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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 0-21078
________________
UNION BANKSHARES, LTD.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 84-0986148
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1825 LAWRENCE STREET, SUITE 444
DENVER, COLORADO 80202
(Address of principal executive offices)
(303)298-5352
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
________________
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 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
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Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will 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-KSB or any amendment to this
Form 10-KSB. [ ]
The Registrant's gross revenues for the fiscal year ended
December 31, 1996 totaled $14.6 million.
The aggregate market value of the voting stock of the registrant
held by non-affiliates, based on a closing price of $17.50 per share
as of March 21, 1997, was approximately $9,586,413.
As of March 21, 1997, there were outstanding 1,154,457 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its
1997 Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission not later than April 30, 1997, are
incorporated by reference into Part III as specified.
Certain Exhibits to this Annual Report on Form 10-KSB have been
incorporated by reference. See Index to Exhibits on Page E-1.
Transitional Small Business Disclosure Format (check one)
Yes No X
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UNION BANKSHARES, LTD.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 25
PART II
Item 5. Market for Common Equity and Related Shareholder Matters 26
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . 27
Item 7. Financial Statements . . . . . . . . . . . . . . . . . 41
Item 8. Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure . . . . . . . . . . . . . . . 41
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 10. Executive Compensation . . . . . . . . . . . . . . . . 42
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . 42
Item 12. Certain Relationships and Related Transactions . . . . 42
Item 13. Exhibits and Reports on Form 8K . . . . . . . . . . . . 43
-i-<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Union Bankshares, Ltd. (the "Company") is an independent bank
holding company whose predecessor was incorporated as a Colorado
corporation in 1984. The Company was reincorporated in Delaware in
1992. The Company's principal asset is the common stock of Union Bank
& Trust (the "Bank"), a state chartered commercial bank located in
Denver, Colorado. The operations of the Bank and its predecessors
date back to 1917. The Company acquired the Bank in 1985. The Bank
attracts FDIC-insured deposits, and focuses on providing relationship
banking based on personal attention and professional service to small
and medium-sized businesses. This operating strategy has resulted in
sustained growth in the Bank's asset and deposit base and loan
portfolio, with strong operating results.
The Bank has maintained its emphasis on asset quality and capital
preservation by following conservative loan underwriting standards
that have allowed it to avoid excessive loan losses. The Bank's
ratios of nonperforming assets to capital and to total assets were
.11% and .01%, respectively, at December 31, 1996.
The Company continues to seek to take advantage of the
opportunities in the Colorado banking market which have resulted from
the relaxation of historical regulatory limitations on branch banking.
In addition, recent acquisition activity in the industry has led to
lapses in coverage of different customer needs and reduction in
customer services, as well as disruption of existing account
relationships. The Company believes that this continues to afford the
Bank an opportunity for internal growth through attracting new
customers and quality personnel with existing customer relationships.
The Company's strategy for growth (see "Growth Strategy") is
based on developing startup branches that are strategically located
around the Denver metropolitan area to serve the Bank's focus market
of small and medium-sized businesses. The Company has opened three
branches, the first in the Lakeside area in July 1994, the second in
the University Hills area in March 1995, and the third in the Lakewood
area in December 1995. Each of these are full service branches,
having the appearance of stand alone banks. The Company continues to
analyze opportunities to open additional full-service branches in the
metropolitan Denver area, subject to identification of an appropriate
market and branch location, negotiation of an acceptable lease and
approval of the various regulatory bodies and branching restrictions
under Colorado law. See "Supervision and Regulation."
See "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Safe Harbor Statement under the Private
Securities Litigation Reform Act" for a discussion of matters
regarding forward-looking statements in this Form 10-KSB.
-1-<PAGE>
OPERATING STRATEGY
The Company's strategy as an independent, one-bank holding
company has been carried out through the operations of the Bank and,
recently, its branches. The Bank, since its acquisition by the Company
in 1985, has emphasized local relationship banking for the small and
medium-sized business. The Bank's operating strategies include:
. Personal Attention and Professional Service
. Maintaining Asset Quality
. Asset/Liability Management
The Company's branching efforts are structured to continue to
build on the three strategies outlined above. The Company has located
the branches in areas that produce a similar customer base to that of
the Bank, has encouraged community participation at each branch
through an Advisory Board of local business leaders, has developed
transparent communication and data delivery systems, and has retained
employees familiar with both the Company's operating philosophies and
the community's needs.
Personal Attention and Professional Service. The Bank's
customer-oriented strategy is one of providing customers with personal
attention and professional service by involving all employees in
developing and carrying out the customer service program. The Bank's
executive management team believes that by providing all employees an
open opportunity to communicate their ideas to management, and, if
appropriate, implementing them, it can refine and improve the
operation of the Bank. This employee involvement has led to two
successful customer service efforts: the "Officer Call" program and
the "Customer Compliment and Service Improvement" program. Under the
Bank's Officer Call Program, which was implemented in 1986, lending
officers call on existing customers and prospects on a regular basis.
At these meetings, the officers seek to develop a better understanding
of the business issues faced by the customer, and can discuss services
which the Bank can provide to help them address their needs. In the
Customer Compliment and Service Improvement program, the Bank, by
including requests in mailings of monthly statements, the Chairman's
Quarterly Statement of Condition report, and direct mail pieces,
solicits customer feedback on the Bank's customer service performance.
Customers are provided with a bank officer's name and phone number to
ease the contact process, and are encouraged to speak (or write)
freely with respect to both positive and negative aspects of the
Bank's service. The Bank also surveys new customers (or existing
customers who have opened additional accounts) to check on the level
of service they received, and, secondarily, to solicit information
that might help the Bank cross-sell additional services. During each
of the past three years, the Bank contracted with an independent
consultant to facilitate three focus groups of approximately twenty
business customers each. The purpose of the groups was to receive
input from the Bank's customer base pertaining to the Bank's future
direction as an organization, present level of service and products,
and customers' ideas and philosophies of serving small and medium-
sized businesses. In 1996, the Bank held its second Customer Business
Fair, at which approximately 76 Union Bank & Trust customers elected
to display
-2-<PAGE>
their goods and services. Approximately 350 - 450 other Union Bank &
Trust customers attended the Fair to view the exhibits. The Bank
intends to repeat this activity in 1997, and will seek to attract more
exhibitors and attendees.
Management believes that its policy of employee involvement,
which it refers to as its "staff to management" philosophy, has
resulted in the very low turnover experienced by the Bank at all
levels of employment. Management believes that this enables the Bank
to provide continuity of service by the same staff members, leading to
long-term customer relationships, high quality service and quick
response to customer needs. The Bank also emphasizes continuing
education and training through formal in-house training programs and
outside accredited programs.
Maintaining Asset Quality. The Bank has emphasized asset quality
through its conservative lending policy rooted in relationship
banking. The Bank generally is not a transaction-by-transaction
lender, preferring instead to develop a full banking relationship with
its loan customers. This philosophy has led to generally positive loan
loss experience and low ratios of nonperforming assets to total
assets. See "Nonperforming Assets."
Asset/Liability Management. The Bank's asset/liability
management policy is designed to manage the risk/return relationships
between capital adequacy, market risk, liquidity and interest rate
risk. A substantial component of this policy is to protect the Bank's
portfolio from undue interest rate risk. Exposure to interest rate
risk arises from volatile interest rates and changes in the Bank's
balance sheet mix. The Bank's policy is to control the exposure of its
earnings to changing interest rates by generally maintaining a
position within a narrow range around an "earnings neutral position,"
which is defined as the mix of assets and liabilities that generate a
net interest margin that is least affected by interest rate changes.
See "Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Asset/Liability Management."
GROWTH STRATEGY
The Company has analyzed several potential bank acquisitions
during the past three years. The Company chose not to finalize such
potential acquisitions due to the heightened price expectations of
sellers in the Colorado market which have been brought about by the
purchase of local banks by out-of-state and, in some cases, in-state
banking groups at historically high multiples of book value.
Management believes that the opportunity to acquire commercial banks
and thrifts located in the Denver metropolitan area, in a manner which
it considers economically advisable, has decreased somewhat in the
past three years. The Company intends to continue to analyze potential
acquisitions in the Denver metropolitan area, as well as other areas
in Colorado, but, in addition, to aggressively pursue its branching
strategy.
The Company is focused on growth as an independent entity and has
adopted an aggressive internal growth strategy through establishing
full-service branches in locations in the Denver metropolitan area
that will reach the small and medium-sized businesses in each
location. The Bank's three existing full-service branches are
structured to provide complete
-3-<PAGE>
banking services in each location and are headed by a branch president
with responsibility and authority to service the banking and lending
needs of the local business. Each full-service branch has an advisory
board of local businessmen providing guidance and input to Bank
management. This structure compliments the Bank's philosophy of
customer-to-staff-to-management direction so that the Bank responds to
customer input rather than the customer being asked to respond to the
Bank without having the opportunity to give input.
On January 7, 1994, the Bank entered into an agreement with
Colorado National Bank, Denver, Colorado, under which the Bank had the
option to acquire up to four authorities to operate branches at a
price of $25,000 per branch. In July, 1994, the Bank opened its first
branch in the Lakeside area of metropolitan Denver. The branch has
been well-received by the community and has attracted over $12.9
million in deposits to date. In March, 1995, the Bank opened its
second branch in the University Hills area of metropolitan Denver, and
in December, 1995, the Bank opened its third branch in the Lakewood
area of metropolitan Denver. These branches have also been well-
received by their respective communities and have attracted over $8.1
million and $6.0 million in deposits to date, respectively. The Bank
may seek to add an additional branch in 1997, though it has
relinquished its contractual option to acquire the fourth branch
authority from Colorado National Bank. Concentrating on branching has
allowed the Bank to continue to expand its customer base at a lower
cost compared to acquisitions while conserving capital in the event an
attractive acquisition opportunity arises.
To accommodate the Company's anticipated growth, management
intends to continue to recruit additional high-quality personnel and
enhance its internal management systems. Management believes that such
personnel and systems are necessary if the Company is to achieve its
growth strategy without compromising its customer-oriented approach to
banking and its commitment to maximize asset quality. Further, the
recent consolidation in the Colorado banking industry has resulted in
the availability of a large number of quality personnel with long-
standing customer relationships. There can be no assurance, however,
that the Company will achieve its growth objectives.
ECONOMIC ENVIRONMENT IN MARKET AREAS SERVED
The Company's principal market for loans and deposits is the
greater Denver metropolitan area. The Bank has benefitted from the
recent strength in the metropolitan Denver economy. The metropolitan
Denver economy's strength is believed to reflect its diversification
from its prior dependence on the oil and gas industry, with strong
contributions from the manufacturing, telecommunications and
government sectors. Total employment, retail sales and home sales have
all been healthy in recent years, while apartment vacancy and
commercial office vacancy rates have generally declined.
As with the metropolitan Denver economy, the Colorado economy has
become more diversified over the past decade. An increase in
international trade and tourism, together with growth in small
manufacturing and high technology industries, has broadened the
economic base of Colorado. Although the Company anticipates continued
economic growth in metropolitan
-4-<PAGE>
Denver and in Colorado, there can be no assurance that growth will
continue at or near the rates recently experienced.
LENDING ACTIVITIES
General. The Bank provides a range of commercial and retail
lending services, including, but not limited to, commercial business
loans, commercial and residential real estate construction loans,
commercial and residential real estate mortgage loans, loan
participations, consumer loans, revolving lines of credit, and letters
of credit. Currently, the primary focus of the Bank is on commercial
business lending to small and medium-sized businesses. The Bank
places a strong emphasis on asset quality, and maintains conservative
underwriting standards. The Bank monitors the concentration of its
loan portfolio in an effort to avoid over-allocating its funds
available for lending to any particular industry sector.
The Bank is not normally a transaction lender and generally
requires a full banking relationship with its commercial customers.
The Bank seeks to continually develop and maintain its strong
community orientation by, among other things, considering the
interests of its existing and potential customers in the Denver
community. In particular, primary consideration is given to customers
with interests in the Bank's and branches' surrounding communities,
including the areas located within a five-mile radius of the Bank's
main location and a three-mile radius of the branch locations.
The Bank's loan officers have an average of over twenty years
lending experience and are committed to the lending profession. The
loan officer staff includes two past presidents of the Rocky Mountain
Chapter of Robert Morris Associates (the national organization of bank
credit officers).
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio by type of loan, aggregate
dollar amount and percentage of total loans at the dates indicated.
<TABLE>
<CAPTION>
December 31
-----------
1996 1995
---- ----
Amount % Amount %
------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial loans . . . . . . . . . . . . . . . . $70,631 71.4% $54,488 68.2%
Real estate -- construction loans . . . . . . . 5,758 5.8% 5,064 6.3%
Real estate -- mortgage loans . . . . . . . . . 5,489 5.5% 7,975 10.0%
Consumer loans . . . . . . . . . . . . . . . . . 18,854 19.1% 13,785 17.3%
------- ------ ------
Total 100,732 101.8% 81,312 101.8%
Less allowance for loan losses (1,754) -1.8% (1,448) -1.8%
------- ------ ------- ------
Loans receivable, net $98,978 100.0% $79,864 100.0%
======= ====== ======= ======
</TABLE>
-5-<PAGE>
Commercial Loans. Commercial lending is the Bank's primary focus
and the strength of its lending activity. The Bank's areas of emphasis
include, but are not limited to, loans to building contractors,
wholesalers, manufacturers, business services companies and energy-
related businesses. The Bank provides a wide range of commercial
business loans, including lines of credit for working capital purposes
and term loans for the acquisition of equipment and other purposes.
Collateral for these loans generally includes accounts receivable,
inventory, equipment and real estate. Where warranted by the overall
financial condition of the borrower, loans may be made on an unsecured
basis. Terms of commercial business loans generally range from one to
five years. The majority of the Bank's commercial business loans have
floating interest rates. Commercial loans outstanding were $70.6
million at December 31, 1996 compared to $54.5 million at December 31,
1995. Many of the Bank's commercial loans are extended to small
business customers. These clients are composed of a variety of
manufacturers, wholesalers, retailers, commercial contractors and
service companies. The primary repayment risk is the failure of the
business due to economic or financial factors. In most cases the Bank
has taken security and receives personal guarantees to help assure an
alternative source of repayment.
Real Estate Construction Loans. The Bank originates financing to
builders who have demonstrated a favorable record of performance for
the construction of pre-sold homes as well as homes built without a
specific buyer on a selective basis.
The Bank generally provides commercial construction financing
when the borrower has received a binding commitment for permanent
financing from either the Bank or another lender. The Bank uses this
service to solicit new customers and to maintain existing
relationships. A variety of risks are present in construction loans,
including the failure of the contractor to complete the work and the
borrower's inability to pay. The Bank carefully monitors construction
draws and frequently inspects the property to insure the work is being
completed as specified. In addition, construction loans generally are
made where a conservative loan-to-value ratio exists. These loans are
frequently backed by personal guarantees and other collateral that
provide an alternative source of repayment. The Bank further attempts
to limit its risk through adherence to conservative underwriting
procedures and by using only state-certified appraisers. The Bank's
real estate construction loans outstanding were $5.8 million at
December 31, 1996, compared to $5.1 million at December 31, 1995.
This increase results from an increased marketing effort by the Bank
to solicit loans from established residential builders in the
metropolitan Denver area.
Real Estate Mortgage Loans. The Bank generally restricts its
commercial real estate lending activity to owner-occupied properties
or to investor properties that are owned by customers with which the
Bank has a complete banking relationship. Therefore, many loans
classified as commercial real estate loans could be characterized as
ordinary commercial loans which are secured by real estate.
Commercial real estate loans are generally made at floating rates
and for maturities ranging from five to ten years. The Bank's
underwriting standards generally require that the loan-to-value ratio
not exceed 75% of appraised value or cost, whichever is lower.
Management does not believe that the Bank's existing commercial real
estate loan portfolio represents a material risk of loan losses.
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The Bank originates SBA real estate loans on owner occupied
properties where the maturities may be up to twenty five years, and
the loan-to-value ratio may reach 90% of appraised value or cost,
whichever is lower. These loans are guaranteed from 80% to 85% of the
amount of the loan by the Federal government.
The primary risks of real estate mortgage loans include the
borrower's inability to pay and deterioration in the value of the real
estate that is being held as collateral. The Bank also originates
residential mortgage loans on a limited basis as a service to its
customers. On those loans that are extended, the Bank attempts to
have conservative loan-to-value ratios, personal guarantees, a strong
history of debt servicing capability, fully amortizing terms over
twenty years or less and alternative collateral if necessary.
From time to time, the Bank purchases loans from a locally owned
mortgage company until the mortgage company sells the loans into the
secondary mortgage market. The loans are then sold back to the
mortgage company. Initially, the Bank receives interest during its
holding period of prime plus .50%. All origination fees and interest
on the loan in excess of the rate payable to the Bank are retained by
the mortgage company. If the mortgage is not sold within specified
periods, the Bank is entitled to receive all of the interest paid on
the mortgage from inception and may be entitled to receive all or a
portion of the origination fees. The mortgage company provides loan
servicing during the period that the mortgage is held by the Bank.
During the years ended December 31, 1996, 1995, and 1994, the Bank
earned interest income on such loans of $6,000, $5,000, and $17,000,
respectively. During the years ended December 31, 1996, 1995, and
1994, the Bank purchased loans in the amounts of $4,106,000,
$2,450,000, and $13,025,000 and sold loans in the amount of
$4,106,000, $2,450,000 and $16,185,000. All loans sold back to the
mortgage company are without recourse to the Bank.
These loans carry the same risks as any other real estate
mortgage loan. However, in most cases, the Bank bears these risks for
only a short period. As a general matter, the loans are presold and
remain in the Bank's portfolio for an average of less than 30 days.
The Bank has not, to date, retained any of these loans. Mr. Zueck,
the Chairman of the Board of the Bank and President and a director of
the Company, is a director and Treasurer of the mortgage company.
Consumer Lending. The Bank provides a full range of consumer
loans. The primary risk of consumer lending relates to the personal
circumstances of the borrower. The Bank provides as a service to its
business customers and their employees the choice of dealing with the
same loan officer for consumer and business matters. This service has
been well received by new business customers and their employees who,
in dealing with large holding company banks, have frequently had to
deal with a variety of different officers for different types of
transactions. Consumer loans outstanding were $18.9 million, $13.8
million and $7.1 million at December 31, 1996, 1995 and 1994,
respectively. The expansion of the Bank's consumer loan portfolio in
1994 reflected the establishment of a relationship with AAA of
Colorado ("AAA") in which the Bank finances vehicle purchase contracts
for members of AAA for vehicles purchased either directly through AAA
or through AAA's dealer referral program. The Bank does its own
credit analysis on each loan in order to determine whether to lend to
each purchaser, following its normal credit criteria in review of the
applications. The Bank intends to continue this relationship in the
future. This program is terminable at the option of either party on
five days'
-7-<PAGE>
notice. The further increase in 1995 and 1996 resulted from a
combination of continued growth in the AAA program, along with strong
growth of the consumer markets at the branches. The branches have a
higher ratio of consumer loans to commercial loans than the main Bank
has historically experienced. Management expects that this will
continue in the future.
