<PAGE> 1
Filed Pursuant to Rule 424(a)
Registration Nos. 333-66153
333-66153-01
SUPPLEMENT DATED NOVEMBER 25, 1998
TO
PRELIMINARY PROSPECTUS DATED NOVEMBER 17, 1998
This Supplement relates to and modifies the Preliminary Prospectus dated
November 17, 1998, of Union Bankshares Capital Trust I and Union Bankshares,
Ltd.
The number of % Cumulative Trust Preferred Securities being offered by
Union Bankshares Capital Trust I pursuant to the Preliminary Prospectus has been
increased from 1,000,000 to 1,315,790. The liquidation amount of each such
Preferred Security has been decreased from $10 to $7.60. The over-allotment
option granted to the underwriters has been increased from 100,000 to 131,578
additional Preferred Securities. Assuming that the over-allotment option is not
exercised, the revised aggregate public offering price of the Preferred
Securities is $10,000,004. All references to the number of Preferred Securities
being offered pursuant to the Preliminary Prospectus, the liquidation amount of
each such Preferred Security, the number of Preferred Securities available to
the underwriters to cover over-allotments and the aggregate public offering
price of the Preferred Securities are hereby amended to reflect these changes.
These changes do not materially affect the historical or pro forma financial
information contained in the Preliminary Prospectus, any of the terms of the
Preferred Securities or the Junior Subordinated Debentures or the Guarantee of
Union Bankshares, Ltd.
The changes in the number of Preferred Securities being offered and the
liquidation amount per Preferred Security were made in order to comply with the
minimum public float requirement necessary for listing the Preferred Securities
on the NASDAQ National Market System, to which application has been made to list
the Preferred Securities.
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SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1998
1,000,000 Trust Preferred Securities
UNION BANKSHARES CAPITAL TRUST I
% Cumulative Trust Preferred Securities
(Liquidation Amount $10 per Trust Preferred Security)
guaranteed as described in this prospectus by
UNION BANKSHARES, LTD.
Union Bankshares Capital Trust I, a Delaware statutory business trust is
offering the % Cumulative Trust Preferred Securities. The Preferred
Securities represent undivided beneficial interests in the assets of Union
Bankshares Capital Trust I. Union Bankshares, Ltd. will be the owner of all of
the beneficial interests represented by common securities of Union Bankshares
Capital Trust I and will guarantee all of Union Bankshares Capital Trust I's
obligations under the Preferred Securities as described in this prospectus.
Union Bankshares, Ltd. intends to include the Preferred Securities for listing
on the NASDAQ National Market under the trading symbol "UBSC.Pr.A."
YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 12 BEFORE INVESTING IN
THE PREFERRED SECURITIES.
These securities are not savings accounts or deposits and are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering
Price.............. $ $10,000,000
Maximum Underwriting
Discount........... $ $
Proceeds to Union
Bankshares Capital
Trust I............ $ $
</TABLE>
The underwriters may purchase up to 100,000 additional Preferred Securities from
Union Bankshares Capital Trust I under certain circumstances.
The underwriters are offering the Preferred Securities subject to certain
conditions. The underwriters expect to deliver the Preferred Securities on or
about , 1998.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BIGELOW & COMPANY INVESTMENT BANKERS
BARINGTON CAPITAL GROUP
The date of this prospectus is , 1998
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Selected Consolidated Financial Data........................ 10
Risk Factors................................................ 12
Safe Harbor Statement Under the Private Securities
Litigation
Reform Act of 1995........................................ 24
Use of Proceeds............................................. 25
Accounting Treatment........................................ 25
Capitalization.............................................. 26
Ratio of Earnings to Fixed Charges.......................... 27
Pro Forma Consolidated Financial Statements................. 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 35
Business.................................................... 52
Management.................................................. 68
Information Concerning Lakewood State Bank.................. 70
Description of the Preferred Securities..................... 84
Description of the Junior Subordinated Debentures........... 96
Book-Entry Issuance......................................... 108
Description of Guarantee.................................... 111
Relationship Among the Preferred Securities, the Junior
Subordinated Debentures and the Guarantee................. 114
Certain Federal Income Tax Consequences..................... 116
ERISA Considerations........................................ 121
Underwriting................................................ 121
Legal Matters............................................... 123
Experts..................................................... 123
Incorporation of Certain Documents by Reference............. 123
Available Information....................................... 124
Index to Financial Statements............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary provides an overview of selected information contained elsewhere in
this prospectus and does not contain all the information you should consider.
Therefore, you should also read the more detailed information set forth in this
prospectus, the financial statements of the company and the other information
that is incorporated by reference in this prospectus.
THE COMPANY
OVERVIEW
Union Bankshares, Ltd. is an independent bank holding company which owns Union
Bank & Trust, a state chartered commercial bank located in Denver, Colorado. The
bank, acquired by the company in 1985, and its predecessors have been operating
since 1917. The bank attracts FDIC-insured deposits, and focuses on providing
relationship banking based on personal attention and professional service. Most
of the bank's customers are small and medium-sized businesses and individuals
located in the Denver area. The bank follows conservative underwriting standards
and emphasizes asset quality and capital preservation. As a result, the bank has
largely avoided excessive loan losses. The bank's ratios of nonperforming assets
to capital and to total assets were .13% and .01%, respectively, at December 31,
1997. At September 30, 1998, the company had consolidated total assets of $249.4
million, net loans of $125.6 million, deposits of $217.1 million and
shareholders equity of $19.9 million. Additionally, the company's Tier I and
total risk-based capital ratios were 11.72% and 12.97%, respectively.
On August 27, 1998, the company announced the planned acquisition of Lakewood
State Bank, a state chartered bank located in Lakewood, Colorado. Lakewood State
Bank focuses on account relationships that are similar to those of the bank. At
September 30, 1998, Lakewood State Bank had total assets of $44.9 million, net
loans of $23.6 million, deposits of $40.3 million and shareholders equity of
$4.3 million. Additionally, Lakewood State Bank's Tier I and total risk-based
capital ratios were 16.1% and 17.3%, respectively.
The company continues to seek to take advantage of the opportunities in the
Colorado banking market which have resulted from the relaxation of regulatory
limitations on branch banking. In addition, recent bank acquisition activity 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 has been to develop startup branches around
the Denver metropolitan area. 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 $22.7 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. The University Hills and Lakewood
branches have also been well received by their respective communities and have
attracted over $18.4 million and $15.0 million in deposits to date,
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respectively. The recently opened Littleton branch has attracted over $6.3
million of deposits, and a Golden branch opened in October 1998. The bank plans
to operate Lakewood State Bank as a stand-alone branch. The company continues to
analyze opportunities to open additional branches in the metropolitan Denver
area.
As a result of this strategy, the company has enjoyed substantial growth in its
asset base, revenues and net income. The company's total assets increased from
approximately $167.2 million at December 31, 1995, to $249.4 million at
September 30, 1998. The company's net interest income increased from $8.2
million for the year ended December 31, 1995 to $10.8 million for the twelve
month period ended December 31, 1997. The company's net income increased from
$1.2 million for the year ended December 31, 1995 to $2.1 million for the twelve
month period ended December 31, 1997.
OPERATING STRATEGY
The company's strategy as an independent, one-bank holding company has been
carried out through the operations of the bank and, since 1994, its branches.
The bank emphasizes local relationship banking for small and medium-sized
businesses and individuals. The bank's operating strategies include:
- Personal Attention and Professional Service
- Maintaining Asset Quality
- Asset/Liability Management
- - Personal Attention and Professional Service. The bank's customer-oriented
strategy is to provide customers with personal attention and professional
service. The bank involves all employees in developing and carrying out its
customer service program. The bank's executive management team believes that by
providing 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.
- - 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 resulted in
generally low loan losses and low ratios of nonperforming assets to total
assets. See "Business -- Nonperforming Assets."
- - Asset/Liability Management. The bank maintains an asset/liability management
policy to manage the risk/return relationships between capital adequacy, market
risk, liquidity and interest rate risk. A primary goal of this policy is to
protect the bank's asset and liability portfolio from undue interest rate risk.
Exposure to interest rate risk arises from volatile interest rates and
differences in the maturities of the bank's assets (i.e. loans and securities)
and its liabilities (i.e. deposits). The bank attempts 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management."
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GROWTH STRATEGY
On August 27, 1998 the company announced that it had reached an agreement to
acquire Lakewood State Bank. The company believes that Lakewood State Bank's
operating philosophy is consistent with that of Union Bank & Trust, and that the
combined bank, with approximately $300 million in pro forma total assets, will
be able to operate effectively in the Denver marketplace. The acquisition is
structured as a cash-for-stock merger in which the shareholders of Lakewood
State Bank will receive a total of $8.35 million in cash, Lakewood State Bank
will be merged into the bank and its separate corporate existence will cease.
Thereafter, the bank will continue Lakewood State Bank's operations in the same
fashion as the company's other branches. The acquisition of Lakewood State Bank
is referred to in this prospectus as the "Lakewood Acquisition."
The company is focused on growth of the bank as an independent entity. The bank
has adopted an aggressive internal growth strategy through establishing
full-service branches to serve the small and medium-sized businesses in each
location. The bank's five existing full-service branches provide complete
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. 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.
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. We cannot
guarantee, however, that we will achieve our growth objectives.
The company's principal executive office is located at 1825 Lawrence Street,
Suite 444, Denver, Colorado 80202, and its telephone number is (303) 298-5352.
UNION BANKSHARES CAPITAL TRUST I
Union Bankshares Capital Trust I is a statutory business trust created under
Delaware law on October 14, 1998. The trust's business and affairs will be
conducted by the Property Trustee, the Delaware Trustee and three individual
Administrative Trustees who are officers of the company. The trust was created
for the exclusive purpose of offering the Preferred Securities and engaging in
the other transactions discussed in this prospectus. All of the common
securities of the trust are owned by the company. See "Description of the
Preferred Securities -- Subordination of Common Securities of the Trust Held by
the Company." The trust will have a term of 30 years, but may dissolve earlier
as provided in the trust agreement.
Union Bankshares Capital Trust I's principal executive office is located at 1825
Lawrence Street, Suite 444, Denver, Colorado 80202, and its telephone number is
(303) 298-5352.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE "RISK FACTORS" SET OUT IMMEDIATELY FOLLOWING
THIS SUMMARY.
THE OFFERING
Preferred Securities issuer..... Union Bankshares Capital Trust I
Securities offered.............. 1,000,000 Preferred Securities. The
Preferred Securities represent undivided
beneficial interests in the trust's assets,
which will consist solely of the Junior
Subordinated Debentures and payments
thereunder and rights under an expense
agreement.
Distributions................... The distributions payable on each Preferred
Security will be fixed at a rate per annum
of % of the Liquidation Amount of $10
per Preferred Security, will be cumulative,
will accrue from the date of issuance of the
Preferred Securities, and will be payable
quarterly in arrears on the 15th day of
January, April, July and October of each
year that the Preferred Securities are
outstanding, commencing on April 15, 1999
(subject to possible deferral as described
below). The amount of each distribution due
with respect to the Preferred Securities
will include amounts accrued through the
date the distribution payment is due. See
"Description of the Preferred
Securities -- Distributions."
Extension Periods............... So long as no default has occurred and is
continuing, the company will have the right,
at any time, to defer payments of interest
on the Junior Subordinated Debentures for a
period not exceeding 20 consecutive quarters
with respect to each deferral period (each
an "Extension Period"). No Extension Period
may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. If interest
payments are deferred, distributions on the
Preferred Securities will also be deferred
and the company will generally not be
permitted to declare or pay any cash
distributions with respect to the company's
capital stock or debt securities that rank
equally with or junior to the Junior
Subordinated Debentures. During an Extension
Period, distributions will continue to
accrue with income on the deferred
distributions compounding quarterly at the
rate of %. Because interest would
continue to accrue and
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compound on the Junior Subordinated
Debentures, to the extent permitted by
applicable law, holders of the Preferred
Securities would be required to accrue
income for United States federal income tax
purposes. This means that you would have
income from the Preferred Securities for
United States federal income tax purposes
but that you would not receive any cash with
which to pay any tax that may be due on that
income. See "Description of the Junior
Subordinated Debentures -- Option to Extend
Interest Payment Period," "Certain Federal
Income Tax Consequences -- Interest Income
and Original Issue Discount" and "Risk
Factors -- Option to Extend Interest Payment
Period; Tax Consequences; Market Price
Consequences."
Maturity........................ The Junior Subordinated Debentures will
mature on , 2028, which date may be
accelerated (such date, as it may be
accelerated, the "Stated Maturity") to a
date not earlier than , 2003 if certain
conditions are met (including the company
having received prior approval of the
Federal Reserve to do so if then required).
Redemption...................... You may be required to sell your Preferred
Securities to the trust if the Junior
Subordinated Securities are prepaid. In this
case, the trust will buy your Preferred
Securities at a redemption price equal to
the aggregate Liquidation Amount of the
Preferred Securities, plus accumulated and
unpaid distributions on the Preferred
Securities to the date of redemption.
Subject to Federal Reserve approval, if then
required under applicable capital guidelines
or policies of the Federal Reserve, the
company may redeem the Junior Subordinated
Debentures prior to maturity (i) on or after
, 2003, in whole at any time or in part
from time to time, or (ii) at any time, in
whole (but not in part), upon the occurrence
and during the continuance of a Tax Event,
an Investment Company Event or a Capital
Treatment Event, in each case at a
redemption price equal to 100% of the
principal amount of the Junior Subordinated
Debentures so redeemed, plus any accrued but
unpaid interest to the date fixed for
redemption. See "Description of the
Preferred Securities -- Redemption" and
"Description of the Junior Subordinated
Debentures -- Redemption."
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Distribution of Junior
Subordinated Debentures......... The company has the right at any time to
dissolve the trust and, after satisfaction
of the liabilities of creditors of the trust
as provided by applicable law, cause the
Junior Subordinated Debentures to be
distributed to holders of Preferred
Securities in liquidation of the trust, if
the company has received prior approval of
the Federal Reserve to do so if then
required. See "Description of the Preferred
Securities -- Distribution of Junior
Subordinated Debentures."
Guarantee....................... The company will provide a guarantee on a
subordinated basis of payments by the trust
of distributions and certain other amounts
due on the Preferred Securities, to the
extent the trust has sufficient funds. If
the trust has insufficient funds to pay
distributions on the Preferred Securities
(i.e., if the company has failed to make
required payments under the Junior
Subordinated Debentures), a holder of the
Preferred Securities would be entitled to
institute a legal proceeding directly
against the company to enforce such holder's
rights under the Guarantee. See "Risk
Factors -- Limitations on Direct Actions
Against the Company and on Rights Under the
Guarantee" and "Description of the Junior
Subordinated Debentures -- Debenture Events
of Default," "-- Enforcement of Certain
Rights of Holders of Preferred Securities,"
"Description of Guarantee."
Ranking......................... The Preferred Securities will rank equally
with, and payments thereon will be made pro
rata, with the Common Securities of the
trust held by the company, except as
described under "Description of the
Preferred Securities -- Subordination of
Common Securities of the Trust Held by the
Company." The company's obligations under
the Guarantee, the Junior Subordinated
Debentures and other documents described in
this prospectus are unsecured and rank
subordinate and junior in right of payment
to all current and future Senior and
Subordinated Debt of the company. At
September 30, 1998, the aggregate
outstanding Senior and Subordinated Debt of
the company, on an unconsolidated basis, was
$1.0 million. In addition, all existing and
future liabilities of the company's
subsidiaries, including the bank, will rank
prior to all obligations of the company
relating to the securities described in this
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prospectus. The company may cause additional
preferred securities to be issued by trusts
similar to Union Bankshares Capital Trust I
in the future, and there is no limit on the
amount of such securities that may be
issued. In this event, the company's
obligations under the junior subordinated
debentures to be issued to such other trusts
and the company's guarantees of the payments
by such trusts will rank equally with the
company's obligations under the Junior
Subordinated Debentures and the Guarantee.
Voting Rights................... The holders of the Preferred Securities will
generally have limited voting rights
relating only to the modification of the
Preferred Securities, the dissolution,
winding-up or termination of the trust and
certain other matters described herein. See
"Description of the Preferred Securities --
Voting Rights; Amendment of the Trust
Agreement."
Proposed NASDAQ Symbol.......... UBSC.Pr.A
Use of Proceeds................. The proceeds to the trust from the sale of
the Preferred Securities offered by this
prospectus will be used by the trust to
purchase the Junior Subordinated Debentures
of the company. The company, in turn,
intends to contribute $7 million of the net
proceeds to the capital of the bank to
finance the acquisition of Lakewood State
Bank, and with the remainder of the proceeds
to be used for general corporate purposes,
which may include, without limitation,
establishment of future bank branch
locations, possible future acquisitions and
additional capital contributions to the
bank. The company expects approximately $5.8
million of the Preferred Securities to
qualify as Tier 1 capital under the capital
guidelines of the Federal Reserve subject to
regulatory limitations. See "Use of
Proceeds."
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SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Interest income............. $ 13,079 $ 11,688 $ 15,960 $ 13,526 $ 12,091 $ 9,549 $ 7,738
Interest expense............ 4,516 3,737 5,118 4,212 3,845 2,659 2,627
Net interest income......... 8,563 7,951 10,842 9,314 8,246 6,890 5,111
Provision for loan losses... 243 270 360 285 120 195 170
Other income................ 715 700 958 1,037 610 413 1,275
Other expenses.............. 7,547 6,242 8,453 7,616 7,213 5,817 4,897
Income tax expense.......... 240 628 851 540 297 248 201
Net income before
extraordinary items....... 1,248 1,511 2,136 1,910 1,226 1,043 1,118
Extraordinary items......... -- -- -- 337 -- -- --
Net income.................. 1,248 1,511 2,136 1,573 1,226 1,043 1,118
BALANCE SHEET
Total Assets................ 249,398 208,389 221,505 183,186 167,232 145,772 132,878
Loans....................... 127,929 122,792 122,784 100,732 81,312 65,199 57,957
Allowance for loan losses... 2,304 2,034 2,125 1,754 1,448 1,071 1,006
Investment securities
available for sale........ 58,515 32,240 37,180 39,904 51,232 33,100 42,664
Investment securities held
to maturity............... 25,786 30,317 27,929 24,634 18,416 34,219 23,013
Nonperforming assets(1)..... 52 129 23 14 192 1,025 560
Deposits.................... 217,063 176,900 190,076 156,409 140,175 126,201 113,094
Shareholders' equity........ 19,859 17,565 18,222 16,032 14,912 12,055 12,339
PER COMMON SHARE
Net income per share
(basic)(3)................ $ 0.53 $ 0.65 $ 0.92 $ 0.68 $ 0.53 $ 0.44 $ 0.52
Net income per share
(diluted)(3).............. $ 0.47 $ 0.60 $ 0.84 $ 0.65 $ 0.47 $ 0.41 $ 0.47
Tangible book value per
share (basic)(3).......... $ 7.40 $ 6.40 $ 6.69 $ 5.89 $ 5.10 $ 3.62 $ 4.08
Tangible book value per
share (diluted)(3)........ $ 6.58 $ 5.91 $ 6.12 $ 5.42 $ 3.51 $ 2.50 $ 2.90
KEY RATIOS:
Net interest margin(2)...... 5.77% 6.30% 6.25% 6.29% 6.35% 6.03% 4.99%
Net interest spread(2)...... 4.68% 5.20% 5.14% 5.29% 5.33% 5.24% 4.17%
Return on average assets
(annualized).............. 0.73% 1.05% 1.08% 0.91% 0.80% 0.76% 0.91%
Return on average common
equity (annualized)....... 8.79% 12.16% 12.68% 10.44% 9.28% 8.49% 10.23%
Shareholders' equity to
total assets.............. 7.96% 8.41% 8.22% 8.75% 8.92% 8.27% 9.29%
Tier 1 risk-based capital... 11.72% 10.34% 9.91% 10.12% 9.88% 10.35% 11.14%
Total risk-based capital.... 12.97% 11.61% 11.18% 11.37% 11.15% 11.58% 12.39%
Nonperforming assets to
total assets.............. 0.02% 0.06% 0.01% 0.01% 0.12% 0.70% 0.42%
Nonperforming loans to total
loans..................... 0.04% 0.11% 0.02% 0.01% 0.24% 1.57% 0.97%
Allowance for loan losses to
total loans............... 1.80% 1.66% 1.73% 1.74% 1.78% 1.64% 1.74%
Allowance for loan losses to
nonperforming loans....... 4,430.77% 1,576.74% 9,239.13% 12,528.57% 754.17% 104.49% 179.64%
</TABLE>
- ---------------
(1) Includes loans 90 days or more delinquent and still accruing interest,
nonaccrual loans and restructured loans.
(2) On a tax equivalent basis.
(3) Earnings per share and tangible book value per share recalculated in prior
years to reflect the 2 for 1 stock dividend in 1998.
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UNION BANK & TRUST BRANCH LOCATIONS
[MAP]
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RISK FACTORS
You should consider, among other things, the following risk factors in
connection with a decision to purchase the Preferred Securities.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
Ranking of the Company's Obligations Under the Junior Subordinated Debentures
and the Guarantee. The ability of the trust to make the required payments on the
Preferred Securities depends completely upon the company making required
payments on the Junior Subordinated Debentures. The company's obligations under
the Guarantee, the Junior Subordinated Debentures and other documents described
in this prospectus are unsecured and rank lower in right of payment to all
current and future Senior and Subordinated Debt of the company. At September 30,
1998, the aggregate outstanding Senior and Subordinated Debt of the company was
$1.0 million. The company and its subsidiaries may incur an unlimited amount of
additional debt under the Indenture, the Guarantee and the Trust Agreement. The
company may also issue additional junior subordinated debentures in connection
with future offerings of Preferred Securities, and any such additional
debentures would rank equally with the Junior Subordinated Debentures.
All existing and future liabilities of the company's subsidiaries, including the
bank, will rank prior to all obligations of the company relating to the
securities described in this prospectus. At September 30, 1998, the bank had
total liabilities of $228.8 million. The right of the company to participate in
any distribution of assets of any subsidiary upon such subsidiary's liquidation
or reorganization or otherwise (and thus the ability of holders of the Preferred
Securities to benefit indirectly from such distribution) is subject to the prior
claims of creditors of that subsidiary, except to the extent that the company
may itself be recognized as a creditor of that subsidiary. Accordingly, holders
of the Preferred Securities should look only to the assets of the company, and
not to the assets of its subsidiaries, for principal and interest payments on
the Junior Subordinated Debentures. See "Description of the Junior Subordinated
Debentures -- Subordination" and "Description of Guarantee -- Status of the
Guarantee."
Dependence on Dividends from Subsidiary Bank. As a holding company, with the
substantial majority of its assets represented by its ownership of the bank, the
company's ability to pay interest on the Junior Subordinated Debentures to the
trust (and consequently the trust's ability to pay Distributions on the
Preferred Securities and the company's ability to pay its obligations on the
Guarantee) depends primarily upon the cash dividends the company receives from
the bank. The bank's ability to pay dividends to the company depends on several
factors including the following:
- - regulatory limitations imposed by the various regulatory agencies with
authority over the bank, generally based on current and retained earnings;
- - regulatory restrictions if such dividends would impair the capital of the
bank; and
- - the profitability and financial condition of the bank and its capital
expenditures and other cash flow requirements
We cannot give any assurance that the bank will be able to pay dividends at past
levels, or at all, in the future.
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Option to Extend Interest Payment Period; Tax Consequences; Market Price
Consequences. If no Debenture Event of Default (as defined herein) has occurred
and is continuing, we have the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures at any time for a period of not
more than 20 consecutive quarters with respect to each Extension Period,
provided that we cannot defer the payment of interest beyond the Stated Maturity
of the Junior Subordinated Debentures. If we defer payment of interest on the
Junior Subordinated Debentures, then the trust will also defer quarterly
Distributions on the Preferred Securities (and the amount of Distributions to
which holders of the Preferred Securities are entitled will accumulate
additional amounts at the rate of % per year compounded quarterly, from the
relevant payment date for such Distributions, if permitted by applicable law)
during any such Extension Period. During any such Extension Period, the company
will not be permitted to make certain payments or distributions with respect to
the company's capital stock (including dividends on or redemptions of common or
preferred stock which may be issued in the future) and the company will not be
permitted to make certain payments with respect to any debt securities of the
company that rank equally with or junior in interest to the Junior Subordinated
Debentures; however, the company may (a) pay dividends or distributions in
common stock of the company, (b) redeem rights or take certain other actions
under a stockholders' rights plan, if any, (c) make payments under the Guarantee
or (d) make purchases of common stock related to the issuance of common stock or
rights under any future benefit plans for the company's directors, officers or
employees. Further, during an Extension Period, we would have the ability to
continue to make payments on Senior and Subordinated Debt. Before the
termination of any Extension Period, we may further extend such Extension Period
if such extension does not cause such Extension Period to exceed 20 consecutive
quarters or to extend beyond the Stated Maturity. Following termination of any
Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the annual rate of %, compounded
quarterly, if permitted by applicable law), we may elect to begin a new
Extension Period subject to the above requirements. There is no limitation on
the number of times that we may elect to begin an Extension Period. See
"Description of the Preferred Securities -- Distributions" and "Description of
the Junior Subordinated Debentures -- Option to Extend Interest Payment Period."
The company believes the likelihood of it exercising its option to defer
payments of interest is remote. Consequently, the Junior Subordinated Debentures
will be treated as issued without "original issue discount" ("OID") for United
States federal income tax purposes, and each beneficial owner of the Preferred
Securities will be treated as owning an undivided beneficial interest in the
Junior Subordinated Debentures. Therefore, holders of Preferred Securities will
include interest in taxable income under their own methods of accounting (i.e.,
cash or accrual). If the company exercises its right to defer payments of
interest or if the Internal Revenue Service successfully took the position that
the exercise of such right was not remote at the time of issuance of the Junior
Subordinated Debentures, OID would arise, and the holders of Preferred
Securities would be required to include their pro rata share of OID in gross
income as it accrues for United States federal income tax purposes before
receiving cash. See "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount." We do not currently intend to exercise our right
to defer payments of interest by extending the interest payment period on the
Junior Subordinated Debentures. However, if we do elect to exercise our right to
defer payments of interest in the future, the market price of the Preferred
Securities is
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likely to be adversely affected. Therefore, if you dispose of your Preferred
Securities during an Extension Period, you might not receive the same return on
your investment than if you continued to hold the Preferred Securities. In
addition, the mere existence of the company's right to defer payments of
interest on the Junior Subordinated Debentures may cause the market price of the
Preferred Securities to be more volatile than the market prices of other
securities on which OID accrues that are not subject to such deferrals.
Tax Event Redemption, Investment Company Act Redemption or Capital Treatment
Event Redemption. If a Tax Event, an Investment Company Event or a Capital
Treatment Event (whether occurring before or after , 2003) occurs and
is continuing, the company may redeem the Junior Subordinated Debentures in
whole (but not in part) at a price equal to 100% of the principal amount plus
accrued but unpaid interest to the date fixed for redemption within 90 days
following the occurrence of such Tax Event, Investment Company Event or Capital
Treatment Event and therefore cause a mandatory redemption of the Trust
Securities. The company may not exercise such right without receiving prior
approval of the Federal Reserve to do so if then required under applicable
guidelines or policies of the Federal Reserve. See "Description of the Preferred
Securities -- Redemption."
A "Tax Event" will occur if counsel experienced in such matters delivers an
opinion to the company and the trust to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any of its
political subdivisions or taxing authorities, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the original issuance of the
Preferred Securities, there is more than an insubstantial risk that (i) the
trust is, or will be within 90 days of the date of such opinion, subject to
United States federal income tax with respect to income received or accrued on
the Junior Subordinated Debentures, (ii) any portion of the interest payable by
the company on the Junior Subordinated Debentures is not, or within 90 days of
such opinion, will not be, deductible by the company for United States federal
income tax purposes, or (iii) the trust is, or will be within 90 days of the
date of the opinion, subject to more than a de minimis amount of other taxes,
duties or other governmental charges. See "-- Possible Tax Law Changes Affecting
the Preferred Securities" below for a discussion of certain legislative
proposals that, if adopted, could give rise to a Tax Event, which may permit the
company to cause a redemption of the Junior Subordinated Debentures (and
therefore a redemption by the trust of the Preferred Securities) prior to
, 2003.
An "Investment Company Event" will occur if counsel experienced in such matters
delivers an opinion to the company and the trust to the effect that, as a result
of any change in law or regulation or a change in interpretation or application
of law or regulation by any relevant governmental authority, which change
becomes effective on or after the original issuance of the Preferred Securities,
the trust is or will be considered an "investment company" that is required to
be registered under the Investment Company Act.
A "Capital Treatment Event" will occur if the company reasonably determines
that, as a result of any amendment to, or change (including any proposed change)
in, the laws or regulations applying to the company, or as a result of any
official or administrative
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<PAGE> 16
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the company's ability to treat the Preferred
Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the then
equivalent thereof) for purposes of the capital adequacy guidelines of the
Federal Reserve, as then in effect and applicable to the company.
Possible Tax Law Changes Affecting the Preferred Securities. In both 1996 and
1997 legislation was proposed that would, if enacted, have adversely affected
the tax treatment of the Preferred Securities by limiting the ability of the
company to deduct interest paid on the Junior Subordinated Debentures. On March
19, 1996, President Clinton proposed certain tax law changes (the "1996 Proposed
Legislation") that would, among other things, generally deny corporate issuers a
deduction for interest in respect of certain debt obligations having a maximum
term in excess of 20 years and not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Neither the 1996 Proposed Legislation nor
other similar legislation was enacted during the 104th Congress. On February 6,
1997, President Clinton proposed in the administration's fiscal year 1998 budget
certain tax law changes (the "Administration's 1997 Tax Proposals") that would,
among other things, generally deny corporate issuers a deduction for interest or
OID in respect of certain debt obligations having a maximum term in excess of 15
years and not shown as indebtedness on the issuer's applicable consolidated
balance sheet. Neither the Administration's 1997 Tax Proposals nor similar
legislation was enacted by the 105th Congress. Nevertheless, we cannot give any
assurance that other legislation enacted in the future will not limit the
ability of the company to deduct the interest payable on the Junior Subordinated
Debentures or otherwise give rise to a Tax Event. Therefore, we cannot give any
assurance that a Tax Event will not occur. A Tax Event would permit the company,
upon approval of the Federal Reserve if then required, to cause a redemption of
the Preferred Securities before, as well as after , 2003. See
"Description of the Preferred Securities -- Redemption," "Description of Junior
Subordinated Debentures -- Redemption," and "Certain Federal Income Tax
Consequences."
Possible Distribution of Junior Subordinated Debentures to Holders of Preferred
Securities. The company may at any time dissolve the trust, and after
satisfaction of the liabilities of creditors of the trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Preferred Securities in liquidation of the trust, subject to
the receipt of any required prior approval of the Federal Reserve. Because
holders of the Preferred Securities may receive Junior Subordinated Debentures
upon liquidation of the trust and because Distributions are otherwise limited to
payments on the Junior Subordinated Debentures, prospective purchasers of the
Preferred Securities are also making an investment decision with regard to the
Junior Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained in this prospectus. See
"Description of the Preferred Securities -- Liquidation Distribution upon
Termination" and "Description of the Junior Subordinated Debentures."
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of the trust, the company will use its
best efforts to list the Junior Subordinated Debentures on the NASDAQ or such
stock exchanges, if any, on which the Preferred Securities are then listed.
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<PAGE> 17
Limitations on Direct Actions Against the Company and on Rights Under the
Guarantee. Under the Guarantee, the company guarantees the payment of
Distributions by the trust and payments on liquidation of or redemption of the
Preferred Securities (subordinate to the right to payment of Senior and
Subordinated Debt of the company) to the extent of funds held by Union Capital.
If the trust does not have sufficient funds to pay Distributions on the
Preferred Securities when due (i.e., if the company has failed to make required
payments under the Junior Subordinated Debentures), a holder of the Preferred
Securities would be able to make a claim directly against the company to collect
payment of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder. Except as described in this prospectus,
holders of the Preferred Securities will not be able to exercise directly any
other remedy available to the holders of the Junior Subordinated Debentures or
assert directly any other rights in respect of the Junior Subordinated
Debentures unless the Junior Subordinated Debentures have been distributed to
such holders.
Under the Guarantee, American Securities Transfer & Trust, Inc. will act as
indenture trustee (the "Guarantee Trustee"). The holders of at least a majority
in aggregate Liquidation Amount of the Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust power conferred upon the Guarantee Trustee under the
Guarantee Agreement. Any holder of the Preferred Securities may institute a
legal proceeding directly against the company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the trust, the
Guarantee Trustee or any other person or entity. The Trust Agreement provides
that each holder of the Preferred Securities agrees to the provisions of the
Guarantee Agreement and the Indenture. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights of Holders of Preferred Securities"
and "-- Debenture Events of Default" and "Description of Guarantee."
Under the Guarantee the company has agreed to pay, to the extent not paid by the
trust:
- any accumulated and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the trust has funds available
therefor at such time,
- the Redemption Price (as defined herein) with respect to any Preferred
Securities called for redemption, to the extent that the trust has funds
available therefor at such time, and
- upon a voluntary or involuntary dissolution, winding-up or liquidation of
the trust (other than in connection with the distribution of Junior
Subordinated Debentures to the holders of Preferred Securities or a
redemption of all of the Preferred Securities), the lesser of (a) the
amount of the Liquidation Distribution (as defined herein), to the extent
the trust has funds available therefor at such time, and (b) the amount
of assets of the trust remaining available for distribution to holders of
the Preferred Securities in liquidation of the trust.
If the company fails to pay amounts payable under the Junior Subordinated
Debentures, the trust would be unable to pay Distributions or amounts payable on
redemption of the Preferred Securities or otherwise, and, therefore, holders of
Preferred Securities would not be able to rely upon the Guarantee for such
amounts. If, however, a Debenture Event of
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<PAGE> 18
Default has occurred and is continuing and such event is a result of the failure
of the company to pay interest on or principal of the Junior Subordinated
Debentures when due, then a holder of Preferred Securities may make a claim
directly against the company for enforcement of payment to such holder of the
principal of or interest on such Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Preferred
Securities of such holder (a "Direct Action"). The exercise by the company of
its right to defer the payment of interest on the Junior Subordinated Debentures
does not constitute a Debenture Event of Default. In connection with such Direct
Action, the company will have a right of set-off under the Indenture to the
extent of any payment made by the company to such holder of Preferred Securities
in the Direct Action. Except as described herein, holders of Preferred
Securities will not be able to exercise directly any other remedy available to
the holders of the Junior Subordinated Debentures or assert directly any other
rights in respect of the Junior Subordinated Debentures. See "Description of the
Junior Subordinated Debentures -- Enforcement of Certain Rights by Holders of
Preferred Securities," "-- Debenture Events of Default" and "Description of the
Guarantee."
Limited Covenants. The covenants in the Indenture are limited, and there are no
covenants relating to the company in the Trust Agreement. The Indenture and the
Trust Agreement do not protect holders of Junior Subordinated Debentures or
Preferred Securities in the event of a material adverse change in the company's
financial condition or results of operations. The Indenture and the Trust
Agreement permit the company or any subsidiary to incur unlimited additional
indebtedness. Therefore, you should not consider the provisions of these
governing instruments a significant factor in evaluating whether the company
will be able to comply with its obligations under the Junior Subordinated
Debentures or the Guarantee.
Limited Voting Rights. Holders of the Preferred Securities will generally have
limited voting rights relating only to the modification of the Preferred
Securities and certain other matters described in this prospectus. If (i) there
is a Debenture Event of Default (as defined herein) with respect to the Junior
Subordinated Debentures (see "Description of the Junior Subordinated
Debentures -- Debenture Events of Default"), (ii) the Property Trustee fails to
pay any Distribution on the Preferred Securities for 30 days (subject to
deferral of Distributions as provided under "Description of the Preferred
Securities -- Distributions"), (iii) the Property Trustee fails to pay the
redemption price on the Preferred Securities when due upon redemption, (iv) the
Property Trustee fails to observe a covenant in the Trust Agreement for the
Preferred Securities for 60 days after receiving a Notice of Default, or (v) the
Property Trustee is declared bankrupt or insolvent and not replaced by the
company within 60 days, the holders of a majority of the outstanding Preferred
Securities will be able to remove the Property Trustee and the Indenture Trustee
(but not the Administrative Trustees who may only be removed by the company as
holder of the Common Securities). See "Description of the Preferred
Securities -- Removal of Trustees" and "-- Voting Rights; Amendment of the Trust
Agreement."
Trading Characteristics of the Preferred Securities. The Preferred Securities
may trade at a price that does not reflect fully the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A holder
who uses the accrual method of accounting for tax purposes (and a cash method
holder, if the Junior Subordinated Debentures are deemed to have been issued
with OID) and who disposes of its Preferred
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<PAGE> 19
Securities between record dates for payments of Distributions on such securities
will be required to include accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition in income as ordinary
income (i.e., interest or, possibly, OID), and to add such amount to its
adjusted tax basis in its share of the underlying Junior Subordinated Debentures
deemed disposed of. If the selling price is less than the holder's adjusted tax
basis (which will include all accrued but unpaid interest), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes. See "Certain Federal Income Tax Considerations -- Interest Income and
Original Issue Discount" and "-- Sales or Redemption of Preferred Securities."
Absence of Existing Public Market; Market Prices. There is no existing market
for the Preferred Securities. The trust intends to apply for listing for the
Preferred Securities on the NASDAQ National Market System ("NASDAQ"). We cannot
make any assurance that a listing of the Preferred Securities will be available
on NASDAQ or, if available, that an active and liquid trading market for the
Preferred Securities will develop or continue. Although the representative of
the underwriters has informed the trust and the company that the underwriters
intend to make a market in the Preferred Securities, the underwriters are not
obligated to do so and any such market making activity may be terminated at any
time without notice to the holders of the Preferred Securities. Future trading
prices of the Preferred Securities will depend on many factors including, among
other things, prevailing interest rates, the operating results and financial
condition of the company, and the market for similar securities. We cannot make
any assurances as to the market prices for the Preferred Securities or the
Junior Subordinated Debentures that may be distributed in exchange for the
Preferred Securities if the company exercises its right to terminate the trust.
Accordingly, the Preferred Securities that an investor may purchase, or the
Junior Subordinated Debentures that a holder of the Preferred Securities may
receive in liquidation of the trust, may decline in value from the price that
the investor paid to purchase the Preferred Securities.
