FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-21078
UNION BANKSHARES, LTD.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0986148
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(State of other jurisdiction of (I.R.S Employer)
incorporation of organization) Identification No.)
1825 LAWRENCE STREET, SUITE 444, DENVER, CO 80202
(Address of principal executive offices)
(Zip Code)
(303) 298-5352
(Registrant's telephone number, including area code)
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Not Changed
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Former name, former address and former fiscal year, if changed since last
report.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO .
At July 27, 1998, there were 2,340,514 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): YES NO X
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UNION BANKSHARES, LTD.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 9
PART II - OTHER INFORMATION......................... 16
SIGNATURES.......................................... 17
2
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Part I - Financial Information
Item 1 - Financial Statements
June 30, 1998
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
(Unaudited)
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<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 15,133,000 $ 15,314,000
Federal funds sold 24,900,000 11,400,000
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Total cash and cash equivalents 40,033,000 26,714,000
Investment securities:
Investment securities held to maturity 25,003,000 27,929,000
Investment securities available for sale 60,457,000 37,180,000
Other investments 952,000 916,000
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Total investment securities 86,412,000 66,025,000
Loans:
Commercial 88,243,000 87,929,000
Real estate mortgage 3,556,000 4,297,000
Real estate construction 10,591,000 9,625,000
Consumer 19,554,000 20,933,000
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Total loans 121,944,000 122,784,000
Less: allowance for loan losses (2,247,000) (2,125,000)
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119,697,000 120,659,000
Mortgage loans held-for-sale 576,000 1,253,000
Excess of investment in subsidiary over net
assets acquired 2,607,000 2,720,000
Furniture, equipment and improvements, net 1,794,000 1,378,000
Accrued interest receivable 1,557,000 1,353,000
Other assets 1,231,000 1,403,000
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TOTAL ASSETS $ 253,907,000 $ 221,505,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest -bearing) $ 58,650,000 $ 57,565,000
NOW 17,754,000 18,914,000
Money Market 81,923,000 65,074,000
Savings 12,129,000 10,798,000
Time 51,663,000 37,725,000
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Total deposits 222,119,000 190,076,000
Federal funds purchased -- --
Notes payable 11,200,000 12,000,000
Accrued interest payable 177,000 187,000
Other liabilities 983,000 1,020,000
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Total liabilities 234,479,000 203,283,000
Stockholders' equity
Common stock 1,000 1,000
Common stock surplus 9,610,000 9,584,000
Valuation allowance 550,000 253,000
Retained earnings 9,267,000 8,384,000
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Total stockholders' equity 19,428,000 18,222,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 253,907,000 $ 221,505,000
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</TABLE>
3
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,155,000 $ 5,348,000 $ 3,089,000 $ 2,853,000
Interest on investment securities:
U.S. government agencies and corporations 1,406,000 1,464,000 741,000 741,000
States and other political subdivisions 664,000 758,000 373,000 372,000
Interest on federal funds sold
and interest bearing deposits at other banks 259,000 23,000 190,000 7,000
----------- ----------- ----------- -----------
Total interest income 8,484,000 7,593,000 4,393,000 3,973,000
INTEREST EXPENSE:
Interest on deposits 2,429,000 1,907,000 1,276,000 961,000
Interest on federal funds purchased 2,000 94,000 0 66,000
Interest on notes payable 394,000 440,000 194,000 234,000
----------- ----------- ----------- -----------
Total interest expense 2,825,000 2,441,000 1,470,000 1,261,000
----------- ----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSS 5,659,000 5,152,000 2,923,000 2,712,000
PROVISION FOR LOAN LOSS 187,000 180,000 88,000 120,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSS 5,472,000 4,972,000 2,835,000 2,592,000