Commitments and Contingent Liabilities. In the ordinary course
of business, the Bank enters into various types of transactions that
include commitments to extend credit as described in Note 9 of Notes
to Consolidated Financial Statements. The Bank applies the same credit
standards to these commitments as it uses in all its lending
activities and has included these commitments in its lending risk
evaluations. The Bank's exposure to credit loss under commitments to
extend credit is represented by the amount of these commitments. It is
management's policy not to commit to extend credit at below market
interest rates.
Credit Authority and Loan Limits. All loans, credit lines, and
letters of credit are subject to the same approval procedures and
amount limitations. These limitations apply to the total outstanding
indebtedness of the borrower to the Bank, including the indebtedness
of any guarantor. All individual or aggregate credits in excess of
$100,000 must be preapproved by the Bank's Loan Committee, with
certain limited exceptions. The Bank allows certain senior loan
officers the flexibility, based on their experience and the individual
loan customer they are working with, to advance, without preapproval,
up to $50,000 per request, with a limit of $100,000 per twelve-month
period, to that customer, even if that customer's aggregate credits
are over the $100,000 limit prior to the request. Any advance made
under these conditions are then required to be ratified at the next
regularly-scheduled Loan Committee meeting. The Loan Committee
consists of the Bank's Chairman of the Board, Herman J. Zueck, its
President, Jerrold B. Evans, and the outside directors of the Bank. A
quorum of the committee is a minimum of four members.
Under federal law, permissible loans to one borrower by the Bank
are generally limited to 15% of its unimpaired capital, surplus,
undivided profits and loan loss reserve ($2.0 million at December 31,
1996). The Bank utilizes a guidepost "house limit" on loans to any
borrower of $1,500,000, which has occasionally been exceeded. The Bank
sells loan participations to accommodate borrowers whose financing
needs exceed the Bank's lending limits. Total loan participations sold
as of December 31, 1996 and 1995 were $3,073,000 and $3,361,000,
respectively.
Loan Policy. The Bank's lending activities are guided by its
Statement of Lending Policies and Procedures. These policies are
reviewed annually and approved by the Bank's Board of Directors. The
Bank supplements its internal supervision and audits of its lending
operations with independent examinations performed by professional,
experienced consultants and auditors.
NONPERFORMING ASSETS
The Company's nonperforming assets consist of nonaccrual loans,
restructured loans, past due loans and other real estate owned
("OREO"). In 1995, the Company adopted the Statement of Financial
Accounting Standards No. 114, "Accounting by Creditor for Impairment
of a Loan".
-8-<PAGE>
The adoption of this statement, which generally requires impaired
loans to be measured at the present value of expected future cash
flows or as a practical expedient at the observable market price or
fair value of collateral, had no material effect on the Company's
financial statements or the comparability between years in the table
below. The following table sets forth information with respect to
these assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Past due 90 days or more . . . . . . . . . . . . . . . . . . . . . . $ -- $ 82 $ 121
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . 14 110 821
Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
----- ------ -------
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . 14 192 942
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . -- -- 83
----- ------ ------
Total nonperforming assets . . . . . . . . . . . . . . . . . . . $ 14 $ 192 $1,025
===== ====== ======
Ratio of total nonperforming assets
to total assets . . . . . . . . . . . . . . . . . . . . . . . . . 0.01% 0.12% 0.70%
Ratio of total nonperforming loans
to total loans . . . . . . . . . . . . . . . . . . . . . . . . . 0.01% 0.24% 1.40%
Ratio of allowance for loan losses to total
nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . 12,528.57% 754.17% 113.70%
</TABLE>
Past Due, Nonaccrual and Impaired Loans. The Company's financial
statements are prepared on the accrual basis of accounting, including
the recognition of interest income on its loan portfolio, unless a
loan is placed on a nonaccrual basis. Loans are placed on nonaccrual
when there are serious doubts about the collectibility of principal or
interest. Amounts received on nonaccrual loans generally are applied
first to principal and then to interest only if all principal has been
collected or principal collection is assured. The Company's policy is
to place a loan on nonaccrual status when the loan becomes past due
for 90 days or more, unless the loan is well secured, is in the
process of being collected and the Bank's Loan Committee has approved
maintaining the loan on an accrual basis, which in practice is rarely
done. At December 31, 1996, the Company had $14,000 of loans
accounted for on a non-accrual basis compared to $110,000 and $821,000
at December 31, 1995 and 1994, respectively. The peak at December 31,
1994 primarily relates to one secured credit of $475,000, which was
paid in full in February 1995, and one secured credit of $240,000,
which was paid in full in July 1995. The previous table would have
shown the following amounts for 1994 without these two loans: (i)
nonaccrual loans, $106,000; (ii) total nonperforming loans, $227,000;
(iii) total nonperforming assets, $310,000; (iv) ratio of total
nonperforming assets to total assets, 0.2%; (v) ratio of total
nonperforming loans to total loans, 0.3%; and (vi) ratio of allowance
for loan losses to total nonperforming loans, 471.8%.
Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to that
borrower or the deferral of interest or principal, have been granted
due to the borrower's weakened financial condition. Interest on
restructured
-9-<PAGE>
loans is accrued at the restructured rates when it is anticipated that
no loss of original principal will occur. The Company had no
restructured loans at December 31, 1996, 1995 and 1994.
Impaired loans, which include non-accrual loans noted above and
potential problem loans, where known information about possible credit
problems causes management to doubt the ability of such borrowers to
comply with contractual repayment terms total $124,000 and $208,000 at
December 31, 1996 and 1995, respectively. An allowance for loan loss
of $24,000 and $121,000 relates to impaired loans at December 31, 1996
and 1995, respectively. Interest of $12,000 and $53,000 was
recognized on average impaired loans of $166,000 and $717,000 for 1996
and 1995, respectively. No interest was recognized on a cash basis on
impaired loans during 1996 and 1995.
Other Real Estate Owned. All of the Company's OREO since the
beginning of 1994 has been located within Colorado. The property is
carried at the lower of its fair market value less selling costs or
the principal balance of the foreclosed loan plus costs of foreclosure
and improvements made to such OREO by the Bank. At December 31, 1996
and 1995, the Company had no OREO compared to OREO property with a
total carrying value of $83,000 at December 31, 1994. OREO at
December 31, 1994 reflects the transfer of a first mortgage on a
residence which was subsequently sold for $148,000 in January 1995.
The excess proceeds on sale of $65,000, over the year-end 1994
carrying value of $83,000, was recorded as a recovery of the
previously charged-off loan from this customer.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's recognition
of the risks of extending credit and its evaluation of the quality of
the loan portfolio. The allowance is maintained at a level considered
adequate to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio, including
a review of problem loans, business conditions and loss experience and
an overall evaluation of the quality of the underlying collateral,
holding and disposal costs and costs of capital. The allowance is
increased by provisions charged to operations and reduced by loans
charged off, net of recoveries. Allowances are provided for
individual loans where ultimate collection is considered questionable
by management after reviewing the current status of loans that are
contractually past due and considering the net realizable value of the
security and of the loan guarantees, if applicable.
Management believes that the Company's allowance for loan losses
is adequate to cover anticipated losses and is in accordance with
generally accepted accounting principles. There can be no assurance,
however, that management will not determine to increase the allowance
for loan losses or that regulators, when reviewing the Bank's loan
portfolio in the future, will not request the Bank to increase such
allowance, either of which could adversely affect the Company's
earnings. Further, there can be no assurance that the Company's actual
loan losses will not exceed its allowance.
-10-<PAGE>
The following table sets forth information regarding changes in
the Company's allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance of allowance for loan
losses at beginning of period . . . . . . . . . . . . . . . . . . $ 1,448 $ 1,071 $ 1,006
Charge-offs:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . 17 93 133
Real estate -- construction loans . . . . . . . . . . . . . . . -- -- 10
Real estate -- mortgage loans . . . . . . . . . . . . . . . . . -- -- --
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . 12 13 11
------- ------- -------
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . 29 106 154
------- ------- -------
Recoveries:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . 50 360 21
Real estate -- construction loans . . . . . . . . . . . . . . . -- -- --
Real estate -- mortgage loans . . . . . . . . . . . . . . . . . -- -- --
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . -- 3 3
------- ------- -------
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . 50 363 24
------- ------- -------
Net charge-offs (recoveries). . . . . . . . . . . . . . . . . . . (21) (257) 130
Provisions for loan losses . . . . . . . . . . . . . . . . . . . 285 120 195
------- ------- -------
Balance of allowance for loan losses
at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 1,754 $ 1,448 $ 1,071
======= ======= =======
Ratio of net charge-offs (recoveries)
to average loans . . . . . . . . . . . . . . . . . . . . . . . . -0.02% -0.35% 0.22%
Average loans outstanding
during the period . . . . . . . . . . . . . . . . . . . . . . . $91,586 $72,924 $58,967
</TABLE>
-11-<PAGE>
The following table sets forth the allowance for loan losses by
loan category, based upon management's assessment of the risk
associated with such categories, at the dates indicated and summarizes
the percentage of gross loans in each category to total gross loans.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Loans in Loans in Loans in
category as a category as a category as a
percentage percentage percentage
Amount of of total Amount of of total Amount of of total
allowance gross loans allowance gross loans allowance gross loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans $1,293 70.2% $1,075 67.0% $ 747 66.7%
Real estate--
construction loans 39 5.7% 48 6.2% 48 6.2%
Real estate--
mortgage loans 157 5.4% 164 9.8% 193 16.2%
Consumer loans 265 18.7% 161 17.0% 83 10.9%
------ ------ ------ ------ ------
Total $1,754 100.0% $1,448 100.0% $1,071 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
The Company maintains a securities portfolio comprised primarily
of U.S. government securities, municipal securities and other
investment securities. The Company manages its investment portfolio to
(i) maximize safety and soundness, (ii) provide adequate liquidity,
(iii) maximize rate of return within the constraints of applicable
liquidity requirements (with liquidity taking precedence over return)
and (iv) complement asset/liability management policies. The Bank's
Asset and Liability Management Committee, which is made up of the
Bank's Chairman of the Board and Chief Executive Officer, its
President, its Executive Vice President and Chief Operations Officer,
its Executive Vice President of Lending, its Senior Vice President of
Finance and Controller and its Vice President of Operations, oversees
the Bank's investment portfolio with the assistance of an outside
consultant. The Bank uses a measurement known as dollar duration to
analyze its exposure to interest rate risk. Dollar duration measures
the percentage loss or gain that the portfolio will sustain with each
100 basis point parallel shift in interest rates. In 1995, the Bank
increased the dollar duration of its portfolio in an effort to
maintain the gross yield from the portfolio as interest rates
declined, and the investments which matured were replaced with new
ones which had approximately the same yields, but with longer
maturities. In 1996, the Bank further increased the dollar duration
of its portfolio as interest rates remained relatively steady, and the
investments which matured were replaced with new investments with
similar yields, but longer maturities. As a result, the Bank has a
relatively higher exposure to increased interest rates at this time
than at year-end 1995. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Asset/Liability Management."
-12-<PAGE>
The table below provides the amortized cost and fair value of the
Company's investment securities at each of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. government agencies
and corporations $ 18,638 $ 18,717 $ 18,386 $ 18,593
Obligations of states and
political subdivisions 5,996 6,253 30 30
------- ------- ------- -------
24,634 24,970 18,416 18,623
------- ------- ------- -------
Available for Sale:
U.S. government agencies
and corporations 14,227 14,244 9,693 9,893
U.S. Treasury securities 4,070 4,103 3,998 3,998
Obligations of states and
political subdivisions 20,384 20,799 32,843 33,831
CMO/REMIC 55 55 1,415 1,393
Commercial Paper 703 703 1,708 1,708
------- ------- ------- -------
39,439 39,904 49,657 50,823
------- ------- ------- -------
Total $ 64,073 $ 64,874 $ 68,073 $ 69,446
======== ======== ======== ========
</TABLE>
The following table sets forth the securities held by the Company
which (other than U.S. government securities) make up more than ten
percent of stockholders' equity:
December 31, 1996
-----------------
Amortized Cost Fair Value
-------------- ----------
(Dollars in Thousands)
Mt. Crested Butte Water and Sanitation $ 2,400 $ 2,452
-------- --------
TOTAL $ 2,400 $ 2,452
======== ========
-13-<PAGE>
The following tables provide the carrying values, maturities and
weighted average yields of the Company's securities portfolio at the
dates indicated.
Held-to-Maturity Securities
- ---------------------------
<TABLE>
<CAPTION>
December 31, 1996<F1>
------------------------------------------------
Due after one Due after five
Due in one year through years though Due after
year or less five years ten years ten years Total
------------ ---------- --------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities:
Balance . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
Weighted average yield . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00%
U.S. government securities:
Balance . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
Weighted average yield . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00%
Agency Pools <F2>:
Balance . . . . . . . . . . . . . . . . . . $ 166 $12,593 $ 3,210 $ 2,669 $18,638
Weighted average yield . . . . . . . . . . 9.00% 7.85% 8.58% 7.95% 8.00%
Municipal securities --
nontaxable <F3>:
Balance . . . . . . . . . . . . . . . . . . $ -- $ -- $ 447 $ 5,549 $ 5,996
Weighted average yield . . . . . . . . . . . 0.00% 0.00% 7.15% 5.87% 7.25%
Municipal securities --
taxable:
Balance . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ $ --
Weighted average yield . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00%
Total:
Balance . . . . . . . . . . . . . . . . . . $ 166 $12,593 $ 3,657 $ 8,218 $24,634
Weighted average yield . . . . . . . . . . 9.00% 7.85% 8.40% 6.55% 7.82%
_____________
<FN>
<F1> Based on contractual maturities and, therefore, do not reflect principal amortization.
<F2> Government guaranteed mortgage pools, such as FHLMC, FNMA, and GNMA, which act as pass-through entities for
income on mortgages from debtors through the Agency pools to investors.
<F3> Yields have been calculated on a full tax-equivalent basis.
</FN>
</TABLE>
-14-<PAGE>
<TABLE>
<CAPTION>
December 31, 1996<F1>
------------------------------------------------
Due after one Due after five
Due in one year through years though Due after
year or less five years ten years ten years Total
------------ ---------- --------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities:
Balance . . . . . . . . . . . . . . . . . . $ - $ 4,104 $ - $ - $ 4,104
Weighted average yield . . . . . . . . . . 0.00% 7.52% 0.00% 0.00% 7.58%
U.S. government securities:
Balance . . . . . . . . . . . . . . . . . . $ 3,711 $ 915 $ 4,427 $ - $ 9,053
Weighted average yield . . . . . . . . . . 6.16% 7.22% 5.94% 0.00% 6.18%
Agency Pools <F2>:
Balance . . . . . . . . . . . . . . . . . . $ - $ 88 $ - $ 5,157 $ 5,245
Weighted average yield . . . . . . . . . . 0.00% 8.35% 0.00% 7.97% 7.97%
Municipal securities --
nontaxable <F3>:
Balance . . . . . . . . . . . . . . . . . . $ 794 $ 1,139 $ 7,609 $ 3,560 $13,102
Weighted average yield . . . . . . . . . . . 4.97% 5.22% 5.91% 5.60% 5.87%
Municipal securities --
taxable:
Balance . . . . . . . . . . . . . . . . . . $ 250 $ 750 $ 1,166 $ 5,531 $ 7,697
Weighted average yield . . . . . . . . . . 6.29% 6.50% 7.07% 6.85% 6.87%
Commercial paper --
Balance . . . . . . . . . . . . . . . . . . $ 703 $ - $ - $ - $ 703
Weighted average yield . . . . . . . . . . 5.80% 0.00% 0.00% 0.00% 5.80%
Total:
Balance . . . . . . . . . . . . . . . . . . $ 5,458 $ 6,996 $13,202 $14,248 $39,904
Weighted average yield . . . . . . . . . . 5.95% 7.01% 6.02% 6.94% 6.58%
_____________
<FN>
<F1> Based on contractual maturities and, therefore, do not reflect principal amortization.
<F2> Government guaranteed mortgage pools, such as FHLMC, FNMA, and GNMA, which act as pass-through entities for
income on mortgages from debtors through the Agency pools to investors.
<F3> Yields have been calculated on a full tax-equivalent basis.
</FN>
</TABLE>
The Company invests in tax-exempt securities to help control
taxable income. Interest paid on tax-exempt securities is non-taxable
for ordinary income tax purposes and partially taxable for
-15-<PAGE>
alternative minimum tax purposes. Management attempts to balance its
investments in tax-exempt securities in order to maximize the tax
benefits from these investments. The Company modestly increased the
size of its tax-exempt portfolio in 1995, but modestly decreased its
investment in 1996 in order to accomplish these goals.
TRUST DEPARTMENT ACTIVITIES
Although the Bank maintains a trust department for individuals
and corporate entities, it currently is engaging in a minimal level of
trust activities, consisting primarily of acting as an escrow agent.
SOURCE OF FUNDS
General. The Bank's primary source of funds has historically
been customer deposits. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and unscheduled loan
prepayments, which are influenced by general interest rate levels,
interest rates available on other investments, competition, economic
conditions and other factors, are not. Although the Bank's deposit
balances have shown historical growth, such balances may be influenced
by changes in the banking industry. Borrowings may be used on a short-
term basis to compensate for reductions in other sources of funds
(such as deposit inflows at less than projected levels). Borrowings
may also be used on a longer term basis to match the maturity or
repricing intervals of assets. In 1994, the Bank became a member of
the Federal Home Loan Bank of Topeka (the "FHLB"). The Bank purchased
$373,900 of dividend-bearing stock in the FHLB. In 1995, the Bank
increased its holdings of FHLB dividend-bearing stock to $409,000, and
in 1996 further increased its holdings of FHLB dividend-bearing stock
to $494,000. The FHLB provides the Bank with access to a
collateralized credit line of approximately $3.7 million, as well as a
source to sell excess federal funds.
On January 14, 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 the Available for Sale portfolio.
The first $5,000,000 enabled management to reduce its current daily
purchase of Federal Funds from approximately $8,000,000 to $3,000,000.
With the remaining $5,000,000, the Bank purchased approximately
$5,000,000 in short-term U.S. Government securities, which were placed
in the Available for Sale portfolio. This allowed the Bank to
transfer approximately $5,000,000 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: $5,000,000 at 6.34%,
maturing January 14, 1999; and $5,000,000 at 6.50%, maturing January
14, 2000. The 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.
Deposit Activities. The Bank offers a variety of accounts for
depositors designed to attract both short-term and long-term deposits.
These accounts include certificates of deposit ("CDS"), savings
accounts, money market accounts, checking and negotiable order of
withdrawal accounts
-16-<PAGE>
and individual retirement accounts. These accounts generally earn
interest at rates established by management based on competitive
market factors and management's desire to increase or decrease certain
types or maturities of deposits. The Bank has not sought brokered
deposits and does not currently intend to do so in the future. The
Bank had no brokered deposits at December 31, 1996.
