FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 .
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At October 19, 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
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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
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Union Bankshares, Ltd.
Part I - Financial Information
Item 1. Financial Statements -- September 30, 1998
<TABLE>
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<CAPTION>
September 30, December 31,
1998 1997
ASSETS (Unaudited)
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<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 17,140,000 $ 15,314,000
Federal funds sold 11,000,000 11,400,000
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Total cash and cash equivalents 28,140,000 26,714,000
Investment securities:
Investment securities held to maturity 25,786,000 27,929,000
Investment securities available for sale 58,515,000 37,180,000
Other investments 970,000 916,000
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Total investment securities 85,271,000 66,025,000
Loans:
Commercial 92,771,000 87,929,000
Real estate mortgage 3,623,000 4,297,000
Real estate construction 12,684,000 9,625,000
Consumer 18,851,000 20,933,000
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Total loans 127,929,000 122,784,000
Less: allowance for loan losses (2,304,000) (2,125,000)
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125,625,000 120,659,000
Mortgage loans held-for-sale 2,504,000 1,253,000
Excess of investment in subsidiary over net assets acquired 2,551,000 2,720,000
Furniture, equipment and improvements, net 2,030,000 1,378,000
Accrued interest receivable 1,636,000 1,353,000
Other assets 1,641,000 1,403,000
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TOTAL ASSETS $ 249,398,000 $ 221,505,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest-bearing) $ 67,038,000 $ 57,565,000
NOW 18,009,000 18,914,000
Money Market 61,245,000 65,074,000
Savings 11,836,000 10,798,000
Time 58,935,000 37,725,000
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Total deposits 217,063,000 190,076,000
Federal funds purchased - -
Notes payable 11,000,000 12,000,000
Accrued interest payable 252,000 187,000
Other liabilities 1,224,000 1,020,000
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Total liabilities 229,539,000 203,283,000
Stockholders' equity
Common stock 1,000 1,000
Common stock surplus 9,610,000 9,584,000
Valuation allowance 616,000 253,000
Retained earnings 9,632,000 8,384,000
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Total stockholders' equity 19,859,000 18,222,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 249,398,000 $ 221,505,000
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</TABLE>
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<TABLE>
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
-------------------------- ---------- ----------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,385,000 $ 8,429,000 $3,230,000 $3,081,000
Interest in investment securities:
U.S. government agencies and corporations 2,189,000 2,129,000 783,000 665,000
States and other political subdivisions 1,018,000 1,050,000 354,000 292,000
Interest on federal funds sold and interest bearing
deposits at other banks 487,000 80,000 228,000 57,000
----------- ----------- ---------- ----------
Total interest income 13,079,000 11,688,000 4,595,000 4,095,000
INTEREST EXPENSE:
Interest on deposits 3,932,000 2,962,000 1,503,000 1,055,000
Interest on federal funds purchased 2,000 108,000 0 14,000
Interest on notes payable 582,000 667,000 188,000 227,000
----------- ----------- ---------- ----------
Total interest expense 4,516,000 3,737,000 1,691,000 1,296,000
----------- ----------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSS 8,563,000 7,951,000 2,904,000 2,799,000
PROVISION FOR LOAN LOSS 243,000 270,000 56,000 90,000
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSS 8,320,000 7,681,000 2,848,000 2,709,000
NONINTEREST INCOME:
Service charges 292,000 280,000 104,000 96,000
Gain (loss) on sale of securities available for sale 25,000 91,000 (10,000) 38,000
Other 398,000 329,000 151,000 106,000
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Total noninterest income 715,000 700,000 245,000 240,000
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NONINTEREST EXPENSE:
Salaries and employee benefits 4,009,000 3,287,000 1,338,000 1,138,000
Amortization of investment in subsidiary over net
assets acquired 170,000 170,000 57,000 57,000
Occupancy and equipment 1,095,000 912,000 431,000 319,000
Other 2,273,000 1,873,000 798,000 636,000
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Total noninterest expense 7,547,000 6,242,000 2,624,000 2,150,000
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INCOME BEFORE INCOME TAX EXPENSE 1,488,000 2,139,000 469,000 799,000
INCOME TAX EXPENSE (Note 3) 240,000 628,000 104,000 276,000
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NET INCOME $ 1,248,000 $ 1,511,000 $ 365,000 $ 523,000
=========== =========== ========== ==========
EARNINGS PER COMMON SHARE BASIC:
(Note 4)
Net income per share $ 0.53 $ 0.65 $ 0.15 $ 0.21
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Weighted average number of common shares
outstanding 2,338,446 2,312,320 2,340,514 2,489,900
=========== =========== ========== ==========
EARNINGS PER COMMON SHARE DILUTED:
(Note 4)
Net income per share $ 0.47 $ 0.60 $ 0.13 $ 0.21
=========== =========== ========== ==========
Weighted average number of common shares
outstanding 2,630,620 2,502,166 2,632,688 2,442,476
=========== =========== ========== ==========
</TABLE>
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<TABLE>