Shortening of Stated Maturity of Junior Subordinated Debentures. The company has
the right, at any time, to shorten the maturity of the Junior Subordinated
Debentures to a date not earlier than , 2003. If the company does
exercise this right, all of the senior debt of the company would be entitled to
receive full payment before any payments are made resulting from the accelerated
maturity. The company may not exercise this right if it does not first receive
prior approval of the Federal Reserve if such approval is then required under
applicable capital guidelines or policies of the Federal Reserve. See
"Description of the Junior Subordinated Debentures -- General."
Redemption; Exchange of Preferred Securities for Junior Subordinated
Debentures. The company has the right at any time to dissolve the trust and
cause the Junior Subordinated Debentures, after satisfaction of liabilities to
creditors of the trust, to be distributed to the holders of the Preferred
Securities in exchange for the Preferred Securities in liquidation of the trust.
The company may not exercise this right if it does not first receive prior
approval of the Federal Reserve if such approval is then required under
applicable capital guidelines or policies of the Federal Reserve. The company
will have the right, in certain circumstances, to redeem the Junior Subordinated
Debentures in whole or in part, instead of a distribution of the Junior
Subordinated Debentures by the trust, in which event the trust will redeem the
Preferred Securities on a pro rata basis to the same extent as the
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<PAGE> 20
Junior Subordinated Debentures are redeemed by the company. Any such
distribution or redemption prior to the Stated Maturity will be subject to prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of the Preferred
Securities -- Redemption."
Under current United States federal income tax law, a distribution of Junior
Subordinated Debentures upon the dissolution of the trust would not be a taxable
event to holders of the Preferred Securities. If, however, the trust is
characterized as an association taxable as a corporation at the time of the
dissolution of the trust, the distribution of the Junior Subordinated Debentures
may constitute a taxable event to holders of Preferred Securities. Moreover, if
a Tax Event occurs, a dissolution of the trust in which holders of the Preferred
Securities receive cash may be a taxable event to such holders. See "Certain
Federal Income Tax Consequences."
Possible Adverse Effect on Market Prices. The company cannot make any assurance
as to the market prices for the Preferred Securities or the Junior Subordinated
Debentures that may be distributed in exchange for Preferred Securities if the
company terminates the trust. Accordingly, the Preferred Securities or the
Junior Subordinated Debentures may trade at a discount from the price that
investors paid to purchase the Preferred Securities offered by this prospectus.
Because holders of Preferred Securities may receive Junior Subordinated
Debentures in liquidation of the trust and because Distributions are otherwise
limited to payments on the Junior Subordinated Debentures, prospective
purchasers of the Preferred Securities are also making an investment decision
with regard to the Junior Subordinated Debentures and should carefully review
all the information regarding the Junior Subordinated Debentures contained in
this prospectus. See "Description of the Junior Subordinated Debentures."
Preferred Securities Are Not Insured. The Preferred Securities are not insured
by the Bank Insurance Fund (the "BIF") or the Savings Association Insurance Fund
(the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"), by the
Depositors Insurance Fund ("DIF") of the Mutual Savings Central Fund, Inc., or
by any other governmental agency.
Book-Entry System; No Physical Certificates. Since transactions in the Preferred
Securities generally can be effected only through the Depositary or its
participants or indirect participants, the ability of a holder to pledge, or to
otherwise act with respect to, the Preferred Securities to persons or entities
that do not participate in the Depositary's system may be limited due to the
lack of a physical certificate for the Preferred Securities. In addition, under
a book-entry format, holders may experience delays in their receipt of payments
since distributions will be made by the trustee, or a paying agent on behalf of
the trustee, to Cede & Co., as nominee for the Depositary. Also, the issuance of
Preferred Securities in book-entry form may reduce their liquidity in any
secondary trading market that may develop because investors may be unwilling to
purchase securities where they can not obtain delivery of physical certificates.
RISK FACTORS RELATING TO THE COMPANY
Economic Conditions and Impact of Interest Rates. The company's profitability,
like that of most similar financial institutions, depends largely on the bank's
net interest income, which is the difference between its interest income on
interest-earning assets, such as loans
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and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the company's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements. The
difference between the amount of the total interest-earning assets and
interest-bearing liabilities which reprice within a given time period could have
a negative effect on the bank's net interest income depending on whether such
difference was positive or negative and whether interest rates are rising or
falling.
Increases in interest rates may reduce demand for loans and, thus, the amount of
loan and commitment fees earned by the bank. In addition, fluctuations in
interest rates may also result in disintermediation, which is the flow of funds
away from depository institutions into direct investments which pay a higher
rate of return, and may affect the value of the company's investment securities
and other interest earning assets. Because the bank's assets consist of a
substantial number of loans with interest rates which change in accordance with
changes in prevailing market rates, if interest rates rise sharply, many of the
bank's borrowers would be required to make higher interest payments on their
loans. Therefore, increases in interest rates may cause the bank to experience
an increase in delinquent loans and defaults to the extent that borrowers are
unable to meet their increased debt servicing obligations. In addition, the bank
has a substantial portfolio of fixed-rate loans that may be prepaid without
significant penalty, so that customers might prepay or refinance them in a
period of declining interest rates. That would alter the bank's asset-liability
gap position and ultimately reduce the rates earned on those assets, as cash
flows from loan repayments would be re-invested at lower rates.
Results of operations for financial institutions, including the company, may be
materially and adversely affected by changes in prevailing economic conditions,
including declines in real estate values, rapid changes in interest rates and
the monetary and fiscal policies of the federal government. The profitability of
the company depends in part on the spread between the interest rates earned on
assets and the interest rates paid on deposits and other interest-bearing
liabilities. Although management believes that the maturities of the company's
assets are moderately balanced in relation to maturities of liabilities
("asset/liability management"), asset/liability management involves estimates as
to how changes in the general level of interest rates will impact the yields
earned on assets and the rates paid on liabilities. A decrease in interest rate
spreads would have a negative effect on the net interest income and
profitability of the company, and we cannot give any assurance that this spread
will not decrease. Although economic conditions in the Denver metropolitan area
have been generally stronger than those in many other regions of the country, we
cannot give any assurance that such conditions will continue to prevail.
Moreover, substantially all of the loans of the company are to businesses and
individuals in the Denver area, and any decline in the economy of this market
area could have an adverse impact on the company. We cannot give any assurance
that positive trends or developments discussed in this prospectus will continue
or that negative trends or developments will not have a material adverse effect
on the company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Growth and Acquisition Risks. The company has pursued and intends to continue to
pursue an internal growth strategy, the success of which will depend primarily
on generating an increasing level of loans and deposits at acceptable risk
levels and terms
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<PAGE> 22
without proportionate increases in noninterest expenses. The company intends to
use a significant portion of the net proceeds from the sale by the company of
the Junior Subordinated Debentures to support growth, including the acquisition
of Lakewood State Bank. The company has grown by the establishment of new
branches, and intends to consider new branching opportunities in the future. The
company cannot give any assurance that it will be successful in continuing its
internal growth strategy. Although the company does not have any discussions or
negotiations underway relating to acquisitions other than the acquisition of
Lakewood State Bank, the company in the future intends to review and solicit
acquisition opportunities and, at any given time, may attempt to acquire
financial institutions. The company may not be successful in identifying
acquisition candidates, integrating acquired institutions or preventing loss of
deposits at acquired institutions. Competition for acquisitions in the company's
market area is highly competitive, and the company may not be able to acquire
institutions on terms beneficial to the company. Furthermore, the level of
success of the company's growth strategy will depend on maintaining sufficient
regulatory capital levels and on continued favorable economic conditions in the
Denver area.
Competitive Banking Environment. The banking business in Colorado is highly
competitive. The company competes for loans and deposits with other local,
regional and national commercial banks, savings banks, savings and loan
associations, finance companies, money market funds, brokerage houses, credit
unions and nonfinancial institutions, many of which have substantially greater
financial resources than the company. Interstate banking is permitted in
Colorado. As a result, management believes that the company may experience
greater competition in its market area.
Allowance for Loan Losses. Inability of borrowers to repay loans can erode
earnings and capital of banks. Like all banks, the company maintains an
allowance for loan losses to provide for loan defaults and nonperformance. The
allowance is based on prior experience with loan losses, as well as an
evaluation of the risks in the current portfolio, and is maintained at a level
considered adequate by management to absorb anticipated losses. The amount of
future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond management's
control, and such losses may exceed current estimates. At December 31, 1997 the
company had nonperforming loans of $23,000 and an allowance for loan losses of
$2,125,000 or 1.73% of total loans and 9,239.13% of nonperforming loans. At
September 30, 1998, the company had nonperforming loans of $52,000 and an
allowance for loan losses of $2,304,000 or 1.80% of total loans and 4,430.77% of
nonperforming loans. We cannot give any assurance that the company's allowance
for loan losses will be adequate to cover actual losses. Future provisions for
loan losses could materially and adversely affect results of operations of the
company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The bank has established an allowance for loan losses in accordance with
generally accepted accounting principles. The company believes that the
allowance is adequate. Nevertheless, future additions to the allowance in the
form of the provision for loan losses may be necessary due to changes in
economic conditions and growth of the bank's loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the bank's allowance for loan losses. An increase in the
bank's provision for loan losses would negatively affect the company's earnings.
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Lending Risks -- Credit Quality. A central focus of the company's and the bank's
strategy is the continued development and growth of a diversified loan
portfolio, with emphasis on commercial business lending to small- and
medium-sized businesses. Certain risks are inherent in the lending function,
including a borrower's inability to pay, insufficient collateral coverage and
changes in interest rates. Repayment risk on commercial loans is significantly
affected by changing economic conditions in a particular geographical area,
business or industry which could impair future operating performance. Risks
associated with general business loans include changes in general economic
conditions which may affect the borrower's ability to repay as well as
underlying collateral values. Installment and other consumer loans are also
subject to repayment risk.
Dependence on Key Personnel. The company depends on the continued services of
Charles R. Harrison, Chairman of the Board and Chief Executive Officer of the
company, Herman J. Zueck, the bank's Chairman of the Board and Chief Executive
Officer and President of the company and Bruce E. Hall, Vice President of the
company. The company has employment agreements with Messrs. Harrison, Zueck and
Hall. The loss of the services of Mr. Harrison, Mr. Zueck or Mr. Hall, or of
certain other key personnel, could adversely affect the company. The company is
the beneficiary of key-person life insurance on the lives of each of Messrs.
Harrison, Zueck and Hall. The company's anticipated growth and expansion into
areas and activities requiring additional expertise are expected to place
increased demands on the company's resources. These demands are expected to
require the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to acquire
such services or to develop such expertise could have a material adverse effect
on the company's future growth. See "Management."
Control by Officers and Directors as a Group; Anti-takeover Effect. Our officers
and directors own beneficially approximately 52.02% of the outstanding shares of
Common Stock. This percentage includes the shares of Common Stock held in the
company's 401(k) plan over which certain officers of the company have voting
control as trustees of the 401(k) plan. As a result, they alone may elect by
simple majority the Board of Directors. This may impede the efforts of a third
party to acquire control of the company or to change the Board of Directors of
the company.
Government Regulation and Recent Legislation. The company and the bank are
subject to extensive federal and state legislation, regulation and supervision
which is intended primarily to protect depositors and the Bank Insurance Fund,
rather than investors. Recently enacted, proposed and future legislation and
regulations designed to strengthen the banking industry have had and may have a
significant impact on the banking industry. Although some of the legislative and
regulatory changes may benefit the company and the bank, others may increase
their costs of doing business or otherwise adversely affect them and create
competitive advantages for non-bank competitors. For a discussion of the
government regulatory environment applicable to the bank and the company, see
the information under "Business" in the company's Form 10-KSB for the year ended
December 31, 1997, incorporated in this prospectus by reference.
The financial institutions industry is subject to significant regulation which
has materially affected the financial institutions industry in the past and will
do so in the future. Such regulations, which affect the company on a daily
basis, may be changed at any time, and the interpretation of the relevant law
and regulations are also subject to change by the
22
<PAGE> 24
authorities who examine the company and the bank and interpret those laws and
regulations. We cannot make any assurance that any present or future changes in
the laws or regulations or in their interpretation will not adversely and
materially affect the company.
Economic Conditions and Monetary Policies. Conditions beyond the company's
control may have a significant impact on the company's operations and its net
interest income from one period to another. Examples of such conditions could
include:
- - prevailing economic conditions both nationally and in the Denver metropolitan
market;
- - the strength of credit demands by customers;
- - fiscal and debt management policies of the federal government, including
changes in tax laws;
- - the Federal Reserve's monetary policy, including the percentage of deposits
that must be held in the form of non-earning cash reserves;
- - the introduction and growth of new investment instruments and transaction
accounts by non-bank financial competitors; and
- - changes in rules and regulations governing the payment of interest on deposit
accounts.
Potential Liability for Undercapitalized Subsidiary Bank. Under federal law, a
bank holding company may be required to guarantee a capital plan filed by an
undercapitalized bank or thrift subsidiary with its primary regulator. If the
subsidiary defaults under the plan, the holding company may be required to
contribute to the capital of the subsidiary bank an amount equal to the lesser
of 5% of the bank's assets at the time it became undercapitalized or the amount
necessary to bring the bank into compliance with applicable capital standards.
It is, therefore, possible that the company would be required to contribute
capital to the bank or any other bank it may acquire in the event that the bank
or such other bank becomes undercapitalized.
Year 2000 Compliance. Some of the company's computer programs are written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognizes a date using "00"
as the year 1900 rather than 2000. This could cause a system failure or
miscalculation causing disruption of operation including, among other things, a
temporary inability to process transactions, pay invoices or engage in similar,
normal business activities.
The company has adopted a Year 2000 Project Management Plan in recognition of
the potential problems that all computer systems may have when the date January
1, 2000 arrives. As part of the implementation of this plan, the company is
currently conducting an assessment to determine whether it will have to modify
or replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project is not estimated to have a material impact on the company's
financial position or the results of its operations and consists entirely of
installation of software upgrades provided by third party vendors or
modification of existing programs. These costs will be expensed as incurred. As
of September 30, 1998, approximately $300,000 in expenses had been incurred in
connection with the implementation of the company's year 2000 plan.
23
<PAGE> 25
The company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. The company's total Year 2000 project cost and estimates for completion
include the estimated costs and time associated with the impact of a third
party's Year 2000 issue and are based on presently available information.
However, we cannot guarantee that the systems of other companies on which the
company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the company's
systems, would not have a material adverse effect on the company.
The company will utilize both internal and external resources to reprogram, or
replace and test the software for Year 2000 modifications. The Year 2000 Project
Management Plan is estimated to be completed by December 31, 1998, which is
prior to any anticipated impact on its operating systems. The company believes
that with modifications to existing software, the Year 2000 issue will not pose
any significant operations problems for its computer system nor is the Year 2000
issue expected to have any significant impact on the operations of the company.
The costs of the project and the date on which the company believes it will
complete the Year 2000 modifications are based on management's best estimates
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, the ability to locate and
correct all relevant computer codes and similar uncertainties. Therefore, the
company cannot give any assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements which are not historical facts contained or incorporated by reference
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: management's ability to integrate the operations of Lakewood State Bank,
continued success of the bank's branching strategy, 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.
Information included and incorporated by reference in this prospectus includes
"forward looking statements," which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"believe," "estimate," or "continue," or the negative thereof or other
variations thereon or comparable terminology. The statements in "risk factors"
and other statements and disclaimers in the prospectus constitute cautionary
statements identifying important factors, including certain risks and
uncertainties, with respect to such forward-looking statements that could cause
actual results to differ materially from those reflected in such forward-looking
statements.
24
<PAGE> 26
USE OF PROCEEDS
All of the proceeds from the sale of Preferred Securities will be invested by
Union Bankshares Capital Trust I in the Junior Subordinated Debentures of the
company. The net proceeds to the company from the sale of the Junior
Subordinated Debentures are estimated to be approximately $9 million (net of
estimated underwriting commissions and offering expenses) assuming the
over-allotment option of the underwriters is not exercised. See "Underwriting."
The company intends to use approximately $7 million of the net proceeds to
finance the bank's acquisition of Lakewood State Bank, with the remainder to be
used for general corporate purposes, which may include, without limitation,
establishment of future bank branch locations, possible future acquisitions and
additional capital contributions to the bank. Any additional net proceeds
received by the company in connection with the underwriters' exercise of their
over-allotment option will be used by the company for general corporate
purposes. Although the company does not have any discussions or negotiations
underway relating to acquisitions other than the acquisition of Lakewood State
Bank, the company in the future intends to review and solicit acquisition
opportunities and, at any given time, may attempt to acquire financial
institutions. Pending their application, the net proceeds may be invested in
short-term, marketable, investment grade interest-bearing securities.
The company is required by the Federal Reserve to maintain certain levels of
capital for bank regulatory purposes. On October 21, 1996, the Federal Reserve
announced that certain qualifying amounts of securities having the
characteristics of the Preferred Securities could be included as Tier 1 capital
for bank holding companies subject to certain limitations. See "Capitalization."
Such Tier 1 capital treatment, together with the company's ability to deduct,
for federal income tax purposes, interest payable on the Junior Subordinated
Debentures, would provide the company with a cost-effective means of obtaining
capital for bank regulatory purposes.
ACCOUNTING TREATMENT
For financial reporting purposes, Union Bankshares Capital Trust I will be
treated as a subsidiary of the company and, accordingly, the accounts of the
trust will be included in the consolidated financial statements of the company.
The Preferred Securities will be presented as a separate line item in the
consolidated balance sheets of the company under the caption "Cumulative Trust
Preferred Securities," and appropriate disclosures about the Preferred
Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the notes to consolidated financial statements. For financial
reporting purposes, the company will record Distributions payable on the
Preferred Securities as interest expense in the consolidated statements of
operations.
Future reports of the company filed under the Exchange Act of 1934, as amended
(the "Exchange Act") will include a footnote to the financial statements stating
that (i) the trust is wholly-owned, (ii) the sole assets of the trust are the
Junior Subordinated Debentures (specifying the principal amount, interest rate
and maturity date of such Junior Subordinated Debentures), and (iii) the
obligations of the company described herein, in the aggregate, constitute a full
and unconditional guarantee on a subordinated basis by the company of the
obligations of the trust under the Preferred Securities. It is expected that the
trust will not be required to provide separate reports under the Exchange Act.
25
<PAGE> 27
CAPITALIZATION
The following table sets forth the consolidated borrowings and capitalization of
the company at September 30, 1998 and as adjusted to give effect to the issuance
of the Preferred Securities by the trust in this offering (the "Offering") and
the use of net proceeds therefrom as described in "Use of Proceeds" and assumes
that the underwriters' over-allotment option was not exercised.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Borrowings:
Total borrowings........................................ $11,000 $11,000
======= =======
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Junior
Subordinated Debentures(1).............................. $ 0 $10,000
======= =======
Shareholders' equity:
Common Stock, $.001 par value; 10 million shares
authorized(2); 2,340,514 shares issued and
outstanding.......................................... 1 1
Additional paid-in capital.............................. 9,610 9,610
Retained earnings....................................... 9,632 9,632
Unrealized appreciation on securities available for
sale, net of income tax effect....................... 616 616
------- -------
Total shareholders' equity...................... $19,859 $19,859
======= =======
Consolidated regulatory capital ratios:
Total capital to risk-weighted assets................... 12.97% 16.37%
Tier 1 capital to risk-weighted assets(3)............... 11.72% 17.62%
Tier 1 capital to tangible assets(3).................... 6.74% 9.41%
</TABLE>
- -------------------------
(1) The subsidiary trust is Union Bankshares Capital Trust I, a wholly-owned
subsidiary of the company that will hold, as its sole asset, approximately
$10.3 million principal amount of Junior Subordinated Debentures, of which
$10 million will be purchased with the proceeds of the % Preferred
Securities issued by the trust. The remaining $300,000 of Junior
Subordinated Debentures will be purchased with the proceeds of the Common
Securities issued by the trust. The company will own all of the Common
Securities. See "Description of the Junior Subordinated Debentures" and
"Description of the Preferred Securities." The Junior Subordinated
Debentures will mature on , 2028, which date may be shortened to a
date not earlier than , 2003 if certain conditions are met. The
Preferred Securities are subject to mandatory redemption upon repayment of
the Junior Subordinated Debentures at maturity or their earlier redemption
in an amount equal to the amount of Junior Subordinated Debentures maturing
or being redeemed at a redemption price equal to the aggregate Liquidation
Amount of the Preferred Securities, plus accumulated and unpaid
distributions thereon to the date of redemption. See
26
<PAGE> 28
"Description of the Preferred Securities -- Redemption" and "Description of
the Junior Subordinated Debentures -- Redemption."
(2) Effective May 27, 1998 the company increased its authorized capital stock to
10 million shares of Common Stock and 500,000 shares of Preferred Stock. The
increase was made to enable the company to consummate a two-for-one split of
its Common Stock in the form of a share-for-share stock dividend and to
provide for possible future capital needs of the company. There is no
pending or planned transaction which would require the issuance of any of
the newly authorized stock. The increase in capital was not part of a plan
by the company's management to adopt a series of anti-takeover measures over
a period of time.
(3) The Preferred Securities have been structured to qualify as Tier 1 capital.
However, they cannot be used to constitute more than 25% of the company's
total Tier 1 capital. As adjusted for this offering, the company's Tier 1
capital as of September 30, 1998 would have been $23.1 million, of which
$5.8 million would have been attributable to the Preferred Securities. Any
future increases in other elements of the company's Tier 1 capital,
including retained earnings, should permit the company to include greater
portions of the Preferred Securities proceeds in Tier 1 capital.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges (as defined below) for the company, the
bank, Lakewood State Bank and on a Pro forma Consolidated basis is detailed
below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Union Bankshares, Ltd.
Including interest on deposits................... 1.33x 1.58x
Excluding interest on deposits................... 3.55x 4.00x
Union Bank & Trust Company
Including interest on deposits................... 1.52x 1.83x
Excluding interest on deposits................... 5.85x 6.56x
Lakewood State Bank
Including interest on deposits................... 1.72x 1.80x
Excluding interest on deposits................... N/A N/A
Union Bankshares, Ltd. Pro forma
Including interest on deposits................... 1.20x 1.37x
Excluding interest on deposits................... 2.00x 2.42x
</TABLE>
N/A -- Lakewood State Bank has no fixed charges other than interest on deposits.
For purposes of computing these ratios, earnings represent income before income
taxes plus fixed charges. Fixed charges including interest on deposits include,
interest on deposits, other interest expense and amortization of debt issuance
cost. Fixed charges excluding interest on deposits, include other interest
expense, and amortization of debt issuance cost.
27
<PAGE> 29
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements and
explanatory notes are presented to show the impact on the historical financial
position and results of operation of the Company of the consummation of the
pending acquisition of Lakewood State Bank. The Lakewood Acquisition will be
accounted for under the purchase method of accounting. See "Prospectus
Summary -- The Company -- Growth Strategy."
The unaudited pro forma consolidated balance sheet assumes that the Lakewood
Acquisition was consummated on September 30, 1998. The unaudited pro forma
consolidated statements of income reflect the consolidation of the results of
operations of the company and Lakewood State Bank for the year ended December
31, 1997, and the nine months ended September 30, 1998, as if the Lakewood
Acquisition had occurred on January 1, 1997.
The unaudited historical financial statement data as of September 30, 1998 and
for the period then ended of both the company and Lakewood State Bank have been
prepared on the same basis as the historical information derived from audited
financial statements. In the opinion of the companies' respective managements,
these financials reflect all adjustments necessary for a fair presentation of
the financial position and results of operations for such periods.
The unaudited pro forma consolidated financial statements do not take into
account the effect of the possible exercise of the underwriters' option to
purchase additional Preferred Securities. For a description of this option see
"Underwriting."
Management believes that the assumptions made in the preparation of these pro
forma consolidated financial statements provide a reasonable basis for
presenting the significant effects of the Lakewood Acquisition as contemplated
and that the pro forma adjustments give appropriate effect to these assumptions.
The unaudited pro forma information does not incorporate any benefits from cost
savings or transaction and integration costs that may occur.
The pro forma consolidated financial statements are not necessarily indicative
of the consolidated financial position or results of future operations of the
combined entity or of the actual results that would have been achieved had the
Lakewood Acquisition been consummated as of the date indicated above.
28
<PAGE> 30
PRO FORMA FINANCIAL SUMMARY
The following unaudited information summarizes financial information of the
company and Lakewood State Bank as if the Lakewood Acquisition had been
effective during the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Pro forma net income................................. $1,003 $1,803
Pro forma net income per share (basic)............... 0.43 0.78
Pro forma return on average equity (annualized)...... 7.02% 10.52%
Pro forma return on average assets (annualized)...... 0.48% 0.74%
</TABLE>
29
<PAGE> 31
UNION BANKSHARES, LTD.
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS -- UNAUDITED)
<TABLE>
<CAPTION>
LAKEWOOD COMBINED PRO FORMA PRO FORMA
COMPANY STATE BANK ENTITY ADJUSTMENTS CONSOLIDATED
-------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks................................... $ 17,140 $ 1,873 $19,013 $ -- $ 19,013
Federal funds sold........................................ 11,000 4,960 15,960 650 16,610
-------- ------- -------- ------- --------
Total Cash and Cash Equivalents.................... 28,140 6,833 34,973 650 35,623
-------- ------- -------- ------- --------
Held-to-maturity securities............................... 25,786 11,988 37,774 -- 37,774
Available-for-sale securities............................. 58,515 -- 58,515 -- 58,515
Other investments......................................... 970 -- 970 -- 970
-------- ------- -------- ------- --------
Total Investment Securities........................ 85,271 11,988 97,259 -- 97,259
-------- ------- -------- ------- --------
Loans, net of allowance for loan losses................... 125,625 23,626 149,251 -- 149,251
Mortgage loans held-for-sale.............................. 2,504 -- 2,504 -- 2,504
Excess of cost over fair value of net assets acquired, net
of amortization......................................... 2,551 -- 2,551 4,093 6,644
Premises and equipment, net............................... 2,030 1,945 3,975 -- 3,975
Accrued interest receivable............................... 1,636 322 1,958 -- 1,958
Other assets.............................................. 1,641 177 1,818 1,000 2,818
-------- ------- -------- ------- --------
TOTAL ASSETS....................................... $249,398 $44,891 $294,289 $ 5,743 $300,032
======== ======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand.................................................. $ 67,038 $10,351 $77,390 $ -- $ 77,390
NOW..................................................... 18,009 5,084 23,093 -- 23,093
Money Market............................................ 61,245 3,936 65,181 -- 65,181
Savings................................................. 11,836 7,240 19,076 -- 19,076
Time.................................................... 58,935 13,673 72,607 -- 72,607
-------- ------- -------- ------- --------
Total Deposits..................................... 217,063 40,284 257,347 -- 257,347
Notes Payable............................................. 11,000 -- 11,000 -- 11,000
Federal funds purchased................................... -- -- -- -- --
Cumulative trust preferred securities..................... -- -- -- 10,000 10,000
Accrued interest payable.................................. 252 242 494 -- 494
Other liabilities......................................... 1,224 108 1,332 -- 1,332
-------- ------- -------- ------- --------
Total Liabilities.................................. 229,539 40,634 270,173 10,000 280,173
-------- ------- -------- ------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; authorized 500,000
shares; issued and outstanding -0- shares............... -- -- -- -- --
Common stock, $.001 par value; authorized 10,000,000
shares; issued and outstanding 2,340,514 shares......... 1 1,000 1,001 (1,000) 1
Additional paid-in-capital................................ 9,610 1,455 11,065 (1,455) 9,610
Unrealized appreciation on available for-sale securities,
net of income taxes of 322,000.......................... 616 -- 616 -- 616
Retained earnings......................................... 9,632 1,802 11,434 (1,802) 9,632
-------- ------- -------- ------- --------
Total Stockholders' Equity......................... 19,859 4,257 24,116 (4,257) 19,859
-------- ------- -------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $249,398 $44,891 $294,289 $ 5,743 $300,032
======== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidating financial statements.
30
<PAGE> 32
UNION BANKSHARES, LTD.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA -- UNAUDITED)
<TABLE>
<CAPTION>
LAKEWOOD
STATE COMBINED PRO FORMA PRO FORMA
COMPANY BANK ENTITY ADJUSTMENTS CONSOLIDATED
---------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................... $ 9,385 $1,781 $11,166 $ -- $ 11,166
Interest on investment securities:
U.S. governmental agencies and corporations........ 2,312 392 2,704 -- 2,704
States and other political sub-divisions........... 895 4 899 -- 899
Interest on federal funds sold and interest-bearing
deposits in other banks............................ 487 219 706 24 730
---------- ------ ------- ------ ----------
Total interest income......................... 13,079 2,396 15,475 24 15,499
INTEREST EXPENSE
Deposits............................................. 3,932 861 4,793 -- 4,793
Federal funds purchased.............................. 2 -- 2 -- 2
Notes payable........................................ 582 -- 582 -- 582
Cumulative trust preferred securities................ -- -- -- 637 637
---------- ------ ------- ------ ----------
Total interest expense........................ 4,516 861 5,377 637 6,014
---------- ------ ------- ------ ----------
NET INTEREST INCOME.................................... 8,563 1,535 10,098 (613) 9,485
PROVISION FOR LOAN LOSSES.............................. 243 -- 243 -- 243
---------- ------ ------- ------ ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 8,320 1,535 9,855 (613) 9,242
---------- ------ ------- ------ ----------
NONINTEREST INCOME
Service charges...................................... 292 185 477 -- 477
Gain on sale of available-for-sale securities, net... 25 -- 25 -- 25
Other................................................ 398 100 498 -- 498
---------- ------ ------- ------ ----------
Total noninterest income...................... 715 285 1,000 -- 1,000
---------- ------ ------- ------ ----------
NONINTEREST EXPENSE
Salaries and employee benefits....................... 4,009 615 4,624 -- 4,624
Amortization of excess of cost over fair value of net
assets acquired.................................... 170 -- 170 205 375
Occupancy and equipment.............................. 1,095 223 1,318 -- 1,318
Other operating expenses............................. 2,273 358 2,631 75 2,706
---------- ------ ------- ------ ----------
Total noninterest expense..................... 7,547 1,196 8,743 280 9,023
---------- ------ ------- ------ ----------
INCOME BEFORE INCOME TAXES............................. 1,488 624 2,112 (893) 1,219
INCOME TAXES........................................... 240 -- 240 (24) 216
---------- ------ ------- ------ ----------
NET INCOME............................................. $ 1,248 $ 624 $ 1,872 $ (869) $ 1,003
========== ====== ======= ====== ==========
EARNINGS PER SHARE
BASIC
Net income per share............................... $ 0.53 $ 0.43
Weighted average number of common shares
outstanding...................................... 2,338,446 2,338,446
========== ==========
DILUTED
Net income per share............................... $ 0.47 $ 0.38
Weighted average number of common shares
outstanding...................................... 2,630,620 2,630,620
========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidating financial statements.
31
<PAGE> 33
UNION BANKSHARES, LTD.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA -- UNAUDITED)
<TABLE>
<CAPTION>
LAKEWOOD COMBINED PRO FORMA PRO FORMA
COMPANY STATE BANK ENTITY ADJUSTMENTS CONSOLIDATED
---------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................... $ 11,448 $2,644 $14,092 $ -- $ 14,092
Interest on investment securities:
U.S. governmental agencies and corporations...... 2,893 326 3,219 -- 3,219
States and other political sub-divisions......... 1,393 6 1,399 -- 1,399
Interest on federal funds sold and interest-bearing
deposits in other banks.......................... 226 105 331 33 364
---------- ------ ------- ------- ----------
Total interest income....................... 15,960 3,081 19,041 33 19,074
---------- ------ ------- ------- ----------
INTEREST EXPENSE
Deposits........................................... 4,121 1,020 5,141 -- 5,141
Federal funds purchased............................ 110 1 111 -- 111
Notes payable...................................... 887 -- 887 -- 887
Cumulative trust preferred securities.............. -- -- -- 850 850
---------- ------ ------- ------- ----------
Total interest expense...................... 5,118 1,021 6,139 850 6,989
---------- ------ ------- ------- ----------
NET INTEREST INCOME.................................. 10,842 2,060 12,902 (817) 12,085
PROVISION FOR LOAN LOSSES............................ 360 -- 360 -- 360
---------- ------ ------- ------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................. 10,482 2,060 12,542 (817) 11,725
---------- ------ ------- ------- ----------
NONINTEREST INCOME
Service charges.................................... 371 279 650 -- 650
Gain on sale of available-for-sale securities,
net.............................................. 101 -- 101 -- 101
Other.............................................. 486 124 610 -- 610
---------- ------ ------- ------- ----------
Total noninterest income.................... 958 403 1,361 -- 1,361
---------- ------ ------- ------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits..................... 4,477 808 5,285 -- 5,285
Amortization of excess of cost over fair value of
net assets acquired.............................. 226 -- 226 273 499
Occupancy and equipment............................ 1,232 307 1,539 -- 1,539
Other operating expenses........................... 2,518 527 3,045 100 3,145
---------- ------ ------- ------- ----------
Total noninterest expense................... 8,453 1,642 10,095 373 10,468
---------- ------ ------- ------- ----------
INCOME BEFORE INCOME TAXES........................... 2,987 821 3,808 (1,190) 2,618
INCOME TAXES......................................... 851 (240) 611 204 815
---------- ------ ------- ------- ----------
NET INCOME........................................... $ 2,136 $1,061 $ 3,197 $(1,394) $ 1,803
========== ====== ======= ======= ==========
EARNINGS PER SHARE
BASIC
Net income....................................... $ 0.92 $ 0.78
Weighted average number of common shares
outstanding.................................... $2,317,056 $2,317,056
========== ==========
DILUTED
Net income....................................... $ 0.84 $ 0.71
Weighted average number of common shares
outstanding.................................... $2,534,904 $2,534,904
========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidating financial statements.
32
<PAGE> 34
UNION BANKSHARES, LTD.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On August 27, 1998, the bank entered into a definitive agreement to acquire by
merger all of the issued and outstanding stock of Lakewood State Bank. The
acquisition will be consummated through the payment of $8,350,000 in cash. The
transaction will be financed with $10,000,000 in long-term debt raised by the
company through the offering of the Preferred Securities. The company will
contribute $7,000,000 to the bank and will use an estimated $1,000,000 for debt
issue costs and will invest the balance in short term investments. The bank will
use the $7,000,00 contributed by the company plus $1,350,000 of short term
investments to fund the Lakewood Acquisition. The additional amounts raised
provide capital for future growth. See "Prospectus Summary -- The Company --
Growth Strategy" and "Use of Proceeds."
1. The pro forma consolidated balance sheet of the company and Lakewood
State Bank as of September 30, 1998 has been prepared in accordance with
the following assumptions:
a. The pending Lakewood Acquisition occurs on September 30, 1998.
b. The pending Lakewood Acquisition is accounted for utilizing the
purchase method of accounting and, accordingly, the net assets of
Lakewood State Bank are adjusted to their fair value. The components
of the transaction assumed in the consolidated balance sheet are
outlined as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
------------
<S> <C>
Cash paid for Lakewood Acquisition.......................... $8,350
Less: Fair value of net assets of Lakewood State Bank....... 4,257
------
Excess of cost over fair value of net assets acquired....... $4,093
======
</TABLE>
c. The company will incur $10,000,000 in long-term debt, comprised of
the proceeds of the Preferred Securities offered by the company, with
interest rates at 8.5% per annum. The additional $1,650,000 raised
but not used in the purchase will be invested in short-term
securities and used to pay for debt issue costs. See "Use of
Proceeds" and "Capitalization." The debt issue costs are estimated to
be $1,000,000.
Management believes that historical book value of the net assets of
Lakewood State Bank approximates fair value.
33
<PAGE> 35
UNION BANKSHARES, LTD.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. The pro forma consolidated income statements have been prepared in
accordance with the following assumptions:
a. The pending Lakewood Acquisition occurred at January 1, 1997 and is
accounted for utilizing the purchase method of accounting.
Accordingly, the operations of Lakewood State Bank are included in
the pro forma results of operations from January 1, 1997 forward.
b. Adjustments to reflect amortization of the purchase accounting
adjustments, increase in interest income on $650,000 in federal funds
sold and interest expense on $10,000,000 in long-term debt, the
amortization of debt issue costs of $1,000,000 over ten years and the
related income tax effects as well as any tax adjustments to reflect
Lakewood State Bank income subject to C-corporation tax rates in the
pro forma condensed income statements are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Increase in interest income for increase in
federal funds sold........................ $ 24 $ 33
Increase in interest on borrowed funds...... (637) (850)
Increase in other expenses for amortization
of excess of cost over fair value of net
assets acquired........................... (205) (273)
Increase in other expense for amortization
of debt issue costs (ten years)........... (75) (100)
Increase in tax expense due to reflect
Lakewood State Bank as a C-Corporation
taxpayer.................................. (233) (546)
Decrease in applicable income taxes based on
adjustments above......................... 257 342
----- -------
Reduction in net income................... $(869) $(1,394)
===== =======
</TABLE>
The assumed interest rate on federal funds sold is 5.00%.
The assumed interest rate on the long-term debt is 8.50% on $10,000,000 and the
estimated issuance costs of $1,000,000 is amortized over the estimated term of
the related debt, ten years.
The excess of cost over fair value of net assets acquired is amortized using the
straight-line method over fifteen years.
34
<PAGE> 36
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 as part 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 remaining Convertible
Notes outstanding, 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. Following the Lakewood
Acquisition the company's financial condition and results of operations will
differ from those of the bank as a result of the issuance of the Junior
Subordinated Debentures of the company and the expenses related to the Offering.
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 five branches since July 1994. As expected, all five
branches have all experienced greater expenses than income during the early
stages of operations. As the deposit and loan balances have grown, however, the
monthly net losses have become smaller. During the last quarter of 1996 and all
of 1997, each of the first three branches had an excess of income over direct
costs. The company expects the new fourth branch, and the recently opened Golden
branch, to have similar performance.
On August 27, 1998, the company announced the planned merger of Lakewood State
Bank ("Lakewood"), a state chartered bank located in Lakewood, Colorado, into
the bank. The company believes that Lakewood's operating philosophy is
consistent with the bank's, and that the combined bank, will be able to operate
effectively in the Denver marketplace. The Lakewood Acquisition is structured as
a cash-for-stock merger in which Lakewood's shareholders will receive a total of
$8.35 million in cash, Lakewood will be merged into the bank and Lakewood's
separate corporate existence will cease. Thereafter, it is expected that
Lakewood's operations will be operated in the same fashion as the bank's other
branches.