The following table presents the average balances outstanding for
each major category of deposits and weighted average interest rates
paid for interest-bearing deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
Weighted Weighted
average average
Average interest Average interest
balance rate balance rate
------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing demand deposits . . . . . . . . . . . . $ 73,722 2.98% $ 63,633 3.04%
Certificates of deposit . . . . . . . . . . . . . . . . 24,820 5.22% 20,736 5.03%
Savings accounts . . . . . . . . . . . . . . . . . . . . 9,313 2.64% 8,483 2.77%
Noninterest-bearing demand deposits . . . . . . . . . . 43,042 N/A 38,237 N/A
-------- ----- -------- -----
Total . . . . . . . . . . . . . . . . . . . $150,897 3.46% $131,089 3.46%
======== ===== ======== =====
</TABLE>
The following table shows the amount and maturity of CDS that had
balances of more than $100,000 at the dates indicated.
December 31,
------------
1996 1995
---- ----
(Dollars in thousands)
CDS over $100,000 with remaining maturity:
Less than three months . . . . . . . . . $ 4,615 $ 4,253
Three to six months . . . . . . . . . . 2,074 3,667
Over six months to one year . . . . . . 3,065 2,527
Over one year 2,177 987
------- -------
Total $11,931 $11,434
======= =======
COMPETITION
The banking business in the greater Denver metropolitan area is
highly competitive. The Company competes for loans and deposits with
other commercial banks, credit unions, thrifts, mortgage bankers and
other institutions with respect to the scope and type of services
offered, interest rates paid on deposits and pricing of loans, among
other things. Many of these competitors have substantially greater
resources than the Company. In addition, by virtue of their larger
capital bases or affiliation with larger multi-bank holding companies,
some of the banks with which the Bank competes have substantially
larger lending limits than the Bank, and perform other functions for
their customers which the Bank can offer only through correspondents.
The Company also
-17-<PAGE>
faces significant competition for investors' funds from sellers of
short-term money market securities and other corporate and government
securities.
The Company competes for loans principally through the range and
quality of the services it provides, interest rates and loan fees. The
Company believes its personal service philosophy in conjunction with
its staff of experienced loan officers enables it to compete favorably
with other financial institutions in its focus market of small and
medium-sized businesses. The Company actively solicits deposit-related
clients and competes for deposits by offering customers personal
attention and professional service.
Competition has intensified as a result of changes in Colorado
banking laws that permit (i) unlimited branching (limited statewide
branching of Colorado-domiciled financial institutions was permitted
until January 1, 1997), and (ii) out-of-state holding companies to
acquire Colorado-based financial institutions, provided that the laws
of the state in which the out-of-state institutions conduct their
principal operations similarly permit Colorado-based institutions to
acquire financial institutions domiciled in their states. During the
past several years, substantial consolidation among financial
institutions in Colorado has occurred. Management believes that this
consolidation led to substantial account disruption for small and
medium-sized businesses which are below the focus threshold for larger
banks and which have had their lending relationships at such banks
severed. Management further believes that this may lead customers in
the Company's market area to seek a relationship with smaller,
service-oriented institutions such as the Bank.
EMPLOYEES
At December 31, 1996, the Company had approximately 94 full-time
equivalent employees. In order to effectuate its "staff to management"
philosophy, the Company has placed a high priority on staff
development. This development involves extensive training (including
customer service training) and selective hiring. New hires are
selected on the basis of both technical skills and customer service
capabilities. Emphasis is placed upon hiring and retaining additional
key officers in areas such as lending, administration and finance.
None of the Company's employees are covered by a collective bargaining
agreement with the Company and management believes that its
relationship with its employees is good.
GOVERNMENT REGULATION
The Company and the Bank are extensively regulated under federal
and Colorado law. These laws and regulations are primarily intended
to protect depositors and the deposit insurance fund of the FDIC, not
shareholders of the Company. The following information is qualified
in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or
regulatory policies may have a material effect on the business,
operations and prospects of the Company and the Bank. The Company is
unable to predict the nature or extent of the effects that fiscal or
monetary policies, economic controls or new federal or state
legislation may have on its business and earnings in the future.
-18-<PAGE>
THE COMPANY
General. The Company is a bank holding company registered under
The Bank Holding Company Act of 1956, as amended, and is subject to
regulation, supervision and examination by the Board of Governors of
the Federal Reserve. The Company is required to file an annual report
and such other reports as the Board of Governors now requires or may
require.
Acquisitions. As a bank holding company, the Company is required
to obtain the prior approval of the Board of Governors before
acquiring direct or indirect ownership or control of more than 5% of
the voting shares of a bank or bank holding company. The Board of
Governors will not approve any acquisition, merger or consolidation
that would have a substantial anti-competitive result, unless the
anti-competitive effects of the proposed transaction are outweighed by
a greater public interest in meeting the needs and convenience of the
public. The Board of Governors also considers managerial, capital and
other financial factors in acting on acquisition or merger
applications.
Permissible Activities. A bank holding company may not engage
in, or acquire direct or indirect control of more than 5% of the
voting shares of any company engaged in a non-banking activity, unless
such activity has been determined by the Board of Governors to be
closely related to banking or managing banks. The Board of Governors
has identified specific non-banking activities in which a bank holding
company may engage with notice to, or prior approval by, the Board of
Governors.
Capital Adequacy. The Board of Governors monitors the capital
adequacy of bank holding companies. As discussed below, the Bank is
also subject to the capital adequacy requirements of the Federal
Deposit Insurance Corporation ("FDIC") and the Division of Banking for
the State of Colorado. The Board of Governors uses a combination of
risk-based guidelines and leverage ratios to evaluate capital
adequacy.
The Board of Governors has adopted a system using risk-based
capital adequacy guidelines to evaluate the capital adequacy of bank
holding companies on a consolidated basis. Under the risk-based
capital guidelines, different categories of assets are assigned
different risk weights, based generally on the perceived credit risk
of the asset. These risk weights are multiplied by corresponding
asset balances to determine a "risk-weighted" asset base. Certain off
balance sheet items, such as loan commitments in excess of one year,
mortgage loans sold with recourse and letters of credit, are added to
the risk-weighted asset base by converting them to a balance sheet
equivalent and assigning to them the appropriate risk weight. For
purposes of the risk-based capital guidelines, total capital is
defined as the sum of "Tier 1" and "Tier 2" capital elements, with
Tier 2 being limited to 100% of Tier 1. For bank holding companies,
Tier 1 capital includes, with certain restrictions, common
shareholders' equity, perpetual preferred stock (no more than 25% of
Tier 1 capital being comprised of cumulative preferred stock) and
minority interests in consolidated subsidiaries. Tier 2 capital
includes, with certain limitations, certain forms of perpetual
preferred stock, as well as maturing capital instruments and the
allowance for loan losses (limited to 1.25% of risk-weighted assets).
The regulatory guidelines require a minimum ratio of total capital to
risk-weighted assets of 8% (of which at least 4% should be in the form
of Tier 1 capital).
-19-<PAGE>
In addition to the risk-based capital guidelines, the Board of
Governors and the FDIC use a leverage ratio as an additional tool to
evaluate the capital adequacy of banks and bank holding companies.
The leverage ratio is defined to be a company's Tier 1 capital divided
by its tangible assets. Based upon the current capital status of the
Company, the applicable minimum required leverage ratio is estimated
to be 5%.
The table below sets forth ratios of (i) total capital risk-
weighted assets, (ii) Tier 1 capital to risk-weighted assets and (iii)
Tier 1 capital to tangible assets, at December 31, 1996.
At December 31, 1996
Ratio Actual Minimum Required
----- ------ ----------------
Total capital to risk-weighted assets 11.79% 8.00%
Tier 1 capital to risk-weighted assets 10.49% 4.00%
Leverage (Tier 1 capital to tangible assets) 6.99% 4.00%
Failure to meet the capital guidelines may result in the
initiation by the Board of Governors of appropriate supervisory or
enforcement actions.
THE BANK
General. The Bank is a Colorado banking corporation, the
deposits of which are insured by the FDIC, and is subject to
supervision and regulation by the FDIC and the Colorado Division of
Banking.
Permissible Activities. No Colorado bank may engage in any
activity not permitted for national banks, unless the institution
complies with applicable capital requirements and the FDIC determines
that the activity poses no significant risk to the insurance fund.
This limitation does not now affect the Bank, since it is not
presently involved in the types of transactions covered by this
limitation.
Branching. Colorado has no limitations on the number of branches
a bank may establish.
Community Reinvestment Act. Enacted in 1977, the federal
Community Reinvestment Act ("CRA") has become increasingly important
to financial institutions, including their holding companies. The CRA
currently allows regulators to turn down an applicant seeking to make
an acquisition or establish a branch unless it has performed
satisfactorily under the CRA. Satisfactory performance means meeting
adequately the credit needs of the communities the applicant serves.
The applicable federal regulators now regularly conduct CRA
examinations to assess the performance of financial institutions.
During the last examination, the Bank received a satisfactory rating.
As a result, management believes that the Bank's performance under CRA
will not impede regulatory approvals of proposed acquisitions or
branching opportunities.
Cross-Guarantee. Under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), a depository
institution insured by the FDIC can be held liable for any loss
-20-<PAGE>
incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to
a commonly controlled FDIC-controlled institution in danger of
default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined
generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
Dividend Restrictions. Dividends paid by the Bank provide
substantially all of the cash flow of the Company. Under Colorado
banking policies, the approval of the Colorado Division of Banking is
required prior to the declaration of any dividend by a bank if the
total of all dividends declared in any calendar year exceed the total
of its net profits of that year combined with its retained net profits
for the preceding two years. In addition, a bank cannot pay a
dividend if it will cause the bank to be "undercapitalized."
Examinations. The FDIC periodically examines and evaluates
state-chartered banks that are not members of the Federal Reserve
System. Based upon such an evaluation, the examining regulator may
revalue the assets of an insured institution and require that it
establish specific reserves to compensate for the difference between
the value determined by the regulator and the book value of such
assets.
The Colorado Division of Banking also conducts examinations of
the state-chartered banks. The Division may accept the results of a
federal examination in lieu of conducting an independent examination.
The Colorado Division of Banking also has the authority to revalue the
assets of a state-chartered institution and require it to establish
reserves.
Capital Adequacy. The FDIC has adopted regulations establishing
minimum requirements for the capital adequacy of insured institutions.
The requirements address both risk-based capital and leverage capital,
with risk-based assets and Tier 1 and Tier 2 capital being determined
in basically the same manner as described above for bank holding
companies. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a
high susceptibility to interest rate risk.
The FDIC risk-based capital guidelines require state banks to
have a ratio of Tier 1 or core capital to total risk-weighted assets
of 4% and a ratio of total capital to total risk-weighted assets of
8%.
The FDIC's leverage guidelines require that state banks maintain
Tier 1 capital of no less than 3% and up to 5% of total tangible
assets. Based on the current capital status of the Bank, the
applicable guideline is estimated to be 5%. Banks with capital ratios
below the required minimum are subject to certain administrative
actions, including the termination of deposit insurance upon notice
and hearing, or a temporary suspension of insurance without a hearing
in the event the institution has no tangible capital.
-21-<PAGE>
The table below sets forth the Bank's capital ratios at
December 31, 1996.
At December 31, 1996
Ratio Actual Minimum Required
----- ------ ----------------
Total capital to risk-weighted assets 11.37% 8.00%
Tier 1 capital to risk-weighted assets 10.12% 4.00%
Tier 1 capital to tangible assets 6.67% 4.00%
The Bank's regulators have adopted regulations that define five
capital levels: well capitalized, adequately capitalized,
undercapitalized, severely undercapitalized and critically
undercapitalized. An institution is critically undercapitalized if it
has a tangible equity to total assets ratio that is equal to or less
than 2%. An institution is well capitalized if it has a total risk-
based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater,
and the institution is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure. An
institution is adequately capitalized if it has a total risk-based
capital ratio of less than 10% but not less than 8%, a Tier 1 risk-
based capital ratio of less than 6% but not less than 4% and a
leverage ratio of less than 5% but not less than 4%. Under these
regulations, as of December 31, 1996, the Bank was well capitalized.
The Federal Deposit Insurance Corporation Improvement Act of 1989
("FDICIA") requires the federal banking regulators to take "prompt
corrective action" with respect to capital-deficient institutions. In
addition to requiring the submission of a capital restoration plan,
FDICIA contains broad restrictions on certain activities of
undercapitalized institutions involving asset growth, acquisitions,
branch establishment, and expansion into new lines of business. With
certain exceptions, an insured depository institution is prohibited
from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the
institution would be undercapitalized after any such distribution or
payment.
As an institution's capital decreases, the powers of the federal
regulators become greater. A significantly undercapitalized
institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with affiliates,
removal of management, and other restrictions. The regulators have
very limited discretion in dealing with a critically undercapitalized
institution and are virtually required to appoint a receiver or
conservator if the capital deficiency is not corrected promptly.
Real Estate Lending Evaluations. The federal regulators have
adopted uniform standards for evaluations of loans secured by real
estate or made to finance improvements to real estate. Banks are
required to establish and maintain written internal real estate
lending policies consistent with safe and sound banking practices and
appropriate to the size of the institution and the nature and scope of
its operations. The regulations establish loan to value ratio
limitations on real estate loans, which are equal to or higher than
the loan to value limitations established by the Bank.
Deposit Insurance Premiums. Effective January 1, 1996, the
assessment schedule for banks will range from 0 to 27 cents per $100
of deposits subject to Bank Insurance Fund ("BIF")
-22-<PAGE>
assessments, based on each institution's risk classification. The
Bank's insured deposits are subject to assessment payable to BIF. An
institution's risk classification is based on an assignment of the
institution by the FDIC to one of three capital groups and to one of
three supervisory subgroups. The capital groups are "well
capitalized," "adequately capitalized" and "undercapitalized." The
three supervisory subgroups are Group "A" (for financially solid
institutions with only a few minor weaknesses), Group "B" (for those
institutions with weaknesses which, if uncorrected could cause
substantial deterioration of the institution and increase the risk to
the deposit insurance fund) and Group "C" (for those institutions with
a substantial probability of loss to the fund absent effective
corrective action). Currently, the Bank is a well-capitalized
institution and a Group A supervisory subgroup.
Interstate Banking Legislation. On September 29, 1994, the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") was enacted into federal law. Under the
Interstate Act, commencing on September 29, 1995, bank holding
companies will be permitted to acquire banks located in any state
regardless of the state law in effect at the time. The Interstate Act
also provides for the nationwide interstate branching of banks. Under
the Interstate Act, both national and state chartered banks will be
permitted to merge across state lines (and to thereby create
interstate branches) commencing July 1, 1997. States are permitted to
"opt-out" of the interstate branching authority by taking action prior
to the commencement date. States may also "opt-in" early (i.e., prior
----
to July 1, 1997) to the interstate branching provisions. Colorado has
neither "opted-in" nor "opted-out" of the interstate branching
provisions and therefore out of state banks may branch into Colorado
after June 30, 1997 in accordance with applicable laws. The Company
does not currently have any plans generally to take any actions
permitted by the Interstate Act.
CHANGING REGULATORY STRUCTURE
The laws and regulations affecting banks and bank holding
companies are in a state of flux. The rules and the regulatory
agencies in this area have changed significantly over recent years,
and there is reason to expect that similar changes will continue in
the future. It is difficult to predict the outcome of these changes.
One of the major additional burdens imposed on the banking
industry is the increased authority of federal agencies to regulate
the activities of federal and state banks and their holding companies.
The Board of Governors, the Comptroller of the Currency and FDIC have
extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository
institutions and their holding companies. These agencies can assess
civil money penalties and other laws have expanded the agencies'
authority in recent years, and the agencies have not yet fully tested
the limits of their powers. In addition, the Colorado Division of
Banking possesses certain enforcement powers to address violations of
the Colorado Banking Code by Colorado state-chartered banks.
-23-<PAGE>
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary
policy of the Board of Governors, have a significant effect on the
operating results of bank holding companies and their subsidiaries.
Among the means available to the Board of Governors to affect the
money supply are open market operations in U.S. Government securities,
changes in the discount rate on member bank borrowings, and changes in
reserve requirements against member bank deposits. These means are
used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use
may affect interest rate charged on loans or paid on deposits.
The Board of Governors' monetary policies have materially
affected the operating results of commercial banks in the past and are
expected to continue to do so in the future. The nature of future
monetary policies and the effect of such policies on the business and
earnings of the Company and its subsidiaries cannot be predicted.
ITEM 2. PROPERTIES
The Bank leases space in a six-story office building in Denver,
Colorado, with approximately 18,932 rentable square feet. This space
houses the Bank's loan and teller facilities, new accounts personnel,
safe deposit facilities, the trust department and administrative
offices. The Bank also leases a 1,723 square-foot detached facility
located one block from the Bank's main offices, which is used for
drive-up and walk-in customer services. In addition, the Bank leases
2,220 square feet of space in an adjacent building which is used for
storage and an employees' lounge. The lease provides the Bank with
parking rights for use by the Bank's customers. The foregoing leases
run for a term of ten years from July 1, 1994, renewable at the Bank's
option for two additional terms of five years each. Effective June 1,
1996, the Bank leased 2,347 additional square feet in the six-story
office building. The space is occupied by the Bank's Real
Estate/Construction Loan Department. The Bank leases this space at
approximately $11.00 per square foot, renewable on an annual basis.
The Bank leases all of the above space at approximately $10.01 per
square foot.
The Company expanded its operations in July 1994 through the
opening of a full-service branch in the Lakeside area of metropolitan
Denver. The branch occupies a two-story office building with
approximately 8,325 square feet. The building houses the branch's
operations and the Bank's data processing operations. The original
lease expires on July 31, 2004 and is renewable for two additional
terms of five years each. Due to the growth of the data processing
operations on August 15, 1996, the Bank leased 1,474 additional square
feet on the second floor. The addendum to the original lease expires
August 14, 2001 and is renewable for three additional years. The Bank
leases this building at approximately $11.05 per square foot, with
rental subject to annual per square foot escalation.
The Company again expanded its operations in March, 1995 by
leasing a 3,917 square-foot building in the University Hills area of
metropolitan Denver for the new branch. The lease expires on
March 31, 2005 and is renewable for two additional terms of five
years. The Bank leases this building at approximately $12.94 per
square foot.
-24-<PAGE>
On December 4, 1995, the Company opened its third branch, this
one in the Lakewood area of metropolitan Denver. The Bank leased
space in a three-story building with approximately 3,955 rentable
square feet, along with a separate drive-up facility with two stalls
and a control booth. The Bank is sub-leasing the space through
February 28, 1997, after which the Bank will lease directly from the
building owners. The lease runs through October 31, 2005. The Bank
leases the building space and drive-up facility at approximately
$18.75 per square foot.
The Company believes its existing facilities will be adequate to
meet the Company's needs for the foreseeable future. Should the
Company need additional space, management believes it will be able to
secure facilities at reasonable rates. The Company believes that the
facilities are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various
claims and lawsuits are brought against the Company, such as claims to
enforce liens, condemnation proceedings on properties in which the
Company holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the
Company's business. In the opinion of the Company's management, the
ultimate liability, if any, resulting from such claims or lawsuits
will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 1996.
