FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 No. 0-21078
UNION BANKSHARES, LTD.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0986148
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(State of other jurisdiction of incorporation (I.R.S. Employer
of organization) Identification No.)
1825 LAWRENCE STREET, SUITE 444, DENVER, CO 80202
(Address of principal executive offices)
(Zip Code)
(303) 298-5352
(Registrant's telephone number, including area code)
Not Changed
Former name, former address and former fiscal year, if changed since last
report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
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 [ X ] No [ ]
At October 29, 1997, there were 1,165,257 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
<PAGE>
UNION BANKSHARES, LTD.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.........................................3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............8
PART II - OTHER INFORMATION...................................................14
Item 5. Other Information...........................................14
Item 6. Exhibits and Reports on Form 8-K............................14
SIGNATURES....................................................................15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 DECEMBER 31,
ASSETS (UNAUDITED) 1996
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<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 14,842,000 $ 12,356,000
Federal funds sold 2,300,000 --
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Total cash and cash equivalents 17,142,000 12,356,000
Investment securities:
Investment securities held to maturity 30,317,000 24,634,000
Investment securities available for sale 32,240,000 39,904,000
Other investments 871,000 494,000
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Total investment securities 63,428,000 65,032,000
Loans:
Commercial 85,685,000 70,631,000
Real estate mortgage 6,156,000 5,489,000
Real estate construction 9,298,000 5,758,000
Consumer 21,653,000 18,854,000
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Total loans 122,792,000 100,732,000
Less: allowance for loan losses (2,034,000) (1,754,000)
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120,758,000 98,978,000
Excess of investment in subsidiary over net assets acquired 2,777,000 2,946,000
Furniture, equipment and improvements, net 1,418,000 1,573,000
Accrued interest receivable 1,537,000 1,107,000
Other assets 1,329,000 1,194,000
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TOTAL ASSETS $ 208,389,000 $ 183,186,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest-bearing) $ 53,709,000 $ 48,742,000
NOW 16,807,000 15,279,000
Money Market 59,911,000 54,772,000
Savings 11,072,000 10,011,000
Time 35,401,000 27,605,000
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Total deposits 176,900,000 156,409,000
Federal funds purchased -- 6,200,000
Notes payable 12,750,000 3,500,000
Accrued interest payable 557,000 95,000
Other liabilities 617,000 950,000
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Total liabilities 190,824,000 167,154,000
Stockholders' equity
Common stock 1,000 1,000
Common stock surplus 9,547,000 9,435,000
Valuation allowance 257,000 348,000
Retained earnings 7,760,000 6,248,000
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Total stockholders' equity 17,565,000 16,032,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 208,389,000 $ 183,186,000
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</TABLE>
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 8,429,000 $ 6,912,000 $ 3,081,000 $ 2,462,000
Interest in investment securities:
U.S. government agencies and corporations 2,129,000 1,502,000 665,000 607,000
States and other political subdivisions 1,050,000 1,336,000 292,000 387,000
Interest on federal funds sold and interest bearing
deposits at other banks 80,000 157,000 57,000 117,000
----------- ----------- ----------- -----------
Total interest income 11,688,000 9,907,000 4,095,000 3,573,000
INTEREST EXPENSE:
Interest on deposits 2,962,000 2,716,000 1,055,000 1,015,000
Interest on federal funds purchased 108,000 74,000 14,000 18,000
Interest on notes payable 667,000 301,000 227,000 84,000
----------- ----------- ----------- -----------
Total interest expense 3,737,000 3,091,000 1,296,000 1,117,000
----------- ----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSS 7,951,000 6,816,000 2,799,000 2,456,000