NONINTEREST INCOME:
Service charges 188,000 184,000 96,000 95,000
Gain (loss) on sale of securities available for sale 35,000 53,000 (3,000) 56,000
Other 247,000 223,000 134,000 116,000
----------- ----------- ----------- -----------
Total non interest income 470,000 460,000 227,000 267,000
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,671,000 2,149,000 1,347,000 1,092,000
Amortization of investment in subsidiary
over net assets acquired 113,000 113,000 57,000 56,000
Occupancy and equipment 664,000 593,000 350,000 296,000
Other 1,475,000 1,237,000 819,000 654,000
----------- ----------- ----------- -----------
Total non interest expense 4,923,000 4,092,000 2,573,000 2,098,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 1,019,000 1,340,000 489,000 761,000
INCOME TAX EXPENSE (Note 3) 136,000 352,000 99,000 217,000
----------- ----------- ----------- -----------
NET INCOME $ 883,000 $ 988,000 $ 390,000 $ 544,000
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE BASIC: (Note 4)
Net income per share $ 0.38 $ 0.43 $ 0.17 $ 0.22
=========== =========== =========== ===========
Weighted average number of common shares outstanding 2,337,395 2,308,272 2,338,256 2,489,900
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE DILUTED (Note 4)
Net income per share $ 0.34 $ 0.40 $ 0.15 $ 0.22
=========== =========== =========== ===========
Weighted average number of common shares outstanding 22,635,105 2,489,258 2,635,965 2,442,476
=========== =========== =========== ===========
</TABLE>
4
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income $ 883,000 $ 988,000 $ 390,000 $ 544,000
Other comprehensive income net of tax:
Unrealized gains on securities 865,000 206,000 567,000 170,000
---------- ---------- ---------- ----------
Comprehensive income $1,748,000 $1,194,000 $ 957,000 $ 714,000
========== ========== ========== ==========
</TABLE>
5
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
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<S> <C> <C>
Net cash provided (used) by operating activities $ (751,000) $ 885,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale
securities 10,882,000 7,130,000
Proceeds from maturities of held-to-maturity
securities 3,525,000 1,656,000
Proceeds from sale of available-for-sale
securities 2,207,000 11,585,000
Purchase of held-to-maturity securities (705,000) --
Purchase of available-for-sale securities (35,889,000) (13,731,000)
Purchase of loans held-for-sale (14,564,000) --
Proceeds from sale of loans held-for-sale 15,241,000 --
Purchase of other investments (36,000) (377,000)
Net increase in loans 1,400,000 (18,913,000)
Purchase of furniture and equipment (615,000) (60,000)
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Net cash used in investing activities (18,554,000) (12,710,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 32,043,000 4,342,000
Increase (decrease) in fed funds purchased -- (875,000)
New borrowings long-term debt -- 10,000,000
Repayments of long-term debt (800,000) (500,000)
Proceeds from issuance of common stock 26,000 24,000
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Net cash provided by financing activities 31,269,000 12,991,000
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Net increase in cash and cash equivalents 11,964,000 1,166,000
Cash and cash equivalents, beginning of year 26,714,000 12,356,000
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Cash and cash equivalents, end of quarter $ 38,678,000 $ 13,522,000
============ ============
</TABLE>
6
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UNION BANKSHARES, LTD. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and related footnotes included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1997. In
the opinion of management, the consolidated financial statements presented
herein include all adjustments (consisting of normal recurring accruals)
necessary to present fairly, in all material respects, the consolidated
financial position of Union Bankshares, Ltd. (the "Company") as of June 30, 1998
and the Company's results of operations for the three and six months ended June
30, 1998 and 1997, and statements of cash flows for the six months ended June
30, 1998 and 1997.
Certain reclassifications have been made to the June 30, 1997 Consolidated
Financial Statements to conform to the June 30, 1998 Consolidated Financial
Statements.
NOTE 2. RESULTS OF OPERATIONS
The results of operations for the three months ended June 30, 1998 are not
indicative of the results to be expected for the full year.