-25-<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Price Range of Common Stock
1996 1995
------------- -------------
High Low High Low
---- --- ---- ---
First Quarter $11.750 $10.500 $8.875 $7.500
Second Quarter $12.750 $10.750 $8.250 $7.625
Third Quarter $17.000 $12.375 $11.813 $8.250
Fourth Quarter $17.375 $14.250 $12.000 $10.500
1997
--------------
High Low
---- ---
First Quarter (to March 21, 1997) $18.25 $15.25
Union Bankshares' common stock has been traded on The NASDAQ
Stock Market since March 1993 under the symbol "UBSC". The above
prices represent closing sale prices on The NASDAQ Stock Market. As
of March 21, 1997, there were 97 shareholders of record and
approximately 700 beneficial shareholders.
DIVIDEND POLICY
The Company's policy is to retain its earnings to support the
growth of its business. The Board of Directors of the Company has not
historically declared cash dividends on its Common Stock, and does not
plan to do so in the foreseeable future. The ability of the Company
to pay cash dividends largely depends on the amount of cash dividends
paid to it by the Bank. Capital distributions, including dividends,
by institutions such as the Bank are subject to restrictions tied to
the institution's earnings.
-26-<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's Consolidated Financial Statements show its
financial condition and information on a consolidated basis. The Bank
is the only operating unit of the Company. The differences between the
Company's financial condition and results of operations and those of
the Bank have historically consisted primarily of the $10 million loan
obtained by the Company upon the acquisition of the Bank (the
"Acquisition Loan"), the $6.9 million in 8.3% convertible notes due
2003 (the "Convertible Notes") issued at the time of the Company's
initial public offering in 1993 and principal and interest payments
thereon, the $4.0 million loan obtained in March 1996 in connection
with the redemption of the Convertible Notes, and the amortization of
the values assigned to the Bank's core deposits and goodwill in the
acquisition of the Bank. In 1993, the Company began amortizing the
remaining goodwill relating to the acquisition at the rate of
approximately $226,000 per year through 2009.
On March 1, 1996, the Company called the Convertible Notes for
redemption. The redemption on April 1, 1996 caused the Company to
accelerate the amortization of the debt issuance costs which were
being amortized over a ten-year period. On March 31, 1996, there was
a write-off of the $473,000 balance of the debt issuance costs and the
$65,000 call premium. The after-tax effect of this transaction was a
$337,000 non-cash charge to income in the first quarter of 1996. This
is reported as an extraordinary item in the Company's financial
statements.
The Company has opened three branches since July 1994. As
expected, the branches have all experienced greater expenses than
income during the first months of operations. As the deposit and loan
balances have grown, however, the monthly net losses have become
smaller. During the last quarter of 1996, all of the branches showed
a small excess of income over direct costs. The Company expects that
the branches will continue to generate modest income in 1997.
NET INTEREST INCOME
For most financial institutions, the primary component of
earnings is net interest income. Net interest income is the difference
between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from
changes in volume, spread and margin. Volume refers to the average
dollar level of interest-earning assets and interest-bearing
liabilities. Spread refers to the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities. Margin refers to net interest income divided by average
interest-earning assets and is influenced by the level and relative
mix of interest-earning assets and interest-bearing liabilities.
During the fiscal years ended December 31, 1996, 1995 and 1994,
average interest-earning assets were $157.5 million, $137.9 million,
and $122.8 million, respectively. During these
-27-<PAGE>
same periods, net interest margin, computed on a full tax equivalent
basis, was 6.29%, 6.35% and 6.03%, respectively. See "Results of
Operations."
The following tables set forth for the periods indicated
information with regard to average balances of assets and liabilities,
as well as the total dollar amounts of interest income from interest-
earning assets and interest expense on interest-bearing liabilities,
resultant yields or costs, net interest income, net interest spread,
net interest margin and the ratio of average interest-earning assets
to average interest-bearing liabilities. Net interest income is
computed on a full tax equivalent basis to reflect the effect of tax
exempt income earned on municipal obligations in the investment
securities portfolio. Full tax equivalent interest income on tax
exempt securities is the amount of income that would have to be earned
on taxable securities to yield the same after tax return. A 34% tax
rate was used.
-28-<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Interest Average Interest Average Interest Average
Average earned yield Average earned yield Average earned yield
balance<F1> or paid or cost balance<F1> or paid or cost balance<F1> or paid or cost
----------- ------- ------- ----------- ------- ------- ----------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Commercial loans . . . . . $ 61,684 $ 6,359 10.31% $ 50,109 $ 5,503 10.98% $ 37,799 $ 3,524 9.32%
Real estate mortgage . . . 6,917 681 9.85% 9,235 969 10.50% 11,582 1,044 9.01%
Real estate construction . 7,296 889 12.18% 5,311 681 12.82% 3,459 417 12.06%
Consumer loans 15,689 1,475 9.40% 9,605 915 9.53% 6,127 551 8.99%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans . . . . . 91,586 9,404 10.27% 74,260 8,068 10.86% 58,967 5,536 9.39%
Allowance for loan loss . . (1,569) (1,335) (1,164)
Securities:
U.S. Government . . . . . 33,222 2,215 6.67% 32,502 2,169 6.67% 27,552 1,777 6.44%
Municipal -- nontaxable . 21,065 1,753 8.34% 17,293 1,507 8.74% 17,856 1,510 8.47%
Municipal -- taxable . . . 8,337 571 6.85% 9,489 608 6.40% 16,524 1,153 6.98%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total securities . . . 62,624 4,539 7.25% 59,284 4,284 7.23% 61,932 4,440 7.17%
Interest-bearing deposits
in other banks . . . . . . 0 0 0.00% 0 0 0.00% 10 0 2.95%
Federal funds sold . . . . . 3,259 177 5.34% 4,364 250 5.72% 1,926 85 4.41%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets . . . . . . . 157,469 14,120 8.97% 137,908 12,602 9.14% 122,835 10,061 8.19%
Noninterest-earning assets:
Excess of investment
in subsidiary over net
assets acquired . . . . . 3,067 3,284 3,501
Other assets . . . . . . . 14,345 13,320 12,253
-------- -------- --------
Total noninterest-
earning assets . . . 17,412 16,604 15,754
-------- -------- --------
Total assets . . . . . $173,312 $153,177 $137,425
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest-bearing
demand accounts . . . . . $ 73,722 $ 2,195 2.98% $ 63,634 $ 1,933 3.04% $ 57,757 $ 1,317 2.28%
Certificates of deposit . 24,820 1,295 5.22% 20,736 1,044 5.03% 15,309 508 3.32%
Savings accounts . . . . . 9,313 246 2.64% 8,483 235 2.77% 8,979 210 2.34%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
accounts . . . . . . 107,855 3,736 3.46% 92,853 3,212 3.46% 82,045 2,035 2.48%
Federal funds purchased . 1,991 91 4.57% 1,499 90 6.00% 1,367 57 4.17%
Notes payable . . . . . . 4,602 385 8.34% 6,541 543 8.30% 6,816 567 8.32%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities . . . . 114,448 4,212 3.68% 100,893 3,845 3.81% 90,228 2,659 2.95%
</TABLE>
-29-<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
accounts . . . . . . . . . 43,042 38,237 34,469
-------- -------- --------
Total deposits and
interest-bearing
liabilities . . . . 157,490 139,130 124,697
Other noninterest-bearing
liabilities . . . . . . 745 833 449
-------- -------- --------
Total liabilities . . 158,235 139,963 125,146
Redeemable preferred stock . 0 0 0
Stockholders' equity . . . . 15,077 13,214 12,279
-------- -------- --------
Total liabilities
and stockholders'
equity . . . . . . . $173,312 $153,177 $137,425
======== ======== ========
Net interest income . . . . $ 9,908 $ 8,757 $ 7,402
======== ======== ========
Net interest spread . . . . 5.29% 5.33% 5.24%
======= ======= =======
Net interest margin . . . . 6.29% 6.35% 6.03%
======= ======= =======
Ratio of average interest-
earning assets to average
total deposits and interest-
bearing liabilities . . . 99.99% 99.12% 98.51%
======= ======= =======
Return on average assets . . 0.91% 0.80% 0.76%
======= ======= =======
Return on average equity . . 10.44% 9.28% 8.49%
======= ======= =======
Dividend payout ratio . . . -- -- --
======= ======= =======
Ratio of average equity to
average assets . . . . . . 8.70% 8.63% 8.94%
======= ======= =======
- ------------------
<FN>
<F1> Average balances are based on daily averages and include nonaccrual loans. Loan fees are included in interest
income as follows: 1995 -- $474,000; 1994 -- $407,000; 1993 -- $273,000.
</TABLE>
-30-<PAGE>
The following table illustrates the changes in the Company's net
interest income due to changes in volume and changes in interest rate
on a full tax equivalent basis. Changes attributable to the combined
effect of volume and interest rate have been allocated proportionately
to the change due to volume and the change due to interest rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
vs. vs.
Year Ended Year Ended
December 31, 1995 December 31, 1994
Increase (decrease) Increase (decrease)
in net interest income in net interest income
due to changes in <F1> due to changes in <F1>
------------------------------ ------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans:
Commercial loans $1,271 $ (415) $ 856 $1,148 $ 831 $1,979
Real estate -- mortgage (243) (45) (288) (212) 137 (75)
Real estate construction 255 (47) 208 223 41 264
Consumer loans 580 (20) 560 313 51 364
------ ------ ------ ------ ----- ------
Total loans 1,863 (527) 1,336 1,472 1,060 2,532
Securities:
U.S. government securities 48 2 46 319 73 392
Municipal -- nontaxable 330 (84) 246 (48) 45 (3)
Municipal -- taxable (74) 37 (37) (491) (54) (545)
------ ------ ------ ------ ----- ------
Total securities 304 (49) 255 (220) 64 (156)
Interest-bearing deposits
at other banks 0 0 0 0 0 0
Federal funds sold (63) (10) (73) 108 57 165
Total interest-earning
assets 2,104 (586) 1,518 1,360 1,181 2,541
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand
deposits 306 (44) 262 134 482 616
Certificates of deposit 206 45 251 180 356 536
Savings deposits 23 (12) 11 (12) 37 25
------ ------ ------ ------ ----- ------
Total interest-bearing
accounts 535 (11) 524 302 875 1,177
Notes payable (160) 2 (158) (23) (1) (24)
Federal funds purchased 30 (29) 1 6 27 33
------ ------ ------ ------ ----- ------
Total interest-bearing
liabilities 405 (38) 367 285 901 1,186
Total increase (decrease)
in net interest income $1,699 $ (548) $1,151 $1,075 $ 280 $1,355
====== ====== ====== ====== ===== ======
_____________
<FN>
<F1> This table is calculated on a full tax-equivalent basis.
</TABLE>
-31-<PAGE>
ASSET/LIABILITY MANAGEMENT
The Company's results of operations depend substantially on its
net interest income. Like most financial institutions, the Company's
interest income and cost of funds are affected by general economic
conditions and by competition in the marketplace.
The function of asset/liability management is to manage the
risk/return relationships between capital adequacy, market risk,
liquidity and interest rate risk. To manage these relationships, the
Bank uses the following items: equity, free capital, debt/capital,
liquidity, volatile liability coverage, portfolio maturities, maturing
assets and maturing liabilities. In addition, in reviewing the needs
of the Bank with regard to proper management of its asset/liability
program, the Company's management has projected its needs into the
future, taking into consideration historical periods of high loan
demand, low deposit balances, projected loan increases (due to
increased demand through marketing), and interest rate changes (as
projected by consulting economists). The Bank's Asset and Liability
Management Committee is responsible for establishing procedures that
enable the Company to achieve its goals while adhering to prudent
banking practices and existing loan and investment policies.
The excess of the Bank's interest-earning assets over its
interest-bearing liabilities have generally been invested in
securities when suitable lending opportunities have not been
sufficient to use such excess funds. The Bank's securities portfolio
plays an important part in the overall asset/liability management
program and is a major contributor to the Company's financial results.
The primary objectives in the overall management of the securities
portfolio are safety, liquidity, yield, interest rate risk and
pledging for public deposits.
The securities designated as available for sale generally have
more liquidity and a shorter term than those designated as held to
maturity. In connection with the preparation of its Consolidated
Financial Statements, the Company has designated securities with a
cost of $39,904,000 as available for sale. These securities are to be
available for sale to assist management in providing an adequate
asset/liability and liquidity management program for the Bank.
Securities designated as held to maturity typically have less
liquidity and also have less call protection than those held for sale.
A critical element of the Company's asset/liability management
program is management of exposure to interest rate risk. Exposure to
interest rate risk arises from volatile interest rates and changes in
the balance sheet mix. The Bank's policy is to control the exposure
of its earnings to changing interest rates by generally maintaining a
position within a narrow range around an "earnings neutral position,"
which is defined as the mix of assets and liabilities that generate a
net interest margin that is least affected by interest rate changes.
The Bank uses a measurement tool known as dollar duration to help
maintain an earnings neutral position. Dollar duration measures the
percentage of loss or gain that the portfolio would sustain with a 100
basis point parallel shift in applicable interest rates.
-32-<PAGE>
In order to control interest rate risk in a rising interest rate
environment, management's philosophy is generally to reduce the dollar
duration of the investment portfolio in order to achieve a more asset
sensitive position, thereby allowing quicker repricings and maximizing
net interest margin. Conversely, in a declining interest rate
environment, management's philosophy is to increase the dollar
duration of the investment portfolio, thereby becoming more liability
sensitive. Management would ideally take steps to increase dollar
duration at the time of a peak in interest rates or during the
stabilization period prior to the anticipated decline of rates. This
strategy provides that rates on the investments are locked in at
higher levels and enhances the effect on net interest margin. The
Bank decreases the dollar duration of its investment portfolio by
taking steps to increase the coupon rate and decrease the average life
(the period for which a security is actually held as opposed to its
stated maturity) of the securities held in the portfolio. The Bank
increases the dollar duration of its investment portfolio by taking
steps to decrease the coupon rate and increase the average life of the
securities held in the portfolio.
The Bank anticipates that the Federal Reserve Board will not
encourage any substantial change in interest rates in 1997. As of
December 31, 1996, the dollar duration of the investment portfolio was
4.00 compared to 3.68 at December 31, 1995. The increase in dollar
duration during 1996 reflects Management's decision to replace
investments which matured and had relatively high yields with
investments that had similar yields. This required the purchase of
securities with longer maturities due to stable interest rates in
1996. The decision resulted in modestly extending the dollar duration
of the portfolio, and increasing the gross yield on the portfolio from
7.23% to 7.25%. 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 non-interest
income and the interest earned on the securities.
Although analysis of interest rate gap (the difference between
the repricing of interest-earning assets and interest-bearing
liabilities during a given period of time) is one standard tool for
the measurement of exposure to interest rate risk, the Company
believes that because interest rate gap analysis does not address all
factors that can affect earnings performance, such as early withdrawal
of time deposits and prepayment of loans, it should not be used as the
primary indicator of exposure to interest rate risk and the related
volatility of net interest income in a changing interest rate
environment. Interest rate gap analysis is primarily a measure of
liquidity based upon the amount of change in principal amounts of
assets and liabilities outstanding, as opposed to a measure of changes
in the overall net interest margin. The Company believes that since
interest rate risk is caused by a combination of (i) differing volumes
of re-pricing assets and liabilities (i.e. gaps), (ii) variability of
interest rate changes (i.e. multiples) and (iii) variability of
occurrence of rate changes for various classes of assets and
liabilities (i.e. lags), that its system of measuring the effect of
each of these factors is a preferable tool for management of interest
rate risk.
The Bank has contracted with a consulting firm to assist it with
economic outlook, interest rate forecasting, asset/liability
management and purchase and/or sale of securities. This firm does not
have discretionary authority to act on behalf of the Company.
-33-<PAGE>
The following table sets forth the estimated maturity or
repricing, and the resulting interest rate gap, of the Company's
interest-earning assets and interest-bearing liabilities at December
31, 1996. The amounts in the table are derived from internal data from
the Company. The amounts are based upon regulatory reporting formats
and, therefore, may not be consistent with financial information
appearing elsewhere in this Form 10-KSB that has been prepared in
accordance with generally accepted accounting principles. The amounts
could be significantly affected by external factors such as changes in
prepayment assumptions, early withdrawals of deposits and competition.
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------------
Estimated maturity or repricing
---------------------------------------------------------------------
Less than Three months One year to Over
three months to one year five years five years Total
------------ ----------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed rate loans . . . . . . . . . . $ 577 $ 5,715 $ 23,991 $ 4,333 $ 34,616
Floating rate loans . . . . . . . . 66,116 -- -- -- 66,116
Investment securities . . . . . . . 1,353 4,307 19,522 39,356 64,538
FHLB stock . . . . . . . . . . . . . -- -- -- 494 494
Federal funds sold . . . . . . . . . -- -- -- -- --
-------- -------- -------- ------- -------
Total interest-earning
assets . . . . . . . . . . . . . 68,046 10,022 43,513 44,183 165,764
Interest-bearing liabilities:
Interest-bearing demand
deposits . . . . . . . . . . . . . 15,279 -- -- -- 15,279
Money market deposits . . . . . . . 54,772 -- -- -- 54,772
Certificates of deposit
under $100,000 . . . . . . . . . . 3,482 7,055 5,137 -- 15,674
Certificates of deposit
over $100,000 . . . . . . . . . . 4,615 4,721 2,595 -- 11,931
Savings deposits . . . . . . . . . . 10,011 -- -- -- 10,011
Notes payable . . . . . . . . . . . -- -- -- 3,500 3,500
Federal funds purchased . . . . . . 6,200 -- -- -- 6,200
------- ------- ------- ------ -------
Total interest-bearing
liabilities . . . . . . . . . . 94,359 11,776 7,732 3,500 117,367
-------- ------- ------- ------ -------
Interest rate gap . . . . . . . . . . (26,313) (1,754) 35,781 40,683 48,397
======== ======= ======= ====== =======
Cumulative interest rate gap . . . . . (26,313) (28,067) 7,714 48,397
======== ======= ======= ====== =======
Cumulative interest rate gap
to total assets . . . . . . . . . . -14.36% -15.32% 4.21% 26.42%
======== ======= ======= ======
Total consolidated assets . . . . . . $183,186
========
</TABLE>
-34-<PAGE>
The following table presents at the date indicated (i) the
aggregate loans by maturity in each major category of the Company's
loan portfolio and (ii) the aggregate amounts of variable and fixed
rate loans that mature after one year. Actual maturities may differ
from the contractual maturities shown below as a result of renewals
and prepayments. Management estimates that approximately $13 million
of loans maturing during the year ending December 31, 1997 will
actually be paid off in cash during that period.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Less than One to Over
one year five years five years Total
-------- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial loans . . . . . . . . . . . . . . . . . . . . $ 31,943 $27,899 $10,788 $ 70,630
Real estate -- construction loans . . . . . . . . . . . 5,758 -- -- 5,758
Real estate -- mortgage loans . . . . . . . . . . . . . 1,712 2,6 1,154 5,489
Consumer loans . . . . . . . . . . . . . . . . . . . . . 10,024 8,029 802 18,855
-------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . $49,437 $38,551 $12,744 $100,732
-------- -------- -------- --------
Fixed rate loans . . . . . . . . . . . . . . . . . . . $23,991 $ 4,333
Floating rate loans . . . . . . . . . . . . . . . . . . 14,560 8,411
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 38,551 $12,744
======== ========
</TABLE>
RESULTS OF OPERATIONS
Years ended December 31, 1996 and 1995
Overview. Net income increased $347,000 for 1996 to $1,573,000
from $1,226,000. Net interest income increased $1,068,000 and gain on
sale of securities increased $249,000. These positive changes were
offset by a $405,000 increase in noninterest expense and a $536,000
extraordinary expense relating to the redemption of the Convertible
Notes. Return on average assets and return on average equity were
.91% and 10.44%, respectively, for 1996 compared to .80% and 9.28%,
respectively, for 1995.
