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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File No. 0-21078
UNION BANKSHARES, LTD.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0986148
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(State of other jurisdiction of (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 November 3, 1999, there were 2,364,914 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................................. 18
SIGNATURES.................................................. 19
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
September 30, December 31,
ASSETS 1999 1998
(Unaudited)
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Cash and cash equivalents:
Cash and due from banks $ 14,528,000 $ 18,914,000
Federal funds sold 7,200,000 26,505,000
------------ ------------
Total cash and cash equivalents 21,728,000 45,419,000
Investment securities:
Investment securities held to maturity 34,045,000 27,469,000
Investment securities available for sale 111,728,000 77,594,000
Other investments 1,949,000 988,000
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Total investment securities 147,722,000 106,051,000
Loans:
Commercial 125,921,000 105,618,000
Real estate mortgage 2,743,000 4,101,000
Real estate construction 18,008,000 12,881,000
Consumer 22,530,000 24,595,000
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Total loans 169,202,000 147,195,000
Less: allowance for loan losses (2,762,000) (2,678,000)
------------ ------------
166,440,000 144,517,000
Mortgage loans held-for-sale -- 4,285,000
Excess of investment in subsidiary over net
assets acquired 6,765,000 7,169,000
Furniture, equipment and improvements, net 3,245,000 3,276,000
Accrued interest receivable 2,451,000 1,542,000
Other assets 3,537,000 2,318,000
============ ============
TOTAL ASSETS $351,888,000 $314,577,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest-bearing) $ 85,095,000 $ 78,017,000
NOW 26,865,000 25,852,000
Money Market 82,246,000 65,452,000
Savings 18,702,000 19,221,000
Time 79,251,000 83,108,000
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Total deposits 292,159,000 271,650,000
Federal funds purchased -- --
Notes payable 28,600,000 10,000,000
Guaranteed preferred beneficial interests
in Company's debentures 10,304,000 10,304,000
Accrued interest payable 338,000 471,000
Other liabilities 976,000 1,808,000
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Total liabilities 332,377,000 294,233,000
Stockholders' equity
Common stock 2,000 2,000
Common stock surplus 9,673,000 9,678,000
Retained earnings 11,113,000 10,021,000
Valuation allowance (1,277,000) 643,000
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Total stockholders' equity 19,511,000 20,344,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $351,888,000 $314,577,000
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $11,033,000 $ 9,385,000 $ 3,982,000 $ 3,230,000
Interest on investment securities:
U.S. government agencies and corporations 5,201,000 2,189,000 1,972,000 783,000
States and other political subdivisions 1,020,000 1,018,000 354,000 354,000
Interest on federal funds sold
and interest bearing deposits at other banks 334,000 487,000 107,000 228,000
----------- ----------- ----------- -----------
Total interest income 17,588,000 13,079,000 6,415,000 4,595,000
INTEREST EXPENSE:
Interest on deposits 5,284,000 3,932,000 1,780,000 1,503,000
Interest on federal funds purchased 137,000 2,000 7,000 0
Interest on notes payable 1,458,000 582,000 700,000 188,000
----------- ----------- ----------- -----------
Total interest expense 6,879,000 4,516,000 2,487,000 1,691,000
----------- ----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSS 10,709,000 8,563,000 3,928,000 2,904,000
PROVISION FOR LOAN LOSS 102,000 243,000 55,000 56,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSS 10,607,000 8,320,000 3,873,000 2,848,000
NONINTEREST INCOME:
Service charges 491,000 292,000 169,000 104,000
Gain (loss) on sale of securities available for sale 266,000 25,000 0 (10,000)
Other 531,000 398,000 180,000 151,000
----------- ----------- ----------- -----------
Total non interest income 1,288,000 715,000 349,000 245,000
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,387,000 4,009,000 1,837,000 1,338,000
Amortization of investment in subsidiary
over net assets acquired 404,000 170,000 135,000 57,000
Occupancy and equipment 1,513,000 1,095,000 536,000 431,000
Other 3,023,000 2,273,000 971,000 798,000
----------- ----------- ----------- -----------
Total non interest expense 10,327,000 7,547,000 3,479,000 2,624,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 1,568,000 1,488,000 743,000 469,000
INCOME TAX EXPENSE (Note 3) 514,000 240,000 280,000 104,000
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NET INCOME $ 1,054,000 $ 1,248,000 $ 463,000 $ 365,000