PROVISION FOR LOAN LOSS 270,000 165,000 90,000 60,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSS 7,681,000 6,651,000 2,709,000 2,396,000
NONINTEREST INCOME:
Service charges 280,000 279,000 96,000 94,000
Gain (loss) on sale of securities available for sale 91,000 89,000 38,000 (123,000)
Other 329,000 350,000 106,000 110,000
----------- ----------- ----------- -----------
Total noninterest income 700,000 718,000 240,000 81,000
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 3,287,000 2,861,000 1,138,000 945,000
Amortization of investment in subsidiary over net
assets acquired 170,000 170,000 57,000 57,000
Occupancy and equipment 912,000 915,000 319,000 322,000
Other 1,873,000 1,590,000 636,000 525,000
----------- ----------- ----------- -----------
Total noninterest expense 6,242,000 5,536,000 2,150,000 1,849,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY ITEM 2,139,000 1,833,000 799,000 628,000
INCOME TAX EXPENSE (Note 3) 628,000 416,000 276,000 177,000
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 1,511,000 1,417,000 523,000 451,000
EXTRAORDINARY ITEM (NET) -- (337,000) 0 0
----------- ----------- ----------- -----------
NET INCOME $ 1,511,000 $ 1,080,000 $ 523,000 $ 451,000
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE: (Note 4)
Income per share before extraordinary item $ 1.21 $ 1.17 $ 0.42 $ 0.37
Extraordinary item, net $ 0.00 $ (0.28) $ 0.00 $ 0.00
----------- ----------- ----------- -----------
Net income per share $ 1.21 $ 0.89 $ 0.42 $ 0.37
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 1,251,083 1,220,463 1,255,065 1,221,238
=========== =========== =========== ===========
</TABLE>
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<PAGE>
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 1,623,000 $ (1,143,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale securities 2,627,000 8,090,000
Proceeds from maturities of held-to-maturity securities 8,221,000 2,698,000
Proceeds from sale of available-for-sale securities 12,717,000 24,707,000
Proceeds from sale of held-to-maturity securities 676,000 --
Purchase of available-for-sale securities (18,153,000) (29,636,000)
Purchase of held-to-maturity securities (4,000,000) (1,010,000)
Purchase of other investments (377,000) --
Net increase in loans (22,050,000) (17,126,000)
Proceeds from sale of furniture and equipment -- 31,000
Purchase of furniture and equipment (152,000) (243,000)
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Net cash used in investing activities (20,491,000) (12,489,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 20,491,000 32,361,000
Increase (decrease) in fed funds purchased (6,200,000) (4,000,000)
New borrowings long-term debt 10,000,000 4,000,000
Repayments of long-term debt (750,000) (6,512,000)
Proceeds from issuance of common stock 113,000 26,000
------------ ------------
Net cash provided by financing activities 23,654,000 25,875,000
------------ ------------
Net increase in cash and cash equivalents 4,786,000 12,243,000
Cash and cash equivalents, beginning of year 12,356,000 10,297,000
------------ ------------
Cash and cash equivalents, end of quarter $ 17,142,000 $ 22,540,000
============ ============
</TABLE>
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UNION BANKSHARES, LTD. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and related footnotes included in the
Company's annual report on Form 10- KSB for the year ended December 31, 1996. In
the opinion of management, the consolidated financial statements presented
herein include all adjustments (consisting of normal recurring accruals)
necessary to present fairly, in all material respects, the consolidated
financial position of Union Bankshares, Ltd. (the "Company") as of September 30,
1997 and the Company's results of operations for the three and nine months ended
September 30, 1997 and 1996, and statements of cash flows for the three and nine
months ended September 30, 1997 and 1996.
Certain reclassifications have been made to the September 30, 1996 Consolidated
Financial Statements to conform to the September 30, 1997 Consolidated Financial
Statements.
NOTE 2. RESULTS OF OPERATIONS
The results of operations for the three and nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year.
NOTE 3. INCOME TAXES
Income taxes are provided for on the liability method, in accordance with
Financial Accounting Standards Board (FASB) Statement No. 109, whereby deferred
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are defined as the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in the tax laws and rates on
the date of enactment.