Interest Income. Interest income increased $1,435,000 to
$13,526,000 for 1996 from $12,091,000 for 1995. Interest income from
loans increased $1,336,000 and interest income on securities increased
$172,000 in 1996, while interest income on federal funds sold
decreased $73,000 in 1996. This increase in interest income from
loans was primarily due to the increase in the size of the loan
portfolio, as the interest rates were relatively stable in 1996.
Interest Expense. Interest expense increased $367,000 to
$4,212,000 for 1996 from $3,845,000 in 1995. Interest expense on
interest-bearing deposits increased $524,000 and interest expense on
federal funds purchased increased $1,000 in 1996, while interest
expense on the notes payable decreased $158,000 in 1996. This
increase in interest expense was primarily due to greater deposit
volume in 1996, as the rates paid on interest bearing deposits were
-35-<PAGE>
relatively unchanged between 1995 and 1996. The decrease in interest
expense on the Notes payable was due to the redemption of the $6.5
million convertible subordinated notes on April 1, 1996 and the
subsequent $4.0 million loan from Boatmen's First National Bank of
Kansas City.
Net Interest Income. Net interest income increased $1,068,000 to
$9,314,000 for 1996 from $8,246,000 for 1995. During 1996 average
loans outstanding increased $17,326,000, average securities owned
increased $3,340,000 and the net interest spread decreased from 5.33%
for 1995 to 5.29% for 1996. The increase in net interest income
resulted from the Bank's ability to increase the percentage of its
assets employed in its loan portfolio.
Noninterest Income. Noninterest income increased $427,000 to
$1,037,000 for 1996 from $610,000 for 1995. This increase relates to
a $249,000 increase in gains on sale of investment securities, a
$49,000 increase in service charge income and a one-time adjustment of
$108,000 which relates to the securities portfolio in a prior year.
Noninterest Expense. Noninterest expense increased $403,000 to
$7,616,000 for 1996 from $7,213,000 for 1995. This increase is a net
result of the following factors: (i) Salary/benefit expense increased
$548,000 primarily due to increased staffing (at the Bank and the
three branches) and, to a lesser extent, to yearly salary increases;
(ii) Occupancy and equipment expense increased $216,000 primarily due
to a full year of operations at the two new branches in 1996; (iii)
Other operating expenses decreased $361,000 primarily as a result of
an $84,000 decrease in legal fees which had been incurred in
connection with a recovery of expenses on a previously charged off
loan, a $100,000 decrease of a 1995 accrual for a claim made against
the Company which was settled favorably in February, 1996, and a
$137,000 decrease in FDIC insurance expense primarily due to a
decrease in the premium.
Extraordinary Item. On March 1, 1996, the Company called the
Convertible Notes for redemption. The redemption on April 1, 1996
caused the Company to accelerate the amortization of the debt issuance
costs which were being amortized over a ten-year period. On March 31,
1996, there was a write-off of the $473,000 balance of the debt
issuance costs and the $65,000 call premium. The after-tax effect of
this transaction was a $337,000 non-cash charge to income in the first
quarter of 1996.
PROVISION FOR LOAN LOSSES
The Company's provisions for loan losses in the years ended
December 31, 1996, 1995 and 1994 were $285,000, $120,000, and
$195,000, respectively. See "Item 1 - Business -- Analysis of
Allowance for Loan Losses."
-36-<PAGE>
INCOME TAXES
The Company's income tax expense for the years ended December 31,
1996, 1995 and 1994 was $339,000 (which is net of the $201,000 tax
effect of the extraordinary item), $297,000, and $248,000,
respectively. The Company's effective tax rate typically differs from
the expected 34% enacted tax rate due to interest income received on
tax-exempt securities, which is partially offset by the amortization
of excess of investment in subsidiary over net assets acquired.
LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are customer deposits,
sales and maturities of investment securities and loan repayments.
These funds are used to make loans, to acquire investment securities
and other assets and to fund continuing operations. During the year
ended December 31, 1996, deposits increased to $156,409,000 from
$140,175,000 and $126,201,000 at December 31, 1995 and 1994,
respectively. None of the deposits at December 31, 1996, 1995 or 1994
were brokered deposits. Management believes that the increases in
deposits in 1995 and 1996 were the result of (i) recent bank
acquisition activity in Colorado which has improved the Bank's
opportunities to attract new business from customers in its small and
medium-sized business focus area; (ii) continued success of the Bank's
Officer Call Program; (iii) referrals from existing customers, and
(iv) the successful opening of the Bank's three new branches and the
resulting increase in new customers at each branch. See "Item 1 -
Business -- Operating Strategy" and "-- Growth Strategy." At December
31, 1996, net loans were $98,978,000 compared to $79,864,000 and
$64,128,000 at December 31, 1995 and 1994, respectively. The Company's
Acquisition Loan was renewed on January 1, 1993, and was paid off on
March 17, 1993 with the proceeds from the sale of Convertible Notes in
the Offering. The Convertible Notes required semi-annual interest
only payments, with no principal due until maturity at March 17, 2003.
On March 1, 1996, the Company exercised the optional redemption
provision of the Convertible Notes. On the redemption date, April 1,
1996, the Company paid 101% of the principal amount of each
Convertible Note redeemed, plus accrued and unpaid interest. Prior to
5:00 p.m. on the redemption date holders of the Convertible Notes had
the right to convert the Convertible Notes into the Company's common
stock at a rate of 78.68 shares for each $1,000 principal amount of
Convertible Notes (a conversion price of $12.71 per share). There
were $6,512,000 in principal amount of Convertible Notes outstanding
and all except $26,000 were tendered for redemption. The Company
entered into a loan agreement (the "Loan Agreement") with Boatmen's
First National Bank of Kansas City ("Boatmen's") to borrow up to
$4,000,000 to fund the redemption. The remainder of the funds needed
to pay off the Convertible Notes was taken from the investments which
the Company held in its available for sale portfolio.
The Loan Agreement provides for interest on outstanding amounts
to be payable at Boatmen's corporate base rate, which is currently
8.25%. 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
-37-<PAGE>
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 Bank was in compliance with
each of the foregoing at December 31, 1996 and the loan was extended
for an additional year.
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.
The Company also successfully negotiated with Boatmen's for a
revolving line of credit 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 would be 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 would be due
quarterly. There is currently no amount outstanding under this line
of credit.
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 and will use funds so provided
primarily to make loans and to purchase securities. The Company
believes that its customer deposits 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. See "Item 1 - Business --
Source of Funds."
-38-<PAGE>
CAPITAL RESOURCES
The Company's total stockholders' equity increased to $16,032,000
at December 31, 1996 from $14,912,000 at December 31, 1995. This
increase is a result of an increase in retained earnings of $1,573,000
relating to 1996 net income, and an increase in common stock surplus
of $25,000 relating to issuance of stock to the outside Directors in
lieu of their annual retainer and $26,000 relating to the Convertible
Subordinated Notes tendered for conversion, offset by a decrease in
unrealized gains on investment securities available for sale of
$504,000, due to the adoption of FAS 115 on January 1, 1995, as
discussed below at "- New Accounting Principles." At December 31,
1996, stockholders' equity was 8.8% of total assets, compared to 8.9%
of total assets at December 31, 1995. Management presently intends to
retain earnings, if any, to support growth. Accordingly, the Company
does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
Federal Reserve Board and FDIC guidelines call for a 4% Tier 1
capital to risk-weighted assets ratio, 8% total capital to risk-
weighted assets ratio, and a 5% leverage ratio. See "Item 1 - Business
- - Government Regulation -- The Company -- Capital Adequacy" and "--
The Bank -- Capital Adequacy." The Company and the Bank currently
exceed the applicable regulatory capital requirements. The Company
contributed $500,000 of the net proceeds of the offering to the Bank
to enhance its regulatory capital levels to support continued asset
growth. The following table sets forth the Company's and the Bank's
capital ratios at December 31, 1996.
December 31, 1996
----------------------
(Dollars in thousands)
Company
Tier 1 Capital . . . . . . . . . . . . . . $ 12,700
Total Capital . . . . . . . . . . . . . . 14,252
Risk-Weighted Assets . . . . . . . . . . . 121,011
Tier 1 Capital to Risk-Weighted Assets . . 10.49%
Total Capital to Risk-Weighted Assets . . 11.78%
Leverage Ratio . . . . . . . . . . . . . . 6.99%
Bank
Tier 1 Capital . . . . . . . . . . . . . . $ 12,167
Total Capital . . . . . . . . . . . . . . 13,673
Risk-Weighted Assets . . . . . . . . . . . 120,223
Tier 1 Capital to Risk-Weighted Assets . . 10.12%
Total Capital to Risk-Weighted Assets . . 11.37%
Leverage Ratio . . . . . . . . . . . . . . 6.67%
Bank management is anticipating capital expenditures of
approximately $233,000 in 1997 in connection with updating its
internal operating systems. The Bank intends to use part of its
anticipated income in 1997 to finance these expenditures.
-39-<PAGE>
Management expects that the current capital levels, together with
internally generated funds, will be sufficient to support the
Company's operations for the foreseeable future. However, depending
upon the nature and scale of the Company's acquisition opportunities,
the Company may be required to obtain additional capital resources
through borrowing or the issuance of additional securities. The
Company's ability to incur additional indebtedness may be limited by
government regulations and the terms of the Boatmen's Loan Agreement.
See "Item 1 - Business - Government Regulation."
EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on the Company's operations is
increased operating costs. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than the
effects of general levels of inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the
prices of goods and services, increases in inflation generally have
resulted in increased interest rates. The effects of inflation,
however, can magnify the growth of assets in the banking industry. If
significant, this would require that equity capital increase at a
faster rate than would otherwise be necessary.
NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board recently adopted
Statement No. 125 (FAS 125), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". FAS 125,
which originally was to become effective for transactions that occur
after December 31, 1996, imposes new rules for determining when
transfers of financial assets are accounted for as sales versus when
transfers are accounted for as borrowings. Management believes that
FAS 125 should have no significant impact on the Company's
consolidated financial statements.
"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 filings with the Securities and Exchange
Commission.
-40-<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements appearing in Item 13 on
Page 48.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-41-<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by
reference to the information set forth under the similarly titled
captions contained in the Proxy Statement to be used by the Company in
connection with its 1997 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission not later than April 30,
1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the information set forth under the similarly titled
caption contained in the Proxy Statement to be used by the Company in
connection with its 1997 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission not later than April 30,
1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by
reference to the information set forth under the similarly titled
caption contained in the Proxy Statement to be used by the Company in
connection with its 1997 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission not later than April 30,
1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the information set forth under the similarly titled
caption contained in the Proxy Statement to be used by the Company in
connection with its 1997 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission not later than April 30,
1997.
-42-<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
Page Reference
--------------
Reports of Independent Accountants F-1
Consolidated Balance Sheets at December 31,
1996 and 1995 F-2 - F-3
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995
and 1994 F-4 - F-5
Consolidated Statements of Changes in
Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994 F-6 - F-7
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996, 1995
and 1994 F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-37
Exhibits
See Exhibit Index on Page E-1 of this Form 10-KSB.
(b) Reports on Form 8-K
None
-43-<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNION BANKSHARES, LTD.
By CHARLES R. HARRISON
------------------------------------
Charles R. Harrison, Chairman of the
Board, Chief Executive Officer and
Director
In accordance with the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <S> <S>
CHARLES R. HARRISON Chairman of the Board, ChiefMarch 27, 1997
- --------------------------------------------Executive Officer and Director
Charles R. Harrison (Principal Executive Officer)
BRUCE E. HALL Vice President-Finance, Secretary,March 27, 1997
- --------------------------------------------Treasurer and a Director
Bruce E. Hall (Principal Financial and
Accounting Officer)
WAYNE T. BIDDLE Director March 27, 1997
- --------------------------------------------
Wayne T. Biddle
JERROLD B. EVANS Director March 27, 1997
- --------------------------------------------
Jerrold B. Evans
RALPH D. JOHNSON Director March 27, 1997
- --------------------------------------------
Ralph D. Johnson
RICHARD C. SAUNDERS Director March 27, 1997
- --------------------------------------------
Richard C. Saunders
C. GALE SELLENS Director March 27, 1997
- --------------------------------------------
C. Gale Sellens
HERMAN J. ZUECK Director March 27, 1997
- --------------------------------------------
Herman J. Zueck
</TABLE>
<PAGE>
EXHIBIT DESCRIPTION AND INDEX
Exhibit
Number Description
- ---------------------
3.1 Certificate of Incorporation of Union Bankshares, Ltd. *
3.2 Bylaws of Union Bankshares, Ltd. *
4.1 Form of Indenture relating to the Company's Convertible
Notes (including Form of Convertible Note) *
10.1 Certificate of Incorporation of Union Bank & Trust Company *
10.2 Bylaws of Union Bank & Trust Company *
10.3 Lease Agreement, dated July 1, 1994, between Lichtenberg
Corporation of Delaware and the Bank ***
10.4 Form of Employment Agreement *
10.5 Equity Incentive Plan *
10.6 Nonemployee Directors' Stock Option Plan *
10.7 Agreement between Union Bank & Trust and Colorado Bankers
Mortgage, Inc.*
10.8 Nonemployee Directors Equity Compensation Plan *
10.9 Amended Shareholders' Agreement **
10.10 Agreement between Union Bank & Trust and Colorado National
Bank ***
10.11 Loan Agreement between Union Bankshares, Ltd., Union Bank &
Trust and Boatmen's First National Bank of Kansas City ****
- --------------------
* Incorporated by reference to the Company's S-1 Registration
Statement filed with the Commission on January 6, 1993, as
amended (Reg. No. 33-56736).
E-1<PAGE>
10.12 Line of Credit Agreement between Union Bankshares, Ltd.,
Union Bank & Trust and Boatmen's First National Bank of
Kansas City *****
10.13 Option Bonus Plan *****
21 Subsidiaries of the Registrant *
23.1 Consent of Baird, Kurtz & Dobson *****
23.2 Consent of McGladrey & Pullen, L.L.P. *****
- --------------------
** Incorporated by reference to the Company's Form 10-KSB filed
with the Commission on March 31, 1994.
*** Incorporated by reference to the Company's Form 10-KSB filed
with the Commission on March 31, 1995.
**** Incorporated by reference to the Company's Form 8-K filed with
the Commission on March 1, 1996.
***** Filed herewith.
E-2<PAGE>
UNION BANKSHARES, LTD.
INDEPENDENT ACCOUNTANTS' REPORT
AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
UNION BANKSHARES, LTD.
