying amounts of held to maturity securities for 1999 and 1998 as shown in the Company's consolidated balance sheets, and their approximate fair values at December 31, are as follows: Gross Gross Book Unrealized Unrealized Fair Value Gains Losses Value 1999 1999 1999 1999 Obligations of state and political subdivisions $4,236,504 $ 20,001 $(114,429) $4,142,076 1998 1998 1998 1998 Obligations of state and political subdivisions $4,375,981 $140,142 $ (13,000) $4,503,123 The amortized cost and fair value of held to maturity securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value Due in one year or less $ 422,271 $ 424,418 Due after one year through five years 1,908,996 1,925,386 Due after five years through ten years 590,237 583,339 Due after ten years 1,315,000 1,208,933 Totals $4,236,504 $4,142,076 Nontaxable interest income on municipal investments was $596,061, $507,771 and $274,081 for 1999, 1998 and 1997, respectively. 5. LOANS At December 31, 1999 and 1998, loans on nonaccrual status totaled approximately $437,000 and $534,000, respectively. If interest had been accrued on such loans, interest income on loans would have been approximately $31,000, $40,000 and $39,000 higher in 1999, 1998 and 1997, respectively. Loans delinquent by 90 days or more that were still on accrual status at December 31, 1999 and 1998 totaled approximately $313,000 and $47,000, respectively. In the ordinary course of business, the Company's subsidiary granted loans to the executive officers and directors of the Company and its subsidiary, and to affiliates of directors. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility. The balance of loans to related parties amounted to $2,350,837 and $2,258,380 at December 31, 1999 and 1998, respectively. New loans granted to related parties in 1999 and 1998 totaled $1,879,937 and $946,303, respectively; payments and reductions amounted to $1,487,205 and $2,343,004 in 1999 and 1998, respectively. At December 31, 1999, the Bank assigned loans in the amount of $5,215,952 to the Federal Reserve Bank of Boston to provide access to additional borrowing capacity for year 2000 readiness purposes. 6. ALLOWANCE FOR LOAN LOSSES Analysis of the allowance for loan losses is as follows for the years ended December 31, 1999, 1998 and 1997: 1999 1998 1997 Balance, beginning of year $2,434,636 $2,212,740 $2,083,831 Provision for loan losses 200,000 285,000 120,000 Balance before loan charge-offs 2,634,636 2,497,740 2,203,831 Loans charged off 148,355 112,810 225,365 Less recoveries on loans charged off 143,190 49,706 234,274 Net loan charge-offs (recoveries) 5,164 63,104 (8,909) Balance, end of year $2,629,472 $2,434,636 $2,212,740 Impairment of loans having recorded investments of $14,978 at December 31, 1999 and $207,686 at December 31, 1998 has been recognized in conformity with SFAS No. 114, as amended by SFAS No. 118. The average recorded investment in impaired loans during both 1999 and 1998 was $111,332 and $69,229, respectively. The total allowance for loan losses related to these loans was $150 and $170 on December 31, 1999 and 1998, respectively. There was no interest income recognized on impaired loans in 1999, 1998 and 1997. 7. LOAN SERVICING The Bank services loans for others amounting to $61,202,606 and $57,721,623 at December 31, 1999 and 1998, respectively. Mortgage servicing rights of $233,848 and $207,659 were capitalized in 1999 and 1998, respectively, and have been written to their fair value of $279,896 and $203,504 through a valuation allowance at December 31, 1999 and 1998, and are included in other assets. Amortization of mortgage servicing rights was $110,792, $53,613 and $28,227 in 1999, 1998 and 1997, respectively. 