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE BASIC: (Note 4)
Net income per share $ 0.45 $ 0.53 $ 0.20 $ 0.15
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Weighted average number of common shares outstanding 2,348,875 2,338,446 2,350,514 2,338,256
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE DILUTED (Note 4)
Net income per share $ 0.40 $ 0.47 $ 0.17 $ 0.13
=========== =========== =========== ===========
Weighted average number of common shares outstanding 2,634,270 2,630,620 2,635,909 2,635,965
=========== =========== =========== ===========
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Nine months ended Three months ended
September 30, September 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
NET INCOME $ 1,054,000 $ 1,248,000 $ 463,000 $ 365,000
OTHER COMPREHENSIVE INCOME (LOSS)
UNREALIZED APPRECIATION (DEPRECIATION) ON
AVAILABLE-FOR-SALE SECURITIES, NET OF
INCOME TAXES (2,087,000) 347,000 (340,000) 72,000
LESS: RECLASSIFICATION ADJUSTMENT FOR REALIZED
(GAIN) LOSSES INCLUDED IN NET INCOME, NET OF
INCOME TAXES 167,000 16,000 0 (6,000)
=========== =========== =========== ===========
COMPREHENSIVE INCOME $ (866,000) $ 1,611,000 $ 123,000 $ 431,000
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UNION BANKSHARES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
September 30,
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1999 1998
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (2,386,000) $ 996,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale
securities 12,639,000 19,295,000
Proceeds from maturities of held-to-maturity
securities 5,996,000 5,236,000
Proceeds from sale of available-for-sale
securities 17,149,000 2,207,000
Purchase of available-for-sale securities (75,320,000) (42,343,000)
Purchase of held-to-maturity securities (3,958,000) (3,237,000)
Purchase of loans held-for-sale (9,389,000) (19,905,000)
Proceeds from sale of loans held-for-sale 13,674,000 19,602,000
Purchase of other investments (961,000) (54,000)
Net (increase) decrease in loans (20,674,000) (5,405,000)
Purchase of furniture and equipment (548,000) (979,000)
Proceeds from sale of other real estate owned 150,000 --
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Net cash used in investing activities (61,242,000) (25,583,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 20,509,000 26,987,000
Increase (decrease) in fed funds purchased -- --
New borrowings long-term debt 33,600,000 --
Repayments of long-term debt (15,000,000) (1,000,000)
Proceeds from issuance of common stock 33,000 26,000
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Net cash provided by financing activities 39,142,000 26,013,000
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Net increase in cash and cash equivalents (24,486,000) 1,426,000
Cash and cash equivalents, beginning of year 45,419,000 26,714,000
------------ ------------
Cash and cash equivalents, end of quarter $ 20,933,000 $ 28,140,000
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UNION BANKSHARES, LTD. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
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, 1998. 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,
1999 and the Company's results of operations for the three and nine months ended
September 30, 1999 and 1998, statements of comprehensive income for the three
and nine months ended September 30, 1999 and 1998, and statements of cash flows
for the nine months ended September 30, 1999 and 1998.
Certain reclassifications have been made to the September 30, 1998 Consolidated
Financial Statements to conform to the September 30, 1999 Consolidated Financial
Statements.
NOTE 2. RESULTS OF OPERATIONS
The results of operations for the three and nine months ended September 30, 1999
and 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.
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NOTE 4. EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income available for
common stockholders by the weighted average number of shares of common stock
outstanding during the period plus the equivalent number of shares purchasable
under common stock options, if dilutive. Earnings per common share were affected
by 285,395 shares purchasable pursuant to exercisable options during the three
and nine months ended September 30, 1999. Earnings per common share were
affected by 292,174 shares purchasable pursuant to exercisable options during
the three and nine months ended September 30, 1998.
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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 nine months ended September 30, 1999. 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, 1998, and should be read in conjunction therewith.
GENERAL
As previously announced, on August 9, 1999, the Company entered into an
agreement providing for the acquisition of Union Bankshares, Ltd. By
Gold Banc Corporation, Inc.