DECEMBER 31, 1996
TABLE OF CONTENTS
-----------------
Page
----
INDEPENDENT ACCOUNTANTS' REPORTS F-1 - F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-3 - F-4
Statements of Income F-5 - F-6
Statements of Stockholders' Equity F-7 - F-8
Statements of Cash Flows F-9 - F-10
Notes to Financial Statements F-11 - F-38
<PAGE>
Independent Accountants' Report
-------------------------------
To the Board of Directors
Union Bankshares, Ltd.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of UNION
BANKSHARES, LTD. (the "Company") as of December 31, 1996, and the
related consolidated statements of income, stockholders' equity and
cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of UNION BANKSHARES, LTD. as of December 31, 1996, and the results of
its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
January 17, 1997
F-1<PAGE>
[McGladrey & Pullen, LLP Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Union Bankshares, Ltd.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Union
Bankshares, Ltd. and Subsidiary (collectively, the Company) as of
December 31, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of the Company at December 31, 1995 and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN
McGLADREY & PULLEN LLP
January 17, 1997
F-2<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- -----------
<S> <C> <C>
Cash and due from banks $12,356,000 $10,297,000
Held-to-maturity securities 24,634,000 18,416,000
Available-for-sale securities 39,904,000 50,823,000
Other investments 494,000 409,000
Loans, net 98,978,000 79,864,000
Excess of cost over fair value of net assets acquired,
net of amortization 2,946,000 3,172,000
Premises and equipment 1,573,000 1,690,000
Accrued interest receivable 1,107,000 1,085,000
Other assets 1,194,000 1,476,000
----------- -----------
$183,186,000 $167,232,000
============ =============
</TABLE>
See Notes to Consllidated Financial Statements
F-3<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ ------------- -------------
<S> <C> <C>
LIABILITIES
Deposits:
Demand $ 48,742,000 $ 42,466,000
NOW 15,279,000 13,512,000
Money Market 54,772,000 52,343,000
Savings 10,011,000 8,818,000
Time 27,605,000 23,036,000
------------- -------------
Total deposits 156,409,000 140,175,000
Notes payable 3,500,000 6,512,000
Federal funds purchased 6,200,000 4,000,000
Accrued interest payable 95,000 230,000
Other liabilities 950,000 1,403,000
------------- -------------
Total liabilities 167,154,000 152,320,000
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized
500,000 shares; issued and outstanding -0- shares - -
Common stock, $.001 par value; authorized
5,000,000 shares; issued and outstanding
1996 - 1,149,982 shares; 1995 - 1,145,670 shares 1,000 1,000
Additional paid-in capital 9,435,000 9,384,000
Unrealized appreciation on available-for-sale securities,
net of applicable income taxes of $158,000 and $396,000
in 1996 and 1995, respectively 348,000 852,000
Retained earnings 6,248,000 4,675,000
------------- -------------
Total stockholders' equity 16,032,000 14,912,000
------------- -------------
$ 183,186,000 $ 167,232,000
============= =============
</TABLE>
F-4<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,404,000 $ 8,068,000 $ 5,536,000
Interest on investment securities:
U.S. government agencies and corporations 2,215,000 2,169,000 1,777,000
State and other political subdivisions 1,730,000 1,604,000 2,151,000
Interest on federal funds sold and
interest-bearing deposits in other banks 177,000 250,000 85,000
------------ ------------ ------------
Total interest income 13,526,000 12,091,000 9,549,000
------------ ------------ ------------
INTEREST EXPENSE
Deposits 3,736,000 3,212,000 2,035,000
Federal funds purchased 91,000 90,000 57,000
Notes payable 385,000 543,000 567,000
------------ ------------ ------------
Total interest expense 4,212,000 3,845,000 2,659,000
------------ ------------ ------------
NET INTEREST INCOME 9,314,000 8,246,000 6,890,000
PROVISION FOR LOAN LOSSES 285,000 120,000 195,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,029,000 8,126,000 6,695,000
------------ ------------ ------------
NONINTEREST INCOME
Service charges 368,000 319,000 324,000
Gain (loss) on sale of available-for-sale
securities, net 162,000 (87,000) (329,000)
Other 507,000 378,000 418,000
------------ ------------ ------------
Total noninterest income 1,037,000 610,000 413,000
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits $ 3,994,000 $ 3,446,000 $ 2,514,000
Amortization of excess of cost over
fair value of net assets acquired 226,000 226,000 226,000
Occupancy and equipment 1,223,000 1,007,000 867,000
Other operating expenses 2,173,000 2,534,000 2,210,000
----------- ----------- -----------
Total noninterest expense 7,616,000 7,213,000 5,817,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,450,000 1,523,000 1,291,000
INCOME TAXES 540,000 297,000 248,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 1,910,000 1,226,000 1,043,000
EXTRAORDINARY ITEM
Loss on early extinguishment of debt
(net of applicable income taxes of $201,000) 337,000 - -
----------- ----------- -----------
NET INCOME $ 1,573,000 $ 1,226,000 $ 1,043,000
=========== =========== ===========
EARNINGS PER SHARE
PRIMARY
Income before extraordinary item $ 1.58 $ 1.06 $ .87
Extraordinary item, net $ (.28) $ - $ -
Net income $ 1.30 $ 1.06 $ .87
Weighted average number of common shares
outstanding 1,207,744 1,157,419 1,196,153
FULLY DILUTED
Income before extraordinary item $ 1.58 $ .95 $ .82
Extraordinary item, net $ (.28) $ - $ -
Net income $ 1.30 $ .95 $ .82
Weighted average number of common shares
outstanding 1,207,744 1,671,941 1,733,267
</TABLE>
See Notes to Consolidated Financial Statements
F-6<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
(PART 1 OF 2)
Unrealized
Appreciation
(Depreciation)
Additional on Available-
Paid-in for-Sale
Shares Amount Capital Securities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 1,208,700 $ 1,000 $ 9,932,000 $ -
Treasury shares purchased, 47,000
at $7.52 per share - - - -
Treasury shares canceled (30,500) - (226,000) -
Net change in unrealized depreciation
of available-for-sale securities,
net of income taxes of $315,000 - - - (666,000)
Unrealized depreciation on investment
securities transferred from available-
for-sale to held-to-maturity
including amortization - - - (307,000)
Net income - - - -
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 1,178,200 1,000 9,706,000 (973,000)
Treasury shares purchased, 19,360
at $7.76 per share - - - -
Treasury shares canceled (35,860) - (278,000) -
Shares issued for stock option plan 3,330 - 25,000 -
Repurchase of warrants - - (69,000) -
Net change in unrealized appreciation
of available-for-sale securities,
net of income taxes of $711,000 - - - 1,435,000
Unrealized appreciation on investment
securities transferred from available-
for-sale to held-to-maturity
including amortization - - - 390,000
Net income - - - -
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 1,145,670 1,000 9,384,000 852,000
<CAPTION>
(PART 2 OF 2)
Treasury Stock
Retained -----------------------------
Earnings Shares Amount Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 2,406,000 - $ - $12,339,000
Treasury shares purchased, 47,000
at $7.52 per share - (47,000) (354,000) (354,000)
Treasury shares canceled - 30,500 226,000 -
Net change in unrealized depreciation
of available-for-sale securities,
net of income taxes of $315,000 - - - (666,000)
Unrealized depreciation on investment
securities transferred from available-
for-sale to held-to-maturity
including amortization - - - (307,000)
Net income 1,043,000 - - 1,043,000
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 3,449,000 (16,500) (128,000) 12,055,000
Treasury shares purchased, 19,360
at $7.76 per share - (19,360) (150,000) (150,000)
Treasury shares canceled - 35,860 278,000 -
Shares issued for stock option plan - - - 25,000
Repurchase of warrants - - - (69,000)
Net change in unrealized appreciation
of available-for-sale securities,
net of income taxes of $711,000 - - - 1,435,000
Unrealized appreciation on investment
securities transferred from available-
for-sale to held-to-maturity
including amortization - - - 390,000
Net income 1,226,000 - - 1,226,000
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 4,675,000 - - 14,912,000
</TABLE>
See Notes to Consolidated Financial Statements
F-7<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
(PART 1 OF 2)
Unrealized
Appreciation
(Depreciation)
Additional on Available-
Paid-in for-Sale
Shares Amount Capital Securities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995
(brought forward) 1,145,670 $ 1,000 $ 9,384,000 $ 852,000
Shares issued for stock option plan 2,270 - 25,000 -
Shares issued upon conversion and
retirement of notes 2,042 - 26,000 -
Net change in unrealized depreciation
of available-for-sale securities,
net of income taxes of $238,000 - - - (462,000)
Unrealized depreciation on investment (462,000)
securities transferred from available-
for-sale to held-to-maturity including
amortization - - -
Net income - - - (42,000)
----------- ----------- ----------- ------------
-----------
BALANCE, DECEMBER 31, 1996 1,149,982 $ 1,000 $ 9,435,000 $ 348,000
=========== =========== =========== ===========
<CAPTION>
(PART 2 OF 2)
Treasury Stock
Retained -----------------------------
Earnings Shares Amount Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995
(brought forward) $ 4,675,000 - $ - $14,912,000
Shares issued for stock option plan - - - 25,000
Shares issued upon conversion and
retirement of notes - - - 26,000
Net change in unrealized depreciation
of available-for-sale securities,
net of income taxes of $238,000 - - -
Unrealized depreciation on investment
securities transferred from available-
for-sale to held-to-maturity including
amortization - - - (42,000)
Net income 1,573,000 - - 1,573,000
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 $ 6,248,000 - - $16,032,000
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-8<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,573,000 $ 1,226,000 $ 1,043,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Gain) loss on sale of securities (162,000) 87,000 329,000
Extraordinary item 337,000 - -
Gain on sale of other real estate owned - - (7,000)
Loss on disposal of furniture and equipment - - 12,000
Accretion of discount on investments (2,323,000) (489,000) (689,000)
Amortization of deferred loan fees, net of costs (395,000) (407,000) (243,000)
Provision for loan losses 285,000 120,000 195,000
Depreciation and amortization 429,000 476,000 250,000
Amortization of excess of cost over fair value of
net assets acquired 226,000 226,000 226,000
Changes in:
Mortgage loans held-for-sale - - 3,160,000
Accrued interest receivable (22,000) (35,000) (265,000)
Prepaid expenses and other assets (208,000) (459,000) (400,000)
Accrued interest payable (135,000) 21,000 23,000
Other liabilities (13,000) 797,000 239,000
------------ ------------ ------------
Net cash provided by (used in) operating
activities (408,000) 1,563,000 3,873,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities $ 8,600,000 $ 3,424,000 $ 9,780,000
Proceeds from maturities of held-to-maturity securities 3,473,000 3,438,000 6,323,000
Proceeds from sale of available-for-sale securities 34,111,000 32,060,000 17,241,000
Purchase of available-for-sale securities (38,731,000) (37,378,000) (29,114,000)
Purchase of held-to-maturity securities (1,010,000) (900,000) (6,800,000)
Purchase of other investments (85,000) (35,000) -
Net increase in loans (19,004,000) (17,477,000) (10,372,000)
Proceeds from sale of student loans - 2,028,000 -
Proceeds from the sale of foreclosed assets - 83,000 24,000
Purchase of premises and equipment (295,000) (438,000) (708,000)
------------ ------------ ------------
Net cash used in investing activities (12,941,000) (15,195,000) (13,626,000)
------------ ------------ ------------
See Notes to Consolidated Financial Statements
F-9<PAGE>
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW, and savings accounts 11,665,000 8,903,000 10,494,000
Net increase in time deposits 4,569,000 5,071,000 2,613,000
Increase in federal funds purchased 2,200,000 4,000,000 -
Proceeds from notes payable 4,000,000 - -
Principal repayments of notes payable (7,077,000) (180,000) (191,000)
Proceeds from issuance of common stock 51,000 25,000 -
Repurchase of common stock - (150,000) (354,000)
Repurchase of stock warrants - (69,000) -
------------ ------------ ------------
Net cash provided by financing activities 15,408,000 17,600,000 12,562,000
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,059,000 3,968,000 2,809,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 10,297,000 6,329,000 3,520,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,356,000 $ 10,297,000 $ 6,329,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-10<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS
- --------------------
Union Bank and Trust ("Bank") is a wholly-owned subsidiary of Union
Bankshares, Ltd. ("Bankshares") (collectively referred to as
"Company"). The Bank provides a full range of banking services to
customers, primarily living in the Denver metropolitan area, through
its home office and three branch facilities located in the Denver
area. The Bank is subject to competition from other financial
institutions. The Bank is also subject to the regulation of certain
federal and state agencies and undergoes periodic examinations by
those regulatory authorities.
USE OF 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 relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of
foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Management believes that the allowance for loan losses and the
valuation of foreclosed assets held for sale are adequate. While
management uses available information to recognize losses on loans and
foreclosed assets held for sale, changes in economic conditions may
necessitate revision of these estimates in future years. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and
valuation of foreclosed assets held for sale. Such agencies may
require the Bank to recognize additional losses based on their
judgments of information available to them at the time of their
examination.
F-11<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Union
Bankshares, Ltd. and its wholly-owned subsidiary, Union Bank and
Trust. All significant intercompany balances and transactions have
been eliminated.
CASH
- ----
Pursuant to normal banking practices, the Bank is required to maintain
certain balances (reserves) with the Federal Reserve Bank. Included in
cash and due from banks in the accompanying consolidated balance
sheets are required reserve balances of approximately $883,000 and
$893,000 at December 31, 1996 and 1995, respectively.
As of December 1996, the Company had approximately $6,091,000 on
deposit in one financial institution.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
- -----------------------------------------
Available-for-sale securities, which include any security for which
the Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Realized gains and losses, based
on specifically identified amortized cost of the specific security,
are included in other income. Unrealized gains and losses are
recorded, net of related income tax effects, in stockholders' equity.
Premiums and discounts are amortized and accreted, respectively, to
interest income using the level-yield method over the period to
maturity.
Held-to-maturity securities, which included any security for which the
Company has the positive intent and ability to hold until maturity,
are carried at historical cost adjusted for amortization of premiums
and accretion of discounts. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield
method over the period to maturity.
Interest and dividends on investments in debt and equity securities
are included in income when earned.
F-12<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
FEE INCOME
- ----------
Loan origination fees, net of direct origination costs, are recognized
as income using the level-yield method over the term of the loans.
LOANS
- -----
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The allowance for loan losses is increased by provisions charged to
expense and reduced by loans charged off, net of recoveries. The
allowance is maintained at a level considered adequate to provide for
potential loan losses, based on management's evaluation of the loan
portfolio, as well as on prevailing and anticipated economic
conditions and historical losses by loan category. General allowances
have been established, based upon the aforementioned factors, and
allocated to the individual loan categories including consumer loans
and real estate mortgage loans that are collectively evaluated.
Allowances are accrued on specific loans evaluated for impairment for
which the basis of each loan, including accrued interest, exceeds the
discounted amount of expected future collections of interest and
principal or, alternatively, the fair value for loan collateral using
a single risk category method of identification.
A loan is considered impaired when it is probable that the Bank will
not receive all amounts due according the contractual terms of the
loan. This includes loans that are delinquent ninety days or more
(nonaccrual loans) and certain other loans identified by management.
Accrual of interest is generally discontinued, and interest accrued
and unpaid is removed, at the time such amounts are delinquent ninety
days. Interest is recognized for nonaccrual loans only upon receipt,
and only after all principal amounts are current according to the
terms of the contract. Loans are charged off when, in the opinion of
management, all or a portion of the principal outstanding is no longer
collectible.
F-13<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
MORTGAGE LOANS HELD FOR SALE
- ----------------------------
Mortgage loans held for sale are normally sold within 120 days of
purchase and are carried at the lower of cost or market. At December
31, 1996, the Company had no loans held for sale.
PREMISES AND EQUIPMENT
- ----------------------
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are
capitalized and amortized using the straight-line method over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
- -----------------------------------------------------
Excess costs of the purchased subsidiary in excess of the fair value
of underlying net tangible assets is amortized on a straight-line
basis. In years prior to 1995, the Company amortized the excess costs
over 40 years. On January 1, 1995, the Company revised its estimate
of the life of the excess costs to be 25 years. The remaining balance
at January 1, 1995, is being amortized through 2009 at a rate of
approximately $226,000 per year.
FORECLOSED ASSETS HELD FOR SALE
- -------------------------------
Assets acquired by foreclosure or in settlement of debt and held for
sale are valued at estimated fair value as of the date of foreclosure,
and a related valuation allowance is provided for estimated costs to
sell the assets. Management evaluates the value of foreclosed assets
held for sale periodically and increases the valuation allowance for
any subsequent declines in fair value. Changes in the valuation
allowance are charged or credited to other expense.
DEBT ISSUANCE COSTS
- -------------------
Debt issuance costs associated with the issuance of the 8.3%
convertible subordinated notes were being amortized over the terms of
the notes. At December 31, 1995, $490,000 remained to be amortized
over future periods and was included in other assets in the
accompanying consolidated balance sheets. Amortization expense
related to these debt issuance costs for the years ended December 31,
1995 and 1994, approximated $83,000 and $89,000, respectively. The
Company redeemed the notes April 1, 1996, and expensed the remaining
unamortized balance of the debt issuance costs in 1996 as an
extraordinary item of $337,000, net of income taxes.
F-14<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
STOCK WARRANTS
- --------------
The Company issued warrants to the underwriter of the March 1993
public offering, whereby, the underwriter could have purchased up to
22,374 common shares at a price of $12.30 per share for the period
from March 17, 1994, through March 17, 1998. The Company repurchased
these warrants in 1995.
INCOME TAXES
- ------------
Deferred tax liabilities and assets are recognized for the tax effect
of differences between the financial statement and tax bases of assets
and liabilities. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized.
EARNINGS PER COMMON SHARE
- -------------------------
Primary net earnings per share available for common stockholders are
computed based on the weighted average number of common shares
outstanding during each period, as restated for the 28.737-for-1 stock
split in 1992 and assuming exercise of all stock options having
exercise prices less than the average market price of the common stock
using the treasury stock method.
Fully diluted earnings per share available for common stockholders
were computed as of December 31, 1995 and 1994, based on the
assumption that all of the convertible subordinated notes were
converted into common shares at the date of issue. Under this
assumption, the weighted average number of common shares outstanding
was increased accordingly, and net income was increased by the amount
of interest expense, net of income taxes, related to the notes and
incurred by the Company during the years ended December 31, 1995 and
1994. The notes were converted to common stock or redeemed for cash
April 1, 1996.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the 1995 and 1994
consolidated financial statements to conform to the 1996 consolidated
financial statement presentation. These reclassifications had no
effect on net income or stockholders' equity.
F-15<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair value of held-to-maturity
securities are as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1996:
- ----
U.S. Government agencies and
corporations $ 18,638,000 $ 203,000 $ (124,000) $ 18,717,000
Obligations of state and political
subdivisions 5,996,000 257,000 - 6,253,000
------------ ------------ ------------ ------------
$ 24,634,000 $ 460,000 $ (124,000) $ 24,970,000
============ ============ ============ ============
1995:
- ----
U.S. Government agencies and
corporations $ 18,386,000 $ 238,000 $ (31,000) $ 18,593,000
Obligations of state and political
subdivisions 30,000 - - 30,000
------------ ------------ ------------ ------------
$ 18,416,000 $ 238,000 $ (31,000) $ 18,623,000
============ ============ ============ ============
</TABLE>
Maturities of held-to-maturity securities at December 31, 1996:
Amortized Approximate
Cost Fair Value
----------- -----------
One year or less $ - $ -
After one year through five years - -
After five years through ten years 1,179,000 1,226,000
After ten years 4,817,000 5,027,000
Mortgage-backed and other debt
securities 18,638,000 18,717,000
----------- -----------
$24,634,000 $24,970,000
=========== ===========
F-16<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 2: INVESTMENTS IN DEBT AND EQUITY
SECURITIES (continued)
The amortized cost and approximate fair value of available-for-sale
securities are as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1996:
- ----
U.S. Government agencies and
corporations $ 14,282,000 $ 33,000 $ (16,000) $ 14,299,000
U.S. Treasury securities 4,070,000 33,000 - 4,103,000
Obligations of state and political
subdivisions 20,384,000 433,000 (18,000) 20,799,000
Commercial paper 703,000 - - 703,000
------------ ------------ ------------ ------------
$ 39,439,000 $ 499,000 $ (34,000) $ 39,904,000
============ ============ ============ ============
1995:
- ----
U.S. Government agencies and
corporations $ 11,108,000 $ 202,000 $ (24,000) $ 11,286,000
U.S. Treasury securities 3,998,000 - - 3,998,000
Obligations of state and political
subdivisions 32,843,000 990,000 (2,000) 33,831,000
Commercial paper 1,708,000 - - 1,708,000
------------ ------------ ------------
$ 49,657,000 $ 1,192,000 $ (26,000) $ 50,823,000
============ ============ ============ ============
</TABLE>
Maturities of available-for-sale securities at December 31, 1996:
Amortized Approximate
Cost Fair Value
----------- -----------
One year or less $ 5,457,000 $ 5,459,000
After one year through five years 6,864,000 6,907,000
After five years through ten years 12,917,000 13,202,000
Due after ten years 8,950,000 9,091,000
Mortgage-backed and other debt securities 5,251,000 5,245,000
----------- -----------
$39,439,000 $39,904,000
=========== ===========
F-17<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (continued)
The book value of securities pledged as collateral, to secure public
deposits and for other purposes, amounted to $15,749,000 at December
31, 1996, and $12,822,000 at December 31, 1995. The approximate fair
value of pledged securities amounted to $16,123,000 at December 31,
1996, and $13,264,000 at December 31, 1995.
Gross gains of $349,000, $126,000, and $22,000 and gross losses of
$187,000, $213,000, and $351,000 resulting from sales of available-
for-sale securities were realized for 1996, 1995, and 1994,
respectively.
As of December 20, 1995, the Company redesignated held-to-maturity
securities with an aggregate amortized cost of $22,377,000 to the
available-for-sale portfolio. The redesignation was prompted by the
announcement by the Financial Accounting Standards Board to allow a
one-time redesignation and reflects management's revised expectations
of liquidity needs. The Company also redesignated available-for-sale
securities with an aggregate amortized cost of $6,101,000,
$10,299,000, and $4,025,000 to the held-to-maturity portfolio during
1996, 1995, and 1994, respectively.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is
required to maintain an investment in capital stock of the FHLB. As a
member, the Bank has access to a $3,700,000 credit line which, if
used, would be secured by investment securities. No ready market
exists for the FHLB stock, and it has no quoted market value. Such
stock is recorded at cost and reported as other investments.