The company expects that the Lakewood Acquisition will initially add
approximately $40 million in total assets, resulting in the company having
approximately $300 million in total assets. Management believes that this higher
level of total assets will enhance the bank's competitive position in the Denver
metropolitan banking community. As a result of
35
<PAGE> 37
the Lakewood Acquisition and the Offering, the company will be required to
amortize approximately $4,093,000 of goodwill over 15 years at approximately
$273,000 per year, will have increased interest expense by $850,000 per year and
will have incurred approximately $1,000,000 in offering costs.
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, 1997,
1996 and 1995, average interest-earning assets were $181.5 million, $157.5
million, and $137.9 million, respectively. During these same periods, net
interest margin, computed on a full tax equivalent basis, was 6.25%, 6.29% and
6.35%, respectively. See "-- Results of Operations." It is expected that the
Lakewood Acquisition will initially add approximately $40 million in
interest-earning assets and that the company's net interest margin will not be
materially affected.
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.
36
<PAGE> 38
ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
-------------------------------------------------------------------
YTD SEPTEMBER 30, 1998 YTD SEPTEMBER 30, 1997
-------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD OR AVERAGE EARNED YIELD OR
BALANCE(1) OR PAID COST BALANCE(1) OR PAID COST
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial........................ $ 89,711 $ 6,635 9.89% $ 77,716 $ 5,918 10.18%
Real estate -- mortgage........... 5,013 360 9.60 4,812 343 9.53
Mortgage loans held for sale...... -- -- -- 16 1 8.36
Real estate -- construction....... 11,168 1,009 12.08 7,665 762 13.29
Consumer loans.................... 19,775 1,381 9.34 20,070 1,405 9.36
-------- ------- ------ -------- ------- ------
Total loans..................... 125,667 9,385 9.98 110,279 8,429 10.22
Reserve for loan loss............... (2,210) (1,888)
Securities:
U.S. government................... 17,209 785 6.10 17,879 907 6.78
Municipal -- tax exempt........... 20,979 1,353 8.64 17,356 1,130 8.70
Municipal -- taxable.............. 2,669 123 6.16 5,905 304 6.88
Mortgage backed................... 29,915 1,350 6.03 22,619 1,222 7.22
Other securities.................. 950 54 7.60 853 -- --
-------- ------- ------ -------- ------- ------
Total securities................ 71,722 3,665 6.84 64,612 3,563 7.37
Interest bearing deposits in other
banks............................. -- -- -- -- -- --
Federal funds sold.................. 11,555 487 5.60 1,963 80 5.45
-------- ------- ------ -------- ------- ------
Total interest-earning assets... 208,944 13,537 8.66 176,854 12,072 9.13
Non interest-earning assets:
Excess of investment in subsidiary
over net assets acquired........ 2,644 2,870
Other assets...................... 18,821 14,535
-------- --------
Total non interest-bearing
assets........................ 21,465 17,405
-------- --------
Total assets.................... $228,199 $192,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Interest bearing demand
accounts........................ $ 80,633 $ 1,751 2.90% $ 70,092 $ 1,505 2.87%
Certificates of deposit........... 47,810 1,959 5.48 30,992 1,247 5.38
Savings accounts.................. 11,535 222 2.57 10,821 212 2.62
-------- ------- ------ -------- ------- ------
Total interest bearing
accounts...................... 139,978 3,932 3.76 111,905 2,964 3.54
Federal funds purchased............. 42 2 6.37 2,563 108 5.63
Notes payable....................... 11,593 582 6.71 12,852 666 6.93
-------- ------- ------ -------- ------- ------
Total interest bearing
liabilities................... 151,613 4,516 3.98 127,320 3,738 3.93
Noninterest bearing demand
accounts........................ 56,510 47,724
-------- --------
Total deposits and interest
bearing liabilities........... 208,123 175,044
Other noninterest-bearing
liabilities....................... 646 1,072
-------- --------
Total liabilities............... 208,769 176,116
Redeemable preferred stock.......... -- --
Shareholders' equity................ 18,937 16,255
-------- --------
Total liabilities and
shareholders' equity.......... $227,706 $192,371
======== ========
Net interest income................. $ 9,022 $ 8,334
======= =======
Net interest spread................. 4.68% 5.20%
====== ======
Net interest margin................. 5.77% 6.30%
====== ======
Ratio of average interest-earning
assets to average total deposits
and interest bearing
liabilities....................... 100.39% 101.03%
====== ======
Net income -- current quarter
Return on assets (current quarter
annualized)..................... 0.73% 1.03%
Return on equity (current quarter
annualized)..................... 8.79% 12.16%
Ratio of average equity to average
assets............................ 8.32% 8.45%
<CAPTION>
CHANGE IN CHANGE IN
CHANGE IN INTEREST AVERAGE
AVERAGE EARNED YIELD OR
BALANCE OR PAID COST
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Commercial........................ $11,995 $ 717 (0.29)%
Real estate -- mortgage........... 201 17 0.07
Mortgage loans held for sale...... (16) (1) --
Real estate -- construction....... 3,503 247 (1.21)
Consumer loans.................... (295) (24) (0.02)
------- ------ -----
Total loans..................... 15,388 956 (0.24)
Reserve for loan loss............... (322)
Securities:
U.S. government................... (670) (122) (0.68)
Municipal -- tax exempt........... 3,623 223 (0.06)
Municipal -- taxable.............. (3,236) (181) (0.72)
Mortgage backed................... 7,296 128 (1.19)
Other securities.................. 97 54 7.60
------- ------ -----
Total securities................ 7,110 102 (0.53)
Interest bearing deposits in other
banks............................. -- -- --
Federal funds sold.................. 9,592 407 0.15
------- ------ -----
Total interest-earning assets... 32,090 1,465 (0.47)
Non interest-earning assets:
Excess of investment in subsidiary
over net assets acquired........ (226)
Other assets...................... 4,286
-------
Total non interest-bearing
assets........................ 4,060
-------
Total assets.................... $35,828
=======
LIABILITIES AND SHAREHOLDERS'
LI EQUITY
Liabilities:
Interest bearing demand
accounts........................ $10,541 $ 246 0.03%
Certificates of deposit........... 16,818 712 0.10
Savings accounts.................. 714 10 (0.05)
------- ------ -----
Total interest bearing
accounts...................... 28,073 968 0.22
Federal funds purchased............. (2,521) (106) 0.74
Notes payable....................... (1,259) (84) (0.22)
------- ------ -----
Total interest bearing
liabilities................... 24,293 778 0.05
Noninterest bearing demand
accounts........................ 8,786
-------
Total deposits and interest
bearing liabilities........... 33,079
Other noninterest-bearing
liabilities....................... (426)
-------
Total liabilities............... 32,653
Redeemable preferred stock.......... --
Shareholders' equity................ 2,682
-------
Total liabilities and
shareholders' equity.......... $35,335
=======
Net interest income................. $ 687
======
Net interest spread................. (0.52)%
=====
Net interest margin................. (0.53)%
=====
Ratio of average interest-earning
assets to average total deposits
and interest bearing
liabilities....................... (0.64)%
=====
Net income -- current quarter
Return on assets (current quarter
annualized).....................
Return on equity (current quarter
annualized).....................
Ratio of average equity to average
assets............................
</TABLE>
- -------------------------
(1) Average balances are based on daily averages and include nonaccrual loans.
Loan fees are included in interest income as follows: 1997 -- $602,000;
1996 -- $589,000; 1995 -- $474,000.
37
<PAGE> 39
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>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
VS.
NINE MONTHS ENDED
SEPTEMBER 30, 1997
INCREASE (DECREASE)
IN NET INTEREST INCOME
DUE TO CHANGES IN
----------------------
VOLUME RATE TOTAL
------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST EARNING ASSETS
Loans:
Commercial loans..................................... $ 913 $(196) $ 717
Real estate mortgage................................. 14 3 17
Mortgage loans held for sale......................... (1) -- (1)
Real estate construction............................. 348 (101) 247
Consumer loans....................................... (21) (3) (24)
------ ----- -----
Total loans.................................. 1,253 (297) 956
------ ----- -----
Securities:
U.S. government securities........................... (34) (88) (122)
Municipal tax exempt................................. 233 (10) 223
Municipal taxable.................................... (167) (14) (181)
Mortgage backed...................................... 394 (266) 128
Other securities..................................... -- 54 54
------ ----- -----
Total securities............................. 426 (324) 102
------ ----- -----
Interest bearing deposits at other banks............... -- -- --
Federal funds sold..................................... 394 13 407
------ ----- -----
Total interest-earning assets................ 2,073 (608) 1,465
------ ----- -----
INTEREST BEARING LIABILITIES
Deposits:
Interest bearing demand deposits..................... $ 226 $ 20 $ 246
Certificates of deposit.............................. 677 35 712
Savings deposits..................................... 14 (4) 10
------ ----- -----
Total interest-bearing accounts.............. 917 51 968
Federal funds purchased................................ (106) -- (106)
Notes payable.......................................... (65) (19) (84)
------ ----- -----
Total interest-bearing liabilities........... 746 32 778
------ ----- -----
Total increase (decrease) in net interest
income.................................... $1,327 $(640) $ 687
====== ===== =====
</TABLE>
MARKET RISK MANAGEMENT
Market risk arises from changes in interest rates. The company has risk
management policies to monitor and limit exposure to market risk as discussed
below. See "-- Asset/ Liability Management." Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 18 of Notes to Consolidated Financial Statements.
38
<PAGE> 40
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 are more liquid and
have 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 $37,180,000 and $58,515,000 as available
for sale as of December 31, 1997 and September 30, 1998, respectively. 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 its efforts to achieve 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.
In order to control interest rate risk in a rising interest rate environment, or
when management believes there is a significant risk of rising interest rates,
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
39
<PAGE> 41
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, if successful, 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.
As of December 31, 1997, the dollar duration of the investment portfolio was
3.20 compared to 4.00 at December 31, 1996. The decrease in dollar duration
during 1997 reflects management's decision to replace investments which matured
with investments that had similar yields, but shorter maturities due to stable
interest rates in 1997. As of September 30, 1998, the dollar duration of the
investment portfolio was 3.20.
During 1998, the gross yield on the investment portfolio has decreased from
7.44% to 6.84%. This decrease is due to replacing matured investments with new
investments at current market yields which are lower than the matured
investments, and an increase in the total portfolio, with the new investments at
the lower current market yields. 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.
40
<PAGE> 42
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, 1997. 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 Registration Statement 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>
SEPTEMBER 30, 1998
-----------------------------------------------------------------
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.............. $ 3,526 $ 7,810 $15,735 $ 3,479 $ 30,550
Floating rate loans........... 83,512 1,972 7,892 6,507 99,883
Investment securities......... 3,230 18,318 24,859 37,894 84,301
FHLB stock.................... 970 -- -- -- 970
Federal funds sold............ 11,000 -- -- -- 11,000
-------- -------- ------- ------- --------
Total interest-earning
assets............. 102,238 28,100 48,486 47,880 226,704
-------- -------- ------- ------- --------
Interest-bearing liabilities:
Interest-bearing demand
deposits................... 18,009 -- -- -- 18,009
Money market deposits......... 61,245 -- -- -- 61,245
Certificates of deposit under
$100,000................... 6,205 12,051 4,228 2,946 25,430
Certificates of deposit over
$100,000................... 17,263 9,512 4,206 2,524 33,505
Savings deposits.............. 11,836 -- -- -- 11,836
Notes payable................. -- 1,000 10,000 -- 11,000
Federal funds purchased....... -- -- -- -- --
-------- -------- ------- ------- --------
Total interest-bearing
liabilities........ 114,558 22,563 18,434 5,470 161,025
-------- -------- ------- ------- --------
Interest rate gap............... $(12,320) $ 5,537 $30,052 $42,410 $ 65,679
======== ======== ======= ======= ========
Cumulative interest rate gap.... $(12,320) $ (6,783) $23,269 $65,679
======== ======== ======= =======
Cumulative interest rate gap to
total assets.................. (4.93)% (2.72)% (9.33)% 26.34%
======== ======== ======= =======
Total consolidated assets....... $249,398
========
</TABLE>
41
<PAGE> 43
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 $14
million of loans maturing during the year ending December 31, 1998 will actually
be paid off in cash during that period.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
----------------------------------------------
LESS THAN ONE TO OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans..................... $69,524 $14,744 $8,503 $ 92,771
Real estate -- construction loan..... 12,684 -- -- 12,684
Real estate -- mortgage loans........ 2,578 349 696 3,623
Consumer loans....................... 10,803 7,251 797 18,851
------- ------- ------ --------
Total...................... $95,589 $22,344 $9,996 $127,929
======= ======= ====== ========
Fixed rate loans..................... $14,451 $3,478
Floating rate loans.................. 7,893 6,518
------- ------
Total...................... $22,344 $9,996
======= ======
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Overview: The company reported net income of $1,248,000 for the nine months
ended September 30, 1998, a decrease of 17.4% from net income of $1,511,000 for
the first nine months of 1997. Earnings were positively impacted in the first
nine months of 1998 by an increase in net interest income of $612,000, a $27,000
decrease in provision for loan loss and a $388,000 decrease in income tax
expense. These improvements were offset by a $66,000 decrease in gain on sale of
securities available for sale and a $1,305,000 increase in noninterest expense
for the nine months ended September 30, 1998. Net income per share (diluted) was
$.47 for the nine months ended September 30, 1998, compared to $.60 per share
for the 1997 period. Return on average assets and average equity were .73% and
8.79%, respectively, for the nine months ended September 30, 1998, compared to
1.05% and 12.18%, respectively, for the first nine months of 1997.
During the first nine months of 1998, the company's deposits increased $27.0
million, mainly in interest bearing accounts. During the same period, the
company's total loans increased $5.1 million, and the company's securities
portfolio and federal funds sold increased $18.8 million. This combination of
changes in the earning asset mix, along with market pressure to price loans
lower and deposits higher, resulted in a lower net interest margin.
In addition, the company's long term debt decreased $1.0 million as a result of
a partial prepayment of the company's loan with NationsBank.
Interest Income: Interest income increased $1,391,000, or 11.9%, to $13,079,000
for the period ended September 30, 1998 from $11,688,000 for the comparable 1997
period, primarily as a result of higher loan balances and interest on federal
funds sold during the
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<PAGE> 44
period. The company's net yield on interest earning assets on a fully tax
equivalent basis was 8.66% for the first nine months of 1998, which reflects a
decrease of 47 basis points (each basis point equals 1/100th of 1%) from the
comparable 1997 period. The average yield on loans decreased from 10.22% in the
1997 period to 9.98% in the 1998 period, and the average yield on securities
held by the company decreased from 7.37% in the 1997 period to 6.84% in the 1998
period. Interest income on loans, federal funds sold and securities was
$956,000, $407,000 and $28,000 greater in the 1998 period, respectively.
Interest Expense: Interest expense increased $779,000, or 20.8%, to $4,516,000
for the nine months ended September 30, 1998 from $3,737,000 for the nine months
ended September 30, 1997. This increase is primarily due to the change in the
mix in interest bearing and noninterest bearing deposit accounts in the 1998
period compared to those in the 1997 period. Average rates paid on interest
bearing deposits increased 22 basis points to 3.76% in the first nine months of
1998 from 3.54% in the first nine months of 1997. Interest bearing deposits
increased to $150.0 million from $123.2 million in the year earlier period.
Net Interest Income: Net interest income before provision for loan loss was
$8,563,000 for the nine months ended September 30, 1998, an increase of
$612,000, or 7.7%, over the first nine months of 1997. Net interest margin
decreased 53 basis points from 6.30% in the 1997 period to 5.77% in the 1998
period. The increase in net interest income is primarily due to a $956,000
increase in interest income on loans and a $407,000 increase in interest income
on federal funds sold, partially offset by a $779,000 increase in interest
expense. The company's average cost of funds for the nine months ended September
30, 1998 was 5 basis points higher than the comparable 1997 period. The
company's average yield on interest earning assets decreased 47 basis points in
the 1998 period compared to the 1997 period, from 9.13% to 8.66%.
Noninterest Income: Noninterest income increased $15,000 for the nine months
ended September 30, 1998 to $715,000 from $700,000 for the nine months ended
September 30, 1997.
Noninterest Expense: Noninterest expense increased $1,305,000, or 20.9%, for the
first nine months of 1998 to $7,547,000 compared to $6,242,000 in the first nine
months of 1997. This increase is primarily the result of (i) increases in
salaries and benefits relating primarily to annual merit increases, staffing
expenses for the new branches, and additional staffing expenses for data
processing in respect of the Year 2000 situation; (ii) increases in occupancy
and equipment relating to the new branches; and (iii) increases in other
noninterest expenses due to increases in marketing expenses and other expenses
relating to opening two new branches in 1998.
Income Tax Expense: Income tax expense decreased $388,000, or 61.8%, for the
first nine months of 1998. This decrease is primarily the result of (i) a
decrease in pretax earnings and (ii) a tax credit recorded in 1998 in connection
with options exercised during 1997 and the stock acquired was sold within twelve
months.
PROVISION FOR LOAN LOSS
The company charged $243,000 to Provision for Loan Loss in the first nine months
of 1998 and $270,000 for the same period in 1997. The ratio of loan loss reserve
to total loans
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<PAGE> 45
was 1.80% at September 30, 1998 and 1.66% at September 30, 1997. The company
sets its loan loss reserve at a level considered adequate to provide for
anticipated loan losses based on management's assessment of various factors
affecting the loan portfolio. These factors include a review of problem loans,
business conditions, loan loss experience and an overall evaluation of the
quality of the collateral, holding and disposal costs and costs of capital.
Provision for loan loss is a direct charge against income and is determined by
management based on the adequacy of the loan loss reserve.
ASSET QUALITY
The company's lending activities are guided by its Statement of Lending Policies
and Procedures. These policies are annually reviewed and approved by the Bank's
Board of Directors. The bank employs an internal auditor to monitor its internal
supervision and audits of its lending operation, and the company supplements
these internal procedures with independent examinations performed by
professional consultants and auditors. The company monitors concentrations of
loans by collateral, purpose and industry. The company has no significant
exposure to highly leveraged transactions and has no foreign credits in its loan
portfolio.
Total nonperforming assets were $52,000 and $23,000 at September 30, 1998 and
December 31, 1997, respectively. Other Real Estate Owned (OREO) was $0 at both
September 30, 1998 and December 31, 1997. At September 30, 1998, securities held
to maturity were $25.8 million, or 30.2% of the total portfolio, and securities
available for sale totaled $58.5 million, or 68.6% of the total portfolio. Other
securities (investment in FHLB stock) totaled $1.0 million, or 1.2% of the total
portfolio. Securities available for sale are those securities which may be sold
in response to changes in interest rates, changes in the company's short term
liquidity needs or changes in prepayment risk, and are stated at the lower of
cost or estimated market value. At September 30, 1998, the market value of
investments available for sale exceeded carrying value by approximately
$938,000.
Securities held to maturity are considered longer term assets which are normally
held until maturity and are carried at amortized cost. The market value of
securities designated as held to maturity exceeded carrying value by
approximately $931,000 at September 30, 1998. U.S. government securities make up
$13.8 million, or 16.2% of the investment portfolio, mortgage backed securities
make up $45.7 million, or 53.6% of the investment portfolio, obligations of
states and political subdivisions (municipal securities) comprise $24.8 million,
or 29.1% of the investment portfolio, and other investments make up $1.0
million, or 1.1% of the investment portfolio at September 30, 1998.
As noted in the company's Form 10-KSB for the year ended December 31, 1997,
management has generally sought to control the exposure of the company's
securities portfolio to rising interest rates by maintaining a position within a
narrow range around an "earnings neutral position" (i.e. the mix of assets and
liabilities that generate a net interest margin that is least affected by
interest rate changes). The company uses a measurement tool known as dollar
duration to help maintain an earnings neutral position. As of September 30,
1998, the dollar duration of the investment portfolio was 3.20 compared to 3.20
at December 31, 1997. This lack of change in dollar duration resulted from the
partial replacement of securities which were sold, matured or called during the
first nine months of 1998 with securities with the same or lower yields but with
longer maturities. The company may also engage in hedging transactions to
control interest rate risk. The effect of
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<PAGE> 46
these efforts in any given period may be to negatively impact reported net
noninterest income and the interest earned on the securities.
CAPITAL RESOURCES
The company's capital adequacy is a direct measurement of the overall financial
strength of the company and its ability to absorb adverse market conditions. In
addition, the capital position of the company provides a mechanism to promote
public confidence in the company and the bank.
The company's total stockholders' equity increased $1.7 million to $19.9 million
at September 30, 1998 from $18.2 million at December 31, 1997. This increase in
stockholders' equity was due to the retention of earnings in the current year
and the exercise of options to purchase 6,500 shares of common stock, plus the
net effect of FAS 115 which requires financial institutions to mark their
available for sale securities portfolio to market.
The Federal Reserve Board and FDIC guidelines require a minimum of a 4% Tier 1
core capital to risk-weighted assets ratio and an 8% total qualifying capital to
risk-weighted assets ratio. Due to the company's high level of capital and the
level of risk in its current asset mix, the company's risk based capital ratios
exceed the regulatory minimum ratios. The company's Tier 1 core capital to risk
weighted assets was 11.72% at September 30, 1998, and its total qualifying
capital to risk weighted assets was 12.97%. As of September 30, 1998, the bank
also exceeded the minimum regulatory risk based capital ratios.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Overview. Net income increased $563,000 for 1997 to $2,136,000 from $1,573,000,
primarily as a result of a $1,528,000 increase in net interest income. The
positive change in net interest income was partially offset by a decrease in
gain on sale of securities of $61,000 and an $837,000 increase in noninterest
expense. Return on average assets and return on average equity were 1.08% and
12.68%, respectively, for 1997, compared to .91% and 10.44%, respectively, for
1996.
Interest Income. Interest income increased $2,434,000 to $15,960,000 for 1997
from $13,526,000 for 1996. In 1997, interest income from loans increased
$2,044,000, interest income on securities increased $341,000 and interest income
on federal funds sold increased $49,000. 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 1997, compared to 1996.
Interest Expense. Interest expense increased $906,000 to $5,118,000 for 1997
from $4,212,000 in 1996. Interest expense on interest-bearing deposits increased
$385,000, interest expense on federal funds purchased increased $19,000, and
interest expense on the notes payable increased $502,000 in 1997. The increase
in interest expense on interest-bearing deposits was primarily due to greater
deposit volume in 1997 as the rates paid on interest-bearing deposits was
relatively unchanged between 1996 and 1997. The increase in interest expense on
the notes payable was due to the $10.0 million increase in notes payable to the
FHLB, offset by the $1.5 million reduction of the NationsBank note.
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<PAGE> 47
Net Interest Income. Net interest income increased $1,528,000 to $10,842,000 for
1997 from $9,314,000 for 1996. During 1997, average loans outstanding increased
$21,457,000, average securities owned increased $1,666,000 and the net interest
spread decreased from 5.29% for 1996 to 5.14% for 1997. The increase in net
interest income resulted primarily from the bank's ability to increase the
percentage of its assets employed in its loan portfolio.
Noninterest Income. Noninterest income decreased $79,000 to $958,000 for 1997
from $1,037,000 for 1996. This decrease is primarily due to a $61,000 decrease
in gains on sale of investment securities.
Noninterest Expense. Noninterest expense increased $837,000 to $8,453,000 for
1997 from $7,616,000 for 1996. This increase is a net result of the following
factors: (i) salary/benefit expense increased $483,000, primarily due to
increased staffing (at the bank and the three branches) and yearly salary
increases; and (ii) other operating expenses increased $345,000, primarily as a
result of an $56,000 increase in advertising and marketing expense, a $157,000
increase in legal fees, primarily due to expenses on a problem credit, and the
absence of a $100,000 accrual reversal of a 1995 claim made against the company,
which was settled favorably in February, 1996.
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, 1997,
1996 and 1995 were $360,000, $285,000, and $120,000, respectively. See
"Business -- Analysis of Allowance for Loan Losses."
INCOME TAXES
The company's income tax expense for the years ended December 31, 1997, 1996 and
1995 was $851,000, $339,000 (which is net of the $201,000 tax effect of the
extraordinary item), and $297,000, 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, 1997, deposits
increased to $190,076,000 from $156,409,000 and $140,175,000 at December 31,
1996 and 1995, respectively. Deposits increased to $217,063,000 at September 30,
1998. None of the deposits at September 30, 1998 or
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<PAGE> 48
December 31, 1997, 1996 or 1995 were brokered deposits. Management believes that
the increases in deposits in 1996, 1997 and 1998 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 branches and the resulting increase in new customers at
each branch. See "Business -- Operating Strategy" and "-- Growth Strategy." The
company expects deposits to increase by up to $40,283,000 upon consummation of
the Lakewood Merger. At December 31, 1997, net loans were $120,659,000 compared
to $98,978,000 and $79,864,000 at December 31, 1996 and 1995, respectively. Net
loans increased to $125,625,000 at September 30, 1998, and are expected to
increase by approximately $23,625,000 upon consummation of the Lakewood
Acquisition. 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 NationsBank, formerly Boatmen's First National Bank of Kansas
City ("NationsBank"), 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 company's total assets increased 12.6% to $249.4 million at September 30,
1998 from $221.5 million at December 31, 1997. During the nine months ended
September 30, 1998 deposits increased $27.0 million to $217.1 million at
September 30, 1998 from $190.1 million at December 31, 1997. None of the
company's deposits at September 30, 1998 were brokered deposits.
The Loan Agreement with NationsBank provides for interest on outstanding amounts
to be payable at NationsBank's corporate base rate, which was 8.50% at September
30, 1998. The Loan Agreement provides for a one-year term loan which is
renewable by the company unless the company's credit standing is unsatisfactory
based on the criteria set forth below. The Loan Agreement contains a twelve-year
amortization schedule, with interest only for the first two years, assuming
renewal of the loan in accordance with its terms.
Annual renewal of the loan is based on the compliance by the bank with the
following criteria:
1. Capital Ratio of not less than 6.25%;
2. Return on Average Assets of not below 1.00%;
3. Loan Loss Reserve/Total Loans Ratio of not below 1.00%;
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<PAGE> 49
4. Non-Performing Loans/Total Loans Ratio of not greater than 2.00%;
5. Debt Service Coverage Ratio of not less than 2:1; and
6. Absence of regulatory dividend restrictions.
In the event the bank does not meet any of these criteria calculated as of
December 31 of each year and based on its financial statements, the company will
have 90 days from the delivery of the financial statements to cure the
situation.
The loan is secured by the pledge of all of the shares of capital stock of the
bank, and contains standard representations, warranties and covenants.
At December 31, 1997, the company met all of the above criteria, and the loan
was renewed for another one year term.
At September 30, 1998, the company had $1.0 million outstanding under this loan
agreement after making a $200,000 principal payment during the third quarter of
1998. The company intends to continue to pay down this loan as liquidity allows.
The company has also entered into a revolving line of credit with NationsBank in
an amount not to exceed $3,000,000. Any monies advanced under this line would be
used solely for capital needs of the company or to purchase the stock of banks
or bank holding companies. This line of credit is available for one year only,
with renewals to be negotiated each year. If any principal is advanced on this
line, the terms of the repayment would also be negotiated depending upon the use
of proceeds. Interest on amounts outstanding under this revolving line of
credit, if any, is due quarterly. At March 31, 1998, this line of credit was
also renewed for an additional one year term.
In early 1998, the bank borrowed $10 million from the FHLB in the form of two $5
million loans. The purpose of securing these loans was primarily to provide
liquidity and allow the bank to limit its capital exposure relative to
securities held in the Available for Sale portfolio. The first $5 million
enabled management to reduce its current daily purchase of federal funds from
approximately $8 million to $3 million. With the remaining $5 million, the bank
purchased approximately $5 million in short-term U.S. Government securities,
which were placed in the Available for Sale portfolio. This allowed the bank to
transfer approximately $5 million in long-term GNMA mortgage pool securities
with relatively high coupon yields to Held to Maturity, which limits the bank's
capital exposure should interest rates increase. The loans are structured as
follows: $5 million at 6.34%, maturing January 14, 1999; and $5 million at
6.50%, maturing January 14, 2000. These loans cannot be prepaid without a
prepayment penalty. Interest on these notes is due monthly. The company expects
that maturities of securities held in the Available for Sale portfolio will be
adequate to fund repayment of these loans.
Management anticipates that the company will continue to rely primarily on
customer deposits, sales and maturities of investment securities, loan sales and
loan repayments, as well as retained earnings to provide liquidity. These funds
are used to make loans, to acquire investment securities and other assets and to
fund continuing operations. The company believes that its customer deposits will
continue to provide a strong source of liquidity because of the high percentage
of core deposits, many of which are held as compensating balances under
long-standing loan relationships. As a secondary source of
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<PAGE> 50
funds, management uses federal funds and its membership in the FHLB. See
"Business -- Sources of Funds."
CAPITAL RESOURCES
The company's total stockholders' equity increased to $19,859,000 at September
30, 1998 from $18,222,000 at December 31, 1997. This increase is a result of an
increase in retained earnings of $1,248,000 relating to 1998 net income, $26,000
relating to the exercise of stock options, and an increase in unrealized gains
on investment securities available for sale of $363,000, due to the adoption of
FAS 115 on January 1, 1995, as discussed below at "-- New Accounting
Principles." At September 30, 1998, stockholders' equity was 8.0% of total
assets, compared to 8.2% of total assets at December 31, 1997. 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. For a further discussion of the guidelines applicable to
the bank and the company, see the information under "Business" in the company's
Form 10-KSB for the year ended December 31, 1997, incorporated in this
prospectus by reference. The company and the bank currently exceed the
applicable regulatory capital requirements. The company intends to contribute
$7.0 million 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 September 30, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Company
Tier 1 Capital..................................... $ 16,692
Total Capital...................................... 18,472
Risk-Weighted Assets............................... 142,421
Tier 1 Capital to Risk-Weighted Assets............. 11.72%
Total Capital to Risk-Weighted Assets.............. 12.97%
Leverage Ratio..................................... 6.74%
Bank
Tier 1 Capital..................................... $ 14,542
Total Capital...................................... 16,315
Risk-Weighted Assets............................... 141,823
Tier 1 Capital to Risk-Weighted Assets............. 10.25%
Total Capital to Risk-Weighted Assets.............. 11.50%
Leverage Ratio..................................... 5.94%
</TABLE>
As of September 30, 1998 the bank has incurred capital expenditures of
approximately $350,000 in connection with updating its internal operating
systems and expenditures of approximately $425,000 for the Littleton branch.
Bank management is anticipating 1998 expenditures of approximately $400,000 for
the new branch in Golden. Also, the bank
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<PAGE> 51
expects the total cost of the Lakewood State Bank acquisition, including
transaction expenses, to be approximately $1 million.
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 NationsBank Loan
Agreement. For a discussion of the government regulations applicable to the bank
and the company, see the information under "Business" in the company's Form
10-KSB for the year ended December 31, 1997, incorporated by reference in this
prospectus.
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.
IMPACT OF YEAR 2000
Some of the company's computer programs are written using two digits rather than
four to define the applicable year. As a result, those computer programs have
time-sensitive software that recognizes a date using "00" as the year 1900
rather than 2000. This could cause a system failure or miscalculation causing
disruption of operation including, among other things, a temporary inability to
process transactions, pay invoices or engage in similar, normal business
activities.
The company has adopted a Year 2000 Project Management Plan in recognition of
the potential problems that all computer systems may have when the date January
1, 2000 arrives. As part of the implementation of this plan, the company is
currently conducting an assessment to determine whether it will have to modify
or replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project is not estimated to have a material impact on the company's
financial position or the results of its operations and consists entirely of
installation of software upgrades provided by third party vendors or
modification of existing programs. The company estimates that its total Year
2000 project cost will be approximately $500,000. These costs will be expensed
as incurred and approximately $300,000 has been incurred as of September 30,
1998.
The company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. The company's total Year 2000 project cost and estimates for completion
include the estimated costs and time associated
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<PAGE> 52
with the impact of a third party's Year 2000 issue and are based on presently
available information. However, there can be no guarantee that the systems of
other companies on which the company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the company's systems, would not have a material adverse
effect on the company.
The company will utilize both internal and external resources to reprogram, or
replace and test the software for Year 2000 modifications. The Year 2000 Project
Management Plan is estimated to be completed by December 31, 1998, which is
prior to any anticipated impact on its operating systems. The company believes
that with modifications to existing software, the Year 2000 issue will not pose
any significant operations problems for its computer system nor is the Year 2000
issue expected to have any significant impact on the operations of the company.
The costs of the project and the date on which the company believes it will
complete the Year 2000 modifications are based on management's best estimates
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, the ability to locate and
correct all relevant computer codes and similar uncertainties. Therefore, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board recently adopted Statement No. 131
(Statement No. 131) "Disclosures about Segments of an Enterprise and Related
Information." Statement No. 131, which became effective for periods beginning
after December 15, 1997, requires that business enterprises report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Management believes that Statement No. 131 will have no
significant impact on the company's financial statements.
The Financial Accounting Standards Board recently issued Statement No. 133
(Statement No. 133) "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 133, which becomes effective for periods beginning
after June 15, 1999, and requires that business enterprises recognize all
derivatives either as assets or liabilities in the financial statements and
record those instruments at fair value. Changes in fair value of these
derivatives is recognized in the statement of income or comprehensive income in
the period of change. Management believes that Statement No. 133 will have no
significant impact on the company's financial statements.
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<PAGE> 53
BUSINESS
OVERVIEW
Union Bankshares, Ltd. 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, 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 and
individuals. 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 .13% and .01%, respectively, at December 31,
1997 and .34% and .02%, respectively at September 30, 1998.
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 primarily
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 and individuals. The company views the acquisition of Lakewood State
Bank as an opportunistic enhancement of its branching strategy. The company has
opened five branches, the first in the Lakeside area in July 1994, the second in
the University Hills area in March 1995, the third in the Lakewood area in
December 1995, the fourth in the Littleton area in May 1998 and the fifth in the
Golden area in October 1998. Each of these is a full service branch, having the
appearance of a stand alone bank. The bank intends to operate Lakewood as a
stand alone branch following its acquisition. 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. For a
discussion of the government regulations and restrictions applicable to the bank
and the company, see the information under "Business" in the company's Form
10-KSB for the year ended December 31, 1997, incorporated by reference in this
prospectus.
See "Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995" for a discussion of matters regarding forward-looking statements in this
Registration Statement.
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<PAGE> 54
OPERATING STRATEGY
The company's strategy as an independent, one-bank holding company has been
carried out through the operations of the bank and, since 1994, its branches.
The bank, since its acquisition by the company in 1985, has emphasized local
relationship banking for the small and medium-sized business and individuals.
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 its branches in areas that
produce a similar customer base to that of the bank, has encouraged community
participation at each branch, 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, 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 1997, the bank held its third Customer Business Fair, at
which approximately 62 Union Bank & Trust customers elected to display their
goods and services. Over 400 other Union Bank & Trust customers attended the
Fair to view the exhibits. The bank held a Speakers' Conference in October 1998
in place of the Customer Business Fair and attracted more attendees to this new
event.
Management believes that its policy of employee involvement, which it refers to
as its "staff to management" philosophy, has resulted in the relatively low
turnover experienced
53
<PAGE> 55
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management."
GROWTH STRATEGY
On August 27, 1998 the company announced that it had reached an agreement to
acquire Lakewood State Bank. The company believes that Lakewood's operating
philosophy is consistent with the bank's, and that the combined bank, with over
$300 million in pro forma total assets, will be able to operate effectively in
the Denver marketplace. The acquisition is structured as a cash-for-stock merger
in which the Lakewood shareholders will receive a total of $8.35 million in
cash, Lakewood will be merged into the bank and its separate corporate existence
will cease. Thereafter, Lakewood's operations will continue on in the same
fashion as the company's other branches.
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 five existing full-service
branches are structured to provide complete 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. 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.
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 $22.7 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. The University Hills and Lakewood branches have also been
well-received by their respective communities and have
54
<PAGE> 56
attracted over $18.4 million and $15.0 million in deposits to date,
respectively. The recently opened Littleton branch has attracted over $6.3 of
deposits, and the Golden branch was opened in October 1998. The bank also plans
to operate Lakewood as a stand-alone branch. Concentrating on branching has
generally allowed the bank to continue to expand its customer base at a lower
cost compared to acquisitions and to conserve capital for attractive acquisition
opportunities.
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 tourism and international
trade, 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 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
55
<PAGE> 57
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
three 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 date indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
------------------
AMOUNT PERCENT
-------- -------
<S> <C> <C>
Commercial loans............................................ $ 92,771 73.8%
Real estate -- construction loans........................... 12,684 10.1
Real estate -- mortgage loans............................... 3,623 2.9
Consumer loans.............................................. 18,851 15.0
-------- ------
Total............................................. 127,929 101.8
Less allowance for loan losses.............................. (2,304) (1.8)
-------- ------
Loan receivable, net........................................ $125,625 100.0%
======== ======
</TABLE>
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 $92.8 million at September 30, 1998 compared to $87.9
million at December 31, 1997 and $70.6 million at December 31, 1996. 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
56
<PAGE> 58
monitors construction draws and inspects each property frequently 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
state-certified appraisers. The bank's real estate construction loans
outstanding were $12.7 million at September 30, 1998 compared to $9.6 million at
December 31, 1997, and $5.8 million at December 31, 1996. 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 fifteen 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.
The bank can originate 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 75% to 80% 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 in 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 nine months ended
September 30, 1998 and years ended December 31, 1997, 1996, and 1995, the bank
earned interest income on such loans of $83,000, $59,000, $6,000, and $5,000,
respectively. During the nine months ended September 30, 1998 and years ended
December 31, 1997, 1996, and 1995, the bank purchased loans in the amounts of
$26,476,000, $5,762,000, $4,106,000, and $2,450,000 and sold loans in the
amounts of $25,225,000, $4,509,000, $4,106,000 and $2,450,000. All loans sold
back to the mortgage company are without recourse to the bank.
57
<PAGE> 59
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, $20.9 million,
$18.9 million and $13.8 million at September 30, 1998, December 31, 1997, 1996
and 1995, respectively. The increases resulted from the 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 10 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, its Executive Vice President of Lending, one branch president, and the
outside directors of the bank. A quorum of the committee is a minimum of four
directors.