The agreement provides for the acquisition of all the Common Stock of the
Company for a purchase price of $23.05 per share, to be paid in shares of Gold
Banc common stock and the assumption of all outstanding options. On August 9,
1999, the closing price on the NASDAQ Stock Market for the Company's Common
Stock was $12.50. The exchange ratio will be determined by dividing $23.05 by
the average price of Gold Banc common stock during the 10-day trading period
ending three days prior to closing, unless the average price is less than $13 or
greater than $16, in which case the average price shall be fixed at $13 or $16,
respectively. On August 9, 1999, the closing price on the NASDAQ Stock Market
for Gold Banc Common Stock was $11.50. If the average price of Gold Banc common
stock falls below $11 for a period of 10 trading days, ending on the day
immediately prior to the meeting at which the merger is considered by the
Company's stockholders, the Company will be entitled to terminate the
transaction within five days following the meeting of stockholders. The Company
expects to hold the stockholder meeting in connection with the transaction in
the first quarter of 2000. The transaction will be structured as a tax-free
reorganization and will be accounted for as pooling-of-interests.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
OVERVIEW: Union Bankshares, Ltd. (the "Company") reported net income of
$1,054,000 for the nine months ended September 30, 1999, a decrease of 15.5%
from net income of $1,248,000 for the first nine months of 1998. Earnings were
positively impacted in the first nine months of 1999 by a $2,146,000 increase in
net interest income, a $141,000 decrease in provision for loan loss, a $241,000
increase in gain on sale of securities available for sale, and a $332,000
increase in other noninterest income. These improvements were offset by a
$2,780,000 increase in noninterest expense and a $274,000 increase in income tax
expense for the nine months ended September 30, 1999. Net income per
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share (diluted) was $.40 for the nine months ended September 30, 1999 compared
to $.47 per share for the 1998 period. Return on average assets and average
equity were .43% and 6.94%, respectively, for the nine months ended
September 30, 1999 compared to .73% and 8.79%, respectively, for the first nine
months of 1998.
During the first nine months of 1999, the Company's cash and Federal Funds sold
decreased $23.7 million, its securities portfolio increased $41.7 million, its
net loan portfolio increased $21.9 million, its deposits increased $20.5
million, and its notes payable to the Federal Home Loan Bank of Topeka ("FHLB")
increased $18.6 million.
INTEREST INCOME: Interest income increased $4,509,000, or 34.5%, to $17,588,000
for the period ended September 30, 1999 from $13,079,000 for the comparable 1998
period. This increase results from the increase in the Company's interest
earning assets from continuing operations and the acquisition of Lakewood State
Bank ("LSB") in December, 1998. The Company's net yield on interest earning
assets on a fully tax equivalent basis was 8.01% for the first nine months of
1999, which reflects a decrease of 65 basis points (each basis point equals
1/100 of 1%) from the comparable 1998 period. The average yield on loans
decreased from 9.98% in the 1998 period to 9.56% in the 1999 period, and the
average yield on securities held by the Company decreased from 6.84% in the 1998
period to 6.49% in the 1999 period. Interest income on loans was $1,648,000
greater in the 1999 period and interest income on securities increased
$3,014,000 in the 1999 period.
INTEREST EXPENSE: Interest expense increased $2,363,000, or 52.3%, to $6,789,000
for the nine months ended September 30, 1999 from $4,516,000 for the nine months
ended September 30, 1998. This increase is primarily due to a $59.2 million
increase in average interest bearing deposit accounts ($30.0 million from the
acquisition of LSB), a $10.3 million increase in notes payable due to the
issuance of the trust preferred securities in December, 1998, a $3.9 million
increase in average Federal Funds purchased, an $8.1 million increase in average
notes payable to FHLB, offset by a $1.3 million decrease in average notes
payable to NationsBank (which was paid off in December, 1998). Average rates
paid on interest bearing deposits decreased 21 basis points to 3.55% in the
first nine months of 1999 from 3.76% in the first nine months of 1998.
NET INTEREST INCOME: Net interest income before provision for loan loss was
$10,709,000 for the nine months ended September 30, 1999, an increase of
$2,146,000, or 25.1%, over the first nine months of 1998. Net interest margin
decreased 81 basis points from 5.77% in the 1998 period to 4.96% in the 1999
period. The increase in net interest income is primarily due to a $1,648,000
increase in interest income on loans and a $3,014,000 increase in interest
income on securities, partially offset by a $153,000 decrease in interest income
on Federal Funds sold and a $2,363,000 increase in interest expense. The
Company's average cost of funds for the nine months ended September 30, 1999 was
1 basis point lower than the comparable 1998 period. The Company's average yield
on interest earning assets decreased 65 basis points in the 1999
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period compared to the 1998 period, from 8.66% to 8.01%.