F-18<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, 1996 and 1995, include:
1996 1995
------------- -------------
Commercial $ 70,631,000 $ 54,488,000
Real estate mortgage 5,489,000 7,975,000
Real estate construction 5,758,000 5,064,000
Consumer 18,854,000 13,785,000
------------- -------------
100,732,000 81,312,000
Allowance for loan losses (1,754,000) (1,448,000)
------------- -------------
Net loans $ 98,978,000 $ 79,864,000
============= =============
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $1,448,000 $1,071,000 $1,006,000
---------- ---------- ----------
Charge offs (29,000) (106,000) (154,000)
Recoveries 50,000 363,000 24,000
---------- ---------- ----------
Net charge offs 21,000 257,000 (130,000)
Provision charged to operating expenses 285,000 120,000 195,000
---------- ---------- ----------
Balance, end of year $1,754,000 $1,448,000 $1,071,000
========== ========== ==========
</TABLE>
Impaired loans totaled $124,000 and $208,000 at December 31, 1996 and
1995, respectively. An allowance for loan losses of $24,000 and
$121,000 related to impaired loans at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, all impaired loans had
allocated allowances.
Interest of $12,000 and $53,000 was recognized on average impaired
loans of $166,000 and $717,000 for 1996 and 1995, respectively. No
interest was recognized on impaired loans on a cash basis during 1996
and 1995.
F-19<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, at
December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Leasehold improvements $ 1,467,000 $ 1,361,000
Furniture and equipment 1,961,000 1,799,000
----------- -----------
3,428,000 3,160,000
Less accumulated depreciation and amortization (1,855,000) (1,470,000)
----------- -----------
Net premises and equipment $ 1,573,000 $ 1,690,000
=========== ===========
</TABLE>
NOTE 5: DEPOSITS
Interest bearing deposits in denominations of $100,000 or more were
$11,931,000 on December 31, 1996, and $11,434,000 on December 31,
1995.
NOTE 6: COMMON STOCK AND CONVERTIBLE SUBORDINATED NOTES
On March 17, 1993, the Company issued 690,000 shares of common stock
and $6,900,000 of 8.3% convertible subordinated notes ("Notes") due
April 1, 2003, through a public offering and simultaneously
extinguished the $5,006,000 note payable to a financial institution
and redeemed 100,000 shares of preferred stock at a price of $10.00
per share plus $13,000 of accumulated dividends.
During the year ended December 31, 1994, the Company repurchased
$200,000 face value of the Notes for $191,000. Additionally, the
Company repurchased 47,000 shares of common stock at prices ranging
from $7.00 per share to $7.88 per share. As of December 31, 1994,
30,500 shares were canceled and 16,500 shares were held in treasury.
During the year ended December 31, 1995, the Company repurchased
$188,000 face value of the Notes for $180,000. Additionally, the
Company repurchased 19,360 shares of common stock at prices ranging
from $7.62 per share to $7.88 per share. As of December 31, 1995,
35,860 shares were canceled by the Company in addition to the 30,500
canceled the previous year and no shares were held in treasury.
F-20<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 6: COMMON STOCK AND CONVERTIBLE SUBORDINATED NOTES (continued)
On April 1, 1996, the Company redeemed 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 $1,000 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.
NOTE 7: NOTES PAYABLE
The Company entered into a $4,000,000 credit agreement with a
financial institution on April 1, 1996, due March 31, 1997. Current
principal of $3,500,000 is due at maturity and interest is due
quarterly at the financial institution's base rate (8.25% as of
December 31, 1996) adjustable daily. The loan is secured by the
pledge of shares of the capital stock of the Bank.
The loan agreement provides for a one-year term which is renewable
based on compliance with covenants stipulated in the loan agreement.
These covenants limit the amount of cash dividends the Company may pay
and funded indebtedness it may assume, guarantee, or otherwise create.
NOTE 8: INCOME TAXES
The provision for income taxes consists of:
1996 1995 1994
-------- -------- --------
Taxes currently payable $ 464,000 $ 454,000 $ 376,000
Deferred income taxes (125,000) (157,000) (128,000)
-------- -------- --------
$ 339,000 $ 297,000 $ 248,000
======== ======== ========
F-21<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 8: INCOME TAXES (continued)
The tax effects of temporary differences related to deferred taxes
shown in the December 31, balance sheets are:
1996 1995
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 437,000 $ 331,000
Nondeductible accrued expenses 176,000 215,000
Deferred loan fees 64,000 48,000
Deferred compensation 11,000 -
--------- ---------
688,000 594,000
--------- ---------
Deferred tax liabilities:
Furniture, equipment, and improvements (16,000) (60,000)
Unrealized gains on available-for-sale
securities (158,000) (396,000)
Other (21,000) (8,000)
--------- ---------
(195,000) (464,000)
--------- ---------
Net deferred tax asset $ 493,000 $ 130,000
========= =========
F-22<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 8: INCOME TAXES (continued)
A reconciliation of income tax expenses at the statutory rate to the
Company's actual income tax is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Computed at the statutory rate (34%) $ 651,000 $ 518,000 $ 439,000
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest (406,000) (349,000) (349,000)
Amortization of excess of investment
in subsidiary over net assets acquired 79,000 79,000 79,000
State income taxes, net of federal tax benefit 24,000 23,000 13,000
Nondeductible interest 25,000 25,000 21,000
Other, net (34,000) 1,000 45,000
---------- ---------- ----------
Income tax expense $ 339,000 $ 297,000 $ 248,000
========== ========== ==========
</TABLE>
NOTE 9: COMMITMENTS AND CREDIT RISKS
The Bank grants commercial, residential, and other installment loans
to customers throughout the state.
Lines of credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Lines
of credit generally have fixed expiration dates. Since a portion of
the line may expire without being drawn upon, the total unused lines
do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant
and equipment, commercial real estate, and residential real estate.
Management uses the same credit policies in granting lines of credit
as it does for on balance sheet instruments.
F-23<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 9: COMMITMENTS AND CREDIT RISKS (continued)
At December 31, 1996 and 1995, the Bank had granted unused lines of
credit to borrowers aggregating approximately $35,666,000 and
$31,484,000 for commercial lines and open-end consumers lines,
respectively. At December 31, 1996, unused lines of credit to
borrowers aggregated approximately $35,045,000 for commercial lines
and $621,000 for open-end consumer lines.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing,
and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans
to customers.
The Bank had total outstanding letters of credit amounting to
$2,127,000 and $1,241,000 at December 31, 1996 and 1995, respectively,
with terms ranging from 15 days to two years.
NOTE 10: OPERATING LEASES
The Bank leases its premises under a non-cancelable lease which
expires in 2001. The lease contains a renewal option clause for an
additional five-year term and provides for periodic rental adjustment
based on the Consumer Price Index.
The estimated future minimum lease payments under non-cancelable
operating leases at December 31, 1996, were as follows:
1997 $ 424,000
1998 422,000
1999 423,000
2000 449,000
2001 390,000
Thereafter 967,000
----------
Total future minimum lease payment $3,075,000
==========
F-24<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 10: OPERATING LEASES (continued)
Total rental expense for all operating leases (net of month-to-month
sublease rental income in 1995 and 1994), including certain cancelable
equipment leases, was $458,000, $362,000, and $309,000 for the years
ended December 31, 1996, 1995, and 1994, respectively.
NOTE 11: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
The Company provides a profit-sharing plan for its employees,
contributing annually to a profit-sharing trust. All employees who
are at least 21 years old and who have been employed by the Company
for at least one year are eligible to participate. Total
contributions were approximately $174,000, $146,000, and $81,000 in
1996, 1995, and 1994, respectively. The Company's profit-sharing plan
conforms to Section 401(k) of the Internal Revenue Code. Employees
may contribute from 2% to 15% of their salary, not to exceed $9,500
and $9,240 for 1996 and 1995, respectively, with contributions vested
100%. The Company matches the first 3% of the participants'
contributions; additional contributions may be made at the discretion
of the Board of Directors. Company contributions are 20% vested after
the participant has completed two years of service, with 20%
incremental increases in vesting for each of the next four years.
During the year ended December 31, 1994, the Company adopted a Non-
Employee Director Equity Compensation Plan ("Compensation Plan")
effective beginning January 1, 1995. The Compensation Plan provides
for the initial authorization of 50,000 shares of common stock. Under
the provisions of the Compensation Plan, the directors are compensated
$6,000 annually provided certain performance measures are met. The
directors have the option of accepting the Company's common stock in
lieu of cash as compensation. If the director opts for common stock,
the number of shares issued is determined on the first business day of
the year. The director has voting rights on the common stock issued
as compensation; however, the common stock is restricted until the
director has met all performance measures. In January 1997, 1996, and
1995, the Company issued 1,875, 2,270, and 3,330 common shares,
respectively, pursuant to the Compensation Plan at exercise prices of
$16.00, $11.00, and $7.50, respectively.
The Company adopted the Equity Incentive Plan ("Incentive Plan") in
December 1992 for certain key employees of the Company. The Incentive
Plan provides for the initial authorization of 212,000 shares of
common stock, plus an additional authorization of one-half percent of
the outstanding shares of common stock as of each succeeding annual
anniversary of the effective date of the Incentive Plan. Options
issued within the Incentive Plan vest in three equal increments on the
date of grant and the first two anniversaries thereof, under a ten-
year term.
F-25<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 11: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (continued)
A summary of the status of the Incentive Plan at December 31, and
changes during the year is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 200,750 $ 9.55 113,250 $ 8.62 91,250 $ 8.88
Granted 13,850 15.25 87,500 10.75 22,000 7.51
Exercised - - - - - -
Forfeited - - - - - -
-------- -------- -------- -------- -------- --------
Outstanding, end of year 214,600 $ 9.84 200,750 $ 9.55 113,250 $ 8.62
======== ======== ======== ======== ======== ========
Options exercisable, end of year 175,700 134,250 93,000
</TABLE>
The following table summarizes information about stock options under
the Incentive Plan outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ------------- ----------- ---------- ----------- ----------
<C> <C> <C> <C> <C> <C>
$9.00 77,000 6 years $ 9.00 76,500 $ 9.00
$8.00 14,250 7 years $ 8.00 14,250 $ 8.00
$7.50 to $7.63 22,000 8 years $ 7.51 22,000 $ 7.51
$10.75 87,500 9 years $ 10.75 58,333 $ 10.75
$15.25 13,850 10 years $ 15.25 4,617 $ 15.25
</TABLE>
The Company also adopted a Nonemployee Directors' Stock Option Plan
("Directors' Plan") in December 1992. An aggregate of 11,000 shares
of common stock are reserved for issuance under the Directors' Plan.
Nonemployee directors are automatically granted options to purchase
250 common shares during each fiscal year following election to the
Board. The Board of Directors, or a committee consisting of such
Board members or other persons as may be appointed by the Board,
administer the Directors' Plan. The Directors' Plan is currently
administered by the Board of Directors. Each option under the
Directors' Plan expires five years from the date of grant.
F-26<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 11: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (continued)
A summary of the status of the Directors' Plan at December 31, and
changes during the year is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 5,000 $ 8.94 3,750 $ 8.25 2,500 $ 8.62
Granted 1,250 16.00 1,250 11.00 1,250 7.50
Exercised - - - - - -
Forfeited - - - - - -
-------- -------- -------- -------- -------- --------
Outstanding, end of year 6,250 $ 10.34 5,000 $ 8.94 3,750 $ 8.25
======== ======== ======== ======== ======== ========
Options exercisable, end of year 5,000 3,750 2,500
</TABLE>
The following table summarizes information about stock options under
the Directors' Plan outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ------------- ----------- ---------- ----------- ----------
<C> <C> <C> <C> <C>
$9.00 1,250 1 year $ 9.00 1,250 $ 9.00
$8.25 1,250 2 years $ 8.25 1,250 $ 8.25
$7.50 1,250 3 years $ 7.50 1,250 $ 7.50
$11.00 1,250 4 years $ 11.00 1,250 $ 11.00
$16.00 1,250 5 years $ 16.00 - $ 16.00
</TABLE>
F-27<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 11: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS (continued)
In May 1996, the Company adopted an "Option Bonus Plan" (Bonus Plan).
Four of the nine eligible members elected to receive these bonuses in
the form of options. Pursuant to this election, the Company issued
36,401 options in January 1997, at an exercise price of $15.25, which
was equal to the market price of the common stock on the date of
grant. The option period expires ten years from the date the options
were granted. The options vest and are exercisable six months after
they are granted. The maximum number of shares that may be issued
pursuant to the exercise of these options is 150,000 shares.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock option plans, and no compensation cost has
been recognized for the plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value
at the grant dates using Statement of Financial Accounting Standards
No. 123, the Company's net income would have decreased by $323,000 and
$105,000 in 1996 and 1995, respectively. In addition, the Company's
primary earnings per share would have decreased by $.27 per share and
$.09 per share in 1996 and 1995, respectively. Fully diluted earnings
per share would have decreased $.27 per share and $.06 per share,
respectively.
F-28<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 12: OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Professional services $ 618,000 $ 456,000 $ 331,000
Amortization of debt issuance costs 17,000 83,000 89,000
Credit card 247,000 228,000 174,000
Advertising and promotion 144,000 175,000 160,000
Service charges 140,000 120,000 77,000
Supplies 138,000 177,000 155,000
Software maintenance and amortization 124,000 111,000 93,000
Postage and delivery 114,000 108,000 80,000
Travel and entertainment 104,000 73,000 77,000
Printing 93,000 62,000 49,000
Legal and accounting 91,000 334,000 266,000
Telephone 89,000 65,000 49,000
Insurance and bonds 88,000 89,000 85,000
Dues and subscriptions 76,000 67,000 47,000
Deposit insurance 2,000 139,000 253,000
Amortization, other - 53,000 22,000
Other operating expenses 88,000 194,000 203,000
----------- ----------- -----------
$ 2,173,000 $ 2,534,000 $ 2,210,000
=========== =========== ===========
</TABLE>
NOTE 13: TRANSACTIONS WITH RELATED PARTIES
At December 31, 1996 and 1995, the Bank had loans outstanding to
shareholders, executive officers, and directors of the Company and
their affiliates, in the amount of $1,680,000 and $1,198,000,
respectively. New loans made to shareholders, executive officers, and
directors of the Company and their affiliates approximated $916,000
and $185,000, and repayments approximated $434,000 and $398,000 for
the years ended December 31, 1996 and 1995, respectively.
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral)
as those prevailing at the time of comparable transactions with other
persons. Further, in management's opinion, these loans did not
involve more than normal risk of collectibility or present other
unfavorable features.
F-29<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 13: TRANSACTIONS WITH RELATED PARTIES (continued)
From time to time, the Bank purchases loans from a locally owned
mortgage company until the mortgage company sells the loans into the
secondary mortgage market. The loans are then sold back to the
mortgage company. Initially, the Bank receives interest during its
holding period of prime plus .50%. All origination fees and interest
on the loan in excess of the rate payable to the Bank are retained by
the mortgage company. If the mortgage is not sold within specified
periods, the Bank is entitled to receive all of the interest paid on
the mortgage from inception and may be entitled to receive all or a
portion of the origination fees. The mortgage company provides loan
servicing during the period that the mortgage is held by the Bank.
During the years ended December 31, 1996, 1995, and 1994, the Bank
earned interest income on such loans of $6,000, $5,000, and $17,000,
respectively. During the years ended December 31, 1996, 1995, and
1994, the Bank purchased loans in the amounts of $4,106,000,
$2,450,000, and $13,025,000 and sold loans in the amount of
$4,106,000, $2,450,000, and $16,185,000. All loans sold back to the
mortgage company are without recourse to the Bank. The Chairman of
the Board of the Bank is a director and treasurer of the mortgage
company.
NOTE 14: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Additional Cash Payment Information
- -----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes paid $ 397,000 $ 383,000 $ 306,000
=========== =========== ===========
Interest paid $ 4,347,000 $ 3,858,000 $ 2,636,000
=========== =========== ===========
NON-CASH INVESTING ACTIVITIES
- -----------------------------
Reclassification of securities from
held-to-maturity to available-for-sale
at amortized cost $ - $22,377,000 $ -
=========== =========== ===========
Reclassification of securities from
available-for-sale to held-to-maturity
at fair value $ - $10,299,000 $ 4,025,000
=========== =========== ===========
</TABLE>
F-30<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 15: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
ONLY
Financial statements of the parent company, Union Bankshares, Ltd.,
are shown below and should be read in conjunction with the
consolidated financial statements.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ------------ ------------
<S> <C> <C>
Cash $ 711,000 $ 720,000
Available-for-sale securities 3,436,000 5,706,000
Excess of cost over fair value of net
assets acquired, net of amortization 2,946,000 3,172,000
Investment in subsidiary 12,515,000 11,621,000
Due from subsidiary 7,000 48,000
Accrued interest receivable 36,000 52,000
Income taxes receivable 26,000 -
Deferred income taxes 23,000 11,000
Other assets - 490,000
------------ ------------
Total assets $ 19,700,000 $ 21,820,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Note payable $ 3,500,000 $ 6,512,000
Income taxes payable - 88,000
Other liabilities 168,000 308,000
------------ ------------
Total liabilities 3,668,000 6,908,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 1,000 1,000
Additional paid-in capital 9,435,000 9,384,000
Unrealized gains on subsidiary's available-for-sale securities 348,000 852,000
Retained earnings 6,248,000 4,675,000
------------ ------------
Total stockholders' equity 16,032,000 14,912,000
------------ ------------
Total liabilities and stockholders' equity $ 19,700,000 $ 21,820,000
============ ============
</TABLE>
F-31<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 15: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
ONLY (continued)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiary $ 1,250,000 $ 1,000,000 $ 1,000,000
Interest income 241,000 343,000 321,000
----------- ----------- -----------
Total operating income 1,491,000 1,343,000 1,321,000
----------- ----------- -----------
OPERATING EXPENSES
Interest 385,000 543,000
567,000
Losses on sales of investment securities - 6,000 228,000
Amortization of excess of investment in
subsidiary over net assets acquired 226,000 226,000 226,000
Salaries and employee benefits 354,000 322,000 236,000
Occupancy and equipment 13,000 14,000 14,000
Other 321,000 357,000 319,000
----------- ----------- -----------
Total operating expenses 1,299,000 1,468,000 1,590,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT,
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY, AND EXTRAORDINARY ITEM (192,000) (125,000) (269,000)
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 1,398,000 989,000 1,046,000
INCOME TAX BENEFIT 320,000 362,000 266,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 1,910,000 1,226,000 1,043,000
EXTRAORDINARY ITEM
Loss on early extinguishment of debt
(net of applicable income taxes of $201,000) 337,000 - -
----------- ----------- -----------
NET INCOME $ 1,573,000 $ 1,226,000 $ 1,043,000
=========== =========== ===========
</TABLE>
F-32<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 15: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
ONLY (continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,573,000 $ 1,226,000 $ 1,043,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Gains) losses on repurchase of notes payable 65,000 (8,000) (9,000)
Losses on sales of securities - 6,000 228,000
Net amortization of premiums (accretion of
discounts) on investments (99,000) 4,000 -
Amortization of debt issuance costs 490,000 83,000 89,000
Amortization of excess of cost over net assets
acquired 226,000 226,000 226,000
Deferred taxes (12,000) (11,000) -
Change in:
Other assets (26,000) 20,000 78,000
Accrued interest receivable 16,000 (20,000) (32,000)
Due from subsidiary 41,000 6,000 (54,000)
Equity in undistributed earnings of subsidiary (1,398,000) (989,000) (1,046,000)
Other liabilities (228,000) 118,000 104,000
----------- ----------- -----------
Net cash provided by operating activities 648,000 661,000 627,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (6,351,000) (5,665,000) (5,267,000)
Proceeds from sales of available-for-sale
securities 4,890,000 4,892,000 4,902,000
Proceeds from maturities of available-for-
sale securities 3,830,000 700,000 -
----------- ----------- -----------
Net cash used in investing activities 2,369,000 (73,000) (365,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 4,000,000 - -
Principal repayments of notes payable (7,077,000) (180,000) (191,000)
Proceeds from issuance of common stock 51,000 25,000 -
Repurchase of common stock - (150,000) (354,000)
Repurchase of stock warrants - (69,000) -
----------- ----------- -----------
Net cash used in financing activities (3,026,000) (374,000) (545,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (9,000) 214,000 (283,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 720,000 506,000 789,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 711,000 $ 720,000 $ 506,000
=========== =========== ===========
</TABLE>
F-33<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 16: REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weighing, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios
(set forth in the table following) 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 adjusted total assets (as defined).