8. PREMISES, FURNITURE AND EQUIPMENT Detail of bank premises, furniture and equipment is as follows: 1999 1998 Land $ 133,378 $ 133,378 Buildings and improvements 3,973,759 3,462,435 Furniture and equipment 3,630,574 3,432,249 Leasehold improvements 478,259 469,221 $8,215,970 $7,497,283 Less accumulated depreciation 5,228,398 4,843,508 $2,987,572 $2,653,775 At December 31, 1999, 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 $124,412 in 1999, $127,953 in 1998 and $114,168 in 1997. The minimum annual lease commitments under noncancellable leases in effect at December 31, 1999 are as follows: Year Ending December 31, Amount 2000 $131,524 2001 $ 88,707 2002 $ 54,896 2003 $ 5,014 2004 $ 5,149 Thereafter $ 70,875 Total $356,165 9. OTHER REAL ESTATE OWNED Other real estate owned is included in other assets and amounts to $0 at December 31, 1999 and $375,506 at December 31, 1998, respectively. Activity in the allowance for losses on other real estate owned for the year ended December 31, 1997 is as follows: 1997 Balance, beginning of year $ 93,082 Provisions charged to income 15,000 Adjustment to market (108,082) Balance, end of year $ 0 There was no activity in the allowance for losses on other real estate owned during 1999 and 1998. 10. DEPOSITS The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was $10,614,011 and $11,479,860 in 1999 and 1998, respectively. At December 31, 1999, the scheduled maturities of time deposits were as follows: 2000 $65,101,945 2001 7,216,826 2002 2,301,735 2003 791,134 Total $75,411,640 11. ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank are summarized as follows: Interest Rates at December 31, 1999 1999 1998 Fixed advances 5.84% to 7.23% $ 451,250 $ 451,250 Variable advances 5.27% to 5.71% 18,000,000 20,000,000 $18,451,250 $20,451,250 Pursuant to the collateral agreements with the Federal Home Loan Bank (FHLB), advances are collateralized by stock in the FHLB, qualifying first mortgage loans and available for sale securities. Advances at December 31, 1999 mature as follows: 2005 2006 2007 2008 2009 2010 2012 2013 $55,000 $9,000,000 $84,250 $7,089,000 $2,000,000 $55,000 $79,000 $89,000 12. OTHER BORROWED FUNDS Securities sold under agreements to repurchase generally mature within one day from the transaction date. At December 31, 1999, securities with a fair value of $26,541,203 were pledged to collateralize other borrowed funds. Information concerning securities sold under agreements to repurchase at December 31, 1999 is summarized as follows: Average balance during the year $ 9,056,088 Average interest rate during the year 3.55% Maximum month-end balance during the year $13,822,285 13. EMPLOYEE BENEFITS The Company adopted SFAS No. 132, "Employer's Disclosure about Pension and Other Post-Retirement Benefits," in 1998. This statement, which revises employers' disclosures about pension and post-retirement benefits, is effective for years beginning after December 31, 1997. Pension Plan The Company's subsidiary has a noncontributory defined benefit pension plan covering substantially all permanent full-time employees. The benefits are based on employees' years of service and the average of their three highest consecutive rates of annual salary preceding retirement. It is the subsidiary's policy to fund the plan sufficiently to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Pension expense amounted to $53,480, $39,145 and $124,079 for the years ended December 31, 1999, 1998 and 1997, respectively. Post-Retirement Benefits Other Than Pensions The Company sponsors a post-retirement benefit program that provides medical coverage and life insurance benefits to certain employees and directors who meet minimum age and service requirements. Active employees and directors accrue benefits over a 25-year period. The following table sets forth the benefit obligations, fair value of plan assets and funded status for the Company's pension and other post-retirement benefit plans at December 31, 1999 and 1998. 