NONINTEREST INCOME: Noninterest income increased $573,000, or 80.1%, for the
nine months ended September 30, 1999 to $1,288,000 from $715,000 for the nine
months ended September 30, 1998. This increase was due to: (i) a $241,000
increase in the gain on sale of securities available for sale ($7,000 due to the
acquisition of LSB); (ii) a $199,000 increase in service charge income ($136,000
due to the acquisition of LSB); and (iii) a $133,000 increase in other
noninterest income ($68,000 due to the acquisition of LSB).
NONINTEREST EXPENSE: Noninterest expense increased $2,780,000, or 36.8%, for the
first nine months of 1999 to $10,327,000 compared to $7,547,000 in the first
nine months of 1998. This increase is primarily the result of: (i) increases in
salaries and benefits relating primarily to staffing expenses for the two new
branches and the branch resulting from the acquisition of LSB, and annual merit
increases; (ii) increases in occupancy and equipment relating to the new
branches and the acquisition of LSB; (iii) increase in goodwill expense due to
the acquisition of LSB; and (iv) increases in other miscellaneous noninterest
expenses relating to the new branches and the acquisition of LSB.
INCOME TAX EXPENSE: Income tax expense increased $274,000, or 114.2%, for the
first nine months of 1999. This increase is primarily the result of: (i) an
increase 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.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
OVERVIEW: The Company reported net income of $463,000 for the three months ended
September 30, 1999, an increase of 26.9% from net income of $365,000 for the
comparable 1998 period. Net income was $.17 per share (diluted) for the three
month period ended September 30, 1999, compared to $.13 per share (diluted) for
the 1998 period. Return on average assets and average equity were .53% and
9.48%, respectively, for the three month period ended September 30, 1999,
compared to .59% and 7.50%, respectively, for the 1998 period.
During the three months ended September 30,1999, the Company's cash and Federal
Funds sold increased $.8 million, its securities portfolio increased $2.6
million, its net loan portfolio increased $9.0 million, its deposits increased
$22.2 million, and its notes payable decreased $10.0 million.
INTEREST INCOME: Interest income increased $1,820,000, or 39.6%, to
$6,415,000 for the three month period ended September 30, 1999 from
$4,595,000 for the comparable 1998 period. This increase results from
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the increase in the Company's interest earning assets as part of its ordinary
course operations and the acquisition of LSB. The Company's net yield on
interest earning assets on a fully tax equivalent basis was 8.15% for the three
month period ended September 30, 1999, which reflects a decrease of 18 basis
points from the comparable 1998 period. The average yield on loans decreased
from 10.02% in the 1998 period to 9.63% in the 1999 period, and the average
yield on securities held by the Company increased from 6.28% in the 1998 period
to 6.69% in the 1999 period. Interest income on loans was $752,000 greater in
the 1999 period and interest income on securities increased $1,189,000 in the
1999 period.
INTEREST EXPENSE: Interest expense increased $796,000, or 47.1%, to $2,487,000
for the three month period ended September 30, 1999 from $1,691,000 for the
three month period ended September 30, 1998. This increase was primarily due to
a $47.1 million increase in average interest bearing deposit accounts ($30.0
million from the acquisition of LSB), a $10.3 million increase in notes payable
due to the issuance of the trust preferred securities in December, 1998, a $24.0
million increase in average notes payable to the FHLB, offset by a $1.2 million
decrease in average notes payable to NationsBank (which was paid off in
December, 1998). Average rates paid on interest bearing deposits decreased 35
basis points to 3.51% in the three month period ended September 30, 1999 from
3.86% in the three month period ended September 30, 1998.
NET INTEREST INCOME: Net interest income before provision for loan loss was
$3,928,000 for the three month period ended September 30, 1999, an increase of
$1,024,000, or 35.3%, over the comparable period of 1998. Net interest margin
decreased 29 basis points between the periods from 5.36% in the 1998 period to
5.07% in the 1999 period. The increase in net interest income is primarily due
to a $752,000 increase in interest income on loans and a $1,089,000 increase in
interest income on securities, offset by a $121,000 decrease in interest income
on Federal Funds sold and a $796,000 increase in interest expense. The Company's
average cost of funds for the three month period ended September 30, 1999 was 4
basis points lower than in the comparable 1998 period. The Company's average
yield on earning assets decreased 18 basis points in the 1999 period compared to
the 1998 period, from 8.33% to 8.15%.