NOTE 4. EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income available for
common stockholders by the weighted average number of shares of common stock
outstanding during the period plus the equivalent number of shares purchasable
under common stock options, if dilutive. Earnings per common share were affected
by 94,923 shares purchasable pursuant to exercisable options during the three
and nine months ended September 30, 1997. Earnings per common share were
affected by 71,256 shares purchasable pursuant to exercisable options during the
three and nine months ended September 30, 1996.
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NOTE 5. EXTRAORDINARY ITEM
On April 1, 1996, the Company redeemed its outstanding Convertible Subordinated
Notes (the "Notes"). Pursuant to the terms of the Notes, and as a result of the
redemption, holders of the Notes were entitled to receive from the Company the
redemption price of 101% of the principal amount of the Notes plus accrued
interest. Alternatively, at the option of the holder, the Notes were convertible
into shares of common stock of the Company at the conversion rate of 78.68
shares of common stock for each $1000 principal amount of Notes redeemed. As a
result of the redemption in 1996, the Company expensed $473,000, the remaining
unamortized balance of the debt issuance costs, and a $65,000 redemption
premium. These amounts, net of $201,000 of applicable income taxes, have been
categorized as an extraordinary loss on the consolidated statement of income.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary presents management's discussion and analysis of the
Company's financial performance and financial condition for the third quarter
and nine months ended September 30, 1997. The discussion is a supplement to the
unaudited Consolidated Financial Statements and should be read in conjunction
with those statements.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
OVERVIEW: Union Bankshares, Ltd. (the "Company") reported net income of
$1,511,000 for the nine months ended September 30, 1997, an increase of 39.9%
from net income of $1,080,000 for the first nine months of 1996. Earnings were
positively impacted in the first nine months of 1997 by an increase in net
interest income of $1,135,000, and the absence of a $337,000 (after tax)
extraordinary expense relating to the Company's redemption of its outstanding
convertible subordinated notes (the "Notes") in the first quarter of 1996. These
improvements were partially offset by a $706,000 increase in noninterest expense
and a $105,000 increase in provision for loan loss for the nine months ended
September 30, 1997. Net income per share was $1.21 for the nine months ended
September 30, 1997 compared to $.89 per share for the 1996 period. Return on
average assets and average equity were 1.05% and 12.18%, respectively, for the
nine months ended September 30, 1997 compared to 0.79% (1.11% before
extraordinary item) and 9.67% (12.65% before extraordinary item), respectively,
for the first nine months of 1996.
During the first nine months of 1997, the Bank's loan portfolio increased by
$22.1 million, while its deposits increased $20.5 million. In addition, the
Company's long term debt increased $9.3 million as a result of the Bank
borrowing $10.0 million from the Federal Home Loan Bank of Topeka (the "FHLB"),
offset by the Company's prepayment of $0.7 million on its loan with NationsBank.
INTEREST INCOME: Interest income increased $1,781,000, or 18.0%, to $11,688,000
for the period ended September 30, 1997 from $9,907,000 for the comparable 1996
period, primarily as a result of higher loan balances during the period. The
Company's net yield on interest earning assets on a fully tax equivalent basis
was 9.13% for the first nine months of 1997, which reflects an increase of 15
basis points (each basis point equals 1/100 of 1%) from the comparable 1996
period. The average yield on loans decreased from 10.34% in the 1996 period to
10.22% in the 1997 period, and the average yield on securities held by the
Company increased from 7.25% in the 1996 period to 7.37% in the 1997 period.
Interest income on loans was $1,517,000 greater in the 1997 period, while
interest income on securities increased $341,000 in the 1997 period.