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 ($2.3 million at December 31, 1997). 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
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<PAGE> 60
limits. Total loan participations sold as of September 30, 1998, December 31,
1997 and 1996 were $3,079,000, $2,927,000 and $3,073,000, 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." 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 date
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Past due 90 days or more.................................... $ 14
Nonaccrual loans............................................ 38
Restructured loans.......................................... --
--------
Total nonperforming loans................................... 52
Other real estate owned..................................... --
--------
Total nonperforming assets........................ $ 52
========
Ratio of total nonperforming assets to total assets......... 0.02%
Ratio of total nonperforming assets to total loans.......... 0.04%
Ratio of allowance for loan losses to total nonperforming
loans..................................................... 4,430.77%
</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 September 30, 1998 the
company had $52,000 of loans accounted for on a non-accrual basis compared to
$23,000, $14,000 and $110,000 at December 31, 1997, 1996 and 1995, respectively.
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
59
<PAGE> 61
on restructured 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 September 30, 1998, December 31, 1997, 1996 and 1995.
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 $2,794,000, $73,000 and $124,000 at September 30, 1998,
December 31, 1997 and 1996, respectively. Approximately $2,000,000 of the
$2,794,000 of impaired loans was attributable to two loans. Management believes
that both of these loans will be fully repaid although not in technical
compliance with the contractual terms under which such loans were originally
made. An allowance for loan loss of $424,000, $19,000 and $24,000 relates to
impaired loans at September 30, 1998, December 31, 1997 and 1996, respectively.
Interest of $196,000, $8,000 and $12,000 was recognized on average impaired
loans of $1,356,000, $98,000 and $166,000 for the nine month period ending
September 30, 1998, and for 1997 and 1996, respectively.
Other Real Estate Owned. OREO 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
September 30, 1998, December 31, 1997, 1996 and 1995, the company had no OREO.
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.
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<PAGE> 62
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,
SEPTEMBER 30, ------------------------------
1998 1997 1996 1995
------------- -------- ------- -------
<S> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of
period......................... $ 2,125 $ 1,754 $ 1,448 $ 1,071
Charge-offs:
Commercial loans............... 60 13 17 93
Real estate -- construction
loans....................... 13 -- -- --
Real estate -- mortgage
loans....................... -- -- -- --
Consumer loans................. 2 11 12 13
-------- -------- ------- -------
Total charge-offs................ 75 24 29 106
-------- -------- ------- -------
Recoveries:
Commercial loans............... 5 35 50 360
Real estate -- construction
loans....................... -- -- -- --
Real estate -- mortgage
loans....................... -- -- -- --
Consumer loans................. 6 -- -- 3
-------- -------- ------- -------
Total recoveries................. 11 35 50 363
-------- -------- ------- -------
Net charge-offs (recoveries)..... 64 (11) (21) (257)
-------- -------- ------- -------
Provision for loan loss.......... 243 360 285 120
-------- -------- ------- -------
Balance of allowance for loan
losses at beginning of
period......................... $ 2,304 $ 2,125 $ 1,754 $ 1,448
======== ======== ======= =======
Ratio of net charge-offs
(recoveries) to average
loans.......................... 0.05% (0.01)% (0.23)% 0.35%
Average loans outstanding
during the period........... $125,667 $113,043 $91,586 $74,260
</TABLE>
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 date indicated and summarizes the percentage of gross loans in each
category to total gross loans.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------
LOANS IN
CATEGORY AS A
PERCENTAGE
AMOUNT OF OF TOTAL
ALLOWANCE LOANS
--------- -------------
<S> <C> <C>
Commercial loans....................................... $1,639 71.1%
Real estate -- construction loans...................... 224 9.7
Real estate -- mortgage loans.......................... 108 4.7
Consumer loans......................................... 333 14.5
------ -----
Total........................................ $2,304 100.0%
====== =====
</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,
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<PAGE> 63
(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, its Senior Vice President of Information Systems, and the
Branch Presidents, 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 1996, the bank modestly 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. In 1997, the bank decreased the dollar
duration of its portfolio as interest rates remained relatively steady, and the
investments which matured were replaced with new investments with similar yield,
but shorter maturities. The shorter maturities of these new investments also
provide more potential liquidity for the bank to use in funding its growing loan
portfolio. To date in 1998, the dollar duration is approximately the same as at
year end 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset/Liability Management."
The table below provides the amortized cost and fair value of the company's
investment securities at each of the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -------------------
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...................... $19,848 $20,315 $21,989 $22,371
Obligations of states and political
subdivisions...................... 5,938 6,402 5,940 6,310
------- ------- ------- -------
25,786 26,717 27,929 28,681
------- ------- ------- -------
Available for Sale:
U.S. government agencies and
corporations...................... 36,412 36,573 12,804 12,781
U.S. Treasury securities............. 3,002 3,049 6,027 6,070
Obligations of states and political
subdivisions...................... 18,163 18,893 16,981 17,330
CMO/REMIC............................ -- -- -- --
Commercial paper..................... -- -- 999 999
------- ------- ------- -------
57,577 58,515 36,811 37,180
------- ------- ------- -------
Total........................ $83,363 $85,232 $64,740 $65,861
======= ======= ======= =======
</TABLE>
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<PAGE> 64
The following tables provide the carrying values, maturities and weighted
average yields of the company's securities portfolio at the date indicated.
HELD-TO-MATURITY SECURITIES
UNION BANK & TRUST
SECURITIES HELD TO MATURITY
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DUE AFTER FIVE
DUE AFTER ONE YEARS DUE AFTER
DUE IN ONE YEAR THROUGH THROUGH TEN
YEAR OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
------------ ------------- -------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities:
Balance................... $ -- $ -- $ -- $ -- $ --
Weighted average yield.... -- % -- % -- % -- % -- %
U.S. Government Agency
Securities:
Balance................... $ -- $ -- $ 366 $ -- $ 366
Weighted average yield.... -- % -- % 7.35% -- % 7.35%
Mortgaged Back Pools(2):
Balance................... $ 835 $7,119 $1,923 $ 9,605 $19,482
Weighted average yield.... 8.46% 7.66% 7.96% 7.78% 7.78%
Municipal Securities --
Nontaxable(3):
Balance................... $ -- $ 349 $1,804 $ 3,785 $ 5,938
Weighted average yield.... -- % 7.15% 5.94% 5.79% 5.92%
Municipal
Securities -- Taxable:
Balance................... $ -- $ -- $ -- $ -- $ --
Weighted average yield.... -- % -- % -- % -- % -- %
Total:
Balance................... $ 835 $7,468 $4,093 $13,390 $25,786
Weighted average yield.... 8.46% 7.64% 7.01% 7.22% 7.35%
</TABLE>
- -------------------------
(1) Based on contractual maturities and, therefore, do not reflect principal
amortization.
(2) 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.
(3) Yields have not been calculated on a full tax-equivalent basis.
63
<PAGE> 65
AVAILABLE-FOR-SALE SECURITIES
UNION BANK & TRUST
SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DUE AFTER FIVE
DUE AFTER ONE YEARS DUE AFTER
DUE IN ONE YEAR THROUGH THROUGH TEN
YEAR OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
------------ ------------- -------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities:
Balance................... $1,001 $2,048 $ -- $ -- $ 3,049
Weighted average yield.... 5.50% 6.25% -- % -- % 6.10%
U.S. Government Agency
Securities:
Balance................... $2,685 $1,031 $ 6,692 $ -- $10,408
Weighted average yield.... 5.56% 7.01% 6.88% -- % 6.59%
Mortgaged Back Pools(2):
Balance................... $ -- $ -- $ 3,233 $22,949 $26,182
Weighted average yield.... -- % -- % 7.13% 7.64% 7.61%
Municipal Securities --
Nontaxable(3):
Balance................... $ 717 $4,598 $ 6,627 $ 4,607 $16,549
Weighted average yield.... 5.53% 5.14% 6.01% 5.83% 5.93%
Municipal
Securities -- Taxable:
Balance................... $ 46 $2,095 $ -- $ 186 $ 2,327
Weighted average yield.... 7.00% 7.05% -- % 7.87% 7.27%
Federal Home Loan Bank
Stock --
Balance................... $ 970 $ -- $ -- $ -- $ 970
Weighted average yield.... 6.50% -- % -- % -- % 6.50%
Total:
Balance................... $5,419 $9,772 $16,552 $27,742 $59,485
Weighted average yield.... 5.73% 5.98% 6.58% 7.34% 6.86%
</TABLE>
- -------------------------
(1) Based on contractual maturities and, therefore, do not reflect principal
amortization.
(2) 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.
(3) Yields have not been calculated on a full tax-equivalent basis.
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 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 decreased
the size of its tax-exempt portfolio in 1996, maintained the same level of its
investment in 1997, and modestly increased the level of investment in 1998 in
order to accomplish these goals.
64
<PAGE> 66
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.
SOURCES 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, 1996 and 1997
the bank increased its holdings of FHLB dividend-bearing stock to $409,000,
$494,000, and $916,000, respectively. The FHLB provides the bank with access to
a collateralized credit line of approximately $19.0 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 GMNA 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, savings accounts, money market accounts,
checking and negotiable order of withdrawal accounts 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, 1997 or at September 30, 1998.
65
<PAGE> 67
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 period indicated.
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30, 1998
-----------------------
WEIGHTED
AVERAGE
AVERAGE INTEREST
BALANCE RATE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest-bearing demand deposits........................... $ 80,633 2.90%
Certificates of deposit.................................... 47,810 5.48
Savings accounts........................................... 11,535 2.57
Noninterest-bearing demand deposits........................ 56,510 N/A
-------- ---
Total............................................ $196,488 3.76%
======== ===
</TABLE>
The following table shows the amount and maturity of certificates of deposit
that had balances of more than $100,000 at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1998 1997 1996
------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Certificates of Deposit over $100,000 with
remaining maturity:
Less than three months....................... $17,264 $10,289 $ 4,615
Three to six months.......................... 5,295 3,156 2,074
Over six months to one year.................. 4,216 2,513 3,065
Over one year................................ 6,730 4,011 2,177
------- ------- -------
Total................................ $33,505 $19,969 $11,931
======= ======= =======
</TABLE>
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
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
66
<PAGE> 68
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 (only 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 September 30, 1998, the company had approximately 111 full-time equivalent
employees. It is expected that the acquisition of Lakewood State Bank will add
approximately 24 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 as a group is good.
UNION BANKSHARES CAPITAL TRUST I
Union Bankshares Capital Trust I is a statutory business trust created under
Delaware law on October 14, 1998. The trust's business and affairs will be
conducted by the Property Trustee, the Delaware Trustee and three individual
Administrative Trustees who are officers of the company. The trust was created
for the exclusive purpose of offering the Preferred Securities and engaging in
the other transactions discussed in this prospectus. All of the common
securities of the trust are owned by the company. See "Description of the
Preferred Securities -- Subordination of Common Securities of the Trust Held by
the Company." The trust will have a term of 30 years, but may dissolve earlier
as provided in the trust agreement.
No separate financial statements of Union Bankshares Capital Trust I have been
included herein. The company and the trust do not consider that such financial
statements would be material to holders of the Preferred Securities because the
trust is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Junior Subordinated
Debentures of the company and issuing the Preferred Securities. See "Prospectus
Summary -- Union Bankshares Capital Trust I," "Description of the Preferred
Securities," "Description of the Junior Subordinated Debentures" and
"Description of Guarantee."
67
<PAGE> 69
MANAGEMENT
INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
Information regarding the executive officers and the members of the Board of
Directors of the company is set forth below:
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
DIRECTOR EXPIRES
NAME AND AGE OF DIRECTOR SINCE IN POSITION
------------------------ -------- ---------- --------
<S> <C> <C> <C>
Charles R. Harrison, 51........ 1985 2001 Chairman of the Board of
Directors and Chief Executive
Officer
Herman J. Zueck, 57............ 1985 2000 President and Director of the
company; Chairman of the Board
of Directors and Chief
Executive Officer of Union Bank
& Trust
Bruce E. Hall, 46.............. 1989 1999 Vice President, Treasurer,
Secretary and Director
Jerrold B. Evans, 54........... 1994 2000 President of Union Bank & Trust
and Director
Wayne T. Biddle, 73............ 1993 2000 Director
Ralph D. Johnson, 70........... 1993 1999 Director
Harold R. Logan, Jr., 53....... 1998 2001 Director
Richard C. Saunders, 57........ 1993 2001 Director
</TABLE>
- -------------------------
Charles R. Harrison has been Chairman of the Board of Directors and Chief
Executive Officer of the company since its founding in 1985, and was President
of the company from its founding until December 1994. Mr. Harrison served as
Chairman of the Board of Directors and Chief Executive Officer of American
Securities Transfer Incorporated, a Denver-based securities transfer agent from
1979 until its sale in 1998. Mr. Harrison was Senior Vice President, Cashier and
a Director of Arvada State Bank, Arvada, Colorado, from August 1976 until
February 1979. At the same time, Mr. Harrison served as the President of the
Colorado chapter of the American Institute of Banking. From 1969 until 1976, Mr.
Harrison served in roles of increasing responsibility, including Vice President
and Cashier, at Jefferson Bank & Trust in Lakewood, Colorado.
Herman J. Zueck has been a Vice President, Executive Vice President or the
President of the company and the Chairman of the Board of Directors and Chief
Executive Officer of the bank since 1985. From 1982 to 1985, Mr. Zueck was
Chairman of the Board of Directors, Chief Executive Officer and President of
Affiliated Littleton National Bank in Littleton, Colorado, a subsidiary of
Affiliated Bankshares of Colorado, Inc. ("Affiliated"). Prior to that time, Mr.
Zueck served in officer positions of increasing seniority at two other
Affiliated bank subsidiaries, Affiliated Denver National Bank and Affiliated
Lakeside National Bank. Mr. Zueck has over 33 years of banking industry
experience.
68
<PAGE> 70
Bruce E. Hall has been Vice President, Treasurer, Secretary and a Director of
the company since 1989. Mr. Hall was Vice President, Chief Financial Officer,
Secretary and Treasurer of American Securities Transfer from 1981 until its sale
in 1998, and conducts an accounting tax consulting practice in Denver, Colorado.
Mr. Hall is a certified public accountant.
Jerrold B. Evans has been President of the bank and senior loan officer since
January 1989, and was its Executive Vice President and senior loan officer from
June 1986 until December 1988. He was elected to the Board of Directors of the
company at the 1994 Annual Meeting of Stockholders. Mr. Evans has served on the
bank's Board of Directors since 1987 and its Loan Committee since 1986. From
1980 to 1986, Mr. Evans was Senior Vice President and senior loan officer for
the First National Bank of Englewood, Englewood, Colorado, a subsidiary of
Affiliated. From 1972 until 1980, Mr. Evans had served First National Bank of
Englewood in a variety of officer positions of increasing responsibility. Mr.
Evans has over 22 years of banking industry experience, and is a past President
of the Rocky Mountain Chapter of Robert Morris Associates, a banking industry
association.
Wayne T. Biddle has been a Director of the company since 1993 and a director of
the bank since 1978. He also was a director and Vice Chairman of Caza Drilling
Co., a Denver-based contract drilling and exploration company from 1987 to 1994.
In addition, Mr. Biddle served as a director of Associated Natural Gas, Inc., a
Denver-based company, from 1983 until 1994. Currently, Mr. Biddle owns 51% of
Taurus, Ltd., a Denver-based investment company.
Ralph D. Johnson has been a Director of the company since 1993 and a director of
the bank since 1970. Mr. Johnson was chief executive officer of Johnson Storage
& Moving, a Denver-based moving company, from 1960 until his retirement in
September 1995. Mr. Johnson is also a member of the Colorado Bar Association.
Harold R. Logan, Jr. has been a Director of the company since 1998, was a member
of the Advisory Board of the company since 1996 and is occupied as Executive
Vice President, Chief Financial Officer and Director of TransMontaigne Oil
Company, a publicly-held holding company engaged in the marketing and
distribution of petroleum products. From 1987 to 1995, Mr. Logan was Senior Vice
President of Finance and a Director of Associated Natural Gas Corporation. Mr.
Logan is also a member of numerous other trade and educational associations.
Richard C. Saunders has been a Director of the company since 1993 and a director
of the bank since 1982. Mr. Saunders has been a majority partner of Saunders
Construction, a Denver-based commercial building contractor, since 1972. Mr.
Saunders has over 37 years of building and construction industry experience.
69
<PAGE> 71
INFORMATION CONCERNING LAKEWOOD STATE BANK
LENDING ACTIVITIES
Lakewood State Bank provides a range of commercial and retail lending services
including, but not limited to, construction, home improvement, new and used car,
real estate, letters of credit, lines of credit, and small business loans.
Currently, the primary focus of Lakewood is on serving small to medium-sized
businesses and individuals. Credit quality is emphasized and controlled through
conservative underwriting standards. Lakewood monitors the concentration of its
loan portfolio in an effort to avoid any concentration in a particular industry;
however, real estate lending comprises 51.7% and 52.4% of loans as of September
30, 1998 and December 30, 1997, respectively.
Lakewood seeks full Banking relationships with its commercial customers. The
emphasis of lending is to serve the needs of the community in which Lakewood is
located. The primary customers are located within a two mile radius of Lakewood.
Lakewood officers average 20 years of lending experience and are active in the
community.
LOAN PORTFOLIO COMPOSITION
The following table sets for the compositions of Lakewood's loan portfolio by
the type of loan at the date indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
SEPTEMBER 30, 1998 1997 1996
------------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans........... $ 4,496 19.0% $ 5,194 21.4% $ 5,462 21.2%
Real estate -- Construction
loans.................... 3,790 16.1% 2,376 9.8% 2,321 9.0%
Real estate -- mortgage
loans.................... 8,622 36.5% 10,511 43.4% 12,615 49.0%
Consumer loans............. 7,086 30.0% 6,532 27.0% 5,778 22.4%
------- -------- ------- ------- ------- -------
Total loans...... 23,994 101.6% 24,613 101.6% 26,176 101.6%
Less: unearned loan fees... (31) (0.1)% (27) (0.1)% (38) (0.2)%
------- -------- ------- ------- ------- -------
Total loans...... 23,963 101.5% 24,586 101.5% 26,138 101.4%
Less: allowance for
possible loan losses..... (337) (1.5)% (364) (1.5)% (372) (1.4)%
------- -------- ------- ------- ------- -------
Net loans........ $23,626 100.0% $24,222 100.0% $25,766 100.0%
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
</TABLE>
COMMERCIAL LOANS
Commercial Loans. Commercial lending is Lakewood's primary focus and the
strength of its lending activity. Lakewood's areas of emphasis include, but are
not limited to, loans to building contractors, wholesalers, manufacturers, and
business services companies. Lakewood 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 Lakewood's commercial
business
70
<PAGE> 72
loans have floating interest rates. Commercial loans outstanding were $4.5 at
September 30, 1998, and $5.2 million at December 31, 1997, compared to $5.5
million at December 31, 1996. Many of Lakewood'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 Lakewood has taken security and
receives personal guarantees to help assure an alternative source of repayment.
REAL ESTATE -- CONSTRUCTION
Real Estate Construction Loans. Lakewood 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.
Lakewood generally provides commercial construction financing when the borrower
has received a binding commitment for permanent financing from either Lakewood
or another lender, except for speculative construction loans. Lakewood 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. Lakewood
carefully monitors construction draws and inspects each property frequently 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. Lakewood further attempts to limit its risk
through adherence to conservative underwriting procedures and by using only
state-certified appraisers. Lakewood's real estate construction loans
outstanding were $3.8 at September 30, 1998, and $2.4 million at December 31,
1997, compared to $2.3 million at December 31, 1996. This increase results from
an increased marketing effort by Lakewood to solicit loans from established
residential builders in the metropolitan Denver area.
REAL ESTATE -- OTHER
Real Estate Mortgage Loans. Lakewood generally restricts its commercial real
estate lending activity to owner-occupied properties or to investor properties
that are owned by customers with which Lakewood 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. Lakewood's underwriting standards
generally require that the loan-to-value ratio not exceed 80% of appraised value
or cost, whichever is lower. Management does not believe that Lakewood's
existing commercial real estate loan portfolio represents a material risk of
loan losses.
Lakewood can originate 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 75% to 80% of the amount of the loan by the federal government.
71
<PAGE> 73
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. Lakewood also originates residential mortgage loans on a limited
basis as a service to its customers. On those loans that are extended, Lakewood
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.
INSTALLMENT LOANS
Consumer Lending. Lakewood provides a full range of consumer loans. The primary
risk of consumer lending relates to the personal circumstances of the borrower.
Lakewood 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 banks owned by large holding companies, have
frequently had to deal with a variety of different officers for different types
of transactions. Consumer loans outstanding were $7.1 million at September 30,
1998, $6.5 million at December 31, 1997 compared to and $5.8 million at December
31, 1996.
NONPERFORMING ASSETS
Lakewood's nonperforming assets consist of nonaccrual loans, restructured loans,
past due loans and other real estate owned (OREO). Lakewood accounts for loans
in accordance with Financial Accounting Standard No. 114, "Accounting by
Creditors for Impairment of Loans". The adoption of this pronouncement, which
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 Lakewood's financial statements.
The following table sets forth information with respect to these assets at the
date indicated:
The table below reflects Lakewood's nonperforming assets and past due loans.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------
1998 1997 1996
------------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans.................................... $ 48 $ 31 $ --
Loans past due 90 days or more (principal or
interest payments)................................ -- -- --
Restructured........................................ -- -- --
---- ---- ----
Total nonperforming loans................. 48 31 --
Other nonperforming assets
Total foreclosed assets held-for-sale............. 158 158 169
Other nonperforming assets........................ -- -- --
---- ---- ----
Total other nonperforming assets.......... 158 158 169
---- ---- ----
Total nonperforming assets................ $206 $189 $169
==== ==== ====
</TABLE>
72
<PAGE> 74
Approximately $2,000 of interest income would have been recorded for the period
ended December 31, 1997, if the nonaccrual loans had been accruing interest
according to the original items.
PAST DUES, NONACCRUAL AND IMPAIRED LOANS
Past Due, Nonaccrual, and Impaired Loans. Lakewood'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. Lakewood'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 Lakewood's Loan Committee has approved maintaining the loan on an
accrual basis, which in practice is rarely done. At September 30, 1998 and
December 31, 1997, Lakewood had $48,000 and $31,000 loans accounted for on a
nonaccrual basis.
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 loans is accrued at the
restructured rates when it is anticipated that no loss on original principal
will occur. Lakewood had no restructured loans at September 30, 1998 and
December 31, 1997.
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 $48,000, $31,000, and $-0- at September 30, 1998, and
December 31, 1997 and 1996, respectively. An allowance for loan loss of $8,000,
$5,000, and $-0-, relates to impaired loans at September 30, 1998, and December
31, 1997 and 1996, respectively. No interest was recognized on average impaired
loans of $39,000, $31,000, and $-0-, respectively.
Other Real Estate Owned. OREO property is carried at the lower of its fair
market value less selling costs or the principal balance on the foreclosed loan
plus costs of foreclosure and improvements made to such OREO by Lakewood. At
September 30, 1998, and at December 31, 1997 Lakewood had one OREO carried in
the amount of $158,000.
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
73
<PAGE> 75
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 Lakewood'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 Lakewood's loan portfolio in the future, will not request Lakewood to
increase such allowance, either of which could adversely affect Lakewood's
earnings. Further, there can be no assurance that Lakewood's actual loan losses
will not exceed its allowance.
The following table sets forth information regarding changes in Lakewood's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -------------------
1998 1997 1996
------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans............................. $23,991 $ 26,414 $21,579
======= ========= =======
Total loans at the end of the period............ $23,962 $ 24,586 $26,138
======= ========= =======
Allowance at beginning of year.................. $ 364 $ 372 $ 290
Charge-offs:
Commercial loans.............................. 10 8 5
Consumer loans................................ 26 33 13
------- --------- -------
Total charge-off loans................ 36 41 18
Recoveries:
Commercial loans.............................. 1 28 93
Consumer loans................................ 8 5 7
------- --------- -------
Total recoveries...................... 9 33 100
------- --------- -------
Net charge-offs (recoveries).................... 27 8 (82)
------- --------- -------
Provisions for loan losses...................... -- -- --
------- --------- -------
Balance of allowance for loan losses at end of
period........................................ $ 337 $ 364 $ 372
======= ========= =======
Ratio of net charge-offs (recoveries) to average
loans......................................... 0.11% 0.03% (0.38)%
Allowance to total loans at end of period....... 1.41% 1.48% 1.42%
Allowance to nonperforming loans................ 702.08% 1174.19% N/A
</TABLE>
74
<PAGE> 76
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.
LAKEWOOD STATE BANK ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
FOR THE PERIOD ENDING
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- --------------------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
1998 LOANS 1997 LOANS 1996 LOANS
--------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans............ $ 63 18.8% $ 77 21.1% $ 78 20.9%
Real estate -- construction
loans..................... 53 15.8% 35 9.7% 33 8.9%
Real estate -- mortgage
loans..................... 121 35.9% 155 42.7% 179 48.1%
Consumer loans.............. 100 29.5% 97 26.5% 82 22.1%
---- ----- ---- ----- ---- -----
Total............. $337 100.0% $364 100.0% $372 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
INVESTMENT ACTIVITIES
Lakewood maintains a securities portfolio comprised primarily of U.S. government
securities, municipal securities and other investment securities. Lakewood
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. Lakewood's
Asset and Liability Management Committee, which is made up of Lakewood's
Chairman of the Board and Chief Executive Officer, its Executive Vice President,
and Chief Operations Officer, and one member of the Board of Directors, oversees
Lakewood's investment portfolio with the assistance of an outside consultant.
Lakewood 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.
75
<PAGE> 77
The table below provides the amortized cost and fair value of Lakewood's
investment securities at each of the dates indicated. All of Lakewood's
investment securities have been classified as held-to-maturity securities for
the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
SEPTEMBER 30, 1998 1997 1996
---------------------- ---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. government agencies
and corporations..... $10,225 $10,289 $6,224 $6,206 $3,821 $3,818
U.S. Treasury
securities........... 1,612 1,623 814 814 2,725 2,722
Obligations of state and
political
subdivisions......... 151 152 151 151 251 250
------- ------- ------ ------ ------ ------
$11,988 $12,064 $7,189 $7,171 $6,797 $6,790
======= ======= ====== ====== ====== ======
</TABLE>
At December 31, 1997, there were no securities held by Lakewood which (other
than U.S. government securities) made up more than ten percent of stockholders'
equity.
The following reflects the carrying values, maturities and weighted average
yields of Lakewood's security portfolio at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------------------------
DUE AFTER
DUE IN DUE AFTER ONE FIVE YEARS
ONE YEAR YEAR THROUGH THROUGH DUE AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ------------- ---------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. government agencies and
corporations
Balance.................. $ 4,768 $ 5,457 $ -- $ -- $10,225
Weighted average yield... 5.63% 5.64% 0.00% 0.00% 5.64%
U.S. Treasury securities
Balance.................. $ 1,205 $ 407 $ -- $ -- $ 1,612
Weighted average yield... 5.43% 5.75% 0.00% 0.00% 5.51%
Obligations of state and
political subdivisions
Balance.................. $ 100 $ 51 $ -- $ -- $ 151
Weighted average yield... 6.21% 6.51% 0.00% 0.00% 6.31%
Other
Balance.................. $ -- $ -- $ -- $ -- $ --
Weighted average yield... 0.00% 0.00% 0.00% 0.00% 0.00%
------- ------- ------- ------- -------
Total
Balance.................. $ 6,073 $ 5,915 $ -- $ -- $11,988
Weighted average yield... 5.60% 5.66% 0.00% 0.00% 5.63%
</TABLE>
76
<PAGE> 78
SOURCES OF FUNDS
General. Lakewood's primary source of funds has historically been customer
deposits. Scheduled loan repayments are a relatively stable source of funds,
while deposits 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 Lakewood'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 of repricing intervals of assets.
Deposit Activities. Lakewood offers a variety of accounts for depositors
designed to attract both short-term and long-term deposits. These accounts
include certificates of deposit, savings accounts, money market accounts,
checking and negotiable order of withdrawal accounts 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 following table presents the average balance of each major category of
deposits and the weighted average interest paid for interest-bearing deposits
for the period indicated.
LAKEWOOD STATE BANK
DEPOSIT COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
SEPTEMBER 30, 1998 1997 1996
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
demand............. $ 8,948,000 2.26% $ 8,064,000 2.41% $ 7,725,000 2.27%
Savings.............. 6,667,000 2.76% 5,542,000 2.94% 5,546,000 2.74%
Certificates less
than $100,000...... 10,741,000 6.23% 10,000,000 5.99% 6,275,000 5.64%
Certificates greater
than $100,000...... 1,873,000 4.98% 1,075,000 5.95% 958,000 5.11%
Non-interest bearing
demand deposits.... 10,134,000 n/a 9,008,000 n/a 8,722,000 n/a
----------- ----- ----------- ----- ----------- -----
Total
deposits... $38,363,000 4.07% $33,689,000 4.13% $28,926,000 3.56%
=========== ===== =========== ===== =========== =====
</TABLE>
77
<PAGE> 79
The following table sets forth the amount and maturity of certificates of
deposit that had balances of more than $100,000 at September 30, 1998.
Remaining maturity:
<TABLE>
<S> <C>
Less than three months...................................... $ 449,000
Three months up to one year................................. 1,216,000
One year and over........................................... 614,000
----------
Total............................................. $2,279,000
==========
</TABLE>
78
<PAGE> 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF LAKEWOOD STATE BANK
The following tables set forth for the periods indicated information with regard
to average balances of assets and liabilities, as well as the dollar amounts of
interest income from interest-earning assets and interest expense of
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 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 been earned on taxable securities to yield the same after
tax return. A 34% tax rate was used.
79
<PAGE> 81
LAKEWOOD STATE BANK
AVERAGE BALANCE, NET INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS AND RATES
ON TAX EQUIVALENT BASIS
The following table sets forth the average balances, net income and expense and
average yields and rates for Lakewood's earning assets and interest-bearing
liabilities for the periods indicated on a tax-equivalent basis assuming a 34%
tax rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
----------- ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Investment securities:
Taxable............................................ $ 6,012,000 $ 327,000 5.44% $ 6,339,000 $ 330,000 5.21%
Tax exempt (tax equivalent)........................ 218,000 8,000 3.67% 333,000 17,000 5.10%
Funds sold and interest-bearing deposits............. 1,935,000 105,000 5.43% 1,465,000 77,000 5.26%
Loans................................................ 26,414,000 2,644,000 10.01% 21,579,000 2,210,000 10.24%
Allowance for loan losses............................ (389,000) (363,000)
----------- ---------- ----- ----------- ---------- -----
Total interest-earning assets.................. $34,190,000 $3,084,000 9.02% $29,353,000 $2,634,000 8.97%
=========== ========== ===== =========== ========== =====
Interest-bearing Liabilities
Interest-bearing deposits
Demand, interest-bearing........................... $ 8,064,000 $ 194,000 2.41% $ 7,725,000 $ 175,000 2.27%
Savings............................................ 5,542,000 163,000 2.94% 5,546,000 152,000 2.74%
Certificates of deposit
Under $100,000................................... 10,000,000 599,000 5.99% 6,275,000 354,000 5.64%
$100,000 and over................................ 1,075,000 64,000 5.95% 958,000 49,000 5.11%
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing deposits................ 24,681,000 1,020,000 4.13% 20,504,000 730,000 3,56%
Advances from the FHLB and fed funds purch........... 24,000 1,000 4.17% 245,000 14,000 5.71%
Notes payable........................................ -- --
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing liabilities............. $24,705,000 $1,021,000 4.13% $20,749,000 $ 744,000 3.59%
=========== ========== ===== =========== ========== =====
Net interest income (tax equivalent)........... $2,063,000 $1,890,000
========== ==========
Net interest margin.................................. 6.03% 6.44%
Net interest spread.................................. 4.89% 5.38%
Ratio of average interest-bearing liabilities to
average interest-earning assets...................... 72.26% 70.69%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
----------- ---------- -------
<S> <C> <C> <C>
Interest Earning Assets
Investment securities:
Taxable................................................. $ 6,077,000 $ 303,000 4.99%
Tax exempt (tax equivalent)............................. 135,000 11,000 8.14%
Funds sold and interest-bearing deposits.................. 1,087,000 62,000 5.70%
Loans..................................................... 18,700,000 1,825,000 9.76%
Allowance for loan losses................................. (368,000)
----------- ---------- ----
Total interest-earning assets....................... $25,631,000 $2,201,000 8.59%
=========== ========== ====
Interest-bearing Liabilities
Interest-bearing deposits
Demand, interest-bearing................................ $ 7,710,000 $ 169,000 2.19%
Savings................................................. 5,612,000 151,000 2.69%
Certificates of deposit
Under $100,000........................................ 4,289,000 232,000 5.41%
$100,000 and over..................................... 540,000 20,000 3.70%
----------- ---------- ----
Total interest-bearing deposits..................... 18,151,000 572,000 3.15%
Advances from the FHLB and fed funds purch................ 1,000 -- 0.00%
Notes payable
----------- ---------- ----
Total interest-bearing liabilities.................. $18,152,000 $ 572,000 3.15%
=========== ========== ====
Net interest income (tax equivalent)................ $1,629,000
==========
Net interest margin....................................... 6.36%
Net interest spread....................................... 5.44%
Ratio of average interest-bearing liabilities to average
interest-earning assets................................... 70.82%
</TABLE>
- -------------------------
(1) Loans are net of any unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income as
follows for the years ended December 31, 1997, $232,000; 1996, $250,000;
1995, $89,000.
(2) Net interest margin is net interest income divided by average total earning
assets.
80
<PAGE> 82
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
----------- ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Investment securities:
Taxable.......................... $ 9,371,000 $ 392,000 5.58% $ 5,945,000 $ 241,000 5.41%
Tax exempt (tax equivalent)...... 151,000 6,000 5.30% 240,000 6,000 3.33%
Funds sold and interest-bearing
deposits......................... 5,421,000 219,000 5.39% 984,000 40,000 5.42%
Loans.............................. 23,991,000 1,781,000 9.90% 26,765,000 1,996,000 9.94%
Allowance for loan losses.......... (355,000)
----------- ---------- ----- ----------- ---------- -----
Total interest-earning
assets..................... $38,579,000 $2,398,000 8.29% $33,934,000 $2,283,000 8.97%
=========== ========== ===== =========== ========== =====
Interest-bearing Liabilities
Interest-bearing deposits
Demand, interest-bearing......... $ 8,948,000 $ 152,000 2.26% $ 7,975,000 $ 143,000 2.39%
Savings.......................... 6,667,000 137,000 2.76% 5,470,000 119,000 2.90%
Certificates of deposit
Under $100,000................. 10,741,000 502,000 6.23% 9,762,000 440,000 6.01%
$100,000 and over.............. 1,873,000 70,000 4.98% 1,076,000 45,000 5.58%
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing
deposits................... 28,229,000 861,000 4.07% 24,283,000 747,000 4.10%
Advances from the FHLB and fed
funds purch...................... -- -- 32,000 1,000
Notes payable...................... -- -- --
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing
liabilities................ $28,229,000 $ 861,000 4.07% $24,315,000 $ 748,000 4.10%
=========== ========== ===== =========== ========== =====
Net interest income (tax
equivalent)................ $1,537,000 $1,535,000
========== ==========
Net interest margin................ 5.31% 6.03%
Net interest spread................ 4.22% 4.87%
Ratio of average interest-bearing
liabilities to average
interest-earning assets............ 73.17% 71.65%
</TABLE>
- -------------------------
(1) Yields are annualized
(2) Loans are net of any unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income as
follows for the nine months ended September 30, 1998, $146,000 -- (196,000
annualized); 1997, $169,000 -- (226,000 annualized).
(3) Net interest margin is net interest income divided by average total earning
assets (on an annualized basis).
81
<PAGE> 83
The following table illustrates the changes in Lakewood's net interest income
due to changes in volume and changes in interest rates on a full tax equivalent
basis. Changes attributable to the combined effect of volume and rate have been
allocated proportionately to the change due to volume and change due to rate.