NOTE 3. INCOME TAXES
Income taxes are provided for on the liability method, in accordance with
Financial Accounting Standards Board (FASB) Statement No. 109, whereby deferred
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are defined as the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in the tax laws and rates on
the date of enactment.
7
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NOTE 4. EARNINGS PER COMMON SHARE
Earnings per common share (diluted) are computed by dividing net income
available for common stockholders by the weighted average number of shares of
common stock outstanding during the period plus the equivalent number of shares
purchasable under common stock options, if dilutive. Earnings per common share
(diluted) were affected by 297,710 shares purchasable pursuant to exercisable
options during the three and six months ended June 30, 1998. Earnings per common
share (diluted) were affected by 180,986 shares purchasable pursuant to
exercisable options during the three and six months ended June 30, 1997.
On May 27, 1998, the stockholders voted to amend the Company's certificate of
incorporation to increase the number of shares of common stock authorized for
issuance from 5,000,000 to 10,000,000 and to approve a two-for-one stock split
of the Company's common stock in the form of a share for share stock dividend.
All agreements concerning stock options and other commitments payable in shares
of the Company's common stock provide for the issuance of additional shares due
the declaration of the stock dividend. An amount equal to the par value of the
common shares issued was transferred from additional paid in capital to the
common stock account. The transfer has been reflected in the consolidated
financial statements and all references to the number of shares and to per share
amounts in the consolidated financial statements have been adjusted to reflect
the stock dividend on a retroactive basis.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary presents management's discussion and analysis of the
Company's financial performance and financial condition for the second quarter
and six months ended June 30, 1998. The discussion is a supplement to the
unaudited Consolidated Financial Statements and the consolidated financial
statements and the management's discussion and analysis of financial condition
and results of operations included in the Company's Form 10-KSB for the year
ended December 31, 1997, and should be read in conjunction therewith.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
OVERVIEW: Union Bankshares, Ltd. (the "Company") reported net income of $883,000
for the six months ended June 30, 1998, a decrease of 10.6% from net income of
$988,000 for the first six months of 1997. Earnings were positively impacted in
the first six months of 1998 by a $507,000 increase in net interest income and a
$216,000 decrease in income tax expense. These improvements were partially
offset by a $18,000 decrease in gain on sale of securities available for sale,
an increase of $7,000 in provision for loan loss and a $831,000 increase in
noninterest expense for the six months ended June 30, 1998. Net income per share
(diluted) was $.34 for the six months ended June 30, 1998 compared to $.40 per
share for the 1997 period. Return on average assets and average equity were .82%
and 9.48%, respectively, for the six months ended June 30, 1998 compared to
1.05% and 12.16%, respectively, for the first six months of 1997.
During the first six months of 1998, the Company's deposits increased $32.0
million, mainly in interest bearing accounts. During the same period, the
Company's net loans decreased $.9 million, and the Company's securities
portfolio and Federal Funds sold increased $33.9 million. This combination
resulted in a lower net interest margin, as the Company typically receives
higher interest on its loans than on its securities portfolio. During the same
period, staffing and marketing expenses increased due to the opening of the
Littleton, Colorado branch and the planned opening of a new branch in Golden,
Colorado. The Company continues to seek quality loans to increase its loan
portfolio in a highly competitive market.
In addition, the Company's long term debt decreased $.8 million as a result of
the Company's prepayment of its loan with NationsBank.
INTEREST INCOME: Interest income increased $891,000, or 11.7%, to $8,484,000 for
the period ended June 30, 1998 from $7,593,000 for the comparable 1997 period,
primarily as a result of higher loan balances and interest on Federal Funds sold
during the period. The Company's net yield on interest earning assets on a fully
tax equivalent basis was 8.85% for the first six months of 1998, which reflects
a decrease of 28 basis points (each basis point equals 1/100 of 1%) from the
comparable
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1997 period. The average yield on loans decreased from 10.24% in the 1997 period
to 9.97% in the 1998 period, and the average yield on securities held by the
Company decreased from 7.45% in the 1997 period to 7.19% in the 1998 period.