1999 1998 Pension Other Pension Other Benefits Benefits Benefits Benefits Change in Benefit Obligations Benefit obligations at beginning of year $4,609,135 $ 1,597,863 $4,262,973 $ 1,413,233 Service cost 185,348 37,622 151,631 63,635 Interest cost 310,869 78,873 288,111 97,391 Actuarial (gain) loss (381,284) (542,761) 138,734 64,090 Benefits paid (234,420) (46,754) (232,314) (40,486) Benefit obligations at end of year $4,489,648 $ 1,124,843 $4,609,135 $ 1,597,863 Change in Plan Assets Fair value of plan assets at beginning of year $5,259,015 $ 0 $4,782,945 $ 0 Actual return on plan assets 348,389 0 708,384 0 Employer contributions 0 46,754 0 40,486 Benefits paid (234,420) (46,754) (232,314) (40,486) Fair value of plan assets at end of year $5,372,984 $ 0 $5,259,015 $ 0 Funded Status $ 883,336 $(1,124,843) $ 649,880 $(1,597,863) Unrecognized net actuarial (gain) loss (587,544) (339,792) (274,284) 194,711 Unamortized prior service cost (28,304) 0 (30,850) 0 Unrecognized transition (net asset) net obligation (84,486) 594,300 (108,264) 639,900 Prepaid (accrued) benefit cost, included in other assets or other liabilities $ 183,002 $ (870,335) $ 236,482 $ (763,252) Net periodic benefit cost includes the following components: 1999 1998 1997 Pension Other Pension Other Pension Other Benefits Benefits Benefits Benefits Benefits Benefits Service cost $185,348 $ 37,622 $151,631 $ 63,635 $177,524 $ 59,472 Interest cost 310,869 78,873 288,111 97,391 293,016 89,543 Expected return on plan assets (416,413) 0 (374,273) 0 (326,921) 0 Recognized net actuarial (gain) loss 0 (8,258) 0 0 6,784 9 Amortization (accretion) of unrecognized transition asset or obligation (23,778) 45,600 (23,778) 45,600 (23,778) 45,600 Amortization of prior service cost (2,546) 0 (2,546) 0 (2,546) 0 Net periodic benefit cost $ 53,480 $153,837 $ 39,145 $206,626 $124,079 $194,624 Weighted-average assumptions as of December 31 Discount rate 6.75% 6.75% 6.75% 6.75% 7.00% 7.00% Expected return on plan assets 8.00% - 8.00% - 8.00% - Rate of compensation increase 4.00% 4.00% 4.00% 5.00% 4.00% 5.00% For measurement purposes, the annual rates of increase in the per capita health care cost of covered benefits were 12%, 11% and 11% for 1999, 1998 and 1997, respectively. The annual rate of increase in per capita health care costs are assumed to decrease annually by 1% until the year 2005 (which at that time will be 6%) and later. The effects of a one-percentage-point change in the assumed health care cost trend rate on the aggregate service and interest cost components of the net periodic post-retirement health care benefit cost would be: 1 Percentage 1 Percentage Point Increase Point Decrease 1999 1998 1997 1999 1998 Effect on total service and interest components $ 177,080 $ 43,505 $ 39,845 $ (136,112) $ (33,525) Effect on post-retirement benefit obligation $1,363,639 $344,334 $332,820 $(1,055,423) $(274,276) The effects of a one-percentage-point decrease in the assumed health care cost trend rate on the aggregate service and interest cost components of the net periodic post-retirement benefit cost and the accumulated post- retirement benefit obligation for health care benefits are not available for 1997. 401(k) Plan The Company has a noncontributory 401(k) plan for employees who meet certain service requirements. Stock Purchase Plan The Bank maintains a stock purchase plan which allows qualified employees and directors to acquire stock at fair market value. 14. INCOME TAXES Income tax expense consists of the following: Current Deferred Total 1999 Federal $1,317,355 $ 0 $1,317,355 State 60,000 0 60,000 $1,377,355 $ 0 $1,377,355 1998 Federal $1,023,720 $211,280 $1,235,000 State 59,000 0 59,000 $1,082,720 $211,280 $1,294,000 1997 Federal $1,176,733 $ 2,267 $1,179,000 State 45,000 0 45,000 $1,221,733 $ 2,267 $1,224,000 The actual tax expense for 1999, 1998 and 1997 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: 1999 1998 1997 Amount % of Amount % of Amount % of Pretax Pretax Pretax Earnings Earnings Earnings Computed "expected" tax expense $1,608,910 34.0% $1,490,570 34.0% $1,334,320 34.0% Nontaxable income on obligations of states and political subdivisions (286,523) (6.1%) (247,762) (5.7%) (158,781) (4.1%) Other 54,968 1.2% 51,192 1.2% 48,461 1.3% $1,377,355 29.1% $1,294,000 29.5% $1,224,000 31.2% 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 1999 1998 Unrealized loss on available for sale securities $1,096,409 $ 0 Allowance for loan losses 894,020 849,232 Deferred compensation 230,225 224,786 Post-retirement