LAKEWOOD STATE BANK
RATE VOLUME VARIANCE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ----------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
----------------------------------- ----------------------------------
INCREASE (DECREASE) IN NET INCOME INCREASE (DECREASE) IN NET INCOME
DUE TO CHANGE IN DUE TO CHANGE IN
----------------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Investment securities:
Taxable................. $ 139,000 $ 12,000 $ 151,000 $(17,000) $ 14,000 $ (3,000)
Tax exempt (tax
equivalent)........... (2,000) 2,000 -- (6,000) (3,000) (9,000)
Funds sold and interest-
bearing deposits........ 180,000 (1,000) 179,000 25,000 3,000 28,000
Loans..................... (207,000) (8,000) (215,000) 495,000 (61,000) 434,000
--------- -------- --------- -------- --------- --------
Total
interest-earning
assets............ 110,000 5,000 115,000 497,000 (47,000) 450,000
--------- -------- --------- -------- --------- --------
Interest-bearing Liabilities
Interest-bearing deposits
Demand,
interest-bearing...... 17,000 (8,000) 9,000 8,000 11,000 19,000
Savings................. 26,000 (8,000) 18,000 -- 11,000 11,000
Certificates of deposit
Under $100,000........ 44,000 18,000 62,000 210,000 35,000 245,000
$100,000 and over..... 33,000 (8,000) 25,000 6,000 9,000 15,000
Advances from the FHLB and
fed funds purch......... (1,000) -- (1,000) (13,000) -- (13,000)
Notes payable............. -- -- -- -- -- --
--------- -------- --------- -------- --------- --------
Total
interest-bearing
liabilities....... 119,000 (6,000) 113,000 211,000 66,000 277,000
--------- -------- --------- -------- --------- --------
Net interest income
(tax
equivalent)....... $ (9,000) $ 11,000 $ 2,000 $286,000 $(113,000) $173,000
========= ======== ========= ======== ========= ========
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 COMPARED TO 1995
-----------------------------------
INCREASE (DECREASE) IN NET INCOME
DUE TO CHANGE IN
-----------------------------------
VOLUME RATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Interest Earning Assets
Investment securities:
Taxable................. $ 13,000 $ 14,000 $ 27,000
Tax exempt (tax
equivalent)........... 21,000 (15,000) 6,000
Funds sold and interest-
bearing deposits........ 22,000 (7,000) 15,000
Loans..................... 281,000 104,000 385,000
-------- -------- --------
Total
interest-earning
assets............ 337,000 96,000 433,000
-------- -------- --------
Interest-bearing Liabilities
Interest-bearing deposits
Demand,
interest-bearing...... -- 6,000 6,000
Savings................. (2,000) 3,000 1,000
Certificates of deposit
Under $100,000........ 107,000 15,000 122,000
$100,000 and over..... 15,000 14,000 29,000
Advances from the FHLB and
fed funds purch......... -- 14,000 14,000
Notes payable............. -- -- --
-------- -------- --------
Total
interest-bearing
liabilities....... 120,000 52,000 172,000
-------- -------- --------
Net interest income
(tax
equivalent)....... $217,000 $ 44,000 $261,000
======== ======== ========
</TABLE>
82
<PAGE> 84
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------------
LESS THAN ONE TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ---------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and Real estate loans........ $ 6,802 $ 4,868 $1,449 $13,119
Real estate -- construction loans....... 3,658 -- 131 3,789
Consumer loans.......................... 1,212 5,154 719 7,085
------- ------- ------ -------
Total......................... $11,672 $10,022 $2,299 $23,993
======= ======= ====== =======
Fixed rate loans........................ $ 9,851 $2,299
Floating rate loans..................... 171 --
------- ------
Total......................... $10,022 $2,299
======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
LESS THAN ONE TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ---------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and Real estate loans........ $ 8,155 $ 5,708 $1,842 $15,705
Real estate -- construction loans....... 2,336 -- 40 2,376
Consumer loans.......................... 848 5,149 535 6,532
------- ------- ------ -------
Total......................... $11,339 $10,857 $2,417 $24,613
======= ======= ====== =======
Fixed rate loans........................ $10,710 $2,417
Floating rate loans..................... 147 --
------- ------
Total......................... $10,857 $2,417
======= ======
</TABLE>
83
<PAGE> 85
DESCRIPTION OF THE PREFERRED SECURITIES
DEFINITIONS OF MATERIAL AGREEMENTS
For purposes of this Prospectus:
- the "Indenture" means the Subordinated Indenture dated as of
, 1998, as amended and supplemented from time to time, between the
company and American Securities Transfer & Trust, Inc., as trustee (the
"Indenture Trustee"), under which the Junior Subordinated Debentures will
be issued,
- the "Trust Agreement" means the Amended and Restated Trust Agreement,
under which the Preferred Securities and the Common Securities will be
issued, dated as of , 1998, as amended and supplemented from
time to time, among the company, as depositor, Wilmington Trust Company,
as Delaware trustee, American Securities Transfer & Trust, Inc. as
"Property Trustee", and the Administrative Trustees named therein and the
holders, from time to time, of the Preferred Securities,
- the "Guarantee" means the Guarantee Agreement relating to the guarantee
between the company and American Securities Transfer & Trust, Inc., as
trustee (the "Guarantee Trustee") on behalf of the holders, and
- the "Expense Agreement" means the Expense Agreement between the company
and Union Capital.
The Preferred Securities and the Common Securities will be issued pursuant to
the terms of the Trust Agreement, which will be qualified as an indenture under
the Trust Indenture Act. Initially, Wilmington Trust Company will be the
Delaware Trustee and American Securities Transfer & Trust, Inc. will be the
Property Trustee and will act as trustee for the purpose of complying with the
Trust Indenture Act. This summary is not complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including certain definitions therein, and the Trust Indenture Act.
However, management believes that all material terms of the Preferred Securities
in the Trust Agreement are set forth in the Summary. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The Administrative Trustees on behalf of Union Bankshares Capital Trust I will
issue the Preferred Securities and the Common Securities (collectively, the
"Trust Securities"). The Preferred Securities will represent preferred undivided
beneficial interests in the assets of the trust and the holders thereof will be
entitled to a preference in respect of certain distributions by the trust and
amounts payable on redemption or liquidation over the Common Securities of the
trust (which will be held by the company), as well as other benefits as
described in the Trust Agreement. Otherwise, the Preferred Securities will
generally rank pari passu, and payments will be made thereon pro rata, with the
Common Securities of the trust.
The Property Trustee will hold the Junior Subordinated Debentures in trust for
the benefit of the holders of the Trust Securities. The Company's Guarantee (the
"Guarantee") will be subordinated and will not guarantee payment of
Distributions (as defined below) or amounts payable on redemption of the
Preferred Securities if the trust does not have funds available to make such
payments. See "Description of Guarantee."
84
<PAGE> 86
If the company does not make required payments on the Junior Subordinated
Debentures held by the trust, the trust will be unable to pay Distributions on
the Preferred Securities. In such event, a holder of the Preferred Securities
may make a claim directly against the company to enforce payment of such
Distributions to such holder.
DISTRIBUTIONS
Payment of Distributions. The trust will make distributions on the Preferred
Securities at the annual rate of % of the stated Liquidation Amount of $10
("Distributions"), payable quarterly in arrears on the 15th day of January,
April, July and October in each year, commencing April 15, 1999 to the holders
of the Preferred Securities on the relevant record dates (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). The amount of each Distribution due with respect to the Preferred
Securities will include amounts accrued through the date the Distribution is
due. Distributions will accumulate from the date of original issuance.
The amount of Distributions payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
payment of the Distribution payable on such date will generally be made on the
next Business Day (and without any interest or other payment in respect to any
such delay). "Business Day" means any day other than a Saturday or a Sunday, or
a day on which banking institutions in the State of Colorado are authorized or
required by law or executive order to remain closed or a day on which the
corporate trust office of the Property Trustee or the Indenture Trustee is
closed for business.
The sole source of the funds of the trust available for distribution to holders
of its Preferred Securities will be payments by the company under the Junior
Subordinated Debentures. See "Description of the Junior Subordinated
Debentures." The company has guaranteed the payment of Distributions (to the
extent the trust has funds available to make such Distributions). See
"Description of Guarantee."
Extension Period. Except during a Debenture Event of Default, the company may
defer the payment of interest on the Junior Subordinated Debentures at any time
or from time to time for a period not exceeding 20 consecutive quarters with
respect to each such period (each, an "Extension Period"). No Extension Period
may extend beyond the Stated Maturity of the Junior Subordinated Debentures. If
the company elects to defer, then quarterly Distributions on the Preferred
Securities will be deferred by the trust during any such Extension Period.
Distributions to which holders of Preferred Securities are entitled will
accumulate additional amounts thereon at the rate per annum of % thereof,
compounded quarterly from the relevant Distribution Date, to the extent
permitted under applicable law. The term "Distributions" as used herein shall
include any such additional accumulated amounts. During any such Extension
Period, the company generally may not:
- declare or pay any cash dividends or distributions on, or use cash to
redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the company's capital stock (which includes common and preferred
stock); or
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the company that rank pari
passu with or junior in interest to the Junior Subordinated Debentures or
make any guarantee payments with respect to any guarantee by the company
of the debt securities of any subsidiary of the company if such guarantee
ranks pari passu with or junior in
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interest to the Junior Subordinated Debentures. Prior to the termination of any
such Extension Period, the company may further extend such Extension Period up
to a maximum of 20 consecutive quarters or the Stated Maturity, whichever occurs
earlier.
Upon the termination of any Extension Period and the payment of all amounts then
due, and subject to the foregoing limitations, the company may elect to begin a
new Extension Period, without any limitation on the number of times that the
company may elect to begin an Extension Period.
The company has no current intention of exercising its right to defer payments
of interest by extending the interest payment period on the Junior Subordinated
Debentures.
REDEMPTION
Mandatory Redemption of Preferred Securities. Upon any partial or complete
repayment or redemption of any Junior Subordinated Debentures, the proceeds from
such repayment or redemption shall be applied by the Property Trustee to redeem
a Like Amount (as defined below) of the Trust Securities. This redemption shall
be made upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the Redemption Price (as defined below).
See "Description of the Junior Subordinated Debentures -- Redemption." In a
partial redemption of the Junior Subordinated Debentures, the Trust Securities
shall be redeemed pro rata.
Optional Redemption of Junior Subordinated Debentures. The company may redeem
the Junior Subordinated Debentures:
- on or after , 2003, in whole or in part by paying the accrued
and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus 100% of the principal amount thereof;
or
- at any time, in whole (but not in part), upon the occurrence of a Tax
Event, an Investment Company Event or a Capital Treatment Event by paying
the accrued and unpaid interest on the Junior Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal
amount thereof. See "Description of the Junior Subordinated
Debentures -- Redemption."
Tax Event Redemption, Investment Company Event Redemption, Capital Treatment
Event Redemption or Distribution of Junior Subordinated Debentures. If a Tax
Event, an Investment Company Event or a Capital Treatment Event shall occur and
be continuing, the company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Trust Securities in whole (but not in part) at the Redemption Price (as
defined below) within 90 days following the occurrence of such Tax Event,
Investment Company Event or Capital Treatment Event. This redemption is subject
to receipt of prior approval by the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve.
DEFINITIONS
"Additional Sums" means the additional amounts as may be necessary to be paid by
the company with respect to the Junior Subordinated Debentures in order that the
amount of Distributions then due and payable by the trust on the outstanding
Trust Securities of the trust shall not be reduced as a result of any additional
taxes, duties and other governmental charges to which the trust has become
subject.
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"Like Amount" means (i) with respect to a redemption of Trust Securities, Trust
Securities having a Liquidation Amount (as defined below) equal to that portion
of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the trust, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of each holder to whom such Junior Subordinated Debentures are
distributed.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the Liquidation
Amount of such Trust Security, plus accumulated and unpaid Distributions to the
Redemption Date, allocated on a pro rata basis (based on Liquidation Amounts)
among the holders of the Trust Securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The company may at any time elect to dissolve the trust and, after satisfaction
of the liabilities of creditors of the trust as provided by applicable law,
cause the Junior Subordinated Debentures to be distributed to the holders of
Trust Securities in liquidation of the trust. After the liquidation date (i)
such Preferred Securities will no longer be deemed to be outstanding, (ii) the
Depositary or its nominee, as the record holder of the Preferred Securities,
will receive a registered global certificate or certificates representing the
Junior Subordinated Debentures to be delivered upon such distribution and (iii)
any certificates representing Preferred Securities not held by the Depositary or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the Liquidation Amount of such Preferred
Securities, and bearing accrued and unpaid interest in an amount equal to the
accrued and unpaid Distributions on the Preferred Securities until such
certificates are presented to the Administrative Trustees or their agent for
transfer or reissuance.
REDEMPTION PROCEDURES
Preferred Securities redeemed on any Redemption Date will be redeemed at the
Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that the trust has funds on hand available
for the payment of such Redemption Price. See "-- Subordination of Common
Securities of the Trust Held by the Company" and "Description of Guarantee."
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the Redemption Date to each holder of Trust Securities at such
holder's registered address.
Unless there is a payment default, Distributions will stop accruing on those
Preferred Securities called for redemption on the date they are called for
redemption.
If the trust gives a notice of redemption in respect of the Preferred
Securities, then, by 12:00 noon, Denver time, on the Redemption Date, the
Property Trustee will pay the Redemption Price to the Depositary, as the record
holder of the Preferred Securities, and
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the Depositary thereafter will credit the Redemption Price to the Participants
for whom it holds the Preferred Securities. See "Book-Entry Issuance." If such
Preferred Securities are no longer in book-entry form, the Property Trustee, to
the extent funds are available, will deposit with the paying agent sufficient
funds to pay the aggregate Redemption Price and will instruct such paying agent
to pay the Redemption Price to the holders thereof upon surrender of their
Preferred Securities certificates. Notwithstanding the foregoing, Distributions
payable on or prior to the Redemption Date will be payable to the holders of
such Preferred Securities on the relevant record dates for the related
Distribution Dates.
If notice of redemption shall have been given and funds deposited as required,
then upon the date of such deposit, all rights of the holders of the Preferred
Securities will cease, unless there is a payment default, except the right of
the holders of the Preferred Securities to receive the applicable Redemption
Price, without interest, and such Preferred Securities will cease to be
outstanding. In the event that payment of the Redemption Price in respect of
Preferred Securities called for redemption is improperly withheld or refused and
not paid either by the trust or by the company pursuant to the Guarantee,
Distributions on such Preferred Securities will continue to accrue at the then
applicable rate, until the Redemption Price is actually paid. See "Description
of Guarantee."
Subject to applicable law (including, without limitation, United States federal
securities law), the company may purchase outstanding Preferred Securities by
tender, in the open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any distribution
of Junior Subordinated Debentures to holders of Preferred Securities will be
made to the applicable record holders on the relevant record date, which date
will be one Business Day prior to the relevant Redemption Date or Liquidation
Date, as applicable; provided, however, that in the event that any Preferred
Securities are not in book-entry form, the relevant record date for such
Preferred Securities will be a date at least 15 days prior to the Redemption
Date or Liquidation Date, as applicable. In the case of a liquidation, the
record date will be no more than 45 days before the Liquidation Date.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Redemption Price for such Trust Securities to be
redeemed will be allocated pro rata to the Preferred Securities and Common
Securities based upon the relative Liquidation Amounts of such classes. The
particular Preferred Securities to be redeemed will be selected by the Property
Trustee from the outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee shall deem fair and
appropriate. The Property Trustee shall promptly notify the Trust Securities
registrar in writing of the Preferred Securities selected for redemption and, in
the case of any Preferred Securities selected for partial redemption, the
Liquidation Amount thereof to be redeemed.
SUBORDINATION OF COMMON SECURITIES OF THE TRUST HELD BY THE COMPANY
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amounts of the Preferred Securities and Common Securities.
However, if on any Distribution Date or Redemption Date a Debenture Event of
Default shall have occurred and be continuing, no payment of any Distribution
on, or applicable Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
the Common Securities, shall be made unless payment
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in full in cash of all amounts owing on the outstanding Preferred Securities
shall have been made or provided for.
In the case of any Event of Default under the Trust Agreement resulting from a
Debenture Event of Default, the company as holder of the Common Securities will
be deemed to have waived any right to act with respect to any such Event of
Default until the effects of all such Events of Default have been cured, waived
or otherwise eliminated. Until that time, the Property Trustee shall act solely
on behalf of the holders of the Preferred Securities.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The company will have the right at any time to dissolve the trust and, after
satisfaction of the liabilities of the creditors of the trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Preferred Securities. Such right is subject to the company
having received prior approval of the Federal Reserve if then required. See
"-- Distribution of Junior Subordinated Debentures" above.
In addition, pursuant to the Trust Agreement, the trust shall automatically
dissolve upon expiration of its term and shall earlier dissolve on the first to
occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
company; (ii) delivery by the company of written direction to the Property
Trustee to dissolve the trust (which direction is optional and wholly within the
discretion of the company); (iii) redemption of all of the Preferred Securities
as described under "-- Redemption;" and (iv) the entry of an order for the
dissolution of the trust by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv) above or
upon the expiration of the term of the trust, the trust shall be liquidated by
the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the trust as
provided by applicable law, to the holders of such Trust Securities a Like
Amount of the Junior Subordinated Debentures, unless such distribution is
determined by the Property Trustee not to be practical. In that event such
holders will be entitled to receive out of the assets of the trust available for
distribution to holders, after satisfaction of liabilities to creditors of the
trust as provided by applicable law, an amount equal to, in the case of holders
of Preferred Securities, the aggregate of the Liquidation Amount of $10 per
Trust Security plus accrued and unpaid Distributions thereon to the date of
payment (such amount being the "Liquidation Distribution"). If such Liquidation
Distribution can be paid only in part because Union Capital has insufficient
assets available to pay in full the aggregate Liquidation Distribution, then the
amounts payable directly by the trust on the Preferred Securities will be paid
on a pro rata basis. The holder(s) of the Common Securities will be entitled to
receive distributions upon any such liquidation pro rata with the holders of the
Preferred Securities, except that if a Debenture Event of Default has occurred
and is continuing, the Preferred Securities will have a priority over the Common
Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, Union Bankshares Capital Trust I is treated as a grantor
trust, a distribution of the Junior Subordinated Debentures should not be a
taxable event to holders of the Preferred Securities. Should there be a change
in law, a change in legal interpretation, a Tax Event or other circumstances,
however, the distribution could be a taxable event to holders of the Preferred
Securities. See "Certain Federal Income Tax Consequences."
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If the company elects to liquidate the trust and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of the trust, the company will continue to have the right to
shorten the maturity of such Junior Subordinated Debentures, subject to certain
conditions. See "Description of the Junior Subordinated Debentures -- General."
EVENTS OF DEFAULT; NOTICE
The following events constitute an "Event of Default" (an "Event of Default")
with respect to the Preferred Securities and Common Securities:
(i) the occurrence of a Debenture Event of Default under the Indenture (see
"Description of Junior Subordinated Debentures -- Debenture Events of
Default"); or
(ii) default by the trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of
30 days; or
(iii) default by the trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) material default in the performance, or breach, of any covenant or
warranty of the Property Trustee in the Trust Agreement (other than a
default or breach in the performance of a covenant or warranty which is
addressed in clause (ii) or (iii) above), and continuation of such default
or breach, for a period of 60 days after there has been given, to the
Property Trustee by the holders of at least 25% in aggregate Liquidation
Amount of the outstanding Preferred Securities, a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any uncured or unwaived Event
of Default actually known to the Property Trustee, the Property Trustee will
transmit notice of such Event of Default to the holders of the Preferred
Securities, the Administrative Trustees and the company. The company and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether they are in compliance with all the conditions and
covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the Preferred
Securities will have a preference over the Common Securities upon dissolution of
the trust as described above. See "-- Liquidation Distribution upon
Dissolution." Upon a Debenture Event of Default, unless the principal of all the
Junior Subordinated Debentures has already become due and payable, either the
Property Trustee or the holders of not less than 25% in aggregate principal
amount of the Junior Subordinated Debentures then outstanding may declare all of
the Junior Subordinated Debentures to be due and payable immediately by giving
notice in writing to the company (and to the Property Trustee, if notice is
given by holders of the Junior Subordinated Debentures). If the Property Trustee
or the holders of the Junior Subordinated Debentures fail to declare the
principal of all of the Junior Subordinated Debentures due and payable upon a
Debenture Event of Default, the holders of at least 25% in Liquidation Amount of
the Preferred Securities then outstanding will have the right to declare the
Junior Subordinated Debentures immediately due and payable. In either event,
payment of principal and interest on the Junior
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Subordinated Debentures will remain subordinated to the extent provided in the
Indenture. In addition, holders of the Preferred Securities have the right in
certain circumstances to bring a Direct Action (as defined below). See
"Description of the Junior Subordinated Debentures -- Enforcement of Certain
Rights by Holders of Preferred Securities."
REMOVAL OF TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event will the holders of the Preferred Securities have the right to vote to
appoint, remove or replace the Administrative Trustees. The company as the
holder of the Common Securities has the sole power to remove the Administrative
Trustee. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of Trust Property may at the time
be located, the company, as the holder of the Common Securities, and the
Administrative Trustees will have power to appoint one or more persons either to
act as a co-trustee, jointly with the Property Trustee, of all or any part of
such Trust Property, or to act as separate trustee of any such property, in
either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone will have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property Trustee,
the Delaware Trustee or any Administrative Trustee that is not a natural person
may be merged or converted or with which it may be consolidated, or any Person
resulting from any merger, conversion or consolidation to which such Trustee
will be a party, or any person succeeding to all or substantially all the
corporate trust business of such Trustee, shall be the successor of such Trustee
under the Trust Agreement, provided such corporation shall be otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The trust may, at the request of the company, with the consent of the
Administrative Trustees and without the consent of the holders of the Preferred
Securities, merge with or into, consolidate, amalgamate, convert into or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that:
- such successor entity either (a) expressly assumes all of the obligations
of the trust with respect to the Preferred Securities or (b) substitutes
for the Preferred Securities other securities having substantially the
same terms as the Preferred
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Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Preferred Securities rank in priority with respect to
distributions and payments upon liquidation, redemption and otherwise,
- the company expressly appoints a trustee of such successor entity
possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures,
- any such transaction does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect,
- such successor entity has a purpose substantially identical to that of
the trust,
- the Successor Securities will be listed or traded on any national
securities exchange or other organization on which the Preferred
Securities may then be listed,
- prior to such a transaction, the company has received an opinion from
independent counsel to the trust experienced in such matters to the
effect that (a) such transaction does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities
(including any Successor Securities) in any material respect, and (b)
following any such transaction, neither the trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act and
- the company or any permitted successor or designee owns all of the common
securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the
extent provided by the Guarantee and enters into an agreement
substantially similar to the Expense Agreement.
Notwithstanding the foregoing, the trust shall not, except with the consent of
holders of 100% in Liquidation Amount of the Preferred Securities, enter into
any such transaction, or permit any other entity to consolidate, amalgamate,
convert into, merge with or into, or replace it if such transaction, would cause
the trust or the successor entity to be classified as other than a grantor trust
for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights. The Trust
Agreement may be amended from time to time by the company, the Property Trustee
and the Administrative Trustees, without the consent of the holders of the Trust
Securities, (i) to cure any ambiguity, correct or supplement any provisions in
the Trust Agreement that may be inconsistent with any other provision, or to
make any other provisions with respect to matters or questions arising under the
Trust Agreement, which shall not be inconsistent with the other provisions of
the Trust Agreement, or (ii) to modify, eliminate or add to any provisions of
the Trust Agreement to such extent as will be necessary to ensure that the trust
will be classified for United States federal income tax purposes as a grantor
trust at all times that any Trust Securities are outstanding or to ensure that
the trust will not be required to register as an "investment company" under the
Investment Company Act. The Trust Agreement may be amended by the Trustees and
the company (i) with the consent of holders representing not less than a
majority of the aggregate Liquidation Amount of the
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outstanding Trust Securities, and (ii) upon receipt by the Trustees of an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Trustees in accordance with such amendment will not affect
the trust's status as a grantor trust for United States federal income tax
purposes or the trust's exemption from status as an "investment company" under
the Investment Company Act, provided that without the consent of each holder of
Trust Securities, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Trust Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Trust Securities as of a specified date or (ii) restrict the right of a
holder of Trust Securities to institute suit for the enforcement of any such
payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property Trustee,
the Trustees shall not (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee, or executing any
trust or power conferred on the Property Trustee with respect to the Junior
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Junior Subordinated Debentures shall be due and payable or
(iv) consent to any amendment, modification or termination of the Indenture or
the Junior Subordinated Debentures, where such consent shall be required,
without, in each case, obtaining the prior approval of the holders of a majority
in aggregate Liquidation Amount of all outstanding Preferred Securities;
provided, however, that where a consent under the Indenture would require the
consent of each holder of Junior Subordinated Debentures affected thereby, no
such consent may be given by the Property Trustee without the prior consent of
each holder of the Preferred Securities. The Trustees shall not revoke any
action previously authorized or approved by a vote of the holders of the
Preferred Securities except by subsequent vote of the holders of the Preferred
Securities. The Property Trustee will notify each holder of the Preferred
Securities of any notice of default with respect to the Junior Subordinated
Debentures. In addition to obtaining the foregoing approvals of such holders of
the Preferred Securities, prior to taking any of the foregoing actions, the
Trustees shall obtain an opinion of counsel experienced in such matters to the
effect that the trust will not be classified as an association taxable as a
corporation for United States federal income tax purposes on account of such
action.
Any required approval of holders of the Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of the Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of the Preferred Securities in the manner set forth in
the Trust Agreement.
No vote or consent of the holders of the Preferred Securities will be required
for the trust to redeem and cancel the Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the company, the Trustees or any affiliate of the
company or any Trustees, shall, for purposes of such vote or consent, be treated
as if they were not outstanding.
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GLOBAL PREFERRED SECURITIES
The Preferred Securities will be represented by one or more global certificates
registered in the name of the Depositary or its nominee ("Global Preferred
Security"). Beneficial interests in the Preferred Securities will be shown on,
and transfers thereof will be effected only through, records maintained by
participants in the Depositary. Except in limited circumstances as described in
the Indenture, Preferred Securities in certificated form will not be issued in
exchange for the global certificates. See "Book-Entry Issuance."
Payments on Preferred Securities represented by a global security will be made
to the Depositary, as the depositary for the Preferred Securities. In the event
the Preferred Securities are issued in definitive form, Distributions will be
payable, the transfer of the Preferred Securities will be registrable, and
Preferred Securities will be exchangeable for Preferred Securities of other
denominations of a like aggregate Liquidation Amount, at the corporate office of
the Property Trustee, or at the offices of any paying agent or transfer agent
appointed by the Administrative Trustees, provided that payment of any
Distribution may be made at the option of the Administrative Trustees by check
mailed to the address of the persons entitled thereto or by wire transfer. In
addition, if the Preferred Securities are issued in certificated form, the
record dates for payment of Distributions will be the first day of the month in
which the relevant Distribution Date occurs. For a description of the terms of
the depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a Global Preferred Security, and the deposit of such Global
Preferred Security with or on behalf of the Depositary, the Depositary or its
nominee will credit, on its book-entry registration and transfer system, the
respective aggregate Liquidation Amounts of the individual Preferred Securities
represented by such Global Preferred Security to persons that have accounts with
such Depositary ("Participants"). Such accounts shall be designated by the
dealers, underwriters or agents with respect to such Preferred Securities.
Ownership of beneficial interests in a Global Preferred Security will be limited
to Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Preferred Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to interests
of Participants) and the records of Participants (with respect to interests of
persons who hold through Participants). The laws of some states require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Preferred Security.
So long as the Depositary for a Global Preferred Security, or its nominee, is
the registered owner of such Global Preferred Security, such Depositary or such
nominee, as the case may be, will be considered the sole owner or holder of the
Preferred Securities represented by such Global Preferred Security for all
purposes under the Trust Agreement governing such Preferred Securities. Except
as provided below, owners of beneficial interests in a Global Preferred Security
will not be entitled to have any of the individual Preferred Securities
represented by such Global Preferred Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Preferred
Securities in definitive form and will not be considered the owners or holders
thereof under the Trust Agreement.
None of the company, the Property Trustee, any Paying Agent, or the Securities
Registrar (defined below) for such Preferred Securities will be responsible or
liable for any aspect of
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the records relating to or payments made on account of beneficial ownership
interests of the Global Preferred Security representing such Preferred
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The company expects that the Depositary for Preferred Securities or its nominee,
upon receipt of any payment of the Liquidation Amount or Distributions in
respect of a permanent Global Preferred Security, immediately will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the aggregate Liquidation Amount of such
Global Preferred Security as shown on the records of such Depositary or its
nominee. The company also expects that payments by Participants to owners of
beneficial interests in such Global Preferred Security held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary for the Preferred Securities is at any time unwilling, unable
or ineligible to continue as depositary and a successor depositary is not
appointed by the company within 90 days, the trust will issue individual
Preferred Securities in exchange for the Global Preferred Security. In addition,
the trust may generally determine not to have any Preferred Securities
represented by one or more Global Preferred Securities. In such event, the trust
will issue individual Preferred Securities in exchange for the Global Preferred
Security or Securities representing the Preferred Securities. Further, if the
trust so specifies with respect to the Preferred Securities, an owner of a
beneficial interest in a Global Preferred Security representing Preferred
Securities may, on terms acceptable to the company, the Property Trustee and the
Depositary for such Global Preferred Security, receive individual Preferred
Securities in exchange for such beneficial interests, subject to any limitations
described herein. In any such instance, an owner of a beneficial interest in a
Global Preferred Security will be entitled to physical delivery of individual
Preferred Securities represented by such Global Preferred Security equal in
Liquidation Amount to such beneficial interest and to have such Preferred
Securities registered in its name. Individual Preferred Securities so issued
will be issued in denominations, unless otherwise specified by the trust, of $10
and integral multiples thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to the Depositary,
which will credit the relevant accounts at the Depositary on the applicable
Distribution Dates or, if any of the Preferred Securities are not held by the
Depositary, such payments will be made by check mailed to the address of the
holder entitled thereto as such address will appear on the Register. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the company. The Paying Agent will be permitted to
resign as Paying Agent upon 30 days' written notice to the Property Trustee and
the company. In the event that the Property Trustee shall no longer be the
Paying Agent, the Administrative Trustees will appoint a successor (which shall
be a bank or trust company acceptable to the Administrative Trustees and the
company) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the Preferred
Securities. Registration of transfers of the Preferred Securities will be
effected without charge by or on behalf of the trust, but upon payment of any
tax or other governmental charges that
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may be imposed in connection with any transfer or exchange. The trust will not
be required to register or cause to be registered the transfer of the Preferred
Securities after such Preferred Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Trust Agreement and, after such Event of Default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee shall take such action as is directed by the company and if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the Trust Securities and will have no liability except for its
own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the affairs
of and to operate the trust in such a way that the trust will not be deemed to
be an "investment company" required to be registered under the Investment
Company Act or classified as an association taxable as a corporation for United
States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the company for United States
federal income tax purposes. In this regard, the company and the Administrative
Trustees are authorized to take any action, not inconsistent with applicable
law, the certificate of trust of the trust or the Trust Agreement, that the
company and the Administrative Trustees determine in their discretion to be
necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the related
Preferred Securities. Holders of the Preferred Securities have no preemptive or
similar rights.
The trust may not borrow money or issue debt or mortgage or pledge any of its
assets.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Subordinated
Indenture, dated as of , 1998 (the "Indenture"), between the company
and American Securities Transfer & Trust, Inc., as trustee (the "Indenture
Trustee"). The following summary of the terms and provisions of the Junior
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture,
which has been filed as an exhibit to the Registration Statement of which this
prospectus forms a part, and to the Trust Indenture Act. The Indenture is
qualified under the Trust Indenture Act. Whenever particular defined terms of
the Indenture are referred to herein, such defined terms are incorporated herein
or therein by reference.
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Concurrently with the issuance of the Preferred Securities, the trust will
invest the proceeds thereof, together with the consideration paid by the company
for the Common Securities, in Junior Subordinated Debentures issued by the
company. The Junior Subordinated Debentures will be issued as unsecured debt
under the Indenture.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
% of the principal amount thereof, payable quarterly in arrears on the 15th
day of January, April, July and October of each year or, if any such date is not
a Business Day, on the next succeeding Business Day (each, an "Interest Payment
Date"), commencing April 15, 1999, to the person in whose name each Junior
Subordinated Debenture is registered, subject to certain exceptions, at the
close of business on the Business Day next preceding such Interest Payment Date.
However, if either the (i) Junior Subordinated Debentures are held by the
Property Trustee and the Preferred Securities are no longer in book-entry only
form or (ii) the Junior Subordinated Debentures are not represented by a Global
Subordinated Debenture (as defined herein), the record date for such payment
shall be the first day of the month in which such payment is made. The amount of
each interest payment due with respect to the Junior Subordinated Debentures
will include amounts accrued through the Interest Payment Date. It is
anticipated that, until the liquidation, if any, of the trust, each Junior
Subordinated Debenture will be held in the name of the Property Trustee in trust
for the benefit of the holders of the Preferred Securities. The amount of
interest payable for any period will be computed on the basis of a 360-day year
of twelve 30-day months. In the event that any date on which interest is payable
on the Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next Business Day (and without
any interest or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on the date such payment was originally payable. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of % thereof, compounded quarterly. The term "interest"
as used herein shall include quarterly interest payments, interest on quarterly
interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will mature on , 2028 (such date,
as it may be shortened as hereinafter described, the "Stated Maturity"). Such
date may be shortened once at any time by the company to any date not earlier
than , 2003, subject to the company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event that the company elects to shorten
the Stated Maturity of the Junior Subordinated Debentures, it will give notice
to the registered holders of the Junior Subordinated Debentures, the Property
Trustee and the Indenture Trustee of such shortening no less than 90 days prior
to the effectiveness thereof. The Property Trustee must give notice to the
holders of the Trust Securities of the shortening of the Stated Maturity.
The Junior Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior and Subordinated Debt of the
company. Because the company is a holding company, the right of the company to
participate in any distribution of assets of any subsidiaries, including the
bank, upon any such subsidiaries'
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liquidation or reorganization or otherwise (and thus the ability of holders of
the Preferred Securities to benefit indirectly from such distribution), is
subject to the prior claims of creditors of that subsidiary, except to the
extent that the company may itself be recognized as a creditor of that
subsidiary. Accordingly, the Junior Subordinated Debentures will be effectively
subordinated to all existing and future liabilities of the company's
subsidiaries, and holders of Junior Subordinated Debentures should look only to
the assets of the company for payments on the Junior Subordinated Debentures.
The Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of the company, including Senior and Subordinated Debt, whether
under the Indenture or any existing or other indenture that the company may
enter into in the future or otherwise. See "-- Subordination" below.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing, the
company has the right under the Indenture at any time during the term of the
Junior Subordinated Debentures to defer the payment of interest at any time or
from time to time for a period not exceeding 20 consecutive quarters (each such
period an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity. At the end of such Extension Period, the company
must pay all interest then accrued and unpaid (together with interest thereon at
the annual rate of %, compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures will be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences."
During any such Extension Period, the company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the company's capital stock or (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the company (including other Junior
Subordinated Debentures) that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the company of the debt securities of any subsidiary of the
company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures (other than (a) dividends or distributions in
common stock of the company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, and (d) purchases of
common stock related to rights under any of the company's benefit plans for its
directors, officers or employees). Prior to the termination of any such
Extension Period, the company may further extend such Extension Period, provided
that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due on any
Interest Payment Date, the company may elect to begin a new Extension Period
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. The company must give the
Property Trustee, the Administrative Trustees and the Indenture Trustee notice
of its election of any Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Preferred Securities would have
been payable except for the election to begin or extend such
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Extension Period or (ii) the date the Administrative Trustees are required to
give notice to the holders of the Preferred Securities of the record date or the
date such Distributions are payable, but in any event not less than one Business
Day prior to such record date. The Indenture Trustee shall give notice of the
company's election to begin or extend a new Extension Period the holders of the
Preferred Securities. There is no limitation on the number of times that the
company may elect to begin an Extension Period.
ADDITIONAL SUMS
If the trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the company will pay as
additional amounts on the Junior Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by
the trust shall not be reduced as a result of any such additional taxes, duties
or other governmental charges.
REDEMPTION
Subject to the company having received prior approval of the Federal Reserve, if
then required under applicable capital guidelines or policies of the Federal
Reserve, the Junior Subordinated Debentures are redeemable prior to maturity at
the option of the company (i) on or after , 2003, in whole at any
time or in part from time to time, or (ii) at any time in whole (but not in
part), upon the occurrence and during the continuance of a Tax Event, an
Investment company Event or a Capital Treatment Event, in each case at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof.
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the Redemption Date to each holder of Junior Subordinated Debentures
to be redeemed at such holder's registered address. Unless the company defaults
in payment of the Redemption Price, on and after the Redemption Date interest
ceases to accrue on such Junior Subordinated Debentures or portions thereof
called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities -- Liquidation
Distribution upon Dissolution," under certain circumstances involving the
dissolution of the trust, the Junior Subordinated Debentures may be distributed
to the holders of the Preferred Securities and Common Securities in liquidation
of the trust after satisfaction of liabilities to creditors of the trust as
provided by applicable law. If distributed to holders of the Preferred
Securities in liquidation, the Junior Subordinated Debentures will initially be
issued in the form of one or more global securities and the Depositary, or any
successor depositary for the Preferred Securities, will act as depositary for
the Junior Subordinated Debentures. It is anticipated that the depositary
arrangements for the Junior Subordinated Debentures would be substantially
identical to those in effect for the Preferred Securities. If the Junior
Subordinated Debentures are distributed to the holders of Preferred Securities
upon the liquidation of the trust, there can be no assurance as to the market
price of any Junior Subordinated Debentures that may be distributed to the
holders of Preferred Securities.
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RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred any event of which the company has
actual knowledge that (a) with the giving of notice or the lapse of time, or
both, would constitute a Debenture Event of Default and (b) in respect of which
the company shall not have taken reasonable steps to cure, or (ii) the company
shall have given notice of its election of an Extension Period as provided in
the Indenture with respect to the Junior Subordinated Debentures and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing, or (iii) while the Junior Subordinated Debentures are held
by the trust, the company shall be in default with respect to its payment of any
obligation under the Guarantee, then the company will not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the company's capital stock or (2)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the company (including other Junior
Subordinated Debt) that rank pari passu with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the company of the debt securities of any subsidiary of the company
if such guarantee ranks equal to or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in common
stock, (b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan in
the future or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee and (d) purchases of common stock related to
rights under any of the company's benefit plans for its directors, officers or
employees).
SUBORDINATION
The Indenture, provides that any Junior Subordinated Debentures will be
subordinate and junior in right of payment to all Senior and Subordinated Debt
of the company. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the company, the holders of Senior and Subordinated
Debt will first be entitled to receive payment in full of principal of (and
premium, if any) and interest, if any, on such Senior and Subordinated Debt
before the holders of Junior Subordinated Debentures will be entitled to receive
or retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior and Subordinated Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the principal of or interest, if any, on the Junior
Subordinated Debentures; provided, however, that holders of Subordinated Debt
shall not be entitled to receive payment of any such amounts to the extent that
such Subordinated Debt is by its terms subordinated to trade creditors.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior and Subordinated Debt
or an event of
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default with respect to any Senior and Subordinated Debt resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means with respect to any person, whether recourse is to all or a portion
of the assets of such person and whether or not contingent:
- every obligation of such person for money borrowed;
- every obligation of such person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
- every reimbursement obligation of such person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the account
of such person;
- every obligation of such person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
- every capital lease obligation of such person; and
- every obligation of the type referred to in the five foregoing clauses of
another person and all dividends of another person the payment of which,
in either case, such person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which ranks equal with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior and Subordinated Debt shall not be
deemed to include:
- any Debt of the company which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of
1978, as amended, was without recourse to the company;
- any Debt of the company to any of its subsidiaries;
- any Debt to any employee of the company;
- any Debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of such Debt by the holders of
the Junior Subordinated Debentures as a result of the subordination
provisions of the Indenture would be greater than they otherwise would
have been as a result of any obligation of such holders to pay amounts
over to the obligees on such trade accounts payable or accrued
liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject;
- the Guarantee; and
- any other debt securities issued pursuant to the Indenture.
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The Indenture does not limit the amount of additional Senior and Subordinated
Debt that may be incurred by the company. The company expects from time to time
to incur additional indebtedness constituting Senior and Subordinated Debt.
DENOMINATIONS, REGISTRATION AND TRANSFER
Under certain circumstances involving the dissolution of the trust, Junior
Subordinated Debentures will be represented by global certificates registered in
the name of the Depositary or its nominee ("Global Subordinated Debenture").
Beneficial interests in the Junior Subordinated Debentures will be shown on, and
transfers thereof will be effected only through, records maintained by the
Depositary. Except as described below, Junior Subordinated Debentures in
certificated form will not be issued in exchange for the global certificates.