INTEREST EXPENSE: Interest expense increased $646,000, or 16.0%, to $3,737,000
for the nine months ended September 30, 1997 from $3,091,000 for the nine months
ended September 30, 1996. This increase is primarily due to the change in the
mix in interest bearing deposit accounts in the 1997 period compared to those in
the 1996 period and the $9.3 million increase in notes payable (primarily as a
result of the FHLB loan). Average rates paid on interest bearing deposits
increased 5 basis points to 3.54% in the first nine months of 1997 from 3.49% in
the first nine months of 1996.
NET INTEREST INCOME: Net interest income before provision for loan loss was
$7,951,000 for the nine months ended September 30, 1997, an increase of
$1,135,000, or 16.7%, over the first nine months of 1996. Net
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<PAGE>
interest margin increased 1 basis point from 6.29% in the 1996 period to 6.30%
in the 1997 period. The increase in net interest income is primarily due to a
$1,517,000 increase in interest income on loans and a $341,000 increase in
interest income on securities, partially offset by a $646,000 increase in
interest expense. The Company's average cost of funds for the nine months ended
September 30, 1997 was 20 basis points higher than the comparable 1996 period.
The Company's average yield on interest earning assets increased 15 basis points
in the 1997 period compared to the 1996 period, from 8.98% to 9.13%.
NONINTEREST INCOME: Noninterest income decreased $18,000 for the nine months
ended September 30, 1997 to $700,000 from $718,000 for the nine months ended
September 30, 1996.
NONINTEREST EXPENSE: Noninterest expense increased $706,000, or 12.8%, for the
first nine months of 1997 to $6,242,000 compared to $5,536,000 in the first nine
months of 1996. This increase is primarily the result of (i) increases in
salaries and benefits relating primarily to annual merit increases; (ii)
increases in other noninterest expenses relating to advertising and business
development expenses; (iii) increases in legal fees relating to one loan
collection effort; and (iv) an absence of recoveries of legal fees and claim
exposures accrued in 1995 which were recovered in 1996.
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<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
OVERVIEW: The Company reported net income of $523,000 for the three months ended
September 30, 1997, an increase of 16.0% from net income of $451,000 for the
comparable 1996 period. Net income was $.42 per share for the three month period
ended September 30, 1997, compared to $.37 per share for the 1996 period. Return
on average assets and average equity were 1.05% and 12.22%, respectively, for
the three month period ended September 30, 1997, compared to 0.99% and 12.12%,
respectively, for the 1996 period.
INTEREST INCOME: Interest income increased $522,000, or 14.6%, to $4,095,000 for
the three month period ended September 30, 1997 from $3,573,000 for the
comparable 1996 period, primarily as a result of higher loan balances during the
period. The Company's net yield on interest earning assets on a fully tax
equivalent basis was 9.11% for the three month period ended September 30, 1997,
which reflects an increase of 20 basis points from the comparable 1996 period.
The average yield on loans decreased from 10.23% in the 1996 period to 10.18% in
the 1997 period, and the average yield on securities held by the Company
decreased from 7.32% in the 1996 period to 7.20% in the 1997 period. Interest
income on loans was $619,000 greater in the 1997 period and interest income on
securities decreased $37,000 in the 1997 period.
INTEREST EXPENSE: Interest expense increased $179,000, or 16.0%, to $1,296,000
for the three month period ended September 30, 1997 from $1,117,000 for the
three month period ended September 30, 1996. This increase was primarily due to
an increase in interest expense on deposits of $40,000 and an increase in
interest expense on borrowings of $143,000. Average rates paid on interest
bearing deposits increased 7 basis points to 3.60% in the three month period
ended September 30, 1997 from 3.53% in the three month period ended September
30, 1996.
NET INTEREST INCOME: Net interest income before provision for loan loss was
$2,799,000 for the three month period ended September 30, 1997, an increase of
$343,000, or 14.0%, over the comparable period of 1996. Net interest margin
increased 7 basis points between the periods from 6.24% in the 1996 period to
6.31% in the 1997 period. The increase in the net interest income is primarily
due to a $619,000 increase in interest income on loans, offset by a $37,000
decrease in interest income on securities and a $179,000 increase in interest
expense. The Company's average cost of funds for the three month period ended
September 30, 1997 was 24 basis points higher than in the comparable 1996
period. The Company's average yield on interest earning assets increased 20
basis points in the 1997 period compared to the 1996 period, from 8.91% to
9.11%.