benefits 295,308 259,674 Other 71,242 157,104 Deferred tax assets $2,587,204 $1,490,796 DEFERRED TAX LIABILITIES Unrealized gain on available for sale securities $ 0 $ 598,622 Allowance for loan losses 146,903 170,114 Premises, furniture and equipment, principally due to differences in depreciation 242,659 256,007 Prepaid pension expense 62,493 80,676 Cash surrender value of life insurance 36,386 36,386 Other 72,751 18,010 Deferred tax liabilities $ 561,192 $1,159,815 The Bank has sufficient refundable taxes paid in available carryback years to fully realize its recorded deferred tax asset of $2,587,204 at December 31, 1999. The deferred tax asset and liability are included in other assets and other liabilities in the balance sheet at December 31, 1999 and 1998. 15. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. Quantitive measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the Federal Reserve Board categorized the Bank as well capitalized under the regulatory framework. To be so categorized, the Bank must maintain minimum total risk based, Tier I risk based and Tier I leverage ratios as set forth in the table. Management believes no conditions or events that would alter the Bank's categorization have occurred since the Board's notification. The actual capital amounts and ratios for the Bank as of December 31, 1999 and 1998 are presented in the table below: December 31, 1999 To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Total capital (to risk weighted assets) $31,061,000 21.2% >$11,705,000 >8.0% >$14,631,300 >10.0% Tier I capital (to risk weighted assets) $29,222,000 20.0% >$ 5,853,000 >4.0% >$ 8,778,780 > 6.0% Tier I capital (to average assets) $29,222,000 11.2% >$ 7,854,000 >3.0% >$13,223,500 > 5.0% December 31, 1998 To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Total capital (to risk weighted assets) $28,490,327 21.6% >$10,540,400 >8.0% >$13,175,500 >10.0% Tier I capital (to risk weighted assets) $26,833,327 20.4% >$ 5,270,200 >4.0% >$ 7,905,300 > 6.0% Tier I capital (to average assets) $26,833,327 10.7% >$ 7,500,060 >3.0% >$12,500,100 > 5.0% The actual capital amounts and ratios for the Company are not materially different from those for the Bank. The Company may not declare or pay a cash dividend on or repurchase any of its capital stock if the effect thereof would cause the capital of the Company to be reduced below the capital requirements imposed by the Federal Reserve. 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION 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 inancial instruments include commitments to extend credit and letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. At December 31, 1999 and 1998, the following financial instruments, whose contract amounts represent credit risk, were outstanding: Contract Amount 1999 1998 Commitments to extend credit $33,241,000 $30,769,000 Standby letters of credit $ 82,000 $ 195,000 Unadvanced portions of construction loans $ 2,667,000 $ 1,564,000 Total $35,990,000 $32,528,000 The Bank's exposure to credit loss in the event of nonperformance by the other parties to the above financial instruments is represented by the contractual amounts of the instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the credit extension, is based on management's credit evaluation of the counterparty. The types of collateral held include residential and commercial real estate and, to a lesser degree, personal property, business inventory and accounts receivable. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Expiration dates are usually within one year. 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, 1999, there were no borrowers whose total indebtedness to the Bank exceeded regulatory limits. 