NONINTEREST INCOME: Noninterest income increased $104,000, or 42.5%, for the
three month period ended September 30, 1999 to $349,000 from $245,000 for the
three month period ended September 30, 1998. This increase was primarily due to:
(i) a $10,000 increase in the gain on sale of securities available for sale;
(ii) a $65,000 increase in service charge income ($44,000 due to the acquisition
of LSB); and (iii) a $29,000 increase in other noninterest income ($13,000 due
to the acquisition of LSB).
NONINTEREST EXPENSE: Noninterest expense increased $855,000, or 32.6%,
for the three month period ended September 30, 1999 to $3,479,000
compared to $2,624,000 in the three month period ended September 30,
1998. This increase is primarily the result of: (i) increases in
salaries and benefits relating primarily to staffing expenses for the
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two new branches and the branch resulting from the acquisition of LSB, and
annual merit increases; (ii) increases in occupancy and equipment relating to
the new branches and the acquisition of LSB; (iii) increase in goodwill expense
due to the acquisition of LSB; and (iv) increases in other miscellaneous
noninterest expenses relating to the new branches and the acquisition of LSB.
PROVISION FOR LOAN LOSS
The Company charged $102,000 to Provision for Loan Loss in the first nine months
of 1999 and $243,000 for the same period in 1998. The ratio of loan loss reserve
to total loans was 1.63% at September 30, 1999 and 1.80% at September 30, 1998.
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 11.9% to $351.9 million at September 30,
1999 from $314.6 million at December 31, 1998. During the nine months ended
September 30, 1999 deposits increased $20.5 million to $292.2 million at
September 30, 1999 from $271.7 million at December 31, 1998. None of the
Company's deposits at September 30, 1999 were brokered deposits.
In December, 1998, Union Bankshares Capital Trust I, a newly formed Delaware
business trust completed the sale of $10.3 million of 9% Cumulative Trust
Preferred Securities, guaranteed on a subordinated basis by the Company. The
Company contributed $7 million of the proceeds of the offering to the Bank to
finance the acquisition of Lakewood State Bank. The remainder of the proceeds
was used for general corporate purposes, including the payoff of all outstanding
amounts to NationsBank under the Loan Agreement. The Company also terminated the
revolving line of credit it maintained with NationsBank.
The Company established a revolving line of credit with Gold Banc in an amount
not to exceed $3.0 million. 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 will be available for one year only,
with renewals to be negotiated each year. There is currently no amount
outstanding under this line of credit.
On January 14, 1998, 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
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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%, which
matured and was repaid on January 14, 1999; and $5 million at 6.50%, maturing
January 14, 2000. This loan cannot be prepaid without a prepayment penalty.
Interest on this note is due monthly. The Company expects that maturities of
securities held in the Available for Sale portfolio will be adequate to fund
repayment of the remaining loan.
During the second quarter of 1999, the Bank borrowed $33.6 million from the FHLB
with rates ranging from 4.90% to 5.11% and maturities ranging from one day to
nine months. The purpose for these loans was to use an alternative source of
funding to fund current loan growth at a time when the Bank's deposits had not
increased and liquidation of a portion of the Bank's bond portfolio was not
believed to be prudent. The Company expects that these loans will be repaid with
liquidity from normal increases in deposits coupled with liquidity from the
Bank's bond portfolio.
During the third quarter of 1999, the Bank repaid $10.0 million of the FHLB
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 $206,000 and $15,000 at September 30, 1999 and
December 31, 1998, respectively. The Company had no Other Real Estate Owned
(OREO) at either September 30, 1999 or December 31, 1998. At September 30, 1999,
securities held to maturity were $34.0 million, or 23.1% of the total portfolio,
and securities available for sale totaled $111.7 million, or 75.6% of the total
portfolio. Other
14
<PAGE>
securities (investment in FHLB stock) totaled $1.9 million, or 1.3% 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, 1999, the carrying value of
investments available for sale exceeded market value by approximately
$2,448,000.
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 $82,000 at September 30, 1999. U.S. government securities make up
$76.7 million, or 51.9% of the investment portfolio, mortgage backed securities
make up $44.6 million, or 30.2% of the investment portfolio, obligations of
states and political subdivisions (municipal securities), comprise $24.5
million, or 16.6% of the investment portfolio, and other investments make up
$1.9 million, or 1.3% of the investment portfolio at September 30, 1999.