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income $ 1,248,000 $ 1,511,000 $ 365,000 $ 523,000
Other comprehensive income net of tax:
Unrealized gains on securities 616,000 257,000 66,000 (91,000)
----------- ----------- ---------- -----------
Comprehensive income $ 1,864,000 $ 1,768,000 $ 431,000 $ 432,000
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</TABLE>
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<TABLE>
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
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1998 1997
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<S> <C> <C>
Net cash provided (used) by operating activities $ 996,000 $ 1,623,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale securities 19,295,000 2,627,000
Proceeds from maturities of held-to-maturity securities 5,236,000 8,221,000
Proceeds from sale of available-for-sale securities 2,207,000 12,717,000
Proceeds from sale of held-to-maturity securities - 676,000
Purchase of available-for-sale securities 42,343,000) (18,153,000)
Purchase of held-to-maturity securities (3,237,000) (4,000,000)
Purchase of loans held-for-sale 19,905,000) -
Purchase from sale of loans held-for-sale 19,602,000 -
Purchase of other investments (54,000) (377,000)
Net increase in loans (5,405,000) (22,050,000)
Purchase of furniture and equipment (979,000) (152,000)
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Net cash used in investing activities 25,583,000) (20,491,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 26,987,000 20,491,000
Increase (decrease) in federal funds purchased - (6,200,000)
New borrowings long-term debt - 10,000,000
Repayments of long-term debt (1,000,000) (750,000)
Proceeds from issuance of common stock 26,000 113,000
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Net cash provided by financing activities 26,013,000 23,654,000
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Net increase in cash and cash equivalents 1,426,000 4,786,000
Cash and cash equivalents, beginning of year 26,714,000 12,356,000
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Cash and cash equivalents, end of quarter $ 28,140,000 $ 7,142,000
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</TABLE>
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UNION BANKSHARES, LTD. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 September 30,
1998 and the Company's results of operations for the three and nine months ended
September 30, 1998 and 1997, and statements of cash flows for the nine months
ended September 30, 1998 and 1997.
Certain reclassifications have been made to the September 30, 1997 Consolidated
Financial Statements to conform to the September 30, 1998 Consolidated Financial
Statements.
NOTE 2. RESULTS OF OPERATIONS
The results of operations for the three months ended September 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.
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 292,174 shares purchasable pursuant to exercisable
options during the three and nine months ended September 30, 1998. Earnings per
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common share (diluted) were affected by 189,846 shares purchasable pursuant to
exercisable options during the three and nine months ended September 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.
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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 third quarter
and nine months ended September 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 with those
statements.
GENERAL
On August 27, 1998, the Company announced the planned merger of Lakewood State
Bank ("LSB") a state chartered bank located in Lakewood, Colorado, into its
wholly owned subsidiary, Union Bank & Trust ("Bank"). The Company believes that
LSB's operating philosophy is consistent with the Bank's, and that the combined
Bank, with over $300 million in proforma assets, will be able to operate
effectively in the Denver marketplace. The merger is structured as a
cash-for-stock acquisition in which the LSB shareholders will receive a total of
$8.35 million in cash, LSB will be merged into the Bank and LSB's separate
corporate existence will cease. Thereafter, it is expected that LSB's operations
will be operated in the same fashion as the Company's other branches.
The Company intends to use the proceeds from either a traditional bank stock
loan, together with available working capital, or the proceeds of a Trust
Preferred Securities offering, to provide long-term financing for the planned
merger.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
OVERVIEW: Union Bankshares, Ltd. (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 partially
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 deposit higher, resulted in a lower net interest margin.
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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 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
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recorded in 1998 in connection with options exercised during 1997 and the stock
acquired was sold within twelve months.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
OVERVIEW: The Company reported net income of $365,000 for the three months ended
September 30, 1998, a decrease of 30.2% from net income of $523,000 for the
comparable 1997 period. Net income was $.13 per share (diluted) for the three
month period ended September 30, 1998, compared to $.21 per share (diluted) for
the 1997 period. Return on average assets and average equity were .59% and
7.50%, respectively, for the three month period ended September 30, 1998,
compared to 1.05% and 12.22%, respectively, for the 1997 period.
