Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
Union Bancshares, Inc. (UBI) is a bank holding company formed in 1982 under the laws of the State of Kansas. In connection with this formation, UBI acquired all of the common stock of Union National Bank of Wichita (UNB) by exchange for UBI Class A common stock on a share for share basis. In 1987, UBI formed Union Boulevard National Bank (UBNB), a wholly-owned subsidiary, to acquire from the Federal Deposit Insurance Corporation certain assets and liabilities previously owned by Boulevard State Bank. UBNB was merged into UNB in 1989. In April 1990, UBI acquired certain assets and liabilities from the Resolution Trust Corporation (RTC) of the former First Federal Savings and Loan Association of Hutchinson. UBI acquired two branch locations in this purchase. One of these branches was closed on January 12, 1991. In November 1990, UBI acquired certain assets and liabilities from the RTC of the former Valley Savings, A Federal Savings and Loan Association of Hutchinson. UBI began operations from two branch locations in this purchase. One branch location was closed on January 12, 1991. The second branch was moved from its initial operational site to a new site on June 30, 1992. On February 16, 1991, UBI acquired from the RTC, certain assets and liabilities of the Derby branch of the former Mid Kansas Savings and Loan, F.A. of Wichita. UBI purchased the Derby branch location from the RTC on June 21, 1991. In April 1994, UBI through merger, acquired the assets and assumed certain liabilities of First Community Federal Savings and Loan Association, Winfield, Kansas ("First Community"). First Community had operations in Winfield, Arkansas City and Derby, Kansas. First Community was merged into UNB with its three locations becoming branches of UNB.
At December 31, 1994, UBI had three active, wholly-owned subsidiaries: UNB, UBI Growth Capital, Inc. (UBIGC), a venture capital company, and UBI Financial Services, Inc. (UBIFS), a community development company. In addition, UNB owns all of the outstanding common stock of Union Center, Inc. (UCI), a Kansas corporation formed in 1956 to purchase and operate the building mainly occupied by UNB. At December 31, 1994, UBI and its subsidiaries had 411 FTE (full-time equivalent) employees.
UBI and its subsidiaries are engaged primarily in commercial banking and related activities authorized by the Bank Holding Company Act of 1956, as amended, or determined by the Board of Governors of the Federal Reserve System to be so closely related to the business of banking as to be proper incident thereto. UBI and its subsidiaries, therefore, did not engage in material operations in separate reportable industry segments for the last three years. - 2 - PAGE
Union Bancshares, Inc. and Subsidiaries
Item 1. Business (Continued)
UBI offers a wide range of financial services in the Wichita and Derby, Sedgwick County, Hutchinson, Reno County, and Winfield and Arkansas City, Cowley County, Kansas, areas through UNB, its subsidiary bank. These services include deposit accounts; commercial, installment and real estate loans; trust, investment and escrow services; and a network of automated teller machines. UNB has fourteen locations and 19 ATMs situated within the city limits of Wichita, Hutchinson, Derby and Winfield. UNB is the third largest bank in Wichita, the second largest bank in Hutchinson and Derby, and the largest bank in Winfield and Arkansas City. In addition, customers may also access UNB services at 450 ATMs throughout the State of Kansas and at over 110,000 ATMs throughout the United States and Canada through UNB participation in Kansas Electronic Transfer Systems, Inc. (KETS), VIA, Cirrus, and Plus ATM switching companies.
UNB faces competition from banks and other financial institutions located in Sedgwick, Reno and Cowley County, Kansas. There are approximately 97 other financial institutions within the Sedgwick, Reno, and Cowley County areas.
UBI and its subsidiary bank are principally affected by the monetary policy of the Board of Governors of the Federal Reserve System and other federal banking regulators. UBI, being a bank holding company, is primarily regulated by the Federal Reserve Bank. UNB, being a national bank, is primarily regulated by the Comptroller of the Currency. UNB is also subject to regulation by the Federal Deposit Insurance Corporation because of deposit insurance. The bank operates under the guidance of its board and officers, implementing policies as to lending practices, interest rates, service charges, and other banking functions. These policies guide the bank in serving the communities in which it operates.