NONINTEREST INCOME: Noninterest income increased $159,000 for the three month
period ended September 30, 1997 to $240,000 from $81,000 for the three month
period ended September 30, 1996. This increase was primarily due to a $161,000
increase in the gain on sale of securities available for sale from a $123,000
loss in the three month period ended September 30, 1996 to a $38,000 gain in the
three month period ended September 30, 1997.
NONINTEREST EXPENSE: Noninterest expense increased $301,000, or 16.3%, for the
three month period ended September 30, 1997 to $2,150,000 compared to $1,849,000
in the three month period ended September 30, 1996. This increase is primarily
the result of (i) salaries and benefits relating primarily to annual merit
increases; (ii) increases in other noninterest expenses relating to advertising
and business development expenses; (iii) increases in legal fees relating to one
loan collection effort; and (iv) an absence of recoveries of legal fees and
claim exposures accrued in 1995 which were recovered in 1996.
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PROVISION FOR LOAN LOSS
The Company charged $270,000 to Provision for Loan Loss in the first nine months
of 1997 and $165,000 for the same period in 1996. The ratio of loan loss reserve
to total loans was 1.66% at September 30, 1997 and 1.66% at September 30, 1996.
The Company sets its loan loss reserve at a level considered adequate to provide
for anticipated loan losses based on management's assessment of various factors
affecting the loan portfolio. These factors include a review of problem loans,
business conditions, loan loss experience and an overall evaluation of the
quality of the collateral, holding and disposal costs and costs of capital.
Provision for loan loss is a direct charge against income and is determined by
management based on the adequacy of the loan loss reserve.
LIQUIDITY AND SOURCES OF FUNDS
The Company's total assets increased 13.8% to $208.4 million at September 30,
1997 from $183.2 million at December 31, 1996. During the nine months ended
September 30, 1997 deposits increased $20.5 million to $176.9 million at
September 30, 1997 from $156.4 million at December 31, 1996. None of the
Company's deposits at September 30, 1997 were brokered deposits.
The Loan Agreement with Nationsbanc (formerly Boatmen's) provides for interest
on outstanding amounts to be payable at Nationsbanc's corporate base rate, which
is currently 8.50%. The Loan Agreement provides for a one-year term loan which
is renewable by the Company unless the Company's credit standing is
unsatisfactory based on the criteria set forth below. The Loan Agreement
contains a twelve-year amortization schedule, with interest only for the first
two years, assuming renewal of the loan in accordance with its terms.
Annual renewal of the loan is based on the compliance by the Bank with the
following criteria:
1. Capital Ratio of not less than 6.25%;
2. Return on Average Assets of not below 1.00%;
3. Loan Loss Reserve/Total Loans Ratio of not below 1.00%;
4. Non-Performing Loans/Total Loans Ratio of not greater than 2.00%;
5. Debt Service Coverage Ratio of not less than 2:1; and
6. Absence of regulatory dividend restrictions.
In the event the Bank does not meet any of these criteria calculated as of
December 31 of each year and based on its financial statements, the Company will
have 90 days from the delivery of the financial statements to cure the
situation.
The loan is secured by the pledge of all of the shares of capital stock of the
Bank, and contains standard representations, warranties and covenants.
At December 31, 1996, the Company met all of the above criteria, and the loan
was renewed for another one year term. The Company repaid $500,000 on the loan
in June 1997 and $250,000 in September 1997. $2,750,000 remained outstanding
under the Loan Agreement at September 30, 1997.