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, 1999, 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, 1999 and 1998, as these financial instruments have short maturities. Available for Sale Securities and Held to Maturity Securities Fair values are estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Management has determined that the fair value approximates book value on all loans with maturities of one year or less or variable interest rates. The fair values of all other loans are estimated based on bid quotations received from securities dealers. The estimates of maturity are based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions and the effects of estimated prepayments. Loans Held for Sale The fair market value of this financial instrument approximates the book value as the instrument has a short maturity. Accrued Interest Receivable The fair market value of this financial instrument approximates the book value as the instrument has a short maturity. It is the Bank's policy to stop accruing interest on loans past due by more than 90 days. Other Investment Securities, Federal Home Loan Bank Stock and Federal Reserve Bank Stock The fair market value of these financial instruments approximates the book value as these instruments do not have a market, nor is it practical to estimate their fair value without incurring excessive costs. Deposits Fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, savings deposits, NOW accounts and money market and checking accounts, equals the amount payable on demand. The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value was considered, the fair value of the Bank's net assets could increase. Accrued Interest Payable The fair value of this financial instrument approximates the book value as the instrument has a short maturity. Advances from Federal Home Loan Bank The fair values of advances are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Other Borrowed Funds The carrying amount of borrowings under repurchase agreements maturing within 90 days approximates their fair value. Commitments to Extend Credit The Bank has not estimated the fair values of commitments to originate loans due to their short-term nature and their relative immateriality. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The latter may include deferred tax assets, bank premises and equipment and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. A summary of the fair values of the Company's significant financial instruments at December 31, 1999 and 1998 follows: 1999 1998 Carrying Estimate of Carrying Estimate of Value Fair Value Value Fair Value ASSETS Cash, due from banks and federal funds sold $ 9,074,779 $ 9,074,779 $ 17,113,358 $ 17,113,358 Available for sale securities 99,714,632 99,714,632 103,370,494 103,370,494 Held to maturity securities 4,236,504 4,142,076 4,375,981 4,503,123 Other investment securities 3,557,700 3,557,700 3,557,700 3,557,700 Loans 125,019,679 123,904,819 107,987,795 108,860,924 Loans held for sale 594,464 594,464 6,137,956 6,137,956 Accrued interest receivable 2,294,145 2,294,145 2,368,736 2,368,736 LIABILITIES Deposits 192,847,834 194,258,313 188,029,016 189,881,877 Accrued interest payable 823,256 823,256 1,005,749 1,005,749 Advances from Federal Home Loan Bank 18,451,250 18,451,250 20,451,250 20,451,250 Other borrowed funds 13,140,423 13,140,423 8,965,977 8,965,977 19. PARENT-ONLY CONDENSED FINANCIAL STATEMENTS The condensed financial statements of Union Bankshares Company as of December 31, 1999 and 1998 and for each of the years ended December 31, 1999, 1998 and 1997 are presented as follows: BALANCE SHEET December 31, 1999 and 1998 1999 1998 ASSETS Cash $ 49,635 $ 70,198 Investment in subsidiary 27,125,055 28,094,322 Other assets 757,225 870,000 Total assets $27,931,915 $29,034,520 LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 288,924 $ 240,948 Other liabilities 0 53,854 Shareholders' equity 27,642,991 28,739,718 Total liabilities and shareholders' equity $27,931,915 $29,034,520 STATEMENTS OF INCOME Years ended December 31, 1999, 1998, and 1997 1999 1998 1997 Dividend income $1,149,726 $ 971,354 $ 887,466 Equity in undistributed earnings of subsidiary 2,214,170 1,945,460 1,682,019 Other income 0 181,870 140,804 Total income 3,363,896 3,098,684 2,710,289 Operating expenses 9,174 8,656 9,817 Net income $3,354,722 $3,090,028 $2,700,472 STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,354,722 $ 3,090,028 $ 2,700,472 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Undistributed earnings of subsidiary (2,214,170) (1,945,460) (1,682,019) Increase in other assets (48,000) (173) (39,970) Net cash provided by operating activities $ 1,092,552 $ 1,144,395 $ 978,483 CASH FLOWS FROM FINANCING ACTIVITIES Payment to eliminate fractional shares $ (33,126) $ 0 $ (29,699) Increase (decrease) in dividends payable 47,978 (515) 39,558 Dividends paid (1,107,916) (964,144) (885,940) Purchase of treasury stock (80,468) (181,870) (113,440) Sale of treasury stock 60,417 53,546 8,780 Net cash used by financing activities $(1,113,115) $(1,092,983) $ (980,741) Net increase (decrease) in cash and cash equivalents (20,563) 51,412 (2,258) Cash beginning of year 70,198 18,786 21,044 Cash end of year $ 49,635 $ 70,198 $ 18,786 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Net increase (decrease) in net unrealized gain (loss) on available for sale securities $(3,290,356) $ 724,283 $ 609,209 Elimination of minority shares 0 14,635 0 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Union Bankshares Company We have audited the accompanying consolidated balance sheets of Union Bankshares Company and Subsidiary as of December 31, 1999 and 1998, 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, 1999. 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 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, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine January 21, 2000 UNION BANKSHARES COMPANY & UNION TRUST COMPANY DIRECTORS Arthur J. Billings David E. Honey President, Barter Lumber Company Retired, Former Manager Swans Island Electric Coop Peter A. Blyberg President James L. Markos, Jr. General Manager, Robert S. Boit Maine Shellfish Company, Inc. Retired, Former President Blake B. Brown Casper G. Sargent, Jr. President & Owner, Brown's Owner, Sargent's Real Estate Corp. Appliance and TV Richard C. Carver John V. Sawyer II Owner, Carver Oil Co. Chairman of the Board; Retired & Carver Shellfish President, Worcester-Sawyer Agency Peter A. Clapp Stephen C. Shea President, Blue Hill Garage Treasurer, E. L. Shea, Inc.; President, Shea Leasing Sandra H. Collier Attorney at Law, Richard W. Teele Sandra Hylander Collier Law Offices Secretary; Retired Former Executive Vice President & Treasurer Robert B. Fernald Treasurer, A. C. Fernald Sons, Inc. Paul L. Tracy & Jordan Fernald President, Owner, Winter Harbor Agency; Vice President, Co-Owner, Douglas A. Gott Schoodic Insurance Agency; Owner, Douglas A. Gott & Sons Vice President, Co-Owner, MDI Insurance Agency; Co-Owner, Grindstone Financial Group LLC Richard W. Whitney Dentist UNION BANKSHARES COMPANY UNION BANKSHARES COMPANY DIRECTORY OF OFFICERS & UNION TRUST COMPANY HONORARY DIRECTORS John V. Sawyer II Chairman of the Board Franklin L. Beal Retired Peter A. Blyberg President Carroll V. Gay Retired John P. Lynch Executive Vice President Delmont N. Merrill President, Merrill Blueberry Farms, Inc. Peter F. Greene Senior Vice President Thomas R. Perkins Retired Pharmacy Owner Sally J. Hutchins Retired Maine Legislator (Senator) Senior Vice President & Clerk Retired Legislative Liaison MSHA Rebecca J. Sargent John E. Raymond Sr. Vice President, Sr. Trust Officer President, Bimbay, Inc. Richard W. Teele Mary T. Slaven Secretary Realtor Douglas N. Smith Retired I Frank Snow Retired UNION TRUST COMPANY DIRECTORY OF OFFICERS John V. Sawyer II Harold L. Metcalf Chairman of the Board AVP, Relationship Manager Peter A. Blyberg Peter C. O'Brien President, Chief Executive Officer AVP, Loan Support Manager and CRA Officer John P. Lynch Lorraine S. Ouellette Exec. Vice Pres., Sr. Banking Officer AVP, Trust Officer Peter F. Greene Catherine M. Planchart Sr. Vice Pres., Sr. Bank Services Officer AVP, Marketing Officer Sally J. Hutchins Deborah F. Preble Sr. Vice Pres., Treas., Controller & Clerk AVP, Assistant Controller Rebecca J. Sargent Sandy Salsbury Sr. Vice President, Senior Trust Officer Human Resource Officer Edwin Bonnenfont Susan A. Saunders Vice