See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or in
part for the individual Junior Subordinated Debentures represented thereby, it
may not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies the company that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been appointed, or if at any time the Depositary ceases to be a
clearing agency registered under the Exchange Act at a time when the Depositary
is required to be so registered to act as such depositary, (ii) the company in
its sole discretion determines that such global security shall be so
exchangeable or (iii) there shall have occurred and be continuing an Event of
Default under the Indenture with respect to such global security. Any global
security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for definitive certificates registered in such names as the
Depositary shall direct. It is expected that such instructions will be based
upon directions received by the Depositary from its Participants with respect to
ownership of beneficial interests in such global security. In the event that
Junior Subordinated Debentures are issued in definitive form, such Junior
Subordinated Debentures will be in denominations of $10 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Payments on Junior Subordinated Debentures represented by a global security will
be made to the Depositary, as the depositary for the Junior Subordinated
Debentures. In the event Junior Subordinated Debentures are issued in definitive
form, principal and interest will be payable, the transfer of the Junior
Subordinated Debentures will be registrable, and Junior Subordinated Debentures
will be exchangeable for Junior Subordinated Debentures of other denominations
of a like aggregate principal amount, at the corporate office of the Indenture
Trustee, or at the offices of any paying agent or transfer agent appointed by
the company, provided that payment of interest may be made at the option of the
company by check mailed to the address of the persons entitled thereto or by
wire transfer. In addition, if the Junior Subordinated Debentures are issued in
certificated form, the record dates for payment of interest will be the first
day of the month in which such payment is to be made. For a description of the
Depositary and the terms of the depositary arrangements
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relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
The company will appoint the Indenture Trustee as securities registrar under the
Indenture (the "Securities Registrar"). Junior Subordinated Debentures may be
presented for exchange as provided above, and may be presented for registration
of transfer (with the form of transfer endorsed thereon, or a satisfactory
written instrument of transfer, duly executed), at the office of the Securities
Registrar. The company may at any time rescind the designation of any such
registrar or approve a change in the location through which any such registrar
acts, provided that the company maintains a registrar in the place of payment.
The company may at any time designate additional registrars with respect to the
Junior Subordinated Debentures.
In the event of any redemption, neither the company nor the Indenture Trustee
shall be required to (i) issue, register the transfer of or exchange Junior
Subordinated Debentures during a period beginning at the opening of business 15
days before the day of selection for redemption of Junior Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption or (ii) transfer or exchange any Junior
Subordinated Debentures so selected for redemption, except, in the case of any
Junior Subordinated Debentures being redeemed in part, any portion thereof not
to be redeemed.
GLOBAL SUBORDINATED DEBENTURE
As described above under "-- Distribution Upon Liquidation," under certain
circumstances, the Junior Subordinated Debentures may be distributed to the
holders of the Preferred Securities and Common Securities upon the liquidation
of the trust. In such case, the Junior Subordinated Debentures will be
represented by the Global Subordinated Debenture, with beneficial interests and
transfers being reflected only on the books of the Depositary. The Global
Subordinated Debenture will be exchangeable for individual Junior Subordinated
Debentures, in certificated form, registered in the names of persons other than
the Depositary, only in certain circumstances as described above under
"-- Denominations, Registration and Transfer."
Upon the issuance of the Global Subordinated Debenture, and the deposit of such
Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture or its nominee will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the individual Junior Subordinated Debentures represented by such
Global Subordinated Debenture to Participants. Ownership of beneficial interests
in a Global Subordinated Debenture will be limited to Participants or persons
that may hold interests through Participants. Ownership of beneficial interests
in such Global Subordinated Debenture will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the applicable
Depositary or its nominee (with respect to interests of Participants) and the
records of Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its nominee,
is the registered owner of such Global Subordinated Debenture, such Depositary
or such nominee, as the case may be, will be considered the sole owner or holder
of the Junior Subordinated Debentures represented by such Global Subordinated
Debenture for all
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purposes under the Indenture governing such Junior Subordinated Debentures.
Except as provided below, owners of beneficial interests in a Global
Subordinated Debenture will not be entitled to have any of the individual Junior
Subordinated Debentures represented by such Global Subordinated Debenture
registered in their names, will not receive or be entitled to receive physical
delivery of any such Junior Subordinated Debentures in definitive form and will
not be considered the owners or holders thereof under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures, including payments in respect of any redemption, represented by a
Global Subordinated Debenture registered in the name of the Depositary or its
nominee will be made to the Depositary or its nominee, as the case may be, as
the registered owner of the Global Subordinated Debenture representing such
Junior Subordinated Debentures. The Depositary or its nominee, as the case may
be, will in turn make payments to Participants in proportion to the respective
principal amounts of the individual Junior Subordinated Debentures credited to
their accounts. None of the company, the Indenture Trustee, any Paying Agent, or
the Securities Registrar for such Junior Subordinated Debentures will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global
Subordinated Debenture representing such Junior Subordinated Debentures or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of the Global Subordinated Debenture
representing the Junior Subordinated Debentures, immediately will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the principal amount of the Global
Subordinated Debenture as shown on the records of such Depositary or its
nominee. The company also expects that payments by Participants to owners of
beneficial interests in such Global Subordinated Debenture held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary is at any time unwilling, unable or ineligible to continue as
depositary and a successor depositary is not appointed by the company within 90
days, the company will issue individual Junior Subordinated Debentures in
exchange for the Global Subordinated Debenture. In addition, the company may at
any time and in its sole discretion, determine not to have the Junior
Subordinated Debentures represented by one or more Global Subordinated
Debentures and, in such event, will issue individual Junior Subordinated
Debentures in exchange for the Global Subordinated Debenture. Further, if the
company so specifies with respect to the Junior Subordinated Debentures, an
owner of a beneficial interest in a Global Subordinated Debenture representing
the Junior Subordinated Debentures may, on terms acceptable to the company, the
Indenture Trustee and the Depositary for such Global Subordinated Debenture,
receive individual Junior Subordinated Debentures in exchange for such
beneficial interests. In any such instance, an owner of a beneficial interest in
a Global Subordinated Debenture will be entitled to physical delivery of
individual Junior Subordinated Debentures equal in principal amount to such
beneficial interest and to have such Junior Subordinated Debentures registered
in its name. Individual Junior Subordinated Debentures so issued will be issued
in
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denominations, unless otherwise specified by the company, of $10 and integral
multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated Debentures
will be made at the office of the Indenture Trustee, except that at the option
of the company payment of any interest may be made (i) except in the case of a
Global Subordinated Debenture, by check mailed to the address of the person
entitled thereto as such address shall appear in the securities register or (ii)
by transfer to an account maintained by the person entitled thereto as specified
in the securities register, provided that proper transfer instructions have been
received by the regular record date. Payment of any interest on Junior
Subordinated Debentures will be made to the person in whose name such Junior
Subordinated Debenture is registered at the close of business on the regular
record date for such interest. The company may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent; however, the
company will at all times be required to maintain a Paying Agent in each place
of payment for the Junior Subordinated Debentures.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the company in trust, for the payment of the principal of or interest on
the Junior Subordinated Debentures and remaining unclaimed for two years after
such principal or interest has become due and payable shall, at the request of
the company, be repaid to the company and the holder of such Junior Subordinated
Debenture shall thereafter look, as a general unsecured creditor, only to the
company for payment thereof.
MODIFICATION OF INDENTURE
From time to time the company and the Indenture Trustee may, without the consent
of the holders of the Junior Subordinated Debentures, amend, waive or supplement
the Indenture for specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies (provided that any such action does not
materially adversely affect the interests of the holders of the Junior
Subordinated Debentures or the Preferred Securities so long as they remain
outstanding) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
company and the Indenture Trustee, with the consent of the holders of not less
than a majority in principal amount of the outstanding Junior Subordinated
Debentures, to modify the Indenture in a manner affecting the rights of the
holders of the Junior Subordinated Debentures; provided, that, no such
modification may, without the consent of the holder of each outstanding
Subordinated Debenture, (i) change the Stated Maturity of the Junior
Subordinated Debentures or extend the time of payment of interest thereon
(except as described under "-- General" and "-- Option to Extend Interest
Payment Period"), or reduce the principal amount thereof or the rate of interest
thereon, or (ii) reduce the percentage of principal amount of Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture, provided that so long as any of the
Preferred Securities remain outstanding, no such modification may be made that
adversely affects the holders of such Preferred Securities in any material
respect, and no termination of the Indenture may occur, and no waiver of any
Debenture Event of Default or compliance with any covenant under the Indenture
may be effective, without the prior consent of the holders of at least a
majority of the aggregate Liquidation Amount of the Preferred Securities unless
and until the principal of the Junior Subordinated
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Debentures and all accrued and unpaid interest thereon have been paid in full
and certain other conditions are satisfied.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described events
with respect to the Junior Subordinated Debentures that has occurred and is
continuing constitutes a "Debenture Event of Default" with respect to the Junior
Subordinated Debentures:
- failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
- failure to pay any principal on the Junior Subordinated Debentures when
due whether at maturity, upon redemption by declaration or otherwise; or
- failure by the company to observe or perform in any material respect
certain other covenants contained in the Indenture for 90 days after
written notice to the company from the Indenture Trustee or to the company
and the Indenture Trustee by the holders of at least 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures;
- certain events in bankruptcy, insolvency or reorganization of the
company, including the voluntary commencement of bankruptcy proceedings,
entry of an order for relief against the company in a bankruptcy
proceeding, appointment of a custodian over substantially all of the
company's property, a general assignment for the benefit of creditors, or a
court order for liquidation of the company; or
- in the event Junior Subordinated Debentures are issued to the trust or a
trustee of the trust in connection with the issuance of the Trust
Securities by the trust, if the trust shall have voluntarily or
involuntarily dissolved, wound up its business or otherwise terminated its
existence, except in connection with (i) the distribution of Junior
Subordinated Debentures to the holders in liquidation of their interests in
the trust; (ii) the redemption of all of the outstanding Trust Securities;
or (iii) certain mergers, consolidations or amalgamations, each as
permitted by the Trust Agreement.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct any proceeding for any
remedy available to the Indenture Trustee. The Indenture Trustee or the holders
of not less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Indenture Trustee. If the holders of
the Junior Subordinated Debentures fail to annul such declaration and waive such
default, the holders of a majority in aggregate Liquidation Amount of the
Preferred Securities would have such right. In case a Debenture Event of Default
shall occur and be continuing, the Property Trustee may declare the principal of
and the interest on such Junior Subordinated Debentures, and any other amounts
payable under the Indenture, to be due and payable and to enforce its other
rights as a creditor with respect to such Junior Subordinated Debentures.
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The company is required to file annually with the Indenture Trustee a
certificate as to whether the company is in compliance with its obligations
under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default for failure to pay interest or principal on the
Junior Subordinate Debentures has occurred and is continuing, a holder of
Preferred Securities may institute a legal proceeding directly against the
company for enforcement of payment to such holder of the principal of or
interest on such Junior Subordinated Debentures having a principal amount equal
to the aggregate Liquidation Amount of the Preferred Securities of such holder
("Direct Action"). If the right to bring a Direct Action is removed, the trust
may become subject to the reporting obligations under the Exchange Act. The
company shall have the right under the Indenture to set-off any payment made to
such holder of Preferred Securities by the company in connection with a Direct
Action.
The holders of the Preferred Securities would not be able to exercise directly
any remedies other than those set forth in the preceding paragraph available to
the holders of the Junior Subordinated Debentures unless there shall have been
an Event of Default under the Trust Agreement. See "Description of the Preferred
Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the company shall not consolidate with, convert into
or merge into any other Person or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, and no Person shall
consolidate with, convert into or merge into the company or convey, transfer or
lease its properties and assets substantially as an entirety to the company,
unless (i) in case the company consolidates with, converts into or merges into
another Person or conveys or transfers its properties and assets substantially
as an entirety to any Person, the successor Person is organized under the laws
of the United States or any state or the District of Columbia, and such
successor Person expressly assumes the company's obligations on the Junior
Subordinated Debentures issued under the Indenture; (ii) immediately after
giving effect thereto, no Debenture Event of Default, and no event which, after
notice or lapse of time or both, would become a Debenture Event of Default,
shall have occurred and be continuing; and (iii) certain other conditions as
prescribed in the Indenture are met.
The provisions of the Indenture do not afford holders of the Junior Subordinated
Debentures protection in the event of a highly leveraged or other transaction
involving the company that may adversely affect holders of the Junior
Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior Subordinated
Debentures not previously delivered to the Indenture Trustee for cancellation
(i) have become due and payable or (ii) will become due and payable at their
Stated Maturity within one year, and the company deposits or causes to be
deposited with the Indenture Trustee, in trust, funds for the purpose and in an
amount in the currency or currencies in which the Junior Subordinated Debentures
are payable sufficient to pay and discharge the entire indebtedness on the
Junior Subordinated Debentures not previously delivered to the Indenture Trustee
for cancellation, for the principal and interest to the date of the deposit or
to the Stated Maturity, as the case may be, then the Indenture will cease to be
of further effect (except as to the company's obligations to pay all other sums
due pursuant
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to the Indenture and to provide the officers' certificates and opinions of
counsel described therein), and the company will be deemed to have satisfied and
discharged the Indenture.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Colorado.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
COVENANTS OF THE COMPANY
The company will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) the trust is the holder of all such
Junior Subordinated Debentures, (ii) a Tax Event in respect of the trust has
occurred and is continuing and (iii) the company has elected, and has not
revoked such election, to pay Additional Sums (as defined under "Description of
the Preferred Securities -- Definitions") in respect of the Preferred
Securities, the company will pay to the trust such Additional Sums. The company
will also covenant, as to the Junior Subordinated Debentures, (i) to maintain
directly or indirectly 100% ownership of the Common Securities of the trust to
which Junior Subordinated Debentures have been issued, provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
company's ownership of the Common Securities, (ii) not to voluntarily dissolve,
wind up or liquidate the trust, except upon prior approval of the Federal
Reserve if then so required under applicable capital guidelines or policies of
the Federal Reserve, and except (a) in connection with a distribution of Junior
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of the trust or (b) in connection with certain mergers,
consolidations, or amalgamations permitted by the Trust Agreement and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause the trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States federal income
tax purposes.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Preferred
Securities and, if there is a dissolution of the trust account, the Junior
Subordinated Debentures. The Preferred Securities and the Junior Subordinated
Debentures will be issued only as fully-registered securities registered in the
name of Cede & Co. (the Depositary's nominee). One or more fully-registered
global certificates will be issued for the Preferred Securities and the Junior
Subordinated Debentures and will be deposited with the Depositary.
The Depositary is a limited purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
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Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary holds securities that its Participants deposit with the Depositary.
The Depositary also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. "Direct
Participants" include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. The Depositary is owned
by a number of its Direct Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange and the National Association of Securities Dealers,
Inc. Access to the Depositary system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain custodial relationships with Direct Participants, either directly or
indirectly ("Indirect Participants"). The rules applicable to the Depositary and
its Participants are on file with the Securities and Exchange Commission.
Purchases of Preferred Securities or Junior Subordinated Debentures within the
Depositary system must be made by or through Direct Participants, which will
receive a credit for the Preferred Securities or Junior Subordinated Debentures
on the Depositary's records. The ownership interest of each actual purchaser of
each Preferred Security and each Junior Subordinated Debenture ("Beneficial
Owner") is in turn to be recorded on the Direct and Indirect Participants'
records. Beneficial Owners will not receive written confirmation from the
Depositary of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Preferred Securities or Junior
Subordinated Debentures. Transfers of ownership interests in the Preferred
Securities or Junior Subordinated Debentures are to be accomplished by entries
made on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Preferred Securities or Junior Subordinated Debentures, except in
the event that use of the book-entry system for the or Junior Subordinated
Debentures is discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the Preferred
Securities or Junior Subordinated Debentures; the Depositary's records reflect
only the identity of the Direct Participants to whose accounts such Preferred
Securities or Junior Subordinated Debentures are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of the
Preferred Securities or Junior Subordinated Debentures. If less than all of the
Preferred Securities or the Junior Subordinated Debentures are being redeemed,
the Depositary will determine by
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lot or pro rata the amount of the Preferred Securities of each Direct
Participant to be redeemed.
Although voting with respect to the Preferred Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Preferred
Securities or the Junior Subordinated Debentures, in those instances in which a
vote is required, neither the Depositary nor Cede & Co. will itself consent or
vote with respect to Preferred Securities or Junior Subordinated Debentures.
Under its usual procedures, the Depositary would mail an omnibus proxy (the
"Omnibus Proxy") to the relevant Trustee as soon as possible after the record
date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to
those Direct Participants to whose accounts such Preferred Securities or Junior
Subordinated Debentures are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Distribution payments on the Preferred Securities or the Junior Subordinated
Debentures will be made by the relevant Trustee to the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of the
Depositary, the relevant Trustee, the trust or the company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to the Depositary is the responsibility of the relevant
Trustee, disbursement of such payments to Direct Participants is the
responsibility of the Depositary, and disbursements of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities depositary
with respect to any of the Preferred Securities or the Junior Subordinated
Debentures at any time by giving reasonable notice to the relevant Trustee and
the company. In the event that a successor securities depositary is not
obtained, definitive Preferred Securities or Subordinated Debenture certificates
representing such Preferred Securities or Junior Subordinated Debentures are
required to be printed and delivered. The company, at its option, may decide to
discontinue use of the system of book-entry transfers through the Depositary (or
a successor depositary). After a Debenture Event of Default, the holders of a
majority in liquidation preference of Preferred Securities or aggregate
principal amount of Junior Subordinated Debentures may determine to discontinue
the system of book-entry transfers through the Depositary. In any such event,
definitive certificates for such Preferred Securities or Junior Subordinated
Debentures will be printed and delivered.
The Depositary's management is aware that some computer applications, systems,
and the like for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." The Depositary has informed its participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades with the
Depositary, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, the Depositary's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
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However, the Depositary's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third-party vendors from whom the Depositary licenses
software and hardware, and third-party vendors on whom the Depositary relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. The Depositary has informed
the Industry that it is contacting (and will continue to contact) third-party
vendors from whom the Depositary acquires services to: (i) impress upon them the
importance of such services being Year 2000 compliant and (ii) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, the Depositary is in the process of developing
such contingency plans as it deems appropriate.
According to the Depositary, the foregoing information with respect to the
Depositary has been provided to the Industry for informational purposes only and
is not intended to serve as a representation, warranty or contract modification
of any kind.
The information in this section concerning the Depositary and the Depositary's
book-entry system has been obtained from sources that the trust and the company
believe to be accurate, but the trust and the company assume no responsibility
for the accuracy thereof. Neither the trust nor the company has any
responsibility for the performance by the Depositary or its Participants of
their respective obligations as described herein or under the rules and
procedures governing their respective operations.
DESCRIPTION OF GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be executed
and delivered by the company concurrently with the issuance of the Preferred
Securities for the benefit of the holders of the Preferred Securities. American
Securities Transfer & Trust, Inc. will act as trustee under the Guarantee (the
"Guarantee Trustee") for the purposes of compliance with the Trust Indenture
Act, and the Guarantee will be qualified under the Trust Indenture Act. The
following summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Guarantee, including the definitions therein of certain
terms, and the Trust Indenture Act. The form of the Guarantee has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The Guarantee Trustee will hold the Guarantee for the benefit of the holders of
the Preferred Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of all of
the trust's obligations under the Preferred Securities. It will apply only to
the extent that Union Capital has funds sufficient to make such payments, and is
not a guarantee of collection.
The company will irrevocably agree to pay in full on a subordinated basis, to
the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the trust may have or assert other than
the defense of payment. The following payments with respect to the Preferred
Securities, to the extent not paid by or on behalf of the trust (the "Guarantee
Payments"), are covered by the Guarantee: (i) any accumulated and unpaid
Distributions required to be paid on the Preferred Securities, (ii) the
Redemption Price with respect to any Preferred Securities called for redemption,
and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation
of the trust (unless the
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Junior Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the Liquidation Distribution and (b) the amount
of assets of the trust remaining available for distribution to holders of
Preferred Securities. The company's obligation to make a Guarantee Payment may
be satisfied by direct payment of the required amounts by the company to the
holders of the Preferred Securities or by causing the trust to pay such amounts
to such holders.
If the company does not make interest payments on the Junior Subordinated
Debentures held by the trust, the trust will not have funds legally available to
pay Distributions on the Preferred Securities. The Guarantee will rank
subordinate and junior in right of payment to all Senior and Subordinated Debt
of the company. See "-- Status of the Guarantee" below. Because the company is a
holding company, the right of the company to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise, is subject to the prior claims of creditors of that subsidiary,
except to the extent the company may itself be recognized as a creditor of that
subsidiary. Accordingly, the company's obligations under the Guarantee will be
effectively subordinated to all existing and future liabilities of the company's
subsidiaries, and claimants should look only to the assets of the company for
payments thereunder. Except as otherwise described herein, the Guarantee does
not limit the incurrence or issuance of other secured or unsecured debt of the
company, including Senior and Subordinated Debt whether under the Indenture, any
other indenture that the company may enter into in the future, or otherwise.
The company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed on a subordinated
basis all of the trust's obligations under the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee on a subordinated basis of all of the trust's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee is unsecured and ranks subordinate and junior in right of payment
to all Senior and Subordinated Debt in the same manner as the Junior
Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection. The
guaranteed party may institute a legal proceeding directly against the company
to enforce its rights under the Guarantee without first instituting a legal
proceeding against any other person or entity. The Guarantee will be held for
the benefit of the holders of the Preferred Securities. The Guarantee will not
be discharged except by payment of the Guarantee Payments in full to the extent
not paid by the trust or upon distribution to the holders of the Preferred
Securities of the Junior Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee does not place a limitation on the amount of
additional Senior and Subordinated Debt that may be incurred by the company. The
company expects from time to time to incur additional indebtedness constituting
Senior and Subordinated Debt.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect the
rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Preferred Securities. See "Description of the Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the company and shall inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee.
Any holder of the Preferred Securities may institute a legal proceeding directly
against the company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the trust, the Guarantee Trustee or any
other person or entity.
The company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether the company is in compliance with all the
conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the Guarantee Trustee is under no obligation
to exercise any of the powers vested in it by the Guarantee at the request of
any holder of the Preferred Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Preferred Securities, upon full payment
of the amounts payable upon liquidation of the trust or upon distribution of
Junior Subordinated Debentures to the holders of the Preferred Securities. The
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of the Preferred Securities must restore payment
of any sums paid under the Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws of
the State of Colorado.
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THE EXPENSE AGREEMENT
Pursuant to the Agreement as to Expenses and Liabilities entered into by the
company and the trust (the "Expense Agreement"), the company will irrevocably
and unconditionally guarantee to each person or entity to whom the trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the trust, other than obligations of the trust to pay to the holders of the
Preferred Securities or other similar interests in the trust of the amounts due
such holders pursuant to the terms of the Preferred Securities or such other
similar interests, as the case may be.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities are
irrevocably guaranteed by the company as and to the extent set forth under
"Description of Guarantee." Taken together, the company's obligations under the
Junior Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement and the Guarantee provide, in the aggregate, a guarantee on a
subordinated basis, to the extent described herein, of payments of Distributions
and other amounts due on the Preferred Securities (to the extent Union
Bankshares Capital Trust I has funds available for the payment of such
Distributions). No single document standing alone or operating in conjunction
with fewer than all of the other documents constitutes such guarantee. It is
only the combined operation of those documents that has the effect of providing
a guarantee on a subordinated basis of the trust's obligations under the
Preferred Securities. If and to the extent that the company does not make
payments on the Junior Subordinated Debentures, the trust will not pay
Distributions or other amounts due on the Preferred Securities. The Guarantee
does not cover payment of Distributions when the trust does not have sufficient
funds to pay such Distributions. In such event, the remedy of a holder of the
Preferred Securities is to institute a legal proceeding directly against the
company for enforcement of payment of such Distributions to such holder. The
obligations of the company under the Guarantee are subordinate and junior in
right of payment to all Senior and Subordinated Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because:
- - the aggregate principal amount of the Junior Subordinated Debentures will be
equal to the sum of the aggregate Liquidation Amount of the Preferred
Securities and Common Securities;
- - the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the Distribution rate and Distribution and
other payment dates for the Preferred Securities;
- - the company shall pay for all and any costs, expenses and liabilities of the
trust except the trust's obligations to holders of Preferred Securities; and
- - the Trust Agreement further provides that the trust will not engage in any
activity that is not consistent with the limited purposes of the trust.
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Notwithstanding anything to the contrary in the Indenture, the company has the
right to set-off any payment it is otherwise required to make thereunder with
and to the extent the company has theretofore made, or is concurrently on the
date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES UNDER THE GUARANTEE
A holder of any the Preferred Securities may institute a legal proceeding
directly against the company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the trust or
any other person or entity.
A default or event of default under any Senior and Subordinated Debt would not
constitute an Event of Default. However, in the event of payment defaults under,
or acceleration of, Senior and Subordinated Debt, the subordination provisions
of the Indenture provide that no payments may be made in respect of the Junior
Subordinated Debentures until such Senior and Subordinated Debt has been paid in
full or any payment default thereunder has been cured or waived. Failure to make
required payments on Junior Subordinated Debentures would constitute an Event of
Default.
LIMITED PURPOSE OF THE TRUST
The Preferred Securities evidence a beneficial interest in Union Bankshares
Capital Trust I, and the trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in the Junior Subordinated
Debentures. A principal difference between the rights of a holder of the
Preferred Securities and a holder of a Subordinated Debenture is that a holder
of a Subordinated Debenture is entitled to receive from the company the
principal amount of and interest accrued on Junior Subordinated Debentures held,
while a holder of the Preferred Securities is entitled to receive Distributions
from the trust (or from the company under the Guarantee) if and to the extent
the trust has funds available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of the
trust involving the liquidation of the Junior Subordinated Debentures, the
holders of Preferred Securities will be entitled to receive, out of assets held
by the trust, the Liquidation Distribution in cash. See "Description of the
Preferred Securities -- Liquidation Distribution upon Dissolution." Upon any
voluntary or involuntary liquidation or bankruptcy of the company, the Property
Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the company, subordinated in right of payment to all
Senior and Subordinated Debt as set forth in the Indenture, but entitled to
receive payment in full of principal and interest, before any stockholders of
the company receive payments or distributions. Since the company is the
guarantor under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of the trust (other than the trust's obligations to the holders of
its Preferred Securities), the positions of a holder of the Preferred Securities
and a holder of Junior Subordinated Debentures relative to other creditors and
to stockholders of the company in the event of liquidation or bankruptcy of the
company are expected to be substantially the same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Davis, Graham & Stubbs LLP, counsel to the company
("Counsel"), the following summary accurately describes the material United
States federal income tax consequences that may be relevant to the purchase,
ownership and disposition of Preferred Securities. Unless otherwise stated, this
summary deals only with Preferred Securities held as capital assets by United
States Persons (defined below) who purchase the Preferred Securities upon
original issuance at the first price at which a substantial amount of Preferred
Securities were sold. As used herein, a "United States Person" means a person
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of its
source, or (iv) any trust if a court within the United States is able to
exercise primary supervision over the administration of such trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of such trust. The tax treatment of holders may vary depending on
their particular situation. This summary does not address all the tax
consequences that may be relevant to a particular holder or to holders who may
be subject to special tax treatment, such as banks, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors, foreign investors, persons that
will hold the Preferred Securities as part of a position in a "straddle" or as
part of a "hedging" or other integrated transaction, persons whose functional
currency is not the United States dollar or persons that do not hold the
Preferred Securities as capital assets. In addition, this summary does not
include any description of any alternative minimum tax consequences or the tax
laws of any state, local or foreign government that may be applicable to a
holder of Preferred Securities. This summary is based on the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis. Any such change could cause the tax consequences to vary substantially
from the consequences described below, possibly adversely affecting an owner of
Preferred Securities.
The following discussion does not discuss the tax consequences that might be
relevant to persons that are not United States Persons ("non-United States
Persons"). Non-United States Persons should consult their own tax advisors as to
the specific United States federal income tax consequences of the purchase,
ownership and disposition of Preferred Securities.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the Service with
respect to the transactions described herein. Accordingly, there can be no
assurance that the Service will not challenge the opinions expressed herein or
that a court would not sustain such a challenge. It is therefore possible that
the federal income tax treatment of the purchase, ownership and disposition of
Preferred Securities may differ from the treatment described below.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND
OTHER TAX
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<PAGE> 118
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX
LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE PREFERRED SECURITIES
UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE "DESCRIPTION OF THE PREFERRED
SECURITIES -- REDEMPTION."
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Preferred Securities, Counsel is of the
opinion that, under current law and assuming compliance with the terms of the
Trust Agreement, and based on certain facts and assumptions contained in such
opinion, Union Bankshares Capital Trust I will be classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes. As a result, each beneficial owner of the Preferred
Securities (a "Securityholder") will be treated as owning an undivided
beneficial interest in the Junior Subordinated Debentures. Accordingly, each
Securityholder will be required to include in its gross income its pro rata
share of the interest income or OID that is paid or accrued on the Junior
Subordinated Debentures. See "-- Interest Income and Original Issue Discount."
No amount included in income with respect to the Preferred Securities will be
eligible for the dividends received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The company intends to take the position, based on the advice of Davis, Graham &
Stubbs LLP, that the Junior Subordinated Debentures will be classified for
United States federal income tax purposes as indebtedness of the company under
current law, and, by acceptance of a Preferred Security, each holder covenants
to treat the Junior Subordinated Debentures as indebtedness of the company for
all United States tax purposes and the Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures. No
assurance can be given, however, that such position of the company will not be
challenged by the Service or, if challenged, that such a challenge will not be
successful. The remainder of this discussion assumes that the Junior
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the company. See "Risk Factors -- Possible Tax Law
Changes Affecting the Preferred Securities."
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the Junior Subordinated Debentures
generally will be included in income by a Securityholder at the time such
interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting.
The company believes that the Junior Subordinated Debentures will not be
considered to have been issued with OID within the meaning of Section 1273(a) of
the Code since under the applicable Treasury regulations a "remote" contingency
that stated interest will not be timely paid is ignored in determining whether a
debt instrument is issued with OID. The company believes that the likelihood of
exercising its option to defer payments of interest is "remote;" however, the
Treasury regulations provide no guidance with respect to when a contingency is
"remote." If the company's option to defer payments of interest on the Junior
Subordinated Debentures were not treated as remote, the Junior Subordinated
Debentures would be considered issued with OID at original issuance which would,
in general, accrue over the term of the Junior Subordinated Debentures described
below.
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<PAGE> 119
If the company exercises its right to defer payments of interest on the Junior
Subordinated Debentures, the Junior Subordinated Debentures will become OID
instruments, and the amount of OID will be equal to the aggregate of all future
payments of interest on the Junior Subordinated Debentures. In such event, all
Securityholders will be required to accrue the OID on the Junior Subordinated
Debentures on a daily basis during the Extension Period, even though the company
will not pay such interest until the end of the Extension Period, and even
though some Securityholders may use the cash method of tax accounting. Moreover,
thereafter the Junior Subordinated Debentures will be taxed as OID instruments
for as long as they remained outstanding. Thus, even after the end of the
Extension Period, all Securityholders will be required to continue to include
the OID on the Junior Subordinated Debentures in income on a daily economic
accrual basis, regardless of their method of tax accounting and in advance of
receipt of the cash attributable to such interest income. Under the OID economic
accrual rules, a Securityholder will accrue an amount of interest income each
year that approximates the stated interest payments called for under the Junior
Subordinated Debentures, and actual cash payments of interest on the Junior
Subordinated Debentures generally will not be reported separately as taxable
income.
The Treasury regulations described above have not yet been addressed in any
rulings or other definitive interpretations by the Service, and it is possible
that the Service could take a contrary position. If the Service were to assert
successfully that the stated interest on the Junior Subordinated Debentures was
OID regardless of whether the company exercises its right to defer payments of
interest on such debentures, all Securityholders would be required to include
such stated interest in income on a daily economic accrual basis as described
above.
The company does not anticipate that Additional Sums (as defined in the
Indenture) will be paid. However, if Additional Sums are paid, they will be
taxable to the Securityholder as ordinary income (generally as interest income).
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES
Under current law, a distribution by Union Bankshares Capital Trust I of the
Junior Subordinated Debentures as described under the caption "Description of
the Preferred Securities -- Liquidation and Distribution upon Dissolution" will
be non-taxable and will result in the Securityholder receiving directly its pro
rata share of the Junior Subordinated Debentures previously held indirectly
through the trust, with a holding period and aggregate tax basis equal to the
holding period and aggregate tax basis such Securityholder had in its Preferred
Securities before such distribution. If, however, the liquidation of the trust
were to occur because the trust is subject to United States federal income tax
with respect to income accrued or received on the Junior Subordinated Debentures
as a result of a Tax Event or otherwise, the distribution of Junior Subordinated
Debentures to Securityholders by the trust would be a taxable event to the trust
and each Securityholder, and a Securityholder would recognize gain or loss as if
the Securityholder had sold or exchanged its Preferred Securities for the Junior
Subordinated Debentures it received upon the liquidation of the trust. See
"-- Sales or Redemption of Preferred Securities." A Securityholder would
recognize interest income in respect of Junior Subordinated Debentures received
from the trust in the manner described above under "-- Interest Income and
Original Issue Discount."
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<PAGE> 120
SALES OR REDEMPTION OF PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Preferred
Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized (which for this purpose, will exclude
amounts attributable to accrued interest or OID not previously included in
income, which amount will be subject to tax as ordinary interest income) and the
Securityholder's adjusted tax basis in the Preferred Securities sold or so
redeemed. A Securityholder's adjusted tax basis will be its initial purchase
price increased by any accrued OID previously included in such Securityholder's
gross income to the date of disposition and decreased by payments (other than
stated interest on the Junior Subordinated Debentures that does not constitute
OID) received on the Preferred Securities. Any gain or loss on the sale,
exchange or retirement of the Preferred Securities generally will be treated as
capital gain or loss. Under recently enacted legislation, an individual U.S.
holder generally will be subject to tax on the net amount of his or her capital
gain realized on the sale, exchange or retirement of the Preferred Securities at
a maximum rate of 20% for Preferred Securities held for more than one year and
at a maximum rate of 39.6% for Preferred Securities held one year or less.
Special rules (and generally lower maximum rates) apply for individuals whose
taxable income is below certain levels. The deductibility of capital losses is
subject to limitations.
Should the company exercise its option to defer any payment of interest on the
Junior Subordinated Debentures, the Preferred Securities may trade at a price
that does not fully reflect the value of accrued but unpaid interest with
respect to the underlying Junior Subordinated Debentures. In the event of such a
deferral, a Securityholder that disposes of its Preferred Securities between
record dates for payments of Distributions (and consequently does not receive a
Distribution from the trust for the period prior to such disposition) will
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such Securityholder will recognize a capital loss on the
disposition of its Preferred Securities to the extent the selling price (which
may not fully reflect the value of accrued but unpaid interest) is less than the
Securityholder's adjusted tax basis in the Preferred Securities (which will
include accrued but unpaid interest that has been taken into account in income).
Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest paid or OID accrued, if any, on the Junior Subordinated
Debentures, beneficial ownership of which is reflected in the Preferred
Securities held of record by United States Persons (other than corporations and
other exempt Securityholders), will be reported to the Service. Generally,
income on the Preferred Securities will be reported to Securityholders on Form
1099, which form should be mailed to Securityholders by January 31 following
each calendar year. "Backup" withholding at a rate of 31% will apply to payments
of interest to non-exempt United States Persons unless the Securityholder
furnishes its taxpayer identification number in the manner prescribed in
applicable Treasury Regulations, certifies that such number is correct,
certifies as to no loss of exemption from backup withholding and meets certain
other conditions. Any amounts withheld from a Securityholder under the backup
withholding rules will be allowed as a refund or a credit against such
Securityholder's United States federal income tax liability, provided the
required information is furnished to the Service. Payment of the proceeds
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<PAGE> 121
from the disposition of Preferred Securities to or through the United States
office of a broker is subject to information reporting and backup withholding
unless the Securityholder or beneficial owner establishes an exemption from
information reporting and backup withholding.
POSSIBLE TAX LAW CHANGES AFFECTING PREFERRED SECURITIES
The company can make no assurance that future legislative proposals or final
legislation will not affect the ability of the company to deduct interest on the
Junior Subordinated Debentures. Such a change could give rise to a Tax Event,
which may permit the company to cause a redemption of the Trust Preferred
Securities. See "Risk Factors -- Possible Tax Law Changes Affecting the
Preferred Securities," "Description of the Preferred Securities -- Redemption"
and "Description of the Junior Subordinated Debentures -- Redemption."
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ERISA CONSIDERATIONS
Many retirement plans are subject to the rules of the Employee Retirement Income
Security Act of 1974 ("ERISA"), and they are also subject to requirements in the
Code. Retirement plans generally may purchase Preferred Securities. When they
do, the fiduciaries for these retirement plans (usually trustees and custodians)
are required to comply with fiduciary duties under ERISA and other requirements
under the Code. Retirement plans can be employer-sponsored plans like pension
plans and profit sharing plans, individual retirement accounts (IRAs), and other
types of plans which defer the receipt of income.
If a retirement plan is sponsored and/or contributed to by a party that is
affiliated in certain ways with the company, the company and/or its affiliate
could be a "party in interest" or a "disqualified person." The rules regarding
these relationships are very complex. They can arise if the company is a
fiduciary to a retirement plan, such as being the trustee or custodian. They can
arise if the company or one of its affiliates provides any services to or for
the retirement plan. There are many other circumstances which can cause the
relationship to exist. When one of these relationships exists, the purchase of
Preferred Securities by the retirement plan is likely to result in a transaction
that is not permitted by ERISA and/or the Code. These transactions are referred
to as "prohibited transactions" or "disqualifying transactions." These could
lead to excise tax penalties and even tax disqualification of a retirement plan.
However, there may be ways to exempt prohibited transactions from the excise tax
penalties and tax disqualification. This may require application to a
governmental agency.