Interest income on loans and interest on Federal Funds sold was $807,000 and
$236,000 greater in the 1998 period, respectively, and interest income on
securities decreased $152,000 in the 1998 period.
INTEREST EXPENSE: Interest expense increased $384,000, or 15.7%, to $2,825,000
for the six months ended June 30, 1998 from $2,441,000 for the six months ended
June 30, 1997. This increase is primarily due to the increase in interest
bearing deposit accounts in the 1998 period compared to those in the 1997
period. Average rates paid on interest bearing deposits increased 25 basis
points to 3.76% in the first six months of 1998 from 3.51% in the first six
months of 1997.
NET INTEREST INCOME: Net interest income before provision for loan loss was
$5,659,000 for the six months ended June 30, 1998, an increase of $507,000, or
9.8%, over the first six months of 1997. Net interest margin decreased 30 basis
points from 6.30% in the 1997 period to 6.00% in the 1998 period. The increase
in net interest income is primarily due to an $807,000 increase in interest
income on loans and a $236,000 increase in interest income on Federal Funds
sold, partially offset by a $152,000 decrease in interest income on securities
and a $384,000 increase in interest expense. The Company's average cost of funds
for the six months ended June 30, 1998 was 9 basis points higher than the
comparable 1997 period. The Company's average yield on interest earning assets
decreased 28 basis points in the 1998 period compared to the 1997 period, from
9.13% to 8.85%.
NONINTEREST INCOME: Noninterest income increased $10,000 for the six months
ended June 30, 1998 to $470,000 from $460,000 for the six months ended June 30,
1997.
NONINTEREST EXPENSE: Noninterest expense increased $831,000, or 20.3%, for the
first six months of 1998 to $4,923,000 compared to $4,092,000 in the first six
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; and (ii) an increase in other noninterest expenses due to increases
in marketing expenses.
INCOME TAX EXPENSE: Income tax expense decreased $216,000, or 61.4%, for the
first six months of 1998. This decrease is primarily the result of (ii) a
decrease in pretax earnings and (ii) a tax credit recorded in 1998 for options
exercised during 1997 and the stock acquired was sold within twelve months.
10
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
OVERVIEW: The Company reported net income of $390,000 for the three months ended
June 30, 1998, an decrease of 28.3% from net income of $544,000 for the
comparable 1997 period. Net income was $.15 per share (diluted) for the three
month period ended June 30, 1998, compared to $.22 per share (diluted) for the
1997 period. Return on average assets and average equity were .70% and 8.25%,
respectively, for the three month period ended June 30, 1998, compared to 1.14%
and 13.32%, respectively, for the 1997 period.
During the three months ended June 30,1998, the Company's deposits increased
$21.8.0 million, mainly in interest bearing accounts. During the same period,
the Company's net loans decreased $2.3 million, and the Company's securities
portfolio and Federal Funds sold increased $27.7 million. This combination
resulted in a lower net interest margin, as the Company typically receives
higher interest on its loans than on its securities portfolio. During the same
period, staffing and marketing expenses increased due to the opening of the
Littleton, Colorado branch and the planned opening of a new branch in Golden,
Colorado. The Company continues to seek quality loans to increase its loan
portfolio in a highly competitive market.
INTEREST INCOME: Interest income increased $420,000, or 10.6%, to $4,393,000 for
the three month period ended June 30, 1998 from $3,973,000 for the comparable
1997 period, primarily as a result of higher loan balances and interest on
Federal Funds sold during the period. The Company's net yield on interest
earning assets on a fully tax equivalent basis was 8.94% for the three month
period ended June 30, 1998, which reflects an decrease of 43 basis points from
the comparable 1997 period. The average yield on loans decreased from 10.42% in
the 1997 period to 10.00% in the 1998 period, and the average yield on
securities held by the Company decreased from 7.63% in the 1997 period to 7.61%
in the 1998 period. Interest income on loans, interest income on Federal Funds
sold, and interest income on securities was $236,000, $183,000, and $1,000,
respectively, greater in the 1998 period.