Management believes, as of December 31, 1996, that the Company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Company as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company must
maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the institution's category.
F-34<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 16: REGULATORY CAPITAL REQUIREMENTS (continued)
The Company's actual capital amounts and ratios are also presented in
the table. In accordance with FDIC regulations, no amount has been
deducted from capital for interest rate risk.
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total risk-based capital
(to risk-weighted assets):
Consolidated $14,252,000 11.8% $11,402,000 8.0% $12,101,000 10.0%
Bank $13,673,000 11.4% $ 9,618,000 8.0% $12,022,000 10.0%
Tier I risk-based capital
(to risk-weighted assets):
Consolidated $12,700,000 10.5% $ 4,840,000 4.0% $ 7,261,000 6.0%
Bank $12,167,000 10.1% $ 4,809,000 4.0% $ 7,213,000 6.0%
Tier I leverage capital
(to adjusted total assets):
Consolidated $12,700,000 7.0% $ 7,261,000 4.0% $ 9,080,000 5.0%
Bank $12,167,000 6.7% $ 7,292,000 4.0% $ 9,115,000 5.0%
AS OF DECEMBER 31, 1995:
Total risk-based capital
(to risk-weighted assets):
Consolidated $12,698,000 11.2% $ 9,109,000 8.0% $11,387,000 10.0%
Bank $13,069,000 11.7% $ 8,964,000 8.0% $11,205,000 10.0%
Tier I risk-based capital
(to risk-weighted assets):
Consolidated $11,250,000 9.9% $ 4,555,000 4.0% $ 6,832,000 6.0%
Bank $11,621,000 10.4% $ 4,482,000 4.0% $ 6,723,000 6.0%
Tier I leverage capital
(to adjusted total assets):
Consolidated $11,250,000 6.7% $ 6,683,000 4.0% $ 8,354,000 5.0%
Bank $11,621,000 7.3% $ 6,350,000 4.0% $ 7,937,000 5.0%
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December
31, 1996, approximately $3,433,000 of retained earnings were available
for dividend declaration without prior regulatory approval.
F-35<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS
- -------------------------
For these short-term instruments, the carrying amount approximates
fair value.
AVAILABLE-FOR-SALE SECURITIES
- -----------------------------
Fair values for available-for-sale securities, which also are the
amounts recognized in the balance sheet, equal quoted market prices,
if available. If quoted market prices are not available, fair values
are estimated based on quoted market prices of similar securities.
HELD-TO-MATURITY SECURITIES
- ---------------------------
Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are
estimated based on quoted market prices of similar securities.
OTHER INVESTMENTS
- -----------------
For these investments, the carrying value approximates fair value.
LOANS
- -----
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
F-36<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
DEPOSITS
- --------
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the
reporting date (i.e., their carrying amount). The fair value of
fixed-maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
NOTES PAYABLE
- -------------
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
- --------------------------------------------------
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit and lines of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate or otherwise settle the obligations
with the counterparties at the reporting date.
F-37<PAGE>
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
NOTE 17: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these
instruments were calculated by discounting expected cash flows, which
method involves significant judgments by management and uncertainties.
Fair value is the estimated amount at which financial assets or
liabilities could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. Because
no market exists for certain of these financial instruments and
because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown
below represent values at which the respective financial instruments
could be sold individually or in the aggregate.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 12,356,000 $ 12,356,000 $ 10,297,000 $ 10,297,000
Available-for-sale securities 39,904,000 39,904,000 50,823,000 50,823,000
Held-to-maturity securities 24,634,000 24,970,000 18,416,000 18,623,000
Other investments 494,000 494,000 409,000 409,000
Interest receivable 1,107,000 1,107,000 1,085,000 1,085,000
Loans, net of allowance for loan losses 98,978,000 100,566,000 79,864,000 80,713,000
FINANCIAL LIABILITIES
Deposits 156,409,000 157,049,000 140,175,000 140,339,000
Federal funds purchased 6,200,000 6,200,000 4,000,000 4,000,000
Notes payable 3,500,000 3,500,000 6,512,000 6,512,000
Interest payable 95,000 95,000 230,000 230,000
UNRECOGNIZED FINANCIAL
INSTRUMENTS
(net of contract amount):
Commitments to extend credit - - - -
Letters of credit - - - -
Lines of credit - - - -
</TABLE>
NOTE 18: FUTURE CHANGES IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board recently adopted Statement
No. 125 (FAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." FAS 125, which
is to become effective for transactions that occur after December 31,
1996, imposes new rules for determining when transfers of financial
assets are accounted for as sales versus when transfers are accounted
for as borrowings. Management believes that FAS 125 should have no
significant impact on the Company's consolidated financial statements.
F-38
REVOLVING LINE OF CREDIT
AGREEMENT
This agreement is made this 1st day of April, 1996, between Union
Bankshares, Ltd., a Delaware corporation (the "Borrower"), and Union
Bank & Trust, a Colorado corporation (the "Subsidiary Association"),
and Boatmen's First National Bank of Kansas City (the "Bank"), having
its principal office at 14 West 10th Street, Kansas City, Missouri.
Subject to the terms and conditions of this Agreement and the
Note and Security Agreement issued hereunder, the Bank agrees to
extend to the Borrower on or after April 1, 1996 a Revolving Line of
Credit in an amount not to exceed three million and no/100 dollars
($3,000,000.00).
ARTICLE I
1.1 Revolving Line of Credit. Boatmen's agrees, on the terms
------------------------
and subject to the conditions hereinafter set forth and at the request
of the Borrower, to make revolving credit loans to Borrower during the
period commencing on April 1, 1996 and terminating on April 1, 1997 in
amounts not to exceed an aggregate of $3,000,000.00 (the "Line of
Credit"); provided, that the amount remaining available under the Line
of Credit shall be reduced by any loans made under the Line of Credit
in the event the proceeds from a borrowing under the Line of Credit
are used to acquire the stock of a bank or bank holding company.
Borrower may borrow, repay and reborrow under the Line of Credit
during the term of the Note provided however, in no event shall
Boatmen's be obligated to make advances totaling in excess of
$3,000,000.00 at any one time.
1.2 Line of Credit Note. Borrower agrees to execute and deliver
-------------------
to Boatmen's to evidence any advances made under the Line of Credit a
Promissory Note in the form attached hereto as Exhibit A.
1.3 Repayment. Principal under the Line of Credit Note shall be
---------
due and payable in full on the Line Maturity Date. Interest will be
due and payable quarterly on amounts borrowed, the first day of the
third, sixth and ninth months following the date of the Line of Credit
Note and on April 1, 1997, on which date all accrued but unpaid
interest shall be due and payable in full.
1.4 Use of Proceeds. The proceeds of loans to be made under the
---------------
Line of Credit shall be available for use by Borrower solely for
capital needs, or to purchase the stock of banks or bank holding
companies, provided not less that 80% of the issued and outstanding
capital stock of each such bank to be acquired is purchased. In the
event Borrower desires to use any part of the proceeds from the Line
of Credit to directly or indirectly purchase the stock of a bank or
bank holding company with total assets in excess of 10% of the total
assets of Borrower as of the January 1 next preceding the estimated
closing date of such proposed acquisition, then Boatmen's shall have
the opportunity to perform such due diligence of such bank as it deems
necessary and it is satisfied, in its sole and absolute discretion,
with the results of such due diligence.
<PAGE>
1.5 Collateral Security. Pursuant to the security agreement in
-------------------
form attached hereto as Exhibit C, payment of the Line of Credit Note
will be secured by an first pledge and security interest covering 100%
(470 shares) of the capital stock of Union Bank & Trust, Denver,
Colorado, the Subsidiary Association. Advances to purchase banks will
require the pledging of the common stock of the bank being purchased.
1.6 Other Agreements. This Revolving Line of Credit Agreement
----------------
is also subject to certain terms and conditions as stated in that
certain Loan Agreement, attached as Exhibit B, dated March 1, 1996
between Union Bankshares, Ltd., Union Bank & Trust and Boatmen's First
National Bank of Kansas City. The only parts of that Loan Agreement
not applicable is that certain section of 1.3 referring to specific
principal reductions as outlined in Exhibit B of the Loan Agreement
and Section 9 referring to the "Entire Agreement". Loans made under
the line of credit to purchase banks or bank holding companies will be
made on substantially the same terms, conditions, note and security
forms as the Agreement for our previous loan to the Borrower in the
amount of $4,000,000.00 under such Loan Agreement.
1.7 Entire Agreement. This agreement, including the exhibits
----------------
hereto, is the final expression of the Agreement between Boatmen's and
the Borrower with respect to the subject matter hereof. This
agreement may not be contradicted by evidence of any prior oral
agreement or of a contemporaneous oral agreement between the parties.
In the event of any conflict between the terms of this agreement and
those of any agreement or commitment entered into in connection
herewith, the terms of this agreement shall govern.
All of the terms of the final agreement of the parties not set
forth above or which vary any terms set forth above, including any
previous oral agreements are as follows:
No unwritten oral agreement between the parties exists.
IN WITNESS WHEREOF, the parties have executed and delivered this
agreement effective on the date first above written.
"Borrower"
UNION BANKSHARES, LTD.
By: ____________________________________
Title __________________________________
"Subsidiary Association"
Union Bank & Trust
By: ____________________________________
Title __________________________________
"Bank"
BOATMEN'S FIRST NATIONAL BANK
OF KANSAS CITY
By: ____________________________________
Title __________________________________
<PAGE>
EXHIBIT A
---------
LINE OF CREDIT NOTE
-------------------
$3,000,000 and interest Kansas City, Missouri
April 1, 1996
FOR VALUE RECEIVED, the undersigned, UNION BANKSHARES, LTD., a
Delaware corporation (the "Borrower"), hereby promises to pay to the
order of BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY (together with
its successors and assigns, "Boatmen's"), the principal sum of the
lesser of (i) THREE MILLION DOLLARS ($3,000,000), or (ii) the
aggregate unpaid principal amount or all advances made by Boatmen's
hereunder, on April 1, 1997 (the "Maturity Date").
The principal balance from time to time outstanding under this
Line of Credit Note shall bear interest from the date hereof at the
rate per annum equal to Boatmen's "Corporate Base Rate" (as
hereinafter defined), except as otherwise provided herein. As used
herein, the term "Corporate Base Rate" means the rate of interest
announced by the bank as its corporate base rate from time to time,
the Corporate Base Rate to change when and as such corporate base rate
changes; provided, however, that the "Corporate Base Rate" shall
change no more often than daily. The Bank's corporate base rate shall
be the rate generally charged to its preferred business lending
customers for 90 day loans; provided, that such rate need not
necessarily represent the lowest or best rate actually charged to any
customer. Interest shall be payable quarterly in arrears on July 1,
1996, October 1, 1996, January 1, 1997, and on the Maturity Date, upon
any prepayment, at maturity (whether by acceleration or otherwise)
and, after such maturity, on demand and shall be computed on the basis
of a 365-day year.
Any amount hereunder which is not paid when due, whether at
stated maturity, by acceleration or otherwise, shall bear interest
from the date when due until paid at the lesser of (i) the foregoing
rate per annum plus three (3) percentage points or (ii) the maximum
rate permitted by law, said interest to be compounded annually and
computed on the basis of a 365-day year.
If any installment of this Line of Credit Note becomes due and
payable on a Saturday, Sunday or business holiday in the State of
Missouri, payment shall be made on the next successive business day
and interest shall be payable thereon at the rate herein specified
during such extension.
This Line of Credit Note is the Line of Credit Note referred to
in Section 1.2 of the Revolving Line of Credit Agreement dated April
1, 1996, between the Borrower and Boatmen's, to which Loan Agreement,
and any amendments thereto, reference is hereby made for, among other
things, a statement of the terms and conditions under which the loan
evidenced hereby was made and is to be repaid and under which this
Line of Credit Note may be paid prior to the Maturity Date or the
Maturity Date accelerated. This Line of Credit Note is secured as
provided in a Security Agreement, dated April 1, 1996, between the
Borrower and Boatmen's.
<PAGE>
All payments made hereunder shall be made in lawful currency of
the United States of America in immediately available funds at 920
Main Street, Kansas City, Missouri, 64105, Attention: L. Dean Howard,
or at such other place as Boatmen's may designate in writing. All
payments made hereunder shall be allocated first to the discharge of
any expenses for which Boatmen's may be entitled to receive
reimbursement of under any of the Loan Documents (as defined in the
Loan Agreement), next to accrued but unpaid interest, next to
installments of principal overdue and currently due, and then to
installments of principal remaining outstanding hereunder in the
inverse order of their maturity.
There may be other security and Borrower acknowledges that
omitting to list it here shall not constitute a waiver or abandonment
thereof. The holder of this Note, in addition to any other rights the
holder may have, shall have the right to offset against amounts due
under this Note all deposits, funds, securities, and other property of
Borrower in the possession of the holder.
If Borrower does not pay any principal or interest when due
hereunder, or if Borrower defaults under or otherwise fails to perform
or pay any covenant or obligation in any agreement that secures this
Note or has been executed and delivered to the holder hereof in
connection with the indebtedness evidenced by this Note, subject to
the notice and cure provisions set forth in the Loan Agreement, the
holder hereof may declare all principal and unpaid accrued interest to
be immediately due and payable. Failure to do so at any time shall
not constitute a waiver of the right of the holder hereof to do so at
any other time.
The Borrower, for itself and for any guarantors, sureties,
endorsers and/or any other person or persons now or hereafter liable
hereon, if any, hereby waives demand of payment, presentment for
payment, protest, notice of nonpayment or dishonor and any and all
other notices and demands whatsoever, and any and all delays or lack
of diligence in the collection hereof, and expressly consents and
agrees to any and all extensions or postponements of the time of
payment hereof from time to time at or after maturity and any other
indulgence and waives all notice thereof.
If this Note is not paid strictly according to its terms,
Borrower shall (to the extent permitted by law) pay all costs of
collection, including but not limited to court costs and reasonable
attorney's fees and expenses (whether or not there is litigation), and
all costs of the holder hereof incurred in connection with any
proceedings affecting this Note under the United States Bankruptcy
Code.
Borrower agrees that it will use the proceeds of this Note for
business purposes (other than agricultural purposes) only, and not for
personal, family or household purposes.
This note is made pursuant to the terms of the certain Revolving
Line of Credit Agreement dated 4/1/96 between the Borrower, its
wholly-owned subsidiary Union Bank & Trust, and Boatmen's First
National Bank of Kansas City. In the event of any conflict or
ambiguity between the terms of the Note and said Revolving Line of
Credit Agreement, the terms of the Revolving Line of Credit Agreement
shall govern.
<PAGE>
This Line of Credit Note shall be governed by and construed and
enforced in accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the undersigned has duly caused this Line of
Credit Note to be executed and delivered at the place specified above
and as of the date first written above.
UNION BANKSHARES, LTD.
By: ____________________________________
Title __________________________________
Borrower's Notice Address: 1825 Lawrence Street, Suite 444
Denver, Colorado 80202-1817
Borrower's Telephone Number: 1-303-298-5352
Borrower's Facsimile Number: 1-303-298-5380
Borrower's Chief Business Address: 1825 Lawrence Street, Suite 444
Denver, Colorado 80202-1817
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to incorporation by reference in the registration
statements of UNION BANKSHARES, LTD. on Form S-8 relating to the
Company's Equity Incentive Plan, the Option Bonus Plan, the Equity
Compensation Plan for Nonemployee Directors and the Nonemployee
Directors' Stock Option Plan of our report dated January 17, 1997,
relating to the consolidated balance sheets of UNION BANKSHARES, LTD.
as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended,
which report appears in the December 31, 1996 annual report on Form
10-KSB of UNION BANKSHARES, LTD.
BAIRD, KURTZ & DOBSON
BAIRD, KURTZ & DOBSON
March 26, 1997
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Union Bankshares, Ltd.
We consent to incorporation by reference in the registration statement
on Form S-8 relating to the Employees' Equity Incentive Plan, the
Nonemployee Directors' Stock Option Plan and the Equity Compensation
Plan for Nonemployee Directors of Union Bankshares, Ltd. of our report
dated January 28, 1994, relating to the consolidated balance sheets of
Union Bankshares, Ltd. as of December 31, 1993, and the related
consolidated statements of income, stockholders' equity and cash flows
for the year then ended, which report appears in the December 31, 1993
annual report on Form 10-KSB of Union Bankshares, Ltd.
MCGLADREY & PULLEN L.L.P.
MCGLADREY & PULLEN L.L.P.
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,356,000
<INT-BEARING-DEPOSITS> 107,667,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,904,000
<INVESTMENTS-CARRYING> 64,538,000
<INVESTMENTS-MARKET> 64,874,000
<LOANS> 100,732,000
<ALLOWANCE> (1,754,000)
<TOTAL-ASSETS> 183,186,000
<DEPOSITS> 156,409,000
<SHORT-TERM> 6,200,000
<LIABILITIES-OTHER> 1,045,000
<LONG-TERM> 3,500,000
<COMMON> 9,436,000
0
0
<OTHER-SE> 6,248,000
<TOTAL-LIABILITIES-AND-EQUITY> 183,186,000
<INTEREST-LOAN> 9,404,000
<INTEREST-INVEST> 4,122,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,526,000
<INTEREST-DEPOSIT> 3,736,000
<INTEREST-EXPENSE> 4,212,000
<INTEREST-INCOME-NET> 9,314,000
<LOAN-LOSSES> (21,000)
<SECURITIES-GAINS> 162,000
<EXPENSE-OTHER> 7,616,000
<INCOME-PRETAX> 2,450,000
<INCOME-PRE-EXTRAORDINARY> 1,910,000
<EXTRAORDINARY> (337,000)
<CHANGES> 0
<NET-INCOME> 1,573,000
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 8.97
<LOANS-NON> 14,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,448,000
<CHARGE-OFFS> 29,000
<RECOVERIES> 50,000
<ALLOWANCE-CLOSE> 1,754,000
<ALLOWANCE-DOMESTIC> 1,754,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