President, Investment Officer AVP, Project Management Officer Janis Guyette Stephen L. Tobey Vice President, Trust Operations Officer AVP, Cash Management & Security Officer Christopher H. Keefe Julie C. Vittum Vice President, Sr. Relationship Manager AVP, Senior Auditor David A. Krech Linda Carter Vice President, Sr. Investment Officer Deposit Services Officer Bette B. Pierson Helen J. Condon Vice President, Mortgage Loan Officer Electronic Services Officer Geddes Simpson, Jr. Cynthia Davis Vice President, Trust Officer Customer Services Officer Michelle Bannister Sylvia Joy AVP, Training and Development Officer Assistant Trust Officer James M. Callnan Dawn L. Lacerda AVP, Senior Information Services Officer Loan Services Officer Nancy E. Domagala Mary Lou Lane AVP, Mortgage Underwriter Mortgage Underwriter Laurence D. Fernald, Jr. William Sneed AVP, Relationship Mgr. and Information Specialist Officer Appraisal Review Officer Lynda C. Hamblen Brenda Strout AVP, Relationship Manager Assistant Trust Officer Phyllis C. Harmon Tina St. Pierre AVP, Relationship Manager Collections Officer Patti S. Herrick AVP, Information Services Officer UNION TRUST COMPANY BRANCH OFFICES Bar Harbor Gray, Shelly Christopher H. Keefe, VP, Sr. Relationship Manager Grindle, Eugene Hall, Maria Blue Hill Hamilton, Tara Pamela G. Hutchins, AVP, Relationship Manager Handy, Louise Heidi Gommo, Assistant Branch Manager Hennigan, Robin Hills, Darlene Castine Hinkel, Scott Pamela G. Hutchins, AVP, Relationship Manager Hutchins, Rebecca Hutchinson, Elwell Cherryfield Ingalls, Laurea C. Foster Mathews, AVP, Branch Manager Jewell, Beth Johnson, Mindy Ellsworth Shopping Center Kalloch, Debra Melody L. Wright, Branch Manager Kelley, Cindy Look, Cheryl Jonesport Look, Lisa Wendy W. Beal, AVP, Relationship Manager Lounder, Lorraine MacLaughlin, Wendy Machias Madden, Anita Lisa A. Holmes, AVP, Relationship Manager Madore, Jennifer Marshall, Carol Milbridge McCormick, Bernadette James E. Haskell, AVP, Relationship Manager Merritt, Caroline Norton, Clifford III Somesville Owen, Doris William R. Weir, Jr., AVP, Relationship Manager Page, Deborah Perry, Ann Stonington Pineo, Muriel Harry R. Vickerson III, AVP, Relationship Manager Podlubny, Helene Raybourn, Dawn UNION TRUST COMPANY PERSONNEL Reardon, Rhonda Rollins, Bonnie Allen, Deborah Rose, Brenda Armstrong, Rebecca Sackett, Jacqueline Austin, Lois Salisbury, Jane Babson, William Santerre, Tammy Batson, Harold Sawyer, Donna Bayrd, Rona Scott, Marsha Billings, Holly Scoville, Clark Bishop, Kristina Servetas, Dana Bonville, Melissa Sinford, Nicole Boyce, Katrina Sinford, Stacey Carter, Glendon Snow, Christie Carver, Lisa Spaulding, Virginia Cole, Richard Sprague, Donna Curtis, Kristen Sproul, Bonnie Czlapinski, Kathy Swett, Andrea Dillon, Patricia Thibodeau, Mary Dorr, Peggy Thompson, Dianne Douglas, Joanne Treadwell, Mattie Driscoll, Johna Ulichny, Rhonda Dyer, Shari Wallace, Jayne Elliott, Linda Wenger, April Faulkner, Kathy Wilson, Stephanie Furrow, Cecila Youngblood, Mary Gellerson, Tracy Grant, Victoria 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 1999 Annual Report on SEC Form 10K, including the financial statements and schedules required to be filed with the Securities and Exchange Commission. Interested persons should write to: Sally J. Hutchins, Senior Vice President Union Bankshares Company P.O. Box 479 Ellsworth, Maine 04605 EX-27 3
9 12-MOS DEC-31-1999 DEC-31-1999 9035081 0 39698 0 99714632 4236504 4142076 127649151 2629472 257849665 192847834 13140423 5767167 18451250 0 0 7279925 0 257849665 10032349 7232935 0 17265284 5594462 7096453 10168831 200000 0 1785915 4732077 0 0 0 3354722 5.80 0 0 438000 99000 4624000 0 2629472 307000 301000 0 0 0 0
EX-99 4 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, 1999 and 1998, 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, 1999. 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 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, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine January 21, 2000 -----END PRIVACY-ENHANCED MESSAGE-----