INTEREST EXPENSE: Interest expense increased $209,000, or 16.6%, to $1,470,000
for the three month period ended June 30, 1998 from $1,261,000 for the three
month period ended June 30, 1997. This increase was primarily due to an increase
in interest bearing deposit accounts in the 1998 period compared to the 1997
period. Average rates paid on interest bearing deposits increased 26 basis
points to 3.83% in the three month period ended June 30, 1998 from 3.57% in the
three month period ended June 30, 1997.
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NET INTEREST INCOME: Net interest income before provision for loan loss was
$2,923,000 for the three month period ended June 30, 1998, an increase of
$211,000, or 7.8%, over the comparable period of 1997. Net interest margin
decreased 44 basis points between the periods from 6.49% in the 1997 period to
6.05% in the 1998 period. The increase in the net interest income is primarily
due to a $236,000 increase in interest income on loans and a $183,000 increase
in interest income on Federal Funds sold, offset by a $209,000 increase in
interest expense. The Company's average cost of funds for the three month period
ended June 30, 1998 was 7 basis points higher than in the comparable 1997
period. The Company's average yield on earning assets decreased 43 basis points
in the 1998 period compared to the 1997 period, from 9.37% to 8.94%.
NONINTEREST INCOME: Noninterest income decreased $40,000 for the three month
period ended June 30, 1998 to $227,000 from $267,000 for the three month period
ended June 30, 1997. This decrease was primarily due to a $59,000 decrease in
the gain on sale of securities available for sale.
NONINTEREST EXPENSE: Noninterest expense increased $475,000, or 22.6%, for the
three month period ended June 30, 1998 to $2,573,000 compared to $2,098,000 in
the three month period ended June 30, 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; and (ii) an increase in other noninterest expenses
due to increases in marketing expenses.
PROVISION FOR LOAN LOSS
The Company charged $187,000 to Provision for Loan Loss in the first six months
of 1998 and $180,000 for the same period in 1997. The ratio of loan loss reserve
to total loans was 1.83% at June 30, 1998 and 1.63% at June 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.
LIQUIDITY AND SOURCES OF FUNDS
The Company's total assets increased 14.8% to $254.4 million at June 30, 1998
from $221.5 million at December 31, 1997. During the six months ended June 30,
1998 deposits increased $32.0 million to $222.1 million at June 30, 1998 from
$190.1 million at December 31, 1997. None of the Company's deposits at June 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 is currently 8.50%.
The Loan Agreement provides for a one-year term loan
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which is renewable by the Company unless the Company's credit standing is
unsatisfactory based on the criteria set forth below. The Loan Agreement
contains a twelve-year amortization schedule, with interest only for the first
two years, assuming renewal of the loan in accordance with its terms.
Annual renewal of the loan is based on the compliance by the Bank with the
following criteria:
1. Capital Ratio of not less than 6.25%;
2. Return on Average Assets of not below 1.00%;
3. Loan Loss Reserve/Total Loans Ratio of not below 1.00%;
4. Non-Performing Loans/Total Loans Ratio of not greater than 2.00%;
5. Debt Service Coverage Ratio of not less than 2:1; and
6. Absence of regulatory dividend restrictions.
In the event the Bank does not meet any of these criteria calculated as of
December 31 of each year and based on its financial statements, the Company will
have 90 days from the delivery of the financial statements to cure the
situation.
The loan is secured by the pledge of all of the shares of capital stock of the
Bank, and contains standard representations, warranties and covenants.
At December 31, 1997, the Company met all of the above criteria, and the loan
was renewed for another one year term.
At June 30, 1998, the Company had $1.2 million outstanding under this loan
agreement after making a $400,000 principal payment during the second 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.
On January 14, 1997, the Bank borrowed $10 million from the Federal Home Loan
Bank of Topeka (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 exposure relative to the Available for Sale portion of its securities
portfolio, as discussed below. 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
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structured as follows: $5 million at 6.34%, maturing January 14, 1999; and $5
million 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.
Management anticipates that the Company will continue to rely primarily on
customer deposits, sales and maturities of investment securities, loan sales and
loan repayments, as well as retained earnings to provide liquidity. These funds
are used to make loans, to acquire investment securities and other assets and to
fund continuing operations. The Company believes that its customer deposits will
continue to provide a strong source of liquidity because of the high percentage
of core deposits, many of which are held as compensating balances under
long-standing loan relationships. As a secondary source of funds, management
uses federal funds and its membership in the FHLB.
ASSET QUALITY
The Company's lending activities are guided by its Statement of Lending Policies
and Procedures. These policies are annually reviewed and approved by the Bank's
Board of Directors. The Bank employs an internal auditor to monitor its internal
supervision and audits of its lending operation and the Company supplements
these internal procedures with independent examinations performed by
professional consultants and auditors. The Company monitors concentrations of
loans by collateral, purpose and industry. The Company has no significant
exposure to highly leveraged transactions and has no foreign credits in its loan
portfolio.
Total nonperforming assets were $54,000 and $23,000 at June 30, 1998 and
December 31, 1997, respectively. Other Real Estate Owned (OREO) was $0 at both
June 30, 1998 and December 31, 1997. At June 30, 1998, securities held to
maturity were $25.0 million, or 28.9% of the total portfolio, and securities
available for sale totaled $60.4 million, or 70.0% of the total portfolio. Other
securities (investment in FHLB stock) totaled $0.9 million, or 1.1% 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 June 30, 1998, the market value of
investments available for sale exceeded carrying value by approximately
$830,000.
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 $829,000 at June 30, 1998. U.S. government securities make up
$16.7 million, or 18.9% of the investment portfolio, mortgage backed securities
make up $45.9 million, or 52.0% of the investment portfolio, obligations of
states and political subdivisions (municipal securities), comprise $24.7
million, or 28.0% of the investment portfolio, and other investments make up $.9
million, or 1.1% of the investment portfolio at June 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
14
<PAGE>
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 June 30,
1998, the dollar duration of the investment portfolio was 3.50 compared to 3.20
at December 31, 1997. This modest increase in dollar duration resulted from the
partial replacement of securities which were sold, matured or called during the
first six 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 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 $1,521,000 to $19.7 million
at June 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 10.36% at June 30, 1998 and its total qualifying capital to
risk weighted assets was 11.63%. As of June 30, 1998 the Bank also exceeded the
minimum regulatory risk based capital ratios.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995.
Statements which are not historical facts contained in this document are forward
looking statements that involve risks and uncertainties that could cause actual
results to differ from projected results. Factors that could cause actual
results to differ materially include, among others: general economic conditions,
economic conditions in the Denver metropolitan area, the monetary policy of the
Federal Reserve Board, changes in interest rates, inflation, competition in the
banking business, changes in the state and federal regulatory regime applicable
to the Company's and the Bank's operations, the results of financing efforts and
other risk factors detailed in the Company's Forms 10-KSB, 10-QSB and 8-K filed
with the Securities and Exchange Commission.
15
<PAGE>
UNION BANKSHARES, LTD.
PART II - OTHER INFORMATION
Item 6. Exhibits
Exhibit 27. Financial Data Schedule
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION BANKSHARES, LTD.
(Registrant)
July 31, 1998 /s/ Bruce E. Hall
------------------------------------------
Bruce E. Hall
Vice President,Treasurer and Secretary
(Authorized Officer and Principal
Financial Officer of the Registrant)
17
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,133,000
<INT-BEARING-DEPOSITS> 163,469,000
<FED-FUNDS-SOLD> 24,900,000
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