If the company or one of its affiliates is a party in interest or disqualified
person as to a retirement plan, that retirement plan should not acquire
Preferred Securities without first receiving an exemption. Entities like
partnerships and limited liability companies which have a relationship with the
company and/or one of its affiliates and that may be holding assets of
retirement plans also have to address these prohibited transaction issues. All
of these rules are very complicated. Each purchaser which has a relationship of
any kind with the company and/or one of its affiliates should consult with its
own benefits counsel before acquiring Preferred Securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the company and the underwriters listed on the
table below for whom Bigelow & Company is acting as representative (the
"Representative"), the underwriters have severally agreed to purchase from the
trust an aggregate of 1,000,000 Preferred Securities in the amounts set forth
below opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF PREFERRED SECURITIES
- ------------ ------------------------------
<S> <C>
Bigelow & Company....................................
Barington Capital Group L.P..........................
----------
Total...................................... 1,000,000
</TABLE>
The Underwriting Agreement provides that the underwriters' obligations are
subject to conditions precedent and that the underwriters are committed to
purchase all of the Preferred Securities offered hereby if the underwriters
purchase any Preferred Securities.
The underwriters have advised the company and the trust that they propose to
offer the Preferred Securities to the public at the Public Offering Price set
forth on the cover page
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of this prospectus and to selected dealers at such price less a concession not
in excess of $ per Preferred Security. The underwriters may allow and such
dealers may reallow a concession not in excess of $ per Preferred Security
to certain other dealers. After the offering, the Public Offering Price,
concessions and other selling terms may be changed by the underwriters.
In view of the fact that all of the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Underwriting Agreement provides that the company will pay the underwriters as
compensation for arranging the investment therein of such proceeds, up to $
per Preferred Security, depending upon the commission rate applicable to each
particular investor.
The trust has granted the underwriters an option to purchase up to an additional
100,000 Preferred Securities at the Public Offering Price. Such option, which
expires 30 days from the date of this prospectus, may be exercised solely to
cover over-allotments. To the extent that the underwriters exercise this option
to purchase additional Preferred Securities, the trust will issue and sell to
the company additional Common Securities in such aggregate liquidation amount as
is required for the company to continue to hold Common Securities in an
aggregate liquidation amount equal to at least 3% of the total capital of the
trust and the company will issue and sell to the trust Junior Subordinated
Debentures in an aggregate principal amount equal to the total aggregate
liquidation amount of the additional Preferred Securities being purchased
pursuant to the option and the additional Common Securities.
Each of the company and the trust has agreed to indemnify the underwriters and
their controlling persons against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
underwriters may be required to make in respect thereof.
The underwriters may engage in stabilizing transactions in accordance with
Regulation M under the Exchange Act, as well as passive market making relating
to the Preferred Securities. Stabilizing transactions permit bids and purchases
of the Preferred Securities so long as the stabilizing bids do not exceed a
specified maximum. Such stabilizing transactions may cause the price of the
Preferred Securities to be higher than it would otherwise be in the absence of
such transactions. Such stabilizing transactions, if commenced, may be
discontinued at any time.
The underwriters have advised the trust that they do not intend to confirm any
sales of Preferred Securities to any discretionary accounts. In connection with
the offer and sale of the Preferred Securities, the underwriters will comply
with Rule 2810 under the NASD Conduct Rules, to the extent applicable.
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LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of Union
Bankshares Capital Trust I will be passed upon by Richards, Layton & Finger
P.A., Wilmington, Delaware, special Delaware counsel to the company and the
trust. The validity of the Guarantee and the Junior Subordinated Debentures will
be passed upon for the company by Davis, Graham & Stubbs LLP, Denver, Colorado,
counsel to the company. Certain legal matters in connection with this Offering
will be passed upon for the underwriters by Kutak Rock, Denver, Colorado. Davis,
Graham & Stubbs LLP and Kutak Rock will rely on the opinions of Richards, Layton
& Finger P.A. as to matters of Delaware law. Certain matters relating to United
States federal income tax considerations will be passed upon for the company by
Davis, Graham & Stubbs LLP.
EXPERTS
The Consolidated Financial Statements of the company as of December 31, 1997 and
1996 have been included and incorporated herein by reference in reliance upon
the report of Baird, Kurtz & Dobson, independent certified public accountants,
appearing elsewhere and incorporated herein by reference, given upon their
authority as experts in accounting and auditing.
The Consolidated Financial Statements of the company as of December 31, 1995
have been included and incorporated herein by reference in reliance upon the
report of McGladrey & Pullen, LLP, independent public auditors, appearing
elsewhere and incorporated herein by reference, given upon their authority as
experts in accounting and auditing.
The Financial Statements of Lakewood State Bank as of December 31, 1997 and
1996, have been included herein in reliance upon the report of Fortner, Bayens,
Levkulich and Co., independent certified public accountants, given their
authority as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the company with the Securities and Exchange
Commission are incorporated into this prospectus by reference:
1. The company's Annual Report on Form 10-KSB for the year ended December
31, 1997 as amended by the Amendment to Annual Report on Form 10-KSB/A;
2. The company's Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998; and
3. The company's Current Reports on Form 8-K filed with the Commission on
May 28, 1998 and September 2, 1998.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
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The company will provide without charge to any person to whom this prospectus is
delivered, including any beneficial owner, on the written or oral request of
such person, a copy of any or all of the foregoing documents incorporated by
reference herein (other than exhibits, unless such exhibits are specifically
incorporated by reference in such documents) at no cost to such person. Requests
for such documents should be directed to: Union Bankshares, Ltd., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202, Attn: Chief Financial Officer
(telephone (303) 298-5352).
As used herein, the terms "prospectus" and "herein" mean this prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
AVAILABLE INFORMATION
The company is subject to the informational requirements of the Exchange Act,
and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at the Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Copies of such material may also be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. If available, such information
also may be accessed through the Commission's electronic data gathering,
analysis and retrieval system ("EDGAR") via electronic means, including the
Commission's home page on the Internet (http://www.sec.gov). The company's
common stock is traded on the Nasdaq National Market. Such reports, proxy
statements and other information concerning the company also may be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington D.C. 20006.
The company has filed with the Commission a Registration Statement on Form S-2
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. This prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules relating thereto as permitted by the rules and regulations of the
Commission. For further information pertaining to the company and the securities
offered hereby, reference is made to the Registration Statement and the exhibits
thereto. Items of information omitted from this prospectus, but contained in the
Registration Statement, may be obtained at prescribed rates or inspected without
charge at the offices of the Commission set forth above. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
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No separate financial statements of the trust have been included herein. The
company does not consider that such financial statements would be material to
holders of the Preferred Securities because (i) all of the voting securities of
the trust will be owned by the company, a reporting company under the Exchange
Act, (ii) the trust has no independent operations but exists for the sole
purpose of issuing securities representing undivided beneficial interest in the
assets of the trust and investing the proceeds thereof in the Junior
Subordinated Debentures issued by the company, and (iii) the obligations of the
company described herein to provide certain indemnities in respect of and be
responsible for certain costs, expenses, debts and liabilities of the trust
under the Indenture and pursuant to the Trust Agreement, the guarantee issued by
the company with respect to the Preferred Securities, and the Junior
Subordinated Debentures purchased by the trust and the related Indenture, taken
together, constitute, in the belief of the company and the trust, a full and
unconditional guarantee of payments due on the Preferred Securities. See
"Description of the Junior Subordinated Debentures" and "Description of
Guarantee."
The trust is not currently subject to the information reporting requirements of
the Exchange Act. The trust will become subject to such requirements upon the
effectiveness of the Registration Statement, although it intends to seek and
expects to receive relief therefrom from the Commission.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT............................. F-2
INDEPENDENT AUDITOR'S REPORT................................ F-3
CONSOLIDATED FINANCIAL STATEMENTS OF UNION BANKSHARES, LTD.
Balance Sheets............................................ F-4
Statements of Income...................................... F-6
Statements of Comprehensive Income........................ F-8
Statements of Stockholders' Equity........................ F-9
Statements of Cash Flows.................................. F-11
Notes to Financial Statements............................. F-13
INDEPENDENT AUDITORS' REPORT................................ F-37
FINANCIAL STATEMENTS OF LAKEWOOD STATE BANK
Balance Sheets............................................ F-38
Statements of Income...................................... F-39
Statements of Stockholders' Equity........................ F-40
Statements of Cash Flows.................................. F-41
Notes to Financial Statements............................. F-42
</TABLE>
F-1
<PAGE> 128
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Union Bankshares, Ltd.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of UNION
BANKSHARES, LTD. as of December 31, 1997 and 1996, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the years 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 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 UNION BANKSHARES,
LTD. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As described in Note 1, in 1997, the Company retroactively changed its method of
computing earnings per share to adopt the provisions of Financial Accounting
Standards Board Statement No. 128.
/s/ BAIRD, KURTZ & DOBSON
Denver, Colorado
January 16, 1998
F-2
<PAGE> 129
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Union Bankshares, Ltd.
Denver, Colorado
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Union Bankshares, Ltd. and Subsidiary
(collectively, the Company) for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the Company's operations and
their cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Charlotte, North Carolina
January 23, 1996
F-3
<PAGE> 130
UNION BANKSHARES, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1998 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks....................... $ 17,140,000 $ 15,314,000 $ 12,356,000
Federal funds sold............................ 11,000,000 11,400,000 --
------------ ------------ ------------
Total Cash and Cash Equivalents..... 28,140,000 26,714,000 12,356,000
Held-to-maturity securities................... 25,786,000 27,929,000 24,634,000
Available-for-sale securities................. 58,515,000 37,180,000 39,904,000
Other investments............................. 970,000 916,000 494,000
Loans, net.................................... 125,625,000 120,659,000 98,978,000
Mortgage loans held-for-sale.................. 2,504,000 1,253,000 --
Excess of cost over fair value of net assets
acquired, net of amortization............... 2,551,000 2,720,000 2,946,000
Premises and equipment, net................... 2,030,000 1,378,000 1,573,000
Accrued interest receivable................... 1,636,000 1,353,000 1,107,000
Other assets.................................. 1,641,000 1,403,000 1,194,000
------------ ------------ ------------
Total Assets........................ $249,398,000 $221,505,000 $183,186,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 131
UNION BANKSHARES, LTD.
CONSOLIDATED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1998 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Demand........................................... $ 67,038,000 $ 57,565,000 $ 48,742,000
NOW.............................................. 18,009,000 18,914,000 15,279,000
Money market..................................... 61,245,000 65,074,000 54,772,000
Savings.......................................... 11,836,000 10,798,000 10,011,000
Time............................................. 58,935,000 37,725,000 27,605,000
------------ ------------ ------------
Total Deposits........................... 217,063,000 190,076,000 156,409,000
Notes payable...................................... 11,000,000 12,000,000 3,500,000
Federal funds purchased............................ -- -- 6,200,000
Accrued interest payable........................... 252,000 187,000 95,000
Other liabilities.................................. 1,224,000 1,020,000 950,000
------------ ------------ ------------
Total Liabilities........................ 229,539,000 203,283,000 167,154,000
------------ ------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized
500,000 shares; issued and outstanding -0-
shares........................................ -- -- --
Common stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
1997 -- 2,332,014 shares; 1996 -- 2,299,964
shares........................................ 1,000 1,000 1,000
Additional paid-in capital....................... 9,610,000 9,584,000 9,435,000
Unrealized appreciation on available-for-sale
securities, net of applicable income taxes of
$116,000 and $158,000 in 1997 and 1996,
respectively.................................. 616,000 253,000 348,000
Retained earnings................................ 9,632,000 8,384,000 6,248,000
------------ ------------ ------------
Total Stockholders' Equity............... 19,859,000 18,222,000 16,032,000
------------ ------------ ------------
Total Liabilities and Stockholders'
Equity................................ $249,398,000 $221,505,000 $183,186,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 132
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on
loans..................... $ 9,385,000 $ 8,429,000 $11,448,000 $ 9,404,000 $ 8,068,000
Interest on investment
securities:
U.S. government agencies
and corporations....... 2,312,000 2,433,000 2,893,000 2,215,000 2,169,000
State and other political
subdivisions........... 895,000 746,000 1,393,000 1,730,000 1,604,000
Interest on federal funds
sold and
interest-bearing
deposits in other
banks.................. 487,000 80,000 226,000 177,000 250,000
----------- ----------- ----------- ----------- -----------
Total interest
income............. 13,079,000 11,688,000 15,960,000 13,526,000 12,091,000
----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits.................... 3,932,000 2,962,000 4,121,000 3,736,000 3,212,000
Federal funds purchased..... 2,000 108,000 110,000 91,000 90,000
Notes payable............... 582,000 667,000 887,000 385,000 543,000
----------- ----------- ----------- ----------- -----------
Total interest
expense............ 4,516,000 3,737,000 5,118,000 4,212,000 3,845,000
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME........... 8,563,000 7,951,000 10,842,000 9,314,000 8,246,000
PROVISION FOR LOAN LOSSES..... 243,000 270,000 360,000 285,000 120,000
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES... 8,320,000 7,681,000 10,482,000 9,029,000 8,126,000
----------- ----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges............. 292,000 280,000 371,000 368,000 319,000
Gain (loss) on sale of
available-for-sale
securities, net........... 25,000 91,000 101,000 162,000 (87,000)
Other....................... 398,000 329,000 486,000 507,000 378,000
----------- ----------- ----------- ----------- -----------
Total noninterest
income............. 715,000 700,000 958,000 1,037,000 610,000
----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 133
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits.................. $4,009,000 $3,287,000 $4,477,000 $3,994,000 $3,446,000
Amortization of excess of cost over fair value
of net assets acquired........................ 170,000 170,000 226,000 226,000 226,000
Occupancy and equipment......................... 1,095,000 912,000 1,232,000 1,223,000 1,007,000
Other operating expenses........................ 2,273,000 1,873,000 2,518,000 2,173,000 2,534,000
---------- ---------- ---------- ---------- ----------
Total noninterest expense................ 7,547,000 6,242,000 8,453,000 7,616,000 7,213,000
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM............................................ 1,488,000 2,139,000 2,987,000 2,450,000 1,523,000
INCOME TAXES...................................... 240,000 628,000 851,000 540,000 297,000
---------- ---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM.................. 1,248,000 1,511,000 2,136,000 1,910,000 1,226,000
EXTRAORDINARY ITEM
Loss on early extinguishment of debt (net of
applicable income taxes of $201,000).......... -- -- -- 337,000 --
---------- ---------- ---------- ---------- ----------
NET INCOME........................................ $1,248,000 $1,511,000 $2,136,000 $1,573,000 $1,226,000
========== ========== ========== ========== ==========
EARNINGS PER SHARE
BASIC........................................... (RESTATED) (RESTATED)
Income before extraordinary item................ $ .53 $ .65 $ .92 $ .83 $ .53
Extraordinary item, net......................... -- -- -- (.15) --
Net income...................................... .53 .65 .92 .68 .53
Weighted average number of common shares
outstanding................................... 2,338,446 2,312,320 2,317,056 2,298,804 2,300,472
DILUTED
Income before extraordinary item................ $ .47 $ .60 $ .84 $ .79 $ .47
Extraordinary item, net......................... -- -- -- (.14) --
Net income...................................... .47 .60 .84 .65 .47
Weighted average number of common shares
outstanding................................... 2,630,620 2,502,166 2,534,904 2,415,488 3,343,882
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 134
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET INCOME........................ $1,248,000 $1,511,000 $2,136,000 $1,573,000 $1,226,000
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation
(depreciation) on
available-for-sale
securities, net of income
taxes of $228,000 and
$181,000 for September 30,
1998 and 1997, respectively
and $-0-, $(214,000) and
$821,000 for December 31,
1997, 1996, and 1995,
respectively................. 383,000 305,000 -- (360,000) 1,380,000
LESS: reclassification adjustment
for realized gain (losses)
included in net income, net of
income taxes of $9,000 and
$34,000 for September 30, 1998
and 1997, respectively and
$38,000, $60,000, and $(32,000)
for December 31, 1997, 1996, and
1995, respectively.............. (16,000) (57,000) (63,000) (102,000) 55,000
Unrealized appreciation on
investment securities
transferred from available-
for-sale to held-to-maturity
including amortization.......... (4,000) 9,000 (32,000) (42,000) 390,000
---------- ---------- ---------- ---------- ----------
COMPREHENSIVE INCOME.............. $1,611,000 1,768,000 $2,041,000 $1,069,000 $3,051,000
========== ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 135
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
ADDITIONAL ON AVAILABLE- TREASURY STOCK
PAID-IN FOR-SALE RETAINED --------------------
SHARES AMOUNT CAPITAL SECURITIES EARNINGS SHARES AMOUNT TOTAL
--------- ------ ---------- -------------- ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994... 2,356,400 $1,000 $9,706,000 $ (973,000) $3,449,000 (33,000) $(128,000) $12,055,000
Treasury shares purchased,
19,360 at $7.76 per
share.................... -- -- -- -- -- (38,720) (150,000) (150,000)
Treasury shares canceled... (71,720) -- (278,000) -- -- 71,720 278,000 --
Shares issued for stock
option plan.............. 6,660 -- 25,000 -- -- -- -- 25,000
Repurchase of warrants..... -- -- (69,000) -- -- -- -- (69,000)
Net change in unrealized
appreciation of
available-for-sale
securities, net of income
taxes of $711,000........ -- -- -- 1,435,000 -- -- -- 1,435,000
Unrealized appreciation on
investment securities
transferred from
available-for-sale to
held-to-maturity
including amortization... -- -- -- 390,000 -- -- -- 390,000
Net income................. -- -- -- -- 1,226,000 -- -- 1,226,000
--------- ------ ---------- ---------- ---------- -------- --------- -----------
BALANCE, DECEMBER 31, 1995... 2,291,340 $1,000 $9,384,000 $ 852,000 $4,675,000 -- $ -- $14,912,000
Shares issued for stock
option plan.............. 4,540 -- 25,000 -- -- -- -- 25,000
Shares issued upon
conversion and retirement
of notes................. 4,084 -- 26,000 -- -- -- -- 26,000
Net change in unrealized
appreciation of
available-for-sale
securities, net of income
taxes of $238,000........ -- -- -- (462,000) -- -- -- (462,000)
Unrealized appreciation on
investment securities
transferred from
available-for-sale to
held-to-maturity
including amortization... -- -- -- (42,000) -- -- -- (42,000)
Net income................. -- -- -- -- 1,573,000 -- -- 1,573,000
--------- ------ ---------- ---------- ---------- -------- --------- -----------
BALANCE, DECEMBER 31, 1996... 2,299,964 $1,000 $9,435,000 $ 348,000 $6,248,000 -- $ -- $16,032,000
--------- ------ ---------- ---------- ---------- -------- --------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE> 136
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
ADDITIONAL ON AVAILABLE- TREASURY STOCK
PAID-IN FOR-SALE RETAINED -------------------
SHARES AMOUNT CAPITAL SECURITIES EARNINGS SHARES AMOUNT TOTAL
--------- ------ ---------- -------------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996
(brought forward)......... 2,299,964 $1,000 $9,435,000 $348,000 $6,248,000 -- $ -- $16,032,000
Shares issued for stock
option plan............. 32,050 -- 149,000 -- -- -- -- 149,000
Net change in unrealized
appreciation of
available-for-sale
securities, net of
income taxes of
$33,000................. -- -- -- (63,000) -- -- -- (63,000)
Net change in unrealized
appreciation on
investment securities
transferred from
available-for-sale to
held-to-maturity
including
amortization............ -- -- -- (32,000) -- -- -- (32,000)
Net income................ -- -- -- -- 2,136,000 -- -- 2,136,000
--------- ------ ---------- -------- ---------- -------- -------- -----------
BALANCE, DECEMBER 31,
1997...................... 2,332,014 $1,000 $9,584,000 $253,000 $8,384,000 -- $ -- $18,222,000
Shares issued for stock
option plan
(unaudited)............. 8,500 -- 26,000 -- -- -- -- 26,000
Net change in unrealized
appreciation of
available-for-sale
securities, net of
income taxes of $190,000
(unaudited)............. -- -- -- 367,000 -- -- -- 367,000
Net change in unrealized
appreciation on
investment securities
transferred from
available-for-sale to
held-to-maturity
including amortization
(unaudited)............. -- -- -- (4,000) -- -- -- (4,000)
Net income (unaudited).... -- -- -- -- 1,248,000 -- -- 1,248,000
--------- ------ ---------- -------- ---------- -------- -------- -----------
BALANCE, SEPTEMBER 30, 1998
(Unaudited)............... 2,340,514 $1,000 $9,610,000 $616,000 $9,632,000 -- $ -- $19,859,000
========= ====== ========== ======== ========== ======== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE> 137
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 1,248,000 $ 1,511,000 $ 2,136,000 $ 1,573,000 $ 1,226,000
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
(Gain) loss on sale of securities........... (12,000) (91,000) (101,000) (162,000) 87,000
Extraordinary item.......................... -- -- -- 337,000 --
Federal Home Loan Bank stock dividend....... (54,000) (8,000) (53,000) -- --
Accretion of discount on investments........ 231,000 (137,000) (140,000) (2,323,000) (489,000)
Amortization of deferred loan fees, net of
costs..................................... (169,000) 83,000 (955,000) (395,000) (407,000)
Deferred income taxes....................... (134,000) (140,000) (216,000) (125,000) (157,000)
Provision for loan losses................... 243,000 270,000 360,000 285,000 120,000
Depreciation and amortization............... 327,000 307,000 415,000 429,000 476,000
Amortization of excess of cost over fair
value of net assets acquired.............. 169,000 169,000 226,000 226,000 226,000
Changes in:
Mortgage loans held-for-sale................ (1,251,000) (1,736,000) (1,253,000) -- --
Accrued interest receivable................. (283,000) (430,000) (246,000) (22,000) (35,000)
Prepaid expenses and other assets........... (104,000) 5,000 7,000 (83,000) (302,000)
Accrued interest payable.................... 65,000 78,000 92,000 (135,000) 21,000
Other liabilities........................... (2,000) 84,000 103,000 (13,000) 797,000
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities................. 274,000 (35,000) 375,000 (408,000) 1,563,000
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale
securities.................................. $ 19,295,000 $ 8,221,000 $ 8,809,000 $ 8,600,000 $ 3,424,000
Proceeds from maturities of held-to-maturity
securities.................................. 5,236,000 3,305,000 8,652,000 3,473,000 3,438,000
Proceeds from sale of available-for-sale
securities.................................. 2,207,000 12,717,000 13,161,000 34,111,000 32,060,000
Purchase of available-for-sale securities..... (42,343,000) (18,157,000) (24,077,000) (38,731,000) (37,378,000)
Purchase of held-to-maturity securities....... (3,237,000) (4,000,000) (7,003,000) (1,010,000) (900,000)
Purchase of other investments................. -- (369,000) (369,000) (85,000) (35,000)
Net increase in loans......................... (5,040,000) (20,397,000) (21,086,000) (19,004,000) (17,477,000)
Proceeds from sale of student loans........... -- -- -- -- 2,028,000
Proceeds from the sale of foreclosed assets... -- -- -- -- 83,000
Purchases of premises and equipment........... (979,000) (152,000) (220,000) (295,000) (438,000)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities........................... (24,861,000) (18,832,000) (22,133,000) (12,941,000) (15,195,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE> 138
UNION BANKSHARES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money
market, NOW, and savings accounts...... $ 5,778,000 $12,694,000 $23,547,000 $11,665,000 $ 8,903,000
Net increase in time deposits............ 21,209,000 7,797,000 10,120,000 4,569,000 5,071,000
Change in federal funds purchased........ -- (6,200,000) (6,200,000) 2,200,000 4,000,000
Proceeds from issuance of notes
payable................................ -- 10,000,000 10,000,000 4,000,000 --
Principal repayments of notes payable.... (1,000,000) (750,000) (1,500,000) (7,077,000) (180,000)
Proceeds from issuance of common stock... 26,000 112,000 149,000 51,000 25,000
Repurchase of common stock............... -- -- -- -- (150,000)
Repurchase of stock warrants............. -- -- -- -- (69,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities...................... 26,013,000 23,653,000 36,116,000 15,408,000 17,600,000
----------- ----------- ----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 1,426,000 4,786,000 14,358,000 2,059,000 3,968,000
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR..................................... 26,714,000 12,356,000 12,356,000 10,297,000 6,329,000
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR..... $28,140,000 $17,142,000 $26,714,000 $12,356,000 $10,297,000
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE> 139
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
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.
UNAUDITED INTERIM INFORMATION
Information with respect to September 30, 1998, and the periods ended September
30, 1998 and 1997, is unaudited and not covered by the independent accountants'
reports. In the opinion of management, the unaudited financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company at September
30, 1998, and the results of operations and cash flows for the periods ended
September 30, 1998 and 1997, in conformity with generally accepted accounting
principles.
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.
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.
F-13
<PAGE> 140
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of three
months or less to be cash equivalents. At December 31, 1997, cash equivalents
consisted of federal funds sold.
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 $1,525,000 and $883,000 at December 31, 1997 and 1996,
respectively.
As of December 31, 1997, the Company had approximately $6,803,000 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.
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
F-14
<PAGE> 141
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are normally sold within 120 days of origination
and are carried at the lower of cost or market. Gains and losses resulting from
sales of mortgage loans are recognized when the respective loans are sold to
investors. Gains and losses are determined by the difference between the selling
price and the carrying amount of the loans sold, net of discounts collected or
paid and considering a normal servicing rate.
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 over an
estimated life of 25 years. The remaining balance 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.
Increases in the valuation allowance and gains/losses on sales of foreclosed
assets are included in noninterest expense, net.
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
F-15
<PAGE> 142
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, approximated
$83,000. 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.
STOCK WARRANTS
The Company issued warrants to the underwriter of the March 1993 public
offering, which permitted the underwriter to purchase up to 44,748 common shares
at a price of $6.15 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 effects 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
During 1997, the Company implemented Financial Accounting Standards Board
Statement No. 128 (Statement No. 128), which amends the method by which earnings
per share are computed and disclosed in the financial statements. The earnings
per share computations for the years ended December 31, 1996 and 1995 have been
retroactively restated to reflect the implementation of Statement No. 128.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during each period.
Diluted earnings per share is computed assuming exercise of all stock options
having exercise prices less than the average market price of the common stock
using the treasury stock method. The December 31, 1995 calculation was also
based on the assumption that all of the convertible subordinated notes were
converted into common shares at the date of issue.
RESTATEMENT
The financial statements of Union Bankshares, Ltd. as of December 31, 1997 and
1996, and for the years ending December 31, 1997, 1996, and 1995 have been
restated to reflect the two-for-one stock split which was voted on and approved
by stockholders on May 27, 1998. All shares outstanding and per share amounts
have been adjusted to reflect this stock split.
F-16
<PAGE> 143
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair value of held-to-maturity securities was
as follows at September 30, 1998 and December 31, 1997 and 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998 (UNAUDITED):
U.S. Government agencies and
corporations................. $19,848,000 $467,000 $ -- $20,315,000
Obligations of state and
political subdivisions....... 5,938,000 464,000 -- 6,402,000
----------- -------- --------- -----------
$25,786,000 $931,000 $ -- $26,717,000
=========== ======== ========= ===========
DECEMBER 31, 1997:
U.S. Government agencies and
corporations................. $21,989,000 $383,000 $ (1,000) $22,371,000
Obligations of state and
political subdivisions....... 5,940,000 370,000 -- 6,310,000
----------- -------- --------- -----------
$27,929,000 $753,000 $ (1,000) $28,681,000
=========== ======== ========= ===========
DECEMBER 31, 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
=========== ======== ========= ===========
</TABLE>
Maturities of held-to-maturity securities at December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
----------- -----------
<S> <C> <C>
One year or less..................................... $ -- $ --
After one year through five years.................... 1,035,000 1,156,000
After five years through ten years................... 4,564,000 4,637,000
After ten years...................................... 3,342,000 3,525,000
Mortgage-backed and other debt securities............ 18,988,000 19,363,000
----------- -----------
$27,929,000 $28,681,000
=========== ===========
</TABLE>
F-17
<PAGE> 144
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The amortized cost and approximate fair value of available-for-sale securities
was as follows at September 30, 1998, and December 31, 1997 and 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998 (UNAUDITED):
U.S. Government agencies and
corporations.................. $36,412,000 $161,000 $ -- $36,573,000
U.S. Treasury securities........ 3,002,000 47,000 -- 3,049,000
Obligations of state and
political subdivisions........ 18,163,000 743,000 (13,000) 18,893,000
----------- -------- -------- -----------
$57,577,000 $951,000 $(13,000) $58,515,000
=========== ======== ======== ===========
DECEMBER 31, 1997:
U.S. Government agencies and
corporations.................. $12,804,000 $ 7,000 $(30,000) $12,781,000
U.S. Treasury securities........ 6,027,000 43,000 -- 6,070,000
Obligations of state and
political subdivisions........ 16,981,000 388,000 (39,000) 17,330,000
Commercial paper................ 999,000 -- -- 999,000
----------- -------- -------- -----------
$36,811,000 $438,000 $(69,000) $37,180,000
=========== ======== ======== ===========
DECEMBER 31, 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
=========== ======== ======== ===========
</TABLE>
Maturities of available-for-sale securities at December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
----------- -----------
<S> <C> <C>
One year or less..................................... $ 8,085,000 $ 8,106,000
After one year through five years.................... 9,464,000 9,564,000
After five years through ten years................... 11,787,000 11,948,000
Due after ten years.................................. 4,521,000 4,606,000
Mortgage-backed and other debt securities............ 2,954,000 2,956,000
----------- -----------
$36,811,000 $37,180,000
=========== ===========
</TABLE>
The book value of securities pledged as collateral, to secure notes payable,
public deposits, and for other purposes, amounted to $29,008,000 at December 31,
1997, and $15,749,000
F-18
<PAGE> 145
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
at December 31, 1996. The approximate fair value of pledged securities amounted
to $29,725,000 at December 31, 1997, and $16,123,000 at December 31, 1996.
Gross gains of $131,000, $349,000, and $126,000 and gross losses of $46,000,
$187,000, and $213,000 resulting from sales of available-for-sale securities
were realized for 1997, 1996, and 1995, respectively.
The Company redesignated available-for-sale securities with an aggregate
amortized cost of $5,061,000 and $8,830,000 to the held-to-maturity portfolio
during 1997 and 1996, 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 $17,992,000 credit line which is 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.
As discussed in Note 7, the Bank had advances outstanding at December 31, 1997,
of $10,000,000.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1998 1997 1996
------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Commercial............................ $ 92,771,000 $ 87,929,000 $70,631,000
Real estate mortgage.................. 3,623,000 4,297,000 5,489,000
Real estate construction.............. 12,684,000 9,625,000 5,758,000
Consumer.............................. 18,851,000 20,933,000 18,854,000
------------ ------------ -----------
127,929,000 122,784,000 100,732,000
Allowance for loan losses............. (2,304,000) (2,125,000) (1,754,000)
------------ ------------ -----------
Net loans............................. $125,625,000 $120,659,000 $98,978,000
============ ============ ===========
</TABLE>
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
year............... $2,125,000 $1,754,000 $1,754,000 $1,448,000 $1,071,000
---------- ---------- ---------- ---------- ----------
Charge offs.......... (75,000) (11,000) (24,000) (29,000) (106,000)
Recoveries........... 11,000 21,000 35,000 50,000 363,000
---------- ---------- ---------- ---------- ----------
Net recoveries....... (64,000) 10,000 11,000 21,000 257,000
Provision charged to
operating
expenses........... 243,000 270,000 360,000 285,000 120,000
---------- ---------- ---------- ---------- ----------
Balance, end of
year............... $2,304,000 $2,034,000 $2,125,000 $1,754,000 $1,448,000
========== ========== ========== ========== ==========
</TABLE>
F-19
<PAGE> 146
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Impaired loans totaled $73,000 and $124,000 at December 31, 1997 and 1996,
respectively. An allowance for loan losses of $19,000 and $24,000 related to
impaired loans at December 31, 1997 and 1996, respectively. At December 31, 1997
and 1996, all impaired loans had allocated allowances.
Interest of $8,000 and $12,000 was recognized on average impaired loans of
$98,000 and $166,000 for 1997 and 1996, respectively. No interest was recognized
on impaired loans on a cash basis during 1997 and 1996.
NOTE 4: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, at December 31,
were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Leasehold improvements............................... $ 1,485,000 $ 1,467,000
Furniture and equipment.............................. 2,162,000 1,961,000
----------- -----------
3,647,000 3,428,000
Less accumulated depreciation and amortization....... (2,269,000) (1,855,000)
----------- -----------
Net premises and equipment........................... $ 1,378,000 $ 1,573,000
=========== ===========
</TABLE>
NOTE 5: DEPOSITS
Interest bearing deposits in denominations of $100,000 or more were $19,969,000
on December 31, 1997, and $11,931,000 on December 31, 1996.
At December 31, 1997, the scheduled maturities of time deposits were as follows:
<TABLE>
<S> <C>
1998........................................................ $28,704,000
1999........................................................ 2,843,000
2000........................................................ 1,970,000
2001........................................................ 17,000
2002 and thereafter......................................... 4,191,000
-----------
$37,725,000
===========
</TABLE>
NOTE 6: COMMON STOCK AND CONVERTIBLE SUBORDINATED NOTES
On March 17, 1993, the Company issued 1,380,000 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 200,000 shares of preferred
stock at a price of $5.00 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 94,000
shares of common stock at prices ranging from $3.50 per share to $3.94 per
share. As of December 31, 1994, 61,000 shares were canceled and 33,000 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 38,720
shares of
F-20
<PAGE> 147
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
common stock at prices ranging from $3.81 per share to $3.94 per share. As of
December 31, 1995, 71,720 shares were canceled by the Company in addition to the
61,000 canceled the previous year and no shares were held in treasury.
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 157.36 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
Notes payable at December 31, 1997 and 1996, consisted of the following
components:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Note payable to financial institution................ $ 2,000,000 $3,500,000
Advances from FHLB................................... 10,000,000 --
----------- ----------
Total notes payable........................ $12,000,000 $3,500,000
=========== ==========
</TABLE>
The note payable to the financial institution is due April 1, 1998, with
interest payable quarterly at the financial institution's base rate (8.5% at
December 31, 1997).
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.
The Bank entered into two $5,000,000 advance agreements with the FHLB on January
21, 1997. One advance has an interest rate of 6.34% and matures January 14,
1999. The other advance has an interest rate of 6.5% and matures January 14,
2000. The advances are secured by pledges of securities as discussed in Note 2.
NOTE 8: INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Taxes currently payable..................... $1,067,000 $ 464,000 $ 454,000
Deferred income taxes....................... (216,000) (125,000) (157,000)
---------- --------- ---------
$ 851,000 $ 339,000 $ 297,000
========== ========= =========
</TABLE>
F-21
<PAGE> 148
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences related to deferred taxes shown in the
December 31, balance sheets are:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................. $ 572,000 $ 437,000
Accrued expenses...................................... 96,000 176,000
Deferred loan fees.................................... 134,000 64,000
Deferred compensation................................. 24,000 11,000
Furniture, equipment, and improvements................ 52,000 --
Other................................................. 9,000 --
--------- ---------
887,000 688,000
--------- ---------
Deferred tax liabilities:
Federal Home Loan Bank Stock.......................... $ (20,000) $ --
Furniture, equipment, and improvements................ -- (16,000)
Unrealized gains on available-for-sale securities..... (116,000) (158,000)
Other................................................. -- (21,000)
--------- ---------
(136,000) (195,000)
--------- ---------
Net deferred tax asset........................ $ 751,000 $ 493,000
========= =========
</TABLE>
A reconciliation of income tax expenses at the statutory rate to the Company's
actual income tax is shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Computed at the statutory rate (34%)........ $1,016,000 $ 651,000 $ 518,000
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest....................... (328,000) (406,000) (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................................ 17,000 24,000 23,000
Nondeductible interest.................... 30,000 25,000 25,000
Other, net................................ 37,000 (34,000) 1,000
---------- --------- ---------
Income tax expense.......................... $ 851,000 $ 339,000 $ 297,000
========== ========= =========
</TABLE>
F-22
<PAGE> 149
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 9: EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share calculation for income before extraordinary item is shown
below for the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
1997
Income before extraordinary item.......... $ 2,136,000 2,317,056
Basic earnings per share................ $0.92
=====
Effect of dilutive securities:
Stock options........................... -- 217,848
----------- ---------
Diluted earnings per share................ $ 2,136,000 2,534,904 $0.84
=========== ========= =====
1996
Income before extraordinary item.......... $ 1,910,000 2,298,804
Basic earnings per share................ $0.83
=====
Effect of dilutive securities:
Stock options........................... -- 116,684
----------- ---------
Diluted earnings per share................ $ 1,910,000 2,415,488 $0.79
=========== ========= =====
1995
Income before extraordinary item.......... $ 1,226,000 2,300,472
Basic earnings per share................ $0.53
=====
Effect of dilutive securities:
Stock options........................... 14,366
Convertible subordinated notes.......... 358,459 1,029,044
----------- ---------
Diluted earnings per share................ $ 1,584,459 3,343,882 $0.47
=========== ========= =====
</TABLE>
NOTE 10: 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> 150
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31, 1997 and 1996, the Bank had granted unused lines of credit to
borrowers aggregating approximately $45,875,000 and $35,666,000, respectively.
At December 31, 1997, unused lines of credit consisted of approximately
$45,133,000 for commercial lines and $742,000 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 $948,000 and
$2,127,000 at December 31, 1997 and 1996, respectively, with terms ranging from
15 days to two years.
At December 31, 1997, the Bank had outstanding commitments to originate loans
aggregating approximately $9,468,000. The commitments extended over varying
periods of time with the majority being disbursed within a one-year period.
NOTE 11: OPERATING LEASES
The Bank leases its premises under a noncancelable 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 noncancelable operating leases
at December 31, 1997, were as follows:
<TABLE>
<S> <C>
1998........................................................ $ 574,000
1999........................................................ 486,000
2000........................................................ 514,000
2001........................................................ 506,000
2002........................................................ 500,000
Thereafter.................................................. 852,000
----------
Total future minimum lease payment.......................... $3,432,000
==========
</TABLE>
Total rental expense for all operating leases (net of month-to-month sublease
rental income in 1995), including certain cancelable equipment leases, was
$509,000, $458,000, and $362,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
NOTE 12: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
The Company provides a 401(k) 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 $195,000,
$174,000, and $146,000 in 1997, 1996, and 1995, respectively. Employees may
contribute from 2% to 15% of their salary, not to exceed $9,500 for 1997 and
1996, respectively, with contributions vested 100%. The Company matches 50% of
the first 6% of the participants' contributions; additional contributions may be
made at the discretion of the Board of Directors. Company
F-24
<PAGE> 151
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 January 1, 1995.
The Compensation Plan provides for the initial authorization of 100,000 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 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 and 1996, the Company issued 3,750, and 4,540 common shares,
respectively, pursuant to the Compensation Plan at exercise prices of $8.00 and
$5.50, 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
authorization of 624,000 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, and expires ten years
after date of grant.
A summary of the status of the Incentive Plan at December 31, and changes during
the year is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
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............... 429,200 $ 4.42 401,500 $ 4.78 226,500 $ 4.31
Granted.............. 40,600 11.75 27,700 7.63 175,000 5.37
Exercised............ (22,800) 4.16 -- -- -- --
Forfeited............ (3,600) 6.13 -- -- -- --
------- ------ ------- ------ ------- ------
Outstanding, end of
year............... 443,400 $ 5.61 429,200 $ 4.92 401,500 $ 4.78
======= ====== ======= ====== ======= ======
Options exercisable,
end of year........ 407,500 351,400 268,500
</TABLE>
F-25
<PAGE> 152
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options under the
Incentive Plan outstanding at December 31, 1997:
<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
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.50 154,000 5 years $ 4.50 154,000 $ 4.50
$4.00 22,500 6 years $ 4.00 22,500 $ 4.00
$3.75 to $3.81 32,000 7 years $ 3.76 32,000 $ 3.76
$5.38 167,800 8 years $ 5.38 167,800 $ 5.38
$7.63 26,500 9 years $ 7.63 17,666 $ 7.63
$11.75 40,600 10 years $11.75 13,534 $11.75
</TABLE>
The Company also adopted a Nonemployee Directors' Stock Option Plan (Directors'
Plan) in December 1992. An aggregate of 22,000 shares of common stock are
reserved for issuance under the Directors' Plan. Nonemployee directors are
automatically granted options to purchase 500 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.
A summary of the status of the Directors' Plan at December 31, and changes
during the year is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
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............... 12,500 $5.17 10,000 $4.47 7,500 $ 4.13
Granted................. 2,000 12.07 2,500 8.00 2,500 5.50
Exercised............... (5,500) 4.48 -- -- -- --
Forfeited............... -- -- -- -- -- --
------ ----- ------ ----- ------ ------
Outstanding, end of
year.................. 9,000 $7.14 12,500 $5.17 10,000 $ 4.47
====== ===== ====== ===== ====== ======
Options exercisable, end
of year............... 7,000 10,000 7,500
</TABLE>
F-26
<PAGE> 153
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options under the
Directors' Plan outstanding at December 31, 1997:
<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
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.13 1,500 1 years $ 4.13 1,500 $ 4.13
$3.75 1,500 2 years $ 3.75 1,500 $ 3.75
$5.50 1,500 3 years $ 5.50 1,500 $ 5.50
$8.00 2,500 4 years $ 8.00 2,500 $ 8.00
$12.06 2,000 5 years $12.06 -- $12.06
</TABLE>
In May 1996, the Company adopted an "Option Bonus Plan" (Bonus Plan). In 1996,
four of the nine eligible members elected to receive these bonuses in the form
of options. Pursuant to this election, the Company issued 72,802 options in
January 1997, at an exercise price of $7.63. In 1997, two of the twelve eligible
members elected to receive these bonuses in the form of options. Pursuant to
this election, the Company issued 5,784 options in January 1998, at an exercise
price of $11.75. The exercise price on all options is 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 300,000 shares.
A summary of the status of the Bonus Plan at December 31, and changes during the
year is presented below:
<TABLE>
<CAPTION>
1997
-----------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
<S> <C> <C>
Outstanding, beginning of year.............................. 72,802 $ 7.63
Granted..................................................... 5,784 11.75
Exercised................................................... -- --
Forfeited................................................... -- --
------ ------
Outstanding, end of year.................................... 78,586 7.93
------ ------
Options exercisable, end of year............................ 72,802 $ 7.63
====== ======
</TABLE>
F-27
<PAGE> 154
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options under the Bonus
Plan outstanding at December 31, 1997:
<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
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 7.63 72,802 9 years $ 7.63 72,802 $7.63
$11.75 5,784 10 years 11.75 -- --
</TABLE>
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 approximately $172,000, $323,000, and $105,000 in 1997, 1996, and
1995, respectively. In addition, the Company's basic earnings per share would
have decreased by $.07 per share, $.14 per share, and $.05 per share in 1997,
1996, and 1995, respectively. Diluted earnings per share would have decreased
$.07 per share, $.14 per share, and $.03 per share, respectively.
NOTE 13: OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Professional services...................... $ 586,000 $ 618,000 $ 456,000
Credit card................................ 309,000 247,000 228,000
Legal and accounting....................... 271,000 91,000 334,000
Advertising and promotion.................. 200,000 144,000 175,000
Postage and delivery....................... 150,000 114,000 108,000
Software maintenance and amortization...... 140,000 124,000 111,000
Service charges............................ 129,000 140,000 120,000
Supplies................................... 112,000 138,000 177,000
Insurance and bonds........................ 106,000 88,000 89,000
Telephone.................................. 88,000 89,000 65,000
Printing................................... 86,000 93,000 62,000
Travel and entertainment................... 67,000 104,000 73,000
Dues and subscriptions..................... 67,000 76,000 67,000
Deposit insurance.......................... 19,000 2,000 139,000
Amortization, other........................ -- -- 53,000
Amortization of debt issuance costs........ -- 17,000 83,000
Other operating expenses................... 188,000 88,000 194,000
---------- ---------- ----------
$2,518,000 $2,173,000 $2,534,000
========== ========== ==========
</TABLE>
F-28
<PAGE> 155
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 14: TRANSACTIONS WITH RELATED PARTIES
At December 31, 1997 and 1996, the Bank had loans outstanding to shareholders,
executive officers, and directors of the Company and their affiliates, in the
amount of $2,175,000 and $1,680,000, respectively. New loans made to
shareholders, executive officers, and directors of the Company and their
affiliates approximated $716,000 and $916,000, and repayments approximated
$221,000 and $434,000 for the years ended December 31, 1997 and 1996,
respectively.
At September 30, 1998, the Bank had loans outstanding to shareholders, executive
officers, and directors of the Company and their affiliates of $2,403,000. New
loans made to shareholders, executive officers, and directors of the Company and
their affiliates approximated $713,000 and repayments approximated $485,000 for
the nine months ended September 30, 1998.
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.
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, 1997, 1996, and 1995, the Bank earned interest income on such loans of
$59,000, $6,000, and $5,000, respectively. During the nine months ended
September 30, 1998, the Bank earned interest income on such loans of $83,000.
During the years ended December 31, 1997, 1996, and 1995, the Bank purchased
loans in the amounts of $5,762,000, $4,106,000, and $2,450,000 and sold loans in
the amount of $4,509,000, $4,106,000, and $2,450,000, respectively. During the
nine months ended September 30, 1998, the Bank purchased loans in the amount of
$26,476,000, and sold loans in the amount of $25,225,000. 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 15: ADDITIONAL CASH FLOW INFORMATION
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Income taxes paid......................... $ 819,000 $ 397,000 $ 383,000
========== ========== ===========
Interest paid............................. $5,012,000 $4,347,000 $ 3,858,000
========== ========== ===========
</TABLE>
F-29
<PAGE> 156
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NON-CASH INVESTING ACTIVITIES
<TABLE>
<S> <C> <C> <C>
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........................... $5,092,000 $8,808,000 $10,299,000
========== ========== ===========
</TABLE>
NOTE 16: 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
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1998 1997 1996
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash.................................... $ 642,000 $ 311,000 $ 711,000
Available-for-sale securities........... 2,685,000 3,700,000 3,436,000
Excess of cost over fair value of net
assets acquired, net of
amortization.......................... 2,551,000 2,720,000 2,946,000
Investment in subsidiary................ 15,158,000 13,757,000 12,515,000
Due from subsidiary..................... -- -- 7,000
Accrued interest receivable............. 75,000 40,000 36,000
Income taxes receivable................. -- -- 26,000
Deferred income taxes................... 26,000 26,000 23,000
----------- ----------- -----------
Total Assets.................. $21,137,000 $20,554,000 $19,700,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Note payable.......................... $ 1,000,000 $ 2,000,000 $ 3,500,000
Other liabilities..................... 278,000 332,000 168,000
----------- ----------- -----------
Total Liabilities............. 1,278,000 2,332,000 3,668,000
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock.......................... 1,000 1,000 1,000
Additional paid-in capital............ 9,610,000 9,584,000 9,435,000
Unrealized gains on subsidiary's
available-for-sale securities...... 616,000 253,000 348,000
Retained earnings..................... 9,632,000 8,384,000 6,248,000
----------- ----------- -----------
Total Stockholders' Equity.... 19,859,000 18,222,000 16,032,000
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity....... $21,137,000 $20,554,000 $19,700,000
=========== =========== ===========
</TABLE>
F-30
<PAGE> 157
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiary........... $ 750,000 $1,150,000 $1,600,000 $1,250,000 $1,000,000
Interest income..................... 135,000 154,000 224,000 241,000 343,000
---------- ---------- ---------- ---------- ----------
Total operating income...... 885,000 1,304,000 1,824,000 1,491,000 1,343,000
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Interest............................ 101,000 209,000 268,000 385,000 543,000
Losses on sales of investment
securities....................... -- -- -- -- 6,000
Amortization of excess of investment
in subsidiary over net assets
acquired......................... 170,000 170,000 226,000 226,000 226,000
Salaries and employee benefits...... 382,000 345,000 479,000 354,000 322,000
Occupancy and equipment............. 17,000 13,000 13,000 13,000 14,000
Other............................... 319,000 253,000 305,000 321,000 357,000
---------- ---------- ---------- ---------- ----------
Total operating expenses.... 989,000 990,000 1,291,000 1,299,000 1,468,000
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARY, INCOME TAX BENEFIT, AND
EXTRAORDINARY ITEM.................. (104,000) 314,000 533,000 192,000 (125,000)
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY.......................... 1,038,000 983,000 1,337,000 1,398,000 989,000
INCOME TAX BENEFIT.................... 314,000 214,000 266,000 320,000 362,000
---------- ---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM...... 1,248,000 1,511,000 2,136,000 1,910,000 1,226,000
EXTRAORDINARY ITEM
Loss on early extinguishment of debt
(net of applicable income taxes
of $201,000)..................... --........ -- -- 337,000 --
---------- ---------- ---------- ---------- ----------
NET INCOME............................ $1,248,000 $1,511,000 $2,136,000 $1,573,000 $1,226,000
========== ========== ========== ========== ==========
</TABLE>
F-31
<PAGE> 158
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $1,248,000.. $ 1,511,000 $ 2,136,000 $ 1,573,000 $ 1,226,000
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)
Losses on sales of securities....................... -- -- -- -- 6,000
Net amortization of premiums (accretion of
discounts) on investments......................... 1,000 (28,000) (20,000) (99,000) 4,000
Amortization of debt issuance costs................. -- -- -- 490,000 83,000
Amortization of excess of cost over net assets
acquired.......................................... 169,000 169,000 226,000 226,000 226,000
Deferred taxes...................................... -- 1,000 (3,000) (12,000) (11,000)
Change in:
Other assets........................................ -- 26,000 26,000 (26,000) 20,000
Accrued interest receivable......................... (35,000) (26,000) (4,000) 16,000 (20,000)
Due from subsidiary -- 7,000 7,000 41,000 6,000
Equity in undistributed earnings of subsidiary...... (1,038,000) (983,000) (1,337,000) (1,398,000) (989,000)
Other liabilities................................... (54,000) 96,000 164,000 (228,000) 118,000
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities...... 291,000 773,000 1,195,000 648,000 661,000
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities............ (2,686,000) (3,699,000) (3,704,000) (6,351,000) (5,665,000)
Proceeds from sales of available-for-sale
securities.......................................... -- -- -- 4,890,000 4,892,000
Proceeds from maturities of available-for-sale
securities.......................................... 3,700,000 3,460,000 3,460,000 3,830,000 700,000
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities................................... 1,014,000 (239,000) (244,000) 2,369,000 (73,000)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable........................... -- -- -- 4,000,000 --
Principal repayments of notes payable................. (1,000,000) (750,000) (1,500,000) (7,077,000) (180,000)
Proceeds from issuance of common stock................ 26,000 112,000 149,000 51,000 25,000
Repurchase of common stock............................ -- -- -- -- (150,000)
Repurchase of stock warrants.......................... -- -- -- -- (69,000)
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities.......... (974,000) (638,000) (1,351,000) (3,026,000) (374,000)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 331,000 (104,000) (400,000) (9,000) 214,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 311,000 711,000 711,000 720,000 506,000
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 642,000 $ 607,000 $ 311,000 $ 711,000 $ 720,000
=========== =========== =========== =========== ===========
</TABLE>
F-32
<PAGE> 159
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 17: REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are 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 and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The 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 and the Bank 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, 1997, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company and the Bank 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 category.
F-33
<PAGE> 160
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company's and the Bank'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, 1997:
Total risk-based capital (to
risk-weighted assets):
Consolidated......................... $17,208,000 11.2% $12,308,000 8.0% $15,386,000 10.0%
Bank................................. $15,415,000 10.1% $12,216,000 8.0% $15,270,000 10.0%
Tier I risk-based capital (to
risk-weighted assets):
Consolidated......................... $15,249,000 9.9% $ 6,154,000 4.0% $ 9,231,000 6.0%
Bank................................. $13,504,000 8.8% $ 6,108,000 4.0% $ 9,162,000 6.0%
Tier I leverage capital (to adjusted
total assets):
Consolidated......................... $15,249,000 6.9% $ 8,866,000 4.0% $11,083,000 5.0%
Bank................................. $13,504,000 6.6% $ 8,230,000 4.0% $10,287,000 5.0%
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%
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 1997,
approximately $3,724,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
NOTE 18: 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.
F-34
<PAGE> 161
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INVESTMENT 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.
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.
MORTGAGE LOANS HELD-FOR-SALE
Fair values of mortgage loans held-for-sale is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics.
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.
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
F-35
<PAGE> 162
UNION BANKSHARES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks...... $15,314,000 $15,314,000 $12,356,000 $12,356,000
Federal funds sold........... 11,400,000 11,400,000 -- --
Available-for-sale
securities................ 37,180,000 37,180,000 39,904,000 39,904,000
Held-to-maturity
securities................ 27,929,000 28,681,000 24,634,000 24,970,000
Other investments............ 916,000 916,000 494,000 494,000
Interest receivable.......... 1,353,000 1,353,000 1,107,000 1,107,000
Loans, net of allowance for
loan losses............... 120,659,000 123,906,000 98,978,000 100,566,000
Mortgage loans
held-for-sale............. 1,253,000 1,253,000 -- --
FINANCIAL LIABILITIES
Deposits..................... 190,076,000 186,829,000 156,409,000 157,049,000
Federal funds purchased...... -- -- 6,200,000 6,200,000
Notes payable................ 12,000,000 12,137,000 3,500,000 3,500,000
Interest payable............. 187,000 187,000 95,000 95,000
UNRECOGNIZED FINANCIAL
INSTRUMENTS
(net of contract amount):
Commitments to extend
credit.................... -- -- -- --
Letters of credit............ -- -- -- --
Lines of credit.............. -- -- -- --
</TABLE>
NOTE 19: FUTURE CHANGES IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board recently issued Statement No. 131
(Statement No. 131) "Disclosures about Segments of an Enterprise and Related
Information." Statement No. 131, which is to become effective for periods
beginning after December 15, 1997, and requires that business enterprises report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Management believes that Statement No. 131
will have no significant impact on the Company's financial statements.
The Financial Accounting Standards Board recently issued Statement No. 133
(Statement No. 133) "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 133, which becomes effective for periods beginning
after June 15, 1999, and requires that business enterprises recognized all
derivatives either as assets or liabilities in the financial statements and
record those instruments at fair value. Changes in fair value of these
derivatives are recognized in the statement of income or comprehensive income in
the period of change. Management believes that Statement No. 133 will have no
significant impact on the Company's financial statements.
F-36
<PAGE> 163
INDEPENDENT AUDITORS' REPORT
Board of Directors
Lakewood State Bank
Lakewood, Colorado
We have audited the accompanying balance sheets of Lakewood State Bank (an S
corporation) as of December 31, 1997 and 1996 and the related statements of
income, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lakewood State Bank at December
31, 1997 and 1996 and the results of its operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Fortner, Bayens, Levkulich and Co.
Denver, Colorado
January 28, 1998
F-37
<PAGE> 164
LAKEWOOD STATE BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1998 1997 1996
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 1,873,054 $ 1,974,685 $ 1,794,738
Federal funds sold...................... 4,960,000 5,020,000 1,710,000
Securities to be held to maturity....... 11,988,109 7,188,865 6,796,897
Loans................................... 23,962,756 24,585,765 26,138,527
Less allowance for loan losses.......... (336,738) (363,660) (372,196)
----------- ----------- -----------
23,626,018 24,222,105 25,766,331
Bank premises and equipment............. 1,944,997 2,031,654 2,066,324
Accrued interest receivable............. 321,774 196,163 220,561
Real estate acquired by foreclosure..... 158,375 158,375 168,627
Other assets............................ 18,233 14,795 21,930
----------- ----------- -----------
$44,890,560 $40,806,642 $38,545,408
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing....... $10,351,062 $ 9,782,566 $10,023,075
Demand, interest bearing........... 9,020,490 8,639,973 7,941,649
Savings............................ 7,239,615 5,925,937 5,311,318
Time, $100,000 and over............ 2,278,863 1,917,320 1,898,307
Other time......................... 11,392,812 10,297,325 8,869,353
----------- ----------- -----------
40,282,842 36,563,121 34,043,702
Accrued interest payable.............. 242,499 140,200 112,080
Income taxes payable.................. 3,952 3,952 252,395
Deferred income tax liability......... 56,558 56,558 321,017
Other liabilities..................... 47,724 34,956 24,358
----------- ----------- -----------
Total liabilities............. 40,633,575 36,798,787 34,753,552
Commitments (note G)
Stockholders' equity
Common stock -- authorized, issued and
outstanding, 100,000 shares of $10
par value.......................... 1,000,000 1,000,000 1,000,000
Capital surplus....................... 1,455,205 1,455,205 1,455,205
Retained earnings..................... 1,801,780 1,552,650 1,336,651
----------- ----------- -----------
4,256,985 4,007,855 3,791,856
----------- ----------- -----------
$44,890,560 $40,806,642 $38,545,408
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE> 165
LAKEWOOD STATE BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------- -----------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans...... $1,780,666 $1,995,812 $2,644,190 $2,209,894
Interest on taxable investment
securities................... 391,744 241,315 326,014 329,663
Interest on non-taxable
investment securities........ 4,710 4,743 6,313 13,110
Interest on federal funds
sold......................... 218,652 39,507 104,587 77,348
---------- ---------- ---------- ----------
Total interest income... 2,395,772 2,281,377 3,081,104 2,630,015
Interest expense
Demand deposits................. 152,247 142,747 193,504 174,545
Savings deposits................ 137,385 119,247 162,550 152,315
Time deposits................... 571,212 484,820 664,027 402,997
Interest on federal funds
purchased.................... -- 1,439 1,439 13,668
---------- ---------- ---------- ----------
Total interest
expense.............. 860,844 748,253 1,021,520 743,525
---------- ---------- ---------- ----------
Net interest income............... 1,534,928 1,533,124 2,059,584 1,886,490
Provision to allowance for loan
losses (note C)................. -- -- -- --
---------- ---------- ---------- ----------
Net interest income
after reduction in
allowance for loan
losses............... 1,534,928 1,533,124 2,059,584 1,886,490
Other income
Service charges on deposit
accounts..................... 185,001 214,640 278,775 268,990
Miscellaneous income............ 100,424 97,010 124,200 113,376
---------- ---------- ---------- ----------
Total other income...... 285,425 311,650 402,975 382,366
Other expenses
Salaries and employee
benefits..................... 615,201 579,830 808,079 712,674
Occupancy expenses of
premises..................... 158,019 161,490 203,944 202,312
Furniture and equipment
expense...................... 64,923 72,520 102,554 54,930
Other expenses.................. 358,080 379,970 527,379 444,470
---------- ---------- ---------- ----------
Total other expenses.... 1,196,223 1,193,810 1,641,956 1,414,386
---------- ---------- ---------- ----------
Income before income
taxes................ 624,130 650,964 820,603 854,470
Income tax benefit (expense)
Current income tax.............. -- (16,400) (24,063) (262,362)
Deferred income tax............. -- 253,007 264,459 (23,638)
---------- ---------- ---------- ----------
-- 236,607 240,396 (286,000)
---------- ---------- ---------- ----------
NET INCOME........................ $ 624,130 $ 887,571 $1,060,999 $ 568,470
========== ========== ========== ==========
Earnings per common share......... $ 6.24 $ 8.87 $ 10.61 $ 5.68
========== ========== ========== ==========
Average shares outstanding........ 100,000 100,000 100,000 100,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 166
LAKEWOOD STATE BANK
STATEMENT OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1997 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
SECURITIES
AVAILABLE
COMMON CAPITAL RETAINED FOR SALE,
STOCK SURPLUS EARNINGS NET OF TAXES TOTAL
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $1,000,000 $1,455,205 $ 868,181 $(429) $3,322,957
Cash dividend
paid -- $1.00 per
share.................. -- -- (100,000) -- (100,000)
Net income for the
1996................... -- -- 568,470 -- 568,470
Change in unrealized loss
on securities available
for sale............... -- -- -- 429 429
---------- ---------- ---------- ----- ----------
Balance at December 31,
1996................... 1,000,000 1,455,205 1,336,651 -- 3,791,856
Cash dividend
paid -- $8.45 per
share.................. -- -- (845,000) -- (845,000)
Net income for the
1997................... -- -- 1,060,999 -- 1,060,999
---------- ---------- ---------- ----- ----------
Balance at December 31,
1997................... 1,000,000 1,455,205 1,552,650 -- 4,007,855
Cash dividend
paid -- $3.75 per
share.................. -- -- (375,000) -- (375,000)
---------- ---------- ---------- ----- ----------
Net income for period.... -- -- 624,130 -- 624,130
---------- ---------- ---------- ----- ----------
Balance at September 30,
1998................... $1,000,000 $1,455,205 $1,801,780 $ -- $4,256,985
========== ========== ========== ===== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE> 167
LAKEWOOD STATE BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- -------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities
Net income........................... $ 624,130 $ 887,571 $ 1,060,999 $ 568,470
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization...... 143,850 119,970 159,999 118,642
Deferred income taxes.............. -- (253,007) (264,459) 23,638
Writedown on real estate........... -- -- 10,252 --
Changes in deferrals and accruals
Decrease (increase) in interest
receivable.................... (125,611) (35,641) 24,398 (44,366)
Increase in interest payable.... 102,299 94,033 28,120 46,879
Increase (decrease) in income
taxes payable................. -- (252,395) (248,443) 252,395
Other, net...................... 9,330 19,138 17,733 (27,140)
----------- ----------- ----------- -----------
Net cash provided by operating
activities.................. 753,998 579,669 788,599 938,518
Investing activities
Net (increase) decrease in federal
funds sold......................... 60,000 (830,000) (3,310,000) 560,000
Purchase of securities to be held to
maturity........................... (6,025,394) (1,198,958) (3,716,709) (4,319,229)
Proceeds from maturities of
securities to be held to
maturity........................... 1,200,000 2,410,000 3,310,000 3,820,000
Proceeds from maturities of available
for sale securities................ -- -- -- 500,000
Net decrease (increase) in loans..... 596,087 (197,157) 1,544,226 (6,992,808)
Expenditures for equipment and
building improvements.............. (31,043) (73,694) (110,588) (107,208)
----------- ----------- ----------- -----------
Net cash (applied to) provided
by investing activities..... (4,200,350) 110,191 (2,283,071) (6,539,245)
Financing activities
Net increase (decrease) in demand and
savings deposits................... 2,262,691 (687,362) 1,072,434 1,598,190
Net increase in certificates of
deposit............................ 1,457,030 507,790 1,446,985 4,378,971
Cash dividends paid.................. (375,000) (345,000) (845,000) (100,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........ 3,344,721 (524,572) 1,674,419 5,877,161
----------- ----------- ----------- -----------
Net increase in cash and due from
banks................................ (101,631) 165,288 179,947 276,434
Cash and due from banks at beginning of
year................................. 1,974,685 1,794,738 1,794,738 1,518,304
----------- ----------- ----------- -----------
Cash and due from banks at end of
year................................. $ 1,873,054 $ 1,960,026 $ 1,974,685 $ 1,794,738
=========== =========== =========== ===========
Supplemental disclosures of cash flow
information
Cash paid for:
Interest expense................... $ 758,545 $ 654,220 $ 993,400 $ 696,646
Income taxes....................... -- -- 272,506 20,188
</TABLE>
F-41
<PAGE> 168
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
Lakewood State Bank ("the Bank") provides a full range of banking and mortgage
services to individual and corporate customers principally in the Lakewood area.
A majority of the Bank's loans are related to real estate activities. Borrowers'
abilities to honor their loans are dependent upon the continued economic
viability of the area. The Bank is subject to competition from other financial
institutions for loans and deposit accounts. The Bank is also subject to
regulation by certain governmental agencies and undergoes periodic examinations
by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties and assesses estimated
future cash flows from borrowers' operations and the liquidation of loan
collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, changes in
economic conditions may necessitate revisions 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. Such agencies may
require the Bank to recognize additional losses based on their judgments about
information available to them at the time of their examination.
INVESTMENT SECURITIES
The Bank revalues securities designated as available for sale at each reporting
period. The unrealized gain or loss, net of tax effect is recorded as an element
of stockholders' equity.
The designation of a security as held to maturity or available for sale is made
at the time of acquisition. The held to maturity classification includes debt
securities that the Bank has the positive intent and ability to hold to maturity
which are carried at amortized cost. The available for sale classification
includes debt and equity securities which are carried at fair value. Unrealized
gains and losses on securities available for sale are included as a separate
component of stockholders' equity, net of tax effect. Gains or losses on sales
of securities are recognized by the specific identification method.
F-42
<PAGE> 169
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
LOANS
Loans are reported at the principal amount outstanding, net of loan fees and the
allowance for loan losses. Interest on loans is calculated by using the simple
interest method on the daily balance of the principal amount outstanding.
Loan fee income, net of direct origination costs, which is equivalent to
interest, is generally recognized in income over the term of the loan.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when, in the judgment
of management, the loans are estimated to be fully collectible as to both
principal and interest.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through provisions or reductions for
loan losses charged to expenses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal is
unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans, leases
and commitments to extend credit, based on evaluations of the collectibility and
prior loss experience of loans and commitments to extend credit. The evaluations
take into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, leases and commitments, and current and anticipated economic conditions
that may affect the borrowers' ability to pay.
For impairment recognized in accordance with Financial Accounting Standards
Board ("FASB") Statement No. 114, Accounting by Creditors for Impairment of a
Loan, the entire change in present value of expected cash flows is reported as
bad debt expense in the same manner in which impairment initially was recognized
or as a reduction in the amount of bad debt expense that otherwise would be
reported.
F-43
<PAGE> 170
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on the straight-line method.
INCOME TAXES
Through 1996, current and deferred income tax assets or liabilities were
recognized subject to certain limitations, for the tax consequences of all
events that have been recognized in the financial statements. The deferred
income tax asset or liability is measured by the provisions of enacted tax laws.
Effective January 1, 1997, the Bank elected to be taxed under the provisions of
Subchapter S and the Internal Revenue Code. Under these provisions, the Bank
does not pay income taxes on its taxable income. Instead, the stockholders are
liable for individual income taxes on their respective share of the Bank.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure is recorded by the Bank at the lower of cost
or market. Gain or loss on the sale of real estate owned, if any, is recognized
at the time of the sale.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Bank has defined cash
equivalents as those amounts included in the balance sheet caption "Cash and Due
from Banks".
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
NEW ACCOUNTING STANDARDS
Effective January 1, 1997, the Bank adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 125,"Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". the adoption
of SFAS No. 125 did not impact the Bank's financial condition or results of
operations.
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 129, "Disclosure of Information About Capital Structure," which codifies
existing disclosure requirements regarding capital structure. SFAS No. 129 did
not have a significant impact on the Bank's current capital structure
disclosures.
F-44
<PAGE> 171
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", (SFAS 130) and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 requires disclosures of the components
of comprehensive income and the accumulated balance of other comprehensive
income within total stockholders' equity. SFAS 131 requires disclosure of
selected information about operating segments including segment income, revenues
and asset data. Operating segments, as defined in SFAS 131, would include those
components for which financial information is available and evaluated regularly
by the chief operating decision maker in assessing performance and making
resource allocation determinations for operating components such as those which
exceeds 10 percent or more of combined revenue, income, or assets. These
standards are effective for fiscal years beginning after December 15, 1997, and
are not expected to have a material impact on the Bank's financial statements.
The Bank had no items of accumulated comprehensive income at December 31, 1997,
1996 or September 30, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits", which revises employers'
disclosures about pension and other post retirement benefit plans and suggests
combined formats for presentation of pension and other postretirement benefit
disclosures. It is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available. This standard is
not expected to have a material impact on the Bank's financial statements.
NOTE B -- INVESTMENT SECURITIES
The Bank had securities with the following carrying value and estimated fair
market values:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities to be Held to
Maturity
U.S. Treasury securities..... $ 1,612,097 $10,515 $-- $ 1,622,612
U.S. Agency securities....... 10,225,215 63,843 -- 10,289,058
State and political
subdivision obligations... 150,797 899 -- 151,696
----------- ------- -- -----------
$11,988,109 $75,257 $-- $12,063,366
=========== ======= === ===========
</TABLE>
F-45
<PAGE> 172
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities to be Held to Maturity
U.S. Treasury securities....... $ 814,200 $1,413 $ 1,334 $ 814,279
U.S. Agency securities......... 6,223,740 3,273 21,270 6,205,743
State and political subdivision
obligations................. 150,925 98 101 150,922
---------- ------ ------- ----------
$7,188,865 $4,784 $22,705 $7,170,944
========== ====== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities to be Held to Maturity
U.S. Treasury securities....... $2,724,422 $4,260 $ 7,192 $2,721,490
U.S. Agency securities......... 3,821,413 1,234 4,271 3,818,376
State and political subdivision
obligations................. 251,062 97 972 250,187
---------- ------ ------- ----------
$6,796,897 $5,591 $12,435 $6,790,053
========== ====== ======= ==========
</TABLE>
The amortized cost and estimated market value of securities at December 31, 1997
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES TO BE
HELD TO MATURITY
-----------------------
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less................................ $3,103,633 $3,101,381
Due after one year through five years.................. 4,034,307 4,018,540
Due after five years through ten years................. 50,925 51,023
Due after ten years.................................... -- --
---------- ----------
$7,188,865 $7,170,944
========== ==========
</TABLE>
Securities included in the accompanying balance sheets at December 31, 1997 and
1996 with a carrying value of $100,000 and $99,967, respectively, are pledged as
collateral for public deposits and for other purposes as required or permitted
by law.
F-46
<PAGE> 173
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
NOTE C -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Commercial and other.................... $ 4,496,241 $ 5,193,902 $ 5,461,607
Real estate -- construction and
development........................... 3,789,430 2,376,170 2,321,442
Real estate -- other.................... 8,622,005 10,510,598 12,614,516
Consumer................................ 7,084,672 6,530,643 5,778,407
Overdrafts.............................. 1,033 1,352 803
----------- ----------- -----------
23,993,381 24,612,665 26,176,775
Less unearned loan fees................. (30,625) (26,900) (38,248)
----------- ----------- -----------
$23,962,756 $24,585,765 $26,138,527
=========== =========== ===========
</TABLE>
There were no loans transferred to foreclosed real estate in 1997 or 1996.
The Bank had loans having payments delinquent more than sixty days at December
31, 1997 and 1996 of $3,722 and $-0-, respectively.
The accrual of interest had been discontinued on principal balances of loans
totaling $47,694, $30,600, and $-0- at September 30, 1998 and December 31, 1997
and 1996, respectively.
Transactions in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------
1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of year......... $363,660 $372,196 $372,196 $290,210
Recoveries........................... 9,274 29,890 32,649 99,914
Loans charged off.................... (36,196) (19,101) (41,185) (17,928)
-------- -------- -------- --------
Balance at December 31,.............. $336,738 $382,985 $363,660 $372,196
======== ======== ======== ========
</TABLE>
F-47
<PAGE> 174
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
NOTE D -- BANK PREMISES AND EQUIPMENT
At December 31, bank premises and equipment, less accumulated depreciation,
consisted of the following:
<TABLE>
<CAPTION>
1997
--------------------------------------
ACCUMULATED NET
COST DEPRECIATION AMOUNT
---------- ------------ ----------
<S> <C> <C> <C>
Bank premises.............................. $2,612,829 $1,352,701 $1,260,128
Equipment.................................. 669,319 498,193 171,126
Land....................................... 600,400 -- 600,400
---------- ---------- ----------
$3,882,548 $1,850,894 $2,031,654
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------
ACCUMULATED NET
COST DEPRECIATION AMOUNT
---------- ------------ ----------
<S> <C> <C> <C>
Bank premises.............................. $2,586,015 $1,255,577 $1,330,438
Equipment.................................. 585,544 450,058 135,486
Land....................................... 600,400 -- 600,400
---------- ---------- ----------
$3,771,959 $1,705,635 $2,066,324
========== ========== ==========
</TABLE>
NOTE E -- DEPOSITS
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 8,138,935
1999........................................................ 2,616,435
2000........................................................ 414,952
2001........................................................ 327,015
2002........................................................ 528,578
Thereafter.................................................. 188,730
-----------
$12,214,645
===========
</TABLE>
NOTE F -- INCOME TAXES
1997
Effective January 1, 1997, the Bank elected to be taxed under Subchapter S of
the Internal Revenue Code. In accordance with generally accepted accounting
principles, the Bank eliminated all unnecessary deferred tax assets and
liabilities, which resulted in a tax
F-48
<PAGE> 175
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
benefit of $240,396 being recognized in 1997. The remaining deferred tax
liability at December 31, 1997 is attributable to the anticipated tax on the
recapture of the allowance for loan losses for tax purposes.
1996
A deferred tax asset or liability was recognized for the tax consequences of
temporary differences in the recognition of revenue and expense for financial
reporting and tax purposes. Listed below are the components of the net deferred
tax liability as of December 31, 1996:
<TABLE>
<S> <C>
Deferred tax liabilities
Depreciation.............................................. $(447,529)
Deferred tax assets
Allowance for loan losses................................. 44,133
Writedowns of other real estate owned..................... 82,379
---------
Total deferred tax assets......................... 126,512
Valuation allowance......................................... --
---------
Net deferred tax liability........................ $(321,017)
=========
</TABLE>
The effective income tax rate varies from the statutory federal rate because of
several factors, the most significant being tax-exempt income.
NOTE G -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and stand-by letters
of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit and stand-by
letters of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
F-49
<PAGE> 176
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1998 1997 1996
------------- ---------- ----------
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit............ $4,843,712 $3,025,400 $2,532,500
Stand-by letters of credit.............. 52,425 47,915 45,565
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Bank upon extension of credit is based on management's credit evaluation.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Stand-by letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
NOTE H -- EMPLOYEE BENEFIT PLANS
The Bank has a profit sharing plan for employees under which it contributes a
portion of its earnings annually. The annual amount contributed by the Bank to
the plan is determined by the Board of Directors and is allocated to each
eligible employee according to individual compensation. Participants vest in
accordance with the provisions of the plan based on years of service completed
to a maximum of 100%. Contributions of $3,000 and $30,000 were made to the plan
in 1997 and 1996, respectively.
In 1996 the Bank established a defined contribution pension plan covering
substantially all employees. The plan allows employees to make salary deferrals
and allows the Bank to make discretionary matching contributions. Salaries and
employee benefits expense includes $10,300 and $10,200 in 1997 and 1996 for this
plan.
NOTE I -- RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Bank had loans receivable from directors,
officers and principal shareholders (more than ten percent ownership) of the
Bank and their related business interests aggregating approximately $430,000 and
$658,700, respectively.
F-50
<PAGE> 177
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
NOTE J -- REGULATORY MATTERS
The Bank 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Colorado Division
of Banking categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, 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-51
<PAGE> 178
LAKEWOOD STATE BANK
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(ALL FINANCIAL INFORMATION FOR SEPTEMBER 30, 1998
AND 1997 IS UNAUDITED)
The Bank's actual capital amounts and ratios are also presented in the following
table:
<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, 1997
Total capital (to risk
weighted assets).... $4,372,000 11.4% $3,065,000 8.0% $3,831,000 10.0%
Tier 1 capital (to risk
weighted assets).... 4,008,000 10.5 1,533,000 4.0 2,299,000 6.0
Tier 1 capital (to
average assets)..... 4,008,000 9.9 1,627,000 4.0 2,034,000 5.0
As of December 31, 1996
Total capital (to risk
weighted assets).... $4,055,000 12.7% $2,539,000 8.0% $3,174,000 10.0%
Tier 1 capital (to risk
weighted assets).... 3,682,000 11.6 1,270,000 4.0 1,904,000 6.0
Tier 1 capital (to
average assets)..... 3,682,000 10.9 1,342,000 4.0 1,677,000 5.0
</TABLE>
Capital ratios for the Bank as of September 30, 1998, are as follows:
<TABLE>
<S> <C>
Total capital to risk-weighted assets....................... 17.3%
Tier 1 capital to risk-weighted assets...................... 16.1%
Tier 1 capital to average assets............................ 9.5%
</TABLE>
NOTE K -- SUBSEQUENT EVENT (UNAUDITED)
On August 27, 1998, the Bank entered into an Agreement and Plan of Merger
(Agreement) with Union Bank and Trust Company. Under the Agreement, shareholders
of the Bank will exchange their stock for cash. The Agreement is subject to
approval by certain regulatory authorities. It is anticipated the exchange will
be completed in the fourth quarter of 1998.
F-52
<PAGE> 179
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THE INFORMATION HEREIN OR INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION OF AN OFFER TO BUY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,000,000 Trust Preferred Securities
UNION BANKSHARES CAPITAL TRUST I
% Cumulative Trust
Preferred Securities
(Liquidation Amount $10 Per
Trust Preferred Security)
Guaranteed as Described
in this Prospectus by
UNION BANKSHARES, LTD.
--------------------
PROSPECTUS
--------------------
BIGELOW & COMPANY INVESTMENT BANKERS
BARINGTON CAPITAL GROUP
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