As noted in the Company's Form 10-KSB for the year ended December 31, 1998,
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,
1999, the dollar duration of the investment portfolio was 5.10 compared to 3.50
at December 31, 1998. This increase in dollar duration resulted from the partial
replacement of securities which were sold, matured or called during the first
nine months of 1999 and the net addition of $41.7 million of 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 decreased $833,000 to $19.5 million at
September 30, 1999 from $20.3 million at December 31, 1998. This decrease in
stockholders' equity was due to the net effect of FAS 115 which requires
financial institutions to mark their available for sale securities portfolio to
market, offset by the retention of earnings in the current year and the exercise
of options to purchase 6,000 shares of common stock.
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
15
<PAGE>
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 9.62% at September 30, 1999 and
its total qualifying capital to risk weighted assets was 12.42%. As of
September 30, 1999 the Bank also exceeded the minimum regulatory risk based
capital ratios.
IMPACT OF YEAR 2000
Some 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.
In February 1998, the Company 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, in
April 1998, the Company completed an assessment to determine whether it would
have to modify or replace portions of its hardware and software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. By September 1998, the Company had completed all required
renovations of its critical internal information technology ("IT") systems and
by March 1999, had completed compliance testing of such systems. All critical IT
and non-IT systems have tested Year 2000 compliant. Testing is continuing on
non-critical systems and all reasonable steps required to achieve compliance of
such systems will be taken. The steps remaining in the total Year 2000 project
are not estimated to have a material impact on the Company's financial position
or the results of its operations. The Company estimates that its total Year 2000
project cost will be approximately $500,000. These costs will be expensed as
incurred and approximately $485,000 has been incurred as of September 30. 1999.
The Company has initiated formal communications with all of its significant
suppliers and large customers and is continuing its assessment of the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. 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, 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
affect on the Company.
The Company has adopted a contingency plan in the event that third parties
significant to the Company are not timely Year 2000 compliant. The Company has
determined that the most reasonably likely worst-case
16
<PAGE>
scenario would include power and communications failures. Under the contingency
plan, the Company believes that it could carry out its core-business activities
for an indefinite period in such an event. The Company's plan also addresses
contingencies related to liquidity and currency demands which may arise.
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.
"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: 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 Forms 10-KSB, 10-QSB and 8-K filed with the
Securities and Exchange Commission.
Information included in this document includes "forward-looking statements"
which can be identified by the use of forward-looking terminology such as "may,"
"will," "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 Company's Annual
Report on Form 10-KSB 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.
17
<PAGE>
UNION BANKSHARES, LTD.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<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)
November 5, 1999 /s/ BRUCE E. HALL
----------------------------------
Bruce E. Hall
Vice President, Treasurer and
Secretary
(Authorized Officer and Principal
Financial Officer of the Registrant)
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,528,000
<INT-BEARING-DEPOSITS> 207,064,000
<FED-FUNDS-SOLD> 7,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,728,000
<INVESTMENTS-CARRYING> 147,722,000
<INVESTMENTS-MARKET> 147,804,000
<LOANS> 169,202,000
<ALLOWANCE> (2,762,000)
<TOTAL-ASSETS> 351,888,000
<DEPOSITS> 292,159,000
<SHORT-TERM> 28,600,000
<LIABILITIES-OTHER> 1,314,000
<LONG-TERM> 10,304,000
0
0
<COMMON> 9,675,000
<OTHER-SE> 9,386,000
<TOTAL-LIABILITIES-AND-EQUITY> 351,888,000
<INTEREST-LOAN> 11,033,000
<INTEREST-INVEST> 6,221,000
<INTEREST-OTHER> 334,000
<INTEREST-TOTAL> 17,588,000
<INTEREST-DEPOSIT> 5,284,000
<INTEREST-EXPENSE> 6,879,000
<INTEREST-INCOME-NET> 10,709,000
<LOAN-LOSSES> 102,000
<SECURITIES-GAINS> 266,000
<EXPENSE-OTHER> 10,327,000
<INCOME-PRETAX> 1,568,000
<INCOME-PRE-EXTRAORDINARY> 1,054,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,054,000
<EPS-BASIC> .45
<EPS-DILUTED> .40
<YIELD-ACTUAL> 8.01
<LOANS-NON> 206,000
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 2,678,000
<CHARGE-OFFS> 23,000
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