10-Q 1 a386265.txt 6-30-01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 ------------------------------ ------------------ (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) ------------------------------------------------------------------------------- Not Changed ------------------------------------------------------------------------------- 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 August 1, 2001, there were 2,400,194 shares of common stock outstanding. 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 Item 4. Submission of Matters to a Vote of Security Holders..................... 16 Item 6. Exhibits and Reports on Form 8-K..... 16 SIGNATURES............................................. 17 UNION BANKSHARES, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q 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, 2000. 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, 2001 and the Company's results of operations for the three and six months ended June 30, 2001 and 2000, statements of comprehensive income for the three and six months ended June 30, 2001 and 2000, and statements of cash flows for the six months ended June 30, 2001 and 2000. The consolidated balance sheet of the Company as of December 31, 2000, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain reclassifications have been made to the June 30, 2000 Consolidated Financial Statements to conform to the June 30, 2001 Consolidated Financial Statements. NOTE 2. RESULTS OF OPERATIONS The results of operations for the three and six months ended June 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. NOTE 3. 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 253,999 shares purchasable pursuant to exercisable options during the three and six months ended June 30, 2001. Earnings per common share were affected by 222,288 shares purchasable pursuant to exercisable options during the three and six months ended June 30, 2000. NOTE 4. NOTES PAYABLE During the first six months of 2001, the Bank entered into 19 advance agreements totaling $113.6 million with the Federal Home Loan Bank of Topeka (FHLB) bearing interest rates ranging from 3.90% to 5.96%. During this same period the Bank repaid $102.2 million of its advances from the FHLB. As of June 30, 2001, FHLB advances outstanding are $40.0 million with $5.0 million maturing each on July 9, 2001, July 20, 2001, August 8, 2001, August 17, 2001, September 21, 2001, September 21, 2001, October 15, 2001, and December 31, 2002. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS JUNE 30, 2001 UNION BANKSHARES, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE DECEMBER 31, ASSETS 2001 2000 (UNAUDITED) ------------- ------------- Cash and cash equivalents: Cash and due from banks $ 24,186,000 $ 19,551,000 Federal funds sold 5,000,000 -- ------------- ------------- Total cash and cash equivalents 29,186,000 19,551,000 Investment securities: Investment securities available for sale 163,107,000 130,349,000 Other investments 2,430,000 2,430,000 ------------- ------------- Total investment securities 165,537,000 132,779,000 Loans: Commercial 153,025,000 153,727,000 Real estate mortgage 3,889,000 4,372,000 Real estate construction 29,028,000 26,955,000 Consumer 30,914,000 31,754,000 ------------- ------------- Total loans 216,856,000 216,808,000 Less: allowance for loan losses (3,204,000) (3,286,000) ------------- ------------- 213,652,000 213,522,000 Mortgage loans held for sale 1,794,000 -- Excess of cost over fair value of net assets acquired, net of amortization 5,823,000 6,092,000 Furniture, equipment and improvements, net 2,504,000 2,724,000 Accrued interest receivable 2,497,000 3,170,000 Other assets 2,416,000 2,642,000 ------------- ------------- TOTAL ASSETS $423,409,000 $ 380,480,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand (noninterest-bearing) $ 96,155,000 $ 99,220,000 NOW 31,107,000 30,413,000 Money Market 81,900,000 76,549,000 Savings 18,548,000 18,149,000 Time 117,405,000 90,998,000 ------------- ------------- Total deposits 345,115,000 315,329,000 Federal funds purchased -- -- Notes payable 40,000,000 28,600,000 Guaranteed preferred beneficial interests in Company's debentures 10,304,000 10,304,000 Accrued interest payable 396,000 383,000 Other liabilities 1,123,000 1,704,000 ------------- ------------- Total liabilities 396,938,000 356,320,000 Stockholders' equity Common stock 2,000 2,000 Additional paid in capital 9,999,000 9,987,000 Retained earnings 15,701,000 14,393,000 Unrealized appreciation (depreciation) on available for sale securities, net 769,000 (222,000) ------------- ------------- Total stockholders' equity 26,471,000 24,160,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' $ 423,409,000 $ 380,480,000 ============= ============= See Notes to Consolidated Financial Statements UNION BANKSHARES, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)

~~Part~~SIX IMONTHS -ENDED ~~Financial~~THREE ~~Information~~MONTHS ~~Item~~ENDED 1JUNE ~~- Financial Statements March 31~~30, ~~2001~~JUNE ~~UNION BANKSHARES~~30, ~~LTD.~~---------------------------- ~~AND~~---------------------------- ~~SUBSIDIARY~~2001 ~~CONSOLIDATED~~2000 ~~BALANCE SHEETS March 31, December 31, ASSETS~~ 2001 2000 ~~(Unaudited) (Audited)~~ ----------- ----------- ----------- ----------- ~~Cash~~INTEREST ~~and cash equivalents~~INCOME: ~~Cash~~Interest and ~~due~~fees ~~from~~on ~~banks~~loans $ 1610,~~001~~368,000 $ 199,~~551~~859,000 ~~Federal~~$ ~~funds~~5,045,000 ~~sold~~$ 5,~~000~~218,000 --Interest ~~-------------~~on ~~-------------~~investment ~~Total~~securities: ~~cash~~U.S. government agencies and ~~cash~~corporations ~~equivalents~~3,335,000 213,~~001~~868,000 191,~~551~~727,000 ~~Investment~~1,877,000 ~~securities:~~States ~~Investment~~and ~~securities~~other ~~available~~political ~~for~~subdivisions ~~sale~~870,000 ~~140~~700,~~814~~000 503,000 ~~130~~345,~~349,~~000 ~~Other~~Interest ~~investments~~on 2federal funds sold and interest bearing deposits at other banks 179,~~430~~000 49,000 274,~~430~~000 33,000 ----------- ----------- ----------- ----------- Total ~~investment~~interest ~~securities~~income ~~143~~14,~~244~~752,000 ~~132~~14,~~779~~476,000 ~~Loans: Commercial 158~~7,~~321~~349,000 ~~153~~7,~~727~~473,000 ~~Real~~INTEREST ~~estate~~EXPENSE: ~~mortgage~~Interest on deposits 4,~~740~~470,000 43,~~372~~770,000 ~~Real~~2,247,000 ~~estate~~1,956,000 ~~construction~~Interest 25on federal funds purchased 2,~~632~~000 46,000 262,~~955~~000 32,000 ~~Consumer~~Interest 30on notes payable 1,~~592~~271,000 311,~~754~~863,000 646,000 1,001,000 ----------- ----------- ----------- ----------- Total ~~loans~~interest ~~219~~expense 5,~~285~~743,000 ~~216~~5,~~808~~679,000 ~~Less: allowance for loan losses (3~~2,~~336~~895,000) (32,~~286~~989,000) ----------- -- --------- ----------- ~~215,949,000 213,522,000 Mortgage loans held for sale 5,145,000~~ ----------- ~~Excess~~NET ofINTEREST ~~cost~~INCOME ~~over~~BEFORE ~~fair~~PROVISION ~~value~~FOR ofLOAN ~~net~~LOSS ~~assets acquired~~9, ~~net of amortization 5~~009,~~958,~~000 68,~~092~~797,000 ~~Furniture~~4, ~~equipment and improvements~~454, ~~net 2,595,~~000 24,~~724~~484,000 ~~Accrued~~PROVISION ~~interest~~FOR ~~receivable~~LOAN 2LOSS 89,~~385,~~000 3136,~~170,~~000 ~~Other~~0 ~~assets 2~~50,~~547,~~000 ~~2,642,000~~ ----------- ----------- ----------- ----------- ~~TOTAL~~NET ~~ASSETS~~INTEREST $INCOME ~~398~~AFTER PROVISION FOR LOAN LOSS 8,~~824~~920,000 $8,661,000 ~~380~~4,~~480~~454,000 ~~=============~~4,434,000 ~~=============~~NONINTEREST ~~LIABILITIES AND STOCKHOLDERS' EQUITY Deposits~~INCOME: ~~Demand~~Service ~~(noninterest~~charges ~~-bearing) $ 94~~442,~~331,~~000 ~~$ 99~~389,~~220,~~000 ~~NOW 31~~226,~~648,~~000 30201,~~413,~~000 ~~Money~~Gain ~~Market~~on 81sale of securities available for sale 106,~~480~~000 (359,000) 7693,~~549~~000 (359,000) ~~Savings~~Other 18357,~~664,~~000 18380,~~149,~~000 ~~Time 100~~197,~~354,~~000 90203,~~998,~~000 ----------- ----------- ----------- ----------- Total ~~deposits~~non ~~326~~interest income 905,~~477~~000 410,000 ~~315~~516,~~329~~000 45,000 ~~Federal~~----------- ~~funds~~----------- ~~purchased~~ ----------- ----------- ~~Notes~~NONINTEREST ~~payable~~EXPENSE: 35Salaries and employee benefits 4,342,000 3,881,000 282,~~600~~146,000 ~~Guaranteed~~1,904,000 ~~preferred~~Amortization ~~beneficial~~of ~~interests~~investment in ~~Company's~~subsidiary ~~debentures~~over 10net assets acquired 269,~~304~~000 269,000 10134,~~304~~000 134,000 ~~Accrued~~Occupancy ~~interest~~and ~~payable~~equipment ~~398~~1,015,000 ~~383~~1,024,000 503,000 522,000 Other ~~liabilities~~2,214,000 2,092,000 1,~~052~~125,000 1,~~704~~047,000 ----------- ----------- ----------- ----------- Total ~~liabilities~~non ~~373~~interest expense 7,~~231~~840,000 ~~356~~7,~~320~~266,000 ~~Stockholders' equity Common stock 2~~3,908,000 23,607,000 ~~Additional~~----------- ~~paid~~----------- in----------- ~~capital~~----------- 9INCOME BEFORE INCOME TAX EXPENSE 1,~~996~~985,000 91,~~987~~805,000 ~~Retained earnings 15~~1,~~038~~062,000 14872,~~393,~~000 ~~Unrealized~~INCOME ~~appreciation~~TAX ~~(depreciation)~~EXPENSE on693,000 ~~available for sale securities~~369,000 ~~net of tax 557~~398,000 ~~(222~~106,000) ------------- ------------- ~~Total stockholders' equity 25,593,000 24,160,000~~ ------------- ------------- ~~TOTAL~~NET ~~LIABILITIES~~INCOME ~~AND~~$ ~~STOCKHOLDERS'~~1,292,000 ~~EQUITY~~ $ ~~398~~1,~~824~~436,000 $ ~~380~~664,~~480~~000 $ 766,000 =========== =========== =========== =========== EARNINGS PER COMMON SHARE BASIC Net income per share $ 0.54 $ 0.61 $ 0.28 $ 0.33 =========== =========== =========== =========== Weighted average number of common shares outstanding 2,399,646 2,373,053 2,399,913 2,368,798 =========== =========== =========== =========== EARNINGS PER COMMON SHARE DILUTED Net income per share $ 0.49 $ 0.55 $ 0.26 $ 0.29 =========== =========== =========== =========== Weighted average number of common shares outstanding 2,653,645 2,595,341 2,653,911 2,591,086 =========== =========== =========== ===========

See Notes to Consolidated Financial Statements UNION BANKSHARES, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)

~~UNION~~SIX ~~BANKSHARES,~~MONTHS ~~LTD.~~ENDED ~~AND~~THREE ~~SUBSIDIARY~~MONTHS ~~CONSOLIDATED~~ENDED ~~STATEMENTS~~JUNE OF30, ~~INCOME~~JUNE ~~(Unaudited) March 31~~30, ---------------------------- 2001 2000 INTEREST INCOME: Interest and fees on loans $5,323,000 $4,641,000 Interest on investment securities: U.S. government agencies and corporations 1,608,000 1,991,000 States and other political subdivisions 367,000 355,000 Interest on federal funds sold and interest bearing deposits at other banks 105,000 16,000 ---------- ---------- ~~Total interest income 7,403,000 7,003,000 INTEREST EXPENSE: Interest on deposits 2,223,000 1,814,000 Interest on federal funds purchased~~ -------- ~~14,000~~2001 ~~Interest~~2000 on2001 ~~notes~~2000 ~~payable 625,000 862,000~~ ----------- ----------- ~~Total interest expense 2,848,000 2,690,000~~ ----------- ----------- NET ~~INTEREST~~ INCOME ~~BEFORE~~$ ~~PROVISION~~1,292,000 ~~FOR~~$ ~~LOAN~~1,436,000 ~~LOSS~~$ 4664,~~555,~~000 4$ 766,~~313,~~000 ~~PROVISION~~OTHER ~~FOR~~COMPREHENSIVE ~~LOAN~~INCOME (LOSS) ~~89,000~~Unrealized ~~86,000~~appreciation ~~----------~~(depreciation) on available-for-~~--------~~sale ~~NET~~securities, ~~INTEREST~~net ~~INCOME~~of ~~AFTER~~income ~~PROVISION~~taxes ~~FOR~~of ~~LOAN LOSS 4~~$605,~~466,~~000, 4($314,~~227~~000), $200,000 ~~NONINTEREST~~and ~~INCOME:~~($414,000) ~~Service~~respectively ~~charges~~1,058,000 ~~216~~(534,000) ~~188~~271,000 ~~Gain~~(704,000) onUnrealized ~~sale~~(depreciation) ofappreciation ~~securities~~on ~~available~~investments ~~for~~transferred ~~sale~~from ~~13,000~~ held-to-maturity ~~Other~~to ~~160,000 177,000~~ available-for-~~--------~~sale ~~----------~~net ~~Total~~of ~~non~~income ~~interest~~taxes ~~income~~of ~~389~~($261,000) ~~365~~-- (443,000) --~~--------~~ --~~--------~~ ~~NONINTEREST EXPENSE~~LESS: ~~Salaries~~reclassification ~~and~~adjustment ~~employee~~for ~~benefits~~realized ~~2,196,000~~(gain) ~~1,977,000~~losses ~~Amortization~~included ~~of investment~~ in ~~subsidiary~~net ~~over~~income, net ~~assets~~of ~~acquired~~income ~~135,000~~taxes ~~135~~of ($39,000) ~~Occupancy~~ and ~~equipment 512~~$133,000, ~~502~~($34,000) ~~Other~~and 1$133,~~089~~000, respectively (67,000) 1226,~~045,~~000 ~~---------- ---------- Total non interest expense 3~~(59,~~932,~~000) 3226,~~659,~~000 ----------- ----------- ~~INCOME BEFORE INCOME TAX EXPENSE 923,000 933,000 INCOME TAX EXPENSE 295,000 263,000~~ ----------- ----------- ~~NET~~COMPREHENSIVE INCOME $ ~~628~~2,283,000 $ ~~670~~685,000 ~~========== ========== EARNINGS PER COMMON SHARE BASIC Net income per share~~ $ ~~0.26~~876,000 $ ~~0.28~~288,000 ========== =~~=========~~ ~~Weighted average number of common shares outstanding 2,399,376 2,370,908~~ ========== =~~=========~~ ~~EARNINGS PER COMMON SHARE DILUTED Net income per share $ 0.23 $ 0.26~~ ========== =~~=========~~ ~~Weighted average number of common shares outstanding 2,685,206 2,607,678~~ ========== =~~=========~~

See Notes to Consolidated Financial Statements UNION BANKSHARES, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED (UNAUDITED)

~~UNION~~JUNE ~~BANKSHARES~~30, ~~LTD.~~---------------------------- ~~AND~~2001 ~~SUBSIDIARY~~2000 ~~CONSOLIDATED~~---- ~~STATEMENTS~~---- OFNET ~~COMPREHENSIVE~~CASH ~~INCOME~~PROVIDED ~~FOR~~(USED) ~~THE~~BY ~~THREE~~OPERATING ~~ENDED~~ACTIVITIES ~~MARCH~~($212,000) 31$1,704,000 ~~2001~~---------- ~~AND~~---------- ~~2000~~CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of available-for-sale securities 13,716,000 6,819,000 Proceeds from sale of available-for-sale securities 60,796,000 18,032,000 Purchase of available-for-sale securities (~~Unaudited~~105,839,000) ~~Three~~(2,742,000) ~~months~~Purchase ~~ended~~of ~~March~~other 31investments -- (486,000) Net decrease (increase) in loans 111,000 (21,524,000) Purchase of furniture and equipment (135,000) (80,000) ---------------------------- ~~2001~~Net ~~2000~~cash (used in) provided by investing activities (31,351,000) 19,000 ----------- ----------------- ~~NET~~CASH ~~INCOME~~FLOWS $FROM ~~628~~FINANCING ACTIVITIES: Increase in deposits 29,786,000 ~~$ 670~~5,214,000 ~~OTHER~~Decrease ~~COMPREHENSIVE~~in ~~INCOME~~fed ~~(LOSS)~~funds ~~Unrealized~~purchased ~~appreciation~~ (~~depreciation~~8,500,000) onProceeds ~~available-for-sale~~from ~~securities,~~issuance ~~net~~ of ~~income~~notes ~~taxes~~payable of113,600,000 ~~$400~~125,000,000 ~~and~~Principal repayments of notes payable ($4102,200,000) (105,000,000) ~~respectively~~Proceeds ~~779~~from issuance of common stock 12,000 (654,000) ~~LESS:~~---------------------------- ~~reclassification~~Net ~~adjustment~~cash ~~for~~provided ~~realized~~by ~~(gain)~~financing ~~losses~~activities ~~included~~41,198,000 in16,768,000 ~~net~~---------------------------- ~~income,~~Net ~~net~~increase ofin ~~income~~cash ~~taxes~~and ofcash $5equivalents 9,635,000 18,491,000 Cash and $0cash equivalents, ~~respectively~~beginning (8of year 19,551,000) 15,493,000 -- ----------- --------------- ~~COMPREHENSIVE~~Cash ~~INCOME~~and $cash 1equivalents,~~415~~ end of quarter $29,186,000 $ ~~664~~33,984,000 =========== =================

See Notes to Consolidated Financial Statements 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, 2001. The discussion is a supplement to the unaudited Consolidated Financial Statements provided in Item 1 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, 2000, and should be read in conjunction therewith. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 OVERVIEW: The Company reported net income of $1,292,000 for the six months ended June 30, 2001, a decrease of 10.0% from net income of $1,436,000 for the first six months of 2000. Earnings were positively impacted in the first six months of 2001 by a $212,000 increase in net interest income, a $47,000 decrease in provision for loan loss, a $53,000 increase in service charge income and a $465,000 increase in gain (loss) on sale of securities available for sale. These improvements were offset by a $574,000 increase in noninterest expense and a $324,000 increase in income tax expense for the six months ended June 30, 2001. Net income per share (diluted) was $.49 for the six months ended June 30, 2001 compared to $.55 per share for the comparable 2000 period. Return on average assets and average equity were .65% and 10.21%, respectively, for the six months ended June 30, 2001 compared to .77% and 14.53%, respectively, for the first six months of 2000. During the first six months of 2001, the Company's cash and Federal Funds sold increased $9.6 million, its securities portfolio increased $32.8 million, its net loan portfolio increased $1.9 million, its deposits increased $29.8 million, and its notes payable to the FHLB increased $11.4 million. See "Liquidity and Capital Resources" for a discussion of the Company's FHLB borrowings. INTEREST INCOME: Interest income increased $276,000, or 1.9%, to $14,752,000 for the period ended June 30, 2001 from $14,476,000 for the comparable 2000 period. This increase results from the increase in the Company's total interest earning assets, primarily in loans as a percentage of interest earning assets, partially offset by the general decline in interest rates. The Company's net yield on interest earning assets on a fully tax equivalent basis was 8.35% for the first six months of 2001, which reflects a decrease of 39 basis points (each basis point equals 1/100 of 1%) from the comparable 2000 period. The average yield on loans decreased from 10.14% in the six months ended June 30, 2000 to 9.53% in the comparable 2001 period, and the average yield on securities held by the Company decreased from 6.93% in the 2000 period 9 to 6.67% in the 2001 period. Interest income on loans was $509,000 greater in the six months ended June 30, 2001, interest income on securities decreased $363,000 in the 2001 period and interest income on federal funds sold increased $130,000 in the 2001 period, each when compared to the comparable 2000 period. INTEREST EXPENSE: Interest expense increased $64,000, or 1.1%, to $5,743,000 for the six months ended June 30, 2001 from $5,679,000 for the six months ended June 30, 2000. This 2001 increase is primarily due to an increase in interest paid on deposits of $700,000, partially offset by a decrease in interest paid on Federal Funds purchased and notes payable to the FHLB of $636,000. Average rates paid on interest bearing deposits increased 8 basis points to 3.86% in the first six months of 2001 from 3.79% in the first six months of 2000. NET INTEREST INCOME: Net interest income before provision for loan loss was $9,009,000 for the six months ended June 30, 2001, an increase of $212,000, or 2.4%, over the first six months of 2000. Net interest margin decreased 24 basis points from 5.39% in the 2000 period to 5.15% in the 2001 period. The 2001 increase in net interest income is primarily due to a $509,000 increase in interest income on loans and a $130,000 increase in interest income on Federal Funds sold, offset by a $363,000 decrease in interest income on securities and a $64,000 increase in interest expense. The Company's average cost of funds for the six months ended June 30, 2001 was 26 basis points lower than the comparable 2000 period. The Company's average yield on interest earning assets decreased 39 basis points in the 2001 period compared to the 2000 period, from 8.74% to 8.35%. The Company believes that the decline in net interest margin results from the aggressive action of the Federal Reserve to reduce interest rates in response to general economic conditions since January 1, 2001. Further aggressive reduction in interest rates would be expected to materially affect the Company's net interest income. NONINTEREST INCOME: Noninterest income increased $495,000, or 120.7%, for the six months ended June 30, 2001 to $905,000 from $410,000 for the six months ended June 30, 2000. This increase was due to a $53,000 increase in service charge income and a $465,000 increase in gain (loss) on sale of securities available for sale, offset by a $23,000 decrease in other noninterest income. The increase in the gain (loss) on the sale of securities available for sale was due to the increase in market value of the securities sold as a result of the decline in interest rates between the periods. NONINTEREST EXPENSE: Noninterest expense increased $574,000, or 7.9%, for the first six months of 2001 to $7,840,000, compared to $7,266,000 in the first six months of 2000. A significant portion of this increase is increases in salaries and benefits relating primarily to annual merit increases. 10 INCOME TAX EXPENSE: Income tax expense increased $324,000, or 87.8%, for the first six months of 2001 to $693,000 compared to $369,000 in the first six months of 2000. This increase is primarily due to a $111,000 tax benefit recorded in 2000 for pooling related expenses, a $45,000 tax benefit recorded in 2000 for employee option exercises, an $80,000 increase in tax expense relating to lower state tax exempt investments in 2001 and a $67,000 increase in tax expense due to higher pre-tax income in 2001. THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 OVERVIEW: The Company reported net income of $664,000 for the three months ended June 30, 2001, a decrease of 13.3% from net income of $766,000 for the comparable 2000 period. Net income was $.26 per share (diluted) for the three month period ended June 30, 2001, compared to $.29 per share (diluted) for the 2000 period. Return on average assets and average equity were .65% and 10.24%, respectively, for the three month period ended June 30, 2001, compared to .82% and 15.08%, respectively, for the comparable 2000 period. INTEREST INCOME: Interest income decreased $124,000, or 1.7%, to $7,349,000 for the three month period ended June 30, 2001 from $7,473,000 for the comparable 2000 period. This decrease results from the general decline in interest rates, partially offset by the increase in the Company's total interest earning assets, primarily in loans as a percentage of interest earning assets. The Company's net yield on interest earning assets on a fully tax equivalent basis was 8.03% for the three month period ended June 30, 2001, which reflects a decrease of 90 basis points from the comparable 2000 period. The average yield on loans decreased from 10.40% in the 2000 period to 9.23% in the 2001 period, and the average yield on securities held by the Company decreased from 6.86% in the 2000 period to 6.47% in the three months ended June 30, 2001. Interest income on loans was $173,000 lower in the three months ended June 30, 2001, interest income on securities increased $8,000 in the 2001 period and interest income on federal funds sold increased $41,000 in the 2001 period. INTEREST EXPENSE: Interest expense decreased $94,000, or 3.1%, to $2,895,000 for the three months ended June 30, 2001 from $2,989,000 for the three months ended June 30, 2000. This decrease was primarily due to the decrease in average rates paid on interest bearing deposit accounts and an $11.4 million decrease in average notes payable to the FHLB. Average rates paid on interest bearing deposits decreased 20 basis points to 3.73% in the three months ended June 30, 2001 from 3.93% in the three months ended June 30, 2000. 11 NET INTEREST INCOME: Net interest income before provision for loan loss was $4,454,000 for the three months ended June 30, 2001, a decrease of $30,000, or 0.7%, over the comparable period of 2000. Net interest margin decreased 50 basis points between the periods from 5.42% in the 2000 period to 4.92% in the 2001 period. The decrease in net interest income is primarily due to a $173,000 decrease in interest income on loans, an $8,000 increase in interest income on securities, a $41,000 increase in interest income on federal funds sold and a $94,000 decrease in interest expense. The Company's average cost of funds for the three months ended June 30, 2001 was 59 basis points lower than in the comparable 2000 period. The Company's average yield on earning assets decreased 90 basis points in the 2001 period compared to the 2000 period, from 8.93% to 8.03%. In the period since January 1, 2001, the Federal Reserve acted to aggressively reduce interest rates in response to general economic conditions. Further aggressive reduction in interest rates would be expected to materially affect the Company's net interest income. NONINTEREST INCOME: Noninterest income increased $471,000, or 1046.7%, for the three months ended June 30, 2001 to $471,000 from $45,000 for the three months ended June 30, 2000. This increase was primarily due to a $452,000 increase in the gain on sale of securities available for sale and a $25,000 increase in service charge income, offset by a $6,000 decrease in other noninterest income. NONINTEREST EXPENSE: Noninterest expense increased $301,000, or 8.3%, for the three months ended June 30, 2001 to $3,908,000 compared to $3,607,000 in the three months ended June 30, 2000. A significant portion of this increase is increases in salaries and benefits relating primarily to annual merit increases. INCOME TAX EXPENSE: Income tax expense increased $292,000, or 275.5%, for the three months ended June 30, 2001 to $398,000 compared to $106,000 in the three months ended June 30, 2000. This increase is primarily due to a $111,000 tax benefit recorded in 2000 for pooling related expenses, an $47,000 increase in tax expense relating to lower state tax exempt investments in the 2001 period and a $71,000 increase in tax expense due to higher pre-tax income in 2001. PROVISION FOR LOAN LOSS The Company charged $89,000 to the Provision for Loan Loss in the first six months of 2001 and $136,000 for the comparable period in 2000. The ratio of loan loss reserve to total loans was 1.47% at June 30, 2001 and 1.52% at June 30, 2000. 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 12 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 11.3% to $423.4 million at June 30, 2001 from $380.5 million at December 31, 2000. During the six months ended June 30, 2001 deposits increased $29.8 million to $345.1 million at June 30, 2001 from $315.3 million at December 31, 2000. None of the Company's deposits at June 30, 2001 were brokered deposits. The Company has 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. During the second quarter of 2001, the Bank borrowed $33.6 million from the FHLB with rates ranging from 3.90% to 4.95% and maturities ranging from one day to 19 months. These borrowings serve as an alternative source of funding to fund current loan growth at a time when the Bank's deposits have not increased and liquidation of a portion of the Bank's securities portfolio was not believed to be advisable. The Company expects that these loans will be repaid with liquidity from normal increases in deposits coupled with liquidity from the Bank's securities portfolio. During the second quarter of 2001, the Bank repaid $28.6 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 borrowings related to 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 13 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 $1,057,000 and $335,000 at June 30, 2001 and December 31, 2000, respectively. This increase is primarily due to one credit. Management believes it has adequate reserves and collateral for this credit and should any loss be realized management does not expect this credit to have a material adverse effect on the Company's results of operations or financial condition. Other Real Estate Owned (OREO) was $0 and $0 at June 30, 2001 and December 31, 2000, respectively. At June 30, 2001, securities available for sale totaled $163.1 million, or 98.5% of the total portfolio and other securities (investment in FHLB stock) totaled $2.4 million, or 1.5% 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, 