INTEREST INCOME: Interest income increased $500,000, or 12.2%, to $4,595,000 for
the three month period ended September 30, 1998 from $4,095,000 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 8.33% for the three
month period ended September 30, 1998, which reflects a decrease of 78 basis
points from the comparable 1997 period. The average yield on loans decreased
from 10.18% in the 1997 period to 10.02% in the 1998 period, and the average
yield on securities held by the Company decreased from 7.20% in the 1997 period
to 6.28% in the 1998 period. Interest income on loans, Federal Funds sold and
securities was $149,000, 171,000 and $180,000, respectively, greater in the 1998
period.
INTEREST EXPENSE: Interest expense increased $395,000, or 30.5%, to $1,691,000
for the three month period ended September 30, 1998 from $1,296,000 for the
three month period ended September 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 3.86% in the three month period ended September 30, 1998 from
3.60% in the three month period ended September 30, 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
$2,904,000 for the three month period ended September 30, 1998, an increase of
$105,000, or 3.8%, over the comparable period of 1997. Net interest margin
decreased 95 basis points between the periods from 6.31% in the 1997 period to
5.36% in the 1998 period. The increase in the net interest income is primarily
due to an increase in interest income on loans, Federal Funds sold and
securities of $149,000, $171,000 and $180,000, respectively, offset by a
$395,000 increase in interest expense. The Company's average cost of funds for
the three month period ended September 30, 1998 was 10 basis points higher than
in the comparable 1997 period. The Company's average yield on interest earning
assets decreased 78 basis points in the 1998 period compared to the 1997 period,
from 9.11% to 8.33%.
NONINTEREST INCOME: Noninterest income increased $5,000 for the three month
period ended September 30, 1998 to $245,000 from $240,000 for the three month
period ended September 30, 1997.
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NONINTEREST EXPENSE: Noninterest expense increased $474,000, or 22.1%, for the
three month period ended September 30, 1998 to $2,624,000 compared to $2,150,000
in the three month period ended September 30, 1997. This increase is primarily
the result of (i) 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.
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 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.
LIQUIDITY AND SOURCES OF FUNDS
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 (formerly Boatmen's) 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 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.
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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 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
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<PAGE>
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
$963,000.
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
$15.2 million, or 17.8% of the investment portfolio, mortgage backed securities
make up $44.5 million, or 52.3% of the investment portfolio, obligations of
states and political subdivisions (municipal securities) comprise $24.6 million,
or 28.8% 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 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 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.
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<PAGE>
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.
"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.
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<PAGE>
UNION BANKSHARES, LTD.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27.1 Financial Data Schedule
b) Reports on Form 8-K.
On September 2, 1998, the Company filed a Form 8-K reporting under "Item 5.
Other Events" with respect to the acquisition of Lakewood State Bank.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION BANKSHARES, LTD.
---------------------------------------
(Registrant)
October 26, 1998 /s/ BRUCE E. HALL
---------------------------------------
Bruce E. Hall
Vice President, Treasurer and Secretary
(Authorized Officer and Principal
Financial Officer of the Registrant)
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<PAGE>
Union Bankshares Form 10-QSB
09/30/98
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,140,000
<INT-BEARING-DEPOSITS> 150,025,000
<FED-FUNDS-SOLD> 11,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,515,000
<INVESTMENTS-CARRYING> 85,271,000
<INVESTMENTS-MARKET> 86,202,000
<LOANS> 127,929,000
<ALLOWANCE> (2,304,000)
<TOTAL-ASSETS> 249,398,000
<DEPOSITS> 217,063,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,224,000
<LONG-TERM> 11,000,000
0
0
<COMMON> 9,611,000
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<INTEREST-TOTAL> 13,079,000
<INTEREST-DEPOSIT> 3,932,000
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<INTEREST-INCOME-NET> 8,563,000
<LOAN-LOSSES> 243,000
<SECURITIES-GAINS> 25,000
<EXPENSE-OTHER> 7,547,000
<INCOME-PRETAX> 1,488,000
<INCOME-PRE-EXTRAORDINARY> 1,488,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,428,000
<EPS-PRIMARY> .53
<EPS-DILUTED> .47
<YIELD-ACTUAL> 8.66
<LOANS-NON> 52,000
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 2,125,000
<CHARGE-OFFS> 74,000
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