The Company has also entered into a revolving line of credit with Nationsbanc in
an amount not to exceed $3,000,000. Any monies advanced under this line would be
used solely for capital needs of the Company or to purchase the stock of banks
or bank holding companies. This line of credit is available for one year only,
with renewals to be negotiated each year. If any principal is advanced on this
line, the terms of the repayment would also be negotiated depending upon the use
of proceeds. Interest on amounts outstanding under this revolving line of
credit, if any, is due quarterly. At March 31, 1997, this line of credit was
also renewed for an additional one year term.
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In early 1997, the Bank borrowed $10 million from the FHLB in the form of two $5
million loans. The purpose of securing these loans was primarily to provide
liquidity and allow the Bank to limit its capital exposure relative to
securities held in the Available for Sale portfolio. The first $5 million
enabled management to reduce its current daily purchase of Federal Funds from
approximately $8 million to $3 million. With the remaining $5 million, the Bank
purchased approximately $5 million in short-term U.S. Government securities,
which were placed in the Available for Sale portfolio. This allowed the Bank to
transfer approximately $5 million in long-term GNMA mortgage pool securities
with relatively high coupon yields to Held to Maturity, which limits the Bank's
capital exposure should interest rates increase. The loans are structured as
follows: $5 million at 6.34%, maturing January 14, 1999; and $5 million at
6.50%, maturing January 14, 2000. These loans cannot be prepaid without a
prepayment penalty. Interest on these notes is due monthly. The Company expects
that maturities of securities held in the Available for Sale portfolio will be
adequate to fund repayment of these loans.
Management anticipates that the Company will continue to rely primarily on
customer deposits, sales and maturities of investment securities, loan sales and
loan repayments, as well as retained earnings to provide liquidity. These funds
are used to make loans, to acquire investment securities and other assets and to
fund continuing operations. The Company believes that its customer deposits will
continue to provide a strong source of liquidity because of the high percentage
of core deposits, many of which are held as compensating balances under
long-standing loan relationships. As a secondary source of funds, management
uses federal funds and its membership in the FHLB.
ASSET QUALITY
The Company's lending activities are guided by its Statement of Lending Policies
and Procedures. These policies are annually reviewed and approved by the Bank's
Board of Directors. The Bank employs an internal auditor to monitor its internal
supervision and audits of its lending operation, and the Company supplements
these internal procedures with independent examinations performed by
professional consultants and auditors. The Company monitors concentrations of
loans by collateral, purpose and industry. The Company has no significant
exposure to highly leveraged transactions and has no foreign credits in its loan
portfolio.
Total nonperforming assets were $129,000 and $14,000 at September 30, 1997 and
December 31, 1996, respectively. Other Real Estate Owned (OREO) was $0 at both
September 30, 1997 and December 31, 1996. At September 30, 1997, securities held
to maturity were $30.3 million, or 47.8% of the total portfolio, and securities
available for sale totaled $32.2 million, or 50.8% of the total portfolio. Other
securities (investment in FHLB stock) totaled $0.9 million, or 1.4% of the total
portfolio. Securities available for sale are those securities which may be sold
in response to changes in interest rates, changes in the Company's short term
liquidity needs or changes in prepayment risk, and are stated at the lower of
cost or estimated market value. At September 30, 1997, the market value of
investments available for sale exceeded carrying value by approximately
$369,000.
Securities held to maturity are considered longer term assets which are normally
held until maturity and are carried at amortized cost. The market value of
securities designated as held to maturity exceeded carrying value by
approximately $674,000 at September 30, 1997. U.S. government securities make up
$17.9 million, or 28.3% of the investment portfolio, mortgage backed securities
make up $23.4 million, or 36.9% of the investment portfolio, obligations of
states and political subdivisions (municipal securities), comprise $20.3
million, or 32.4% of the investment portfolio, and other investments make up
$1.8 million, or 2.4% of the investment portfolio at September 30, 1997.
As noted in the Company's Form 10-KSB for the year ended December 31, 1996,
management has generally sought to control the exposure of the Company's
securities portfolio to rising interest rates by maintaining a position within a
narrow range around an "earnings neutral position" (i.e. the mix of assets and
liabilities
-12-
<PAGE>
that generate a net interest margin that is least affected by interest rate
changes). The Company uses a measurement tool known as dollar duration to help
maintain an earnings neutral position. As of September 30, 1997, the dollar
duration of the investment portfolio was 3.50 compared to 4.00 at December 31,
1996. This modest decrease in dollar duration resulted from the partial
replacement of securities which were sold, matured or called during the first
nine months of 1997 with securities with the same or lower yields but with
shorter maturities. The Company may also engage in hedging transactions to
control interest rate risk. The effect of these efforts in any given period may
be to negatively impact reported net noninterest income and the interest earned
on the securities.
CAPITAL RESOURCES
The Company's capital adequacy is a direct measurement of the overall financial
strength of the Company and its ability to absorb adverse market conditions. In
addition, the capital position of the Company provides a mechanism to promote
public confidence in the Company and the Bank.
The Company's total stockholders' equity increased $1.6 to $17.6 million at
September 30, 1997 from $16.0 million at December 31, 1996. This increase in
stockholders' equity was due to the retention of earnings in the current year
and the exercise of options to purchase 13,400 shares of common stock, less the
net effect of FAS 115 which requires financial institutions to mark their
Available For Sale securities portfolio to market.
The Federal Reserve Board and FDIC guidelines require a minimum of a 4% Tier 1
core capital to risk-weighted assets ratio and an 8% total qualifying capital to
risk-weighted assets ratio. Due to the Company's high level of capital and the
level of risk in its current asset mix, the Company's risk based capital ratios
exceed the regulatory minimum ratios. The Company's Tier 1 core capital to risk
weighted assets was 10.34% at September 30, 1997 and its total qualifying
capital to risk weighted assets was 11.61%. As of September 30, 1997 the Bank
exceeded the minimum regulatory risk based capital ratios.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements which are not historical facts contained in this document are forward
looking statements that involve risks and uncertainties that could cause actual
results to differ from projected results. Factors that could cause actual
results to differ materially include, among others: general economic conditions,
economic conditions in the Denver metropolitan area, the monetary policy of the
Federal Reserve Board, changes in interest rates, inflation, competition in the
banking business, changes in the state and federal regulatory regime applicable
to the Company's and the Bank's operations, the results of financing efforts and
other risk factors detailed in the Company's Forms 10-KSB, 10-QSB and 8-K filed
with the Securities and Exchange Commission.
-13-
<PAGE>
UNION BANKSHARES, LTD.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The NASDAQ National Market System ("NASDAQ-NMS") recently adopted, and the
Securities and Exchange Commission approved, new continued listing standards for
companies listed on NASDAQ-NMS. Among the new standards is the requirement that
companies listed on NASDAQ-NMS have a public float of at least 750,000 shares.
Although the Company meets all of the other continued listing standards, it does
not currently meet the revised public float requirement. The Company has not yet
received official notification of non-compliance with the revised continued
listing standards from the NASDAQ-NMS.
The Company intends to take such actions as are necessary to maintain its
listing with the NASDAQ-NMS. The Company believes that the most viable solution
to its insufficient public float is to conduct a stock split, stock dividend or
similar transaction of the magnitude necessary to meet the public float
requirement. The Company currently intends to request a temporary exemption from
the revised listing standards until approval of such an action, if necessary,
can be obtained from the Company's stockholders at the next annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K None
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements 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, Ltd.
-----------------------------------------
(Registrant)
October 29, 1997 /s/ Bruce E. Hall
-----------------------------------------
Bruce E. Hall
Vice President, Treasurer and Secretary
(Authorized Officer and Principal
Financial Officer of the Registrant)
-15-
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