2001, the market value of investments available for sale exceeded amortized cost by approximately $1,222,000. As noted in the Company's Form 10-KSB for the year ended December 31, 2000, 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 June 30, 2001, the dollar duration of the investment portfolio was 5.29 compared to 4.60 at December 31, 2000. This increase in dollar duration resulted from the replacement of securities which were sold, matured or called during the first six months of 2001 with securities with lower yields and 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 $2,311,000 to $26.5 million at June 30, 2001 from $24.2 million at December 31, 2000. This 14 increase in stockholders' equity was due to the retention of earnings in the current year and the exercise of options to purchase 2,000 shares of common stock, and by 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 10.11% at June 30, 2001 and its total qualifying capital to risk weighted assets was 11.36%. As of June 30, 2001 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: 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, 10-Q 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. 15 UNION BANKSHARES, LTD. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Union Bankshares, Ltd was held on June 6, 2001. At such meeting, the following proposals were voted on and approved: 1. Proposal No. 1: To elect to the Board three Class 1 directors. FOR WITHHOLD Charles R. Harrison 2,264,460 13,500 Harold R. Logan, Jr 2,264,460 13,500 Richard C. Saunders 2,264,460 13,500 2. Proposal No. 2: Approve the amendment to the Nonemployee Directors' Stock Option Plan. FOR AGAINST ABSTAIN 2,148,060 116,874 13,026 3. Proposal No. 3: Ratify the selection of Baird, Kurtz & Dobson as independent auditors for the Company for the fiscal year ending December 31, 2001. FOR AGAINST ABSTAIN 2,273,360 2,400 2,200 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) None. (b) Reports on Form 8-K. A current report on Form 8-K was filed on June 7, 2001 disclosing, pursuant to Item 9 of Part II of Form 8-K, a statement made by the Company's president at the Company's annual stockholders meeting concerning the Company's results in relation to the interest rate environment. 16 SIGNATURES In accordance with 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) August 10, 2001 /S/ BRUCE E. HALL ---------------------------------- Bruce E. Hall Vice President, Treasurer and Secretary (Authorized Officer and Principal Financial Officer of the Registrant)

UNION BANKSHARES, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Unaudited) March 31, ------------------------------ 2001 2000 ---- ---- Net cash provided (used) by operating activities ($ 4,374,000) $ 817,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of available-for-sale securities 5,773,000 2,162,000 Proceeds from maturities of held-to-maturity securities -- 747,000 Proceeds from sale of available-for-sale securities 58,546,000 300,000 Purchase of available-for-sale securities (73,635,000) (1,203,000) Purchase of other investments -- (446,000) Net increase in loans (2,364,000) (11,887,000) Purchase of furniture and equipment (53,000) (76,000) ------------ ------------ Net cash used in investing activities (11,733,000) (10,403,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits 11,148,000 10,274,000 Decrease in fed funds purchased -- (8,500,000) Proceeds from issuance of notes payable 80,000,000 55,000,000 Principal repayments of notes payable (73,600,000) (40,000,000) Proceeds from issuance of common stock 9,000 54,000 ------------ ------------ Net cash provided by financing activities 17,557,000 16,828,000 ------------ ------------ Net increase in cash and cash equivalents 1,450,000 7,242,000 Cash and cash equivalents, beginning of year 19,551,000 15,493,000 ------------ ------------ Cash and cash equivalents, end of quarter $ 21,001,000 $ 22,735,000 ============ ============

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