In 1989, Congress enacted the "Financial Institutions Reform, Recovery, and Enforcement Act" (FIRREA), which allowed bank holding companies to acquire savings and loan associations, either in or outside of Kansas. It also allowed the acquisition of savings and loan associations by out-of-state bank holding companies. The FIRREA Act also abolished the Federal Savings and Loan Insurance Corporation, making the Federal Deposit Insurance Corporation (FDIC) the single insurer of deposits for financial institutions. This resulted in higher insurance premium rates, which had a negative impact on non-interest expense of UBI starting in 1991. An analysis of non-interest expense is discussed in greater detail starting on page A-38.
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Union Bancshares, Inc. and Subsidiaries
Item 1. Business (Continued)
Beginning July 1, 1992, bank holding companies located in Arkansas, Colorado, Iowa, Missouri, Nebraska, and Oklahoma were permitted to acquire banks and bank holding companies located in Kansas after obtaining the approval of the Kansas State Banking Board. No applications can be approved unless the laws of the state, or jurisdiction in which the applicant bank holding company is located, permit Kansas bank holding companies to acquire banks and bank holding companies in that state or jurisdiction on substantially the same terms as established under Kansas law. This has brought greater competition to Kansas and potentially to the communities in which UBI and its subsidiaries operate. There have been several institutions that have made acquisitions in the state.
In October of 1994 the "Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 " banking bill was passed and signed into law by the President. This law will allow financial institutions beginning partially in 1996 and fully in 1997 to branch into any state unless the state specifically opts out. This will bring further competition to the state of Kansas. It is not anticipated that many states will opt out.
On November 1, 1994 UBI signed an Agreement and Plan of Merger with Commerce Bancshares, Inc. ("Commerce"). Commerce, headquartered in Missouri, is a $8 billion registered bank holding company with banking operations in Missouri, Illinois, and Kansas. Commerce has a credit card bank in Nebraska, a mortgage banking company, a credit life insurance company, a small business investment company, a property and casualty insurance agency and a company primarily engaged in holding bank-related real property. The merger with Commerce, which is subject to regulatory and stockholder approval, will bring expanded products and services and additional capital resources to meet the needs of the current and potential customers of UBI and to meet the competition of the new emerging financial industry under the new banking law.
UBI and its subsidiaries continually evaluate the changes in legislation pending before the federal and state governments which may have an effect on their business. It is difficult to predict what proposals might be adopted and what, if any, effect they may have on UBI and its subsidiaries.
The principal source of UBI's cash revenues is dividends from UNB. The ability of UNB to pay such cash dividends is limited by federal regulations. Approval of the Comptroller of the Currency is required if total dividends declared by a national bank in any calendar year exceed the bank's net profits for that year combined with its retained profits for the preceding two years. At December 31, 1994, dividends of approximately $8,456,000 were available from the bank subsidiary without such approval.
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Union Bancshares, Inc. and Subsidiaries
Item 2.



Item 2. Properties
UBI uses the main offices of UNB, 200 Union Center Building, 150 North Main, Wichita, Kansas, for its offices. Presently, UBI pays no rental to UNB, although UBI may pay to UNB a fair and reasonable charge for all facilities and services furnished by UNB at such time as UBI requires separate facilities.
The Union Center Building is a 10-story structure which was completed and occupied by UNB in 1956. The building is owned by UNB's subsidiary, UCI. Approximately 81,508 square feet, or 68.0%, of the rentable space in the building is leased by UNB. In 1994 UNB paid a monthly rent of $77,760 to UCI. UNB owns two of the thirteen lots comprising the site of the Union Center Building, and leases two others for a term expiring no earlier than the year 2053. UCI owns three of the lots comprising the Union Center Building site, and leases the remaining six lots for terms expiring no earlier than 2047. There are no mortgages or liens outstanding.
UNB owns thirteen separate bank facilities and the land on which they are located. These are at the following locations in Wichita, Hutchinson, Derby, Winfield and Arkansas City, Kansas:
Aggregate annual rental paid during 1994 with respect to all leased real estate to third party lessors amounted to $149,000.
Item 3.

Item 3. Legal Proceedings
There were no legal proceedings pending during the last fiscal year to which UBI or its subsidiaries was a party, other than ordinary routine litigation incidental to their business.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
No information is required in response to this Item as no matters were submitted to a vote of UBI's security holders during the fourth quarter of 1994.
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Union Bancshares, Inc. and Subsidiaries
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
There is no established public trading market for UBI Common Stock, Class A. Therefore, the high and low bid prices for UBI stock cannot be determined. The number of stockholders on record for the Company as of December 31, 1994 was 340. Dividend information for the stock is as follows:
UNB, the principal subsidiary of UBI, must follow regulatory guidelines on the payment of dividends. See the last paragraph of Item 1. Business.
Item 6.

Item 6. Selected Financial Data
The information required by Item 301 of Regulation S-K is contained on page A-51 of the attached Appendix under the caption "Five-Year Summary of Operations".
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by Item 303 of Regulation S-K is contained on pages A-29 thru A-31 of the attached Appendix under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Item 8.


Item 8. Financial Statements and Supplementary Data
Set forth below are the consolidated financial statements of UBI and its subsidiaries appearing on pages A-4 to A-27 of the attached Appendix A.
a. Consolidated Statement of Condition b. Consolidated Statement of Income c. Consolidated Statement of Stockholders' Equity d. Consolidated Statement of Cash Flows e. Notes to Consolidated Financial Statements f. Independent Auditors' Reports
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Union Bancshares, Inc. and Subsidiaries
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
UBI filed a Form 8-K dated October 20, 1993, under Item 4., "Change in Registrant's Certifying Accountants". This discussed the change from Coopers & Lybrand as UBI's independent accountants to Allen, Gibbs & Houlik effective for the fiscal year ending December 31, 1993. There were not any disagreements between Coopers & Lybrand and the management of UBI as defined in Item 304 (a)(1)(v) A-D. The decision to change accountants was recommended and approved by the Audit Committee of the Board of Directors of UBI.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
The information required by Item 401 of Regulation S-K appears on pages 4,5 and 7 of the 1994 Proxy Statement under the caption "Directors of UBI" and "UBI Executive Officers" is hereby incorporated by reference.
Item 11.

Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K appears on pages 9 and 10 of the 1994 Proxy Statement under the caption "Compensation of UBI Directors and Executive Officers" and is hereby incorporated by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 403 of Regulation S-K appears on page 8 of the 1994 Proxy Statement under the caption "Security Ownership of UBI Management" and is hereby incorporated by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions
The information required by Item 404 of Regulation S-K appears on page 11 of the 1994 Proxy Statement under the caption "Transactions with UBI Management" and is hereby incorporated by reference.
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Union Bancshares, Inc. and Subsidiaries
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements, notes, and accountant's report are described in Item 8 to which reference is hereby made.
(2) Financial Statement Schedules
None
(3) Exhibits
None
(b) Reports on Form 8-K
An 8-K/A No.1, dated April 4, 1994 was filed under Item 2., "Acquisition or Disposition of Assets" and Item 7., "Financial Statements and Exhibits" and discussed the execution of the merger agreement between UBI, UNB and First Community.
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Union Bancshares, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Union Bancshares, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNION BANCSHARES, INC.
/S/ WILLIAM G. WATSON /S/ STEVEN C. WORRELL By: William G. Watson By: Steven C. Worrell President & Chief Vice President, Executive Officer Treasurer & Chief Financial Officer
(Principal Executive Officer) (Principal Accounting Officer)
February 15, 1995 February 15, 1995 Date Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/S/ JACK B. HINKLE February 15, 1995 Jack B. Hinkle, Director Date
/S/ RANDOLPH D. LOVE February 15, 1995 Randolph D. Love, Director Date
/S/ ROBERT D. LOVE February 15, 1995 Robert D. Love, Director Date
/S/ DEREK L. PARK February 15, 1995 Derek L. Park, Director Date
/S/ DONALD H. PRATT February 15, 1995 Donald H. Pratt, Director Date
/S/ WILLIAM G. WATSON February 15, 1995 William G. Watson, Director Date
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Union Bancshares, Inc. and Subsidiaries Financial Information
APPENDIX A
FINANCIAL INFORMATION
- A1 - PAGE
THIS PAGE LEFT BLANK INTENTIONALLY
- A2 -
Union Bancshares, Inc. and Subsidiaries Index to 1994 Financial Information
Page
Financial Statements Consolidated Statement of Condition A-4 Consolidated Statement of Income A-5 Consolidated Statement of Stockholders' Equity A-6 Consolidated Statement of Cash Flows A-6 to A-7 Notes to Consolidated Financial Statements A-8 to A-25
Independent Auditors' Reports A-26 to A-27
Management's Report on Financial Statements and Internal Accounting Control A-28
Management's Discussion and Analysis of Financial Condition and Results of Operations A-29 to A-51
Consolidated Statement of Condition - Average Balances and Interest Rates A-32 to A-33
Five-Year Summary of Operations A-51
- A3 -
Union Bancshares, Inc. and Subsidiaries Consolidated Statement of Condition
[FN] The accompanying notes are an integral part of these financial statements. - A4 -
Union Bancshares, Inc. and Subsidiaries Consolidated Statement of Income (In thousands except per share data)
[FN] The accompanying notes are an integral part of these financial statements. - A5 -
Union Bancshares, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity
Union Bancshares, Inc. and Subsidiaries Consolidated Statement of Cash Flows
[FN] The accompanying notes are an integral part of these financial statements. - A6 -
Union Bancshares, Inc. and Subsidiaries Consolidated Statement of Cash Flows (Continued)
[FN] The accompanying notes are an integral part of these financial statements. - A7 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements in 1994, 1993 and 1992 include UBI and its wholly-owned subsidiaries, UNB, UBIGC and UBIFS. All significant intercompany accounts and transactions have been eliminated.
The 1993 and 1992 consolidated financial statements have been reclassified to conform with 1994 presentation. Such reclassifications have no effect on net income.
Statement of Cash Flows
For purposes of reporting cash flows, cash equivalents include amounts due from banks, federal funds sold, and securities purchased under resale agreements. Generally, federal funds are sold for one-day periods.
Investment and Trading Account Securities
Effective January 1, 1994, UBI adopted Financial Accounting Standard No. 115 (FAS 115) which relates to accounting for certain investments in debt and equity securities. FAS 115 requires that banks classify all securities as "held to maturity", "available for sale" or "trading securities". Any new securities at time of purchase must be placed in one of these three categories for reporting purposes. Any security placed in the "available for sale" or "trading securities" must be marked to its fair value at that time. The fair value adjustment for "available for sale" securities will flow through the equity section on the financial reports. The fair value adjustment for the trading securities will continue to flow through the income statement. Securities are classified as "held-to maturity" when management has the intent and UBI has the positive ability to hold the securities to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and accretion of discounts, both computed on straight line method which approximates the constant yield method. The prepayment history of each mortgage-backed security pool is used to recalculate the yield used to amortize and accrete the premium and discount on these securities
Management of UBI has done an extensive evaluation of all of its securities to determine what securities will be placed in each of these categories. Management has considered several factors to determine these securities classifications including liquidity needs, loan demand, tax issues, credit quality, regulatory issues and asset/liability positioning. - A8 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Continued)
Investment and Trading Account Securities (Continued)
Gains or losses on security transactions are recognized upon realization and are reported as a separate component of non- interest income. The specific identification method is used in determining the cost of investment securities sold. For 1993, investment securities were stated at cost, adjusted for amortization of premium and accretion of discount.
Prior to 1994, securities were classified as "Investment Securities" when management had the intent and ability to hold the securities for the foreseeable future. Normal operations did not require the sale of investment securities for liquidity purposes.
Trading account securities are classified as such primarily based on the intent of management at the time the securities are purchased. The securities are held for resale to customers. Trading account securities are stated at market value. Gains or losses on the sale of trading account securities are considered a normal part of operations and are included in other income.
Loans
Loans are stated at principal amount outstanding. Interest income on loans is accrued as earned. Loans are placed on nonaccrual status when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. Loans are also placed on nonaccrual status when there is reasonable doubt as to the ability of the borrower to pay interest or principal. At the time a loan is classified as nonaccrual, interest previously recorded as income but not collected is reversed. Interest payments received on such loans are generally recorded as a reduction in carrying value unless such carrying value is deemed to be collectible.
Allowance for Loan Losses
UBI's policy is to maintain a valuation allowance adequate to provide for potential losses on loans currently outstanding. The allowance for loan losses is determined by management on the basis of a detailed review of the risk factors affecting the loan portfolio, including changes in the portfolio size and mix, past loan loss experience, the financial condition of the borrowers, and the prevailing economic environment. The result of this review enables management to establish the allowance at a level considered adequate to absorb loan losses. - A9 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
Loan losses are charged to the allowance, and recoveries are credited to the allowance. A provision for loan losses is made to maintain the allowance at a level that, in management's judgment, is adequate to absorb potential losses inherent in the loan portfolio.
Loan Fees
Loan commitment and origination fees, net of the related direct loan origination costs, are amortized over the life of the related loans as an adjustment of yield. The unamortized balance of these deferred fees is reported as a reduction of total loans. Annual fees on bankcard loans are amortized on a straight-line basis over a twelve month period, and the unamortized balance of these fees is included in other liabilities.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by straight-line and accelerated methods over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to operating expenses as incurred. Significant renewals and betterments are capitalized.
Income Taxes
In January 1993, UBI adopted Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes". FAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in UBI's financial statements or tax returns. In estimating future tax consequences, FAS 109 generally takes into consideration all expected future events other than enactments of changes in the tax law or rates. Previously, UBI used the Financial Accounting Standards No. 96 asset and liability approach, which gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. Management has determined that there was no significant financial statement impact to UBI with the implementation of FAS 109 for 1993. - A10 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (FAS 107), "Disclosures about Fair Value of Financial Instruments", became effective for financial statements issued for fiscal years ending after December 15, 1992. FAS 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of UBI.
The following methods and assumptions were used by UBI in estimating the fair value of its financial instruments as noted in Note 16:
Cash and cash equivalents: The book values reported in the balance sheet for cash and short-term instruments approximate their fair values.
Investment securities (including mortgage-backed securities): Fair value for investment securities is based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Trading account assets: Fair values for UBI's trading account assets, which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. - A11 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments (Continued)
Loans receivable: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values approximate their book value. The fair values for fixed rate mortgage loans (primarily one-to-four family residential), are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans (primarily commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans, agricultural loans, and consumer loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of credit card loans is estimated to be the book value due to the short-term nature considered to exist in this portfolio. The book value of accrued interest receivable approximates its fair value.
Deposit liabilities: The estimated fair value of non-interest- bearing deposits, NOW accounts, savings accounts and money market accounts is equal to their book value, which represents the amount payable on demand at the reporting date. The book value for variable rate money market and savings accounts approximates their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The book value of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximates their fair values at the reporting date.
FHLB advances: The estimated fair value of variable rate FHLB advances is the balance sheet book value. The estimated fair value of fixed rate advances has been determined using rates currently available to UNB for advances with similar terms and remaining maturities.
Long-term borrowings: The fair values of UBI's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on UBI's current incremental borrowing rates for similar types of borrowing arrangements. - A12 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Mergers and Acquisition
First Community Federal Savings and Loan Association, Winfield, Ks.
On April 4, 1994, First Community Federal Savings and Loan Association (First Community) of Winfield, Kansas, was merged into Union National Bank of Wichita (UNB) in accordance with the merger agreement between Union Bancshares, Inc. (UBI), UNB and First Community dated October 13, 1993. Under the merger agreement, each outstanding share of First Community common stock was converted into $35.00 in cash.
The total cost of the transaction was $12,795,000. The purchase price was determined by assessing the worth in dollars of the ongoing income stream generation from First Community, taking into consideration market value of assets and liabilities. The transaction, which was accounted for as a purchase, was financed with a $7,000,000 loan from Harris Bank and Trust in Chicago and the remaining $5,795,000 from internal funds.
First Community was a savings and loan institution with total assets as of April 4, 1994 of $149,000,000, and offered full service banking from three branches. These facilities are located one each in Winfield, Arkansas City and Derby, Kansas. All three of these offices were part of the merger and are being run as branches of UNB.
The following table presents supplementary information regarding the cash paid for First Community (in thousands):
For the transaction, accounted for as a purchase, the consolidated statement of income includes only the income and expenses of First Community since acquisition. The purchase price has been allocated to the net assets acquired based on their fair values with the excess allocated to cost in excess of net assets acquired which is being amortized on a straight line basis over fifteen years.
The following proforma consolidated data (in thousands), reflects the net effect of acquiring First Community in 1994, as if it was acquired on January 1, 1993, as compared to actual results shown in the Consolidated Statement of Income on page A-5. - A13 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
2. Mergers and Acquisitions (Continued)
Gross revenue in the above table is the sum of "Net interest income" and "Total non-interest income."
Commerce Bancshares, Inc, Kansas City, Mo.
On November 1, 1994 UBI signed an Agreement and Plan of Merger with Commerce. The transaction is subject to UBI Stockholder and Regulatory approvals. Commerce is an $8 billion bank holding company headquartered in Missouri, with bank operations in Missouri, Illinois and Kansas. The transaction provides for the conversion of each outstanding share of UBI Class A Common Stock, $10 par value per share, into the right to receive the sum of $242.00 in cash. The transaction will be accounted for as a purchase of UBI by Commerce in accordance with generally accepted accounting principles.
3. Cash and Due From Banks
Federal Reserve Bank regulations require the subsidiary bank to maintain certain reserve balances relating to deposits. The reserves may be maintained in the form of vault cash or balances maintained with a Federal Reserve Bank. For the two-week reserve period inclusive of December 31, 1994, UNB maintained daily average reserves of $10,463,000. For the two-week reserve period inclusive of December 31, 1993, the daily average reserves maintained were $10,553,000.
4. Investment Securities
Investment Securities Held To Maturity
The book value and estimated market values of investments in securities being held to maturity are as follows (in thousands):
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Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
4. Investment Securities (Continued)
The book value and estimated market value of securities being held to maturity, by contractual maturity, are shown below in thousands. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities have been included in the schedule of maturities based upon their expected estimated average life.
- A15 -
Union Bancshares, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
4. Investment Securities (Continued)
Investment Securities Available For Sale
The book value and estimated market values of investments in securities available for sale are as follows (in thousands):
The book value and estimated market value of securities available for sale, by contractual maturity, are shown below in thousands. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities have been included in the schedule of maturities based upon their expected estimated average life.
Gross realized gains and losses from the sale of investment securities available for sale for the year ended December 31, 1994 are as follows:
Investment securities being held to maturity with a book value of $50,905,000 and $41,322,000 were pledged to secure deposits of public funds at December 31, 1994, and December 31, 1993 respectively. No investment securities available for sale were pledged to secure deposits of public funds at December 31, 1994. Total pledgings required at December 31, 1994, and December 31, 1993, were $16,754,000 and $17,038,000, respectively. - A16 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
5. Loans
Major classifications of loans are summarized as follows (in thousands):
Changes in the allowance for loan losses were as follows (in thousands):
In the ordinary course of business, UBI and its subsidiary bank has, and expects to have, transactions, including borrowings with its officers, directors, and their affiliates. Loans, net of participations sold, made to such borrowers are summarized as follows (in thousands):
The "Other changes" category are loans that were outstanding to directors and their related parties as of December 31, 1993, but who were no longer directors at December 31, 1994.
6. Premises and Equipment
Premises and equipment are summarized as follows (in thousands):
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Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
6. Premises and Equipment (Continued)
Depreciation expense amounted to $1,660,000 in 1994, $1,355,000 in 1993 and $1,175,000 in 1992.
7. Short-term Borrowings
Short-term borrowings of UBI consist of the following (in thousands):
8. FHLB Advances
Federal Home Loan Bank (FHLB) advances outstanding at December 31, 1994, for UBI are detailed below. The advances provide one of many funding alternatives that are used by UBI in its asset/liability management process for acquiring funds to meet customer loan needs and as a source of funds for other asset/liability strategies. The advances are secured by assets of UNB under a blanket pledge agreement with FHLB. Currently all FHLB advances are at a fixed rate to maturity. Maturities and weighted average rates of the FHLB advances at December 31, 1994, are as follows (in thousands):
9. Long-term Borrowings
At December 31, 1994, and 1993, UBI had a note payable to Harris Bank for $13,213,000 and $8,000,000, respectively. At December 31, 1994, $6,000,000 was at a fixed rate of 8.03% with $7,213,000 at a floating rate of LIBOR plus 1.75%. At December 31, 1993, all $8,000,000 was at a fixed rate of 8.28%. At April 1 1995, the rate will float on the total outstanding amount at LIBOR plus 1.75%. The note is collateralized by stock of UNB. Principal payments of $528,571 per quarter began on June 30, 1994, with final payment due on March 31, 2001. Interest is payable quarterly. - A18 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
9. Long-term Borrowings (Continued)
The note payable agreement with Harris Bank contains a restriction on the amount of dividends that UBI can declare or pay during any one calendar year without the prior written consent of Harris Bank. Dividends declared or paid may not exceed 25% of consolidated net income for the calendar year. Other restrictions include minimum capital levels and maximum nonperforming asset ratios.
Maturities of this note payable at December 31, 1994, are as follows (in thousands):
10. Income Taxes
Applicable income taxes include deferred income taxes arising primarily from differences between financial and tax reporting of the provision for loan losses, depreciation, loan fees and items related to the acquisition. The consolidated provisions for income taxes applicable to net income are as follows (in thousands):
The table at the top of the following page is a summary of the source of differences between income tax expense and income taxes computed at the statutory federal income tax rate of 34% (in thousands): - A19 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
10. Income Taxes (Continued)
Deferred income taxes arise from temporary differences in the recognition of revenues, expenses, and tax credits for tax and financial reporting purposes.
Cumulative temporary differences resulted in a net deferred income tax asset of $1,063,000 and $339,000 at December 31, 1994 and December 31, 1993, respectively. The gross deferred tax asset and the gross deferred tax liability are included in other assets and other liabilities respectively in the 1994 Consolidated Statement of Condition. Deferred tax liabilities (assets) are comprised of the following (in thousands):
- A20 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
11. Financial Instruments with Off-Balance-Sheet Risk
UBI is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
UBI's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. UBI uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at December 31, 1994, and 1993, include (in thousands):
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. UBI evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by UBI upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, and income- producing commercial properties.
Standby letters of credit are a conditional commitment issued by UBI to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Credit card lines represent the unused portion of many different customers that have credit card loans.
UBI grants agribusiness, commercial, individual, bankcard, and residential loans to customers throughout the State of Kansas. UBI has a diversified loan portfolio, without what it considers undue concentration in any one economic sector. - A21 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
12. Dividend Availability
Approval of the Comptroller of the Currency is required if total dividends declared by a national bank in any calendar year exceed the bank's net profits for that year combined with its retained profits for the preceding two years. At December 31, 1994, dividends of approximately $8,456,000 were available from the bank subsidiary without such approval.
13. Retirement Plan
UBI's bank subsidiary has an employee thrift plan covering substantially all of its employees after one year of service. Contributions are made based on a percentage of each participant's contribution. The total expense for the years ended December 31, 1994, 1993, and 1992, amounted to $252,000, $201,000, and $184,000 respectively.
14. Net Income per Share
Net income per share is computed by dividing net income by the weighted average number of shares of stock outstanding during the year. The weighted average number of shares was 354,080 in 1994, 350,690 in 1993 and 350,190 in 1992.
15. Supplementary Income Statement Information
Items included on the Consolidated Statement of Income under the captions of other income and other expense which exceed one percent of gross income are as follows (in thousands):
- A22 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
16. Disclosures About Fair Value of Financial Instruments
The estimated fair values of UBI's financial instruments are as follows (in thousands):
The above table should be read in conjunction with footnote 1 on pages A-11 and A-12. The item for "unrecognized financial instruments" was not presented in the above table due to the amount of fees from commitments to extend credit being insignificant in amount.
17. Parent Company Only Financial Statements
Union Bancshares, Inc. Statement of Condition (Parent Only)
- A23 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
17. Parent Company Only Financial Statements (Continued)
Union Bancshares, Inc. Statement of Income (Parent Only)
[FN] Note:Parent company only Statement of Stockholders' Equity is the same as the Consolidated Statement of Stockholders' Equity. - A24 -
Union Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements
17. Parent Company Only Financial Statements (Continued)
Union Bancshares, Inc. Statement of Cash Flows (Parent Only)
- A25 -
Union Bancshares, Inc. and Subsidiaries Independent Auditor's Report
ALLEN, GIBBS & HOULIK, L.C. Certified Public Accountants & Consultants Epic Center, 301 N. Main, Suite 1700 Wichita, Kansas 67202-4868 (316) 267-7231, Fax (316) 267-0339
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders Union Bancshares, Inc.
We have audited the consolidated statements of condition of Union Bancshares, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended, and the separate financial statements of Union Bancshares, Inc. which are included in Note 17 to the consolidated financial statements. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Union Bancshares, Inc. and Subsidiaries and Union Bancshares, Inc. as of December 31, 1994 and 1993, and the results of their respective operations and their respective cash flows for the years then ended in conformity with generally accepted accounting principles.
/S/ Allen, Gibbs & Houlik, L.C.
Wichita, Kansas January 27, 1995
AGH Member: The McGladrey Network and RSM International
- A26 -
Union Bancshares, Inc. and Subsidiaries Independent Auditor's Report
Coopers certified public accountants &Lybrand
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders Union Bancshares, Inc.
We have audited the accompanying consolidated statements of income, stockholders' equity and cash flows for Union Bancshares, Inc. and Subsidiaries for the year ended December 31, 1992, and the separate statements of income, stockholders' equity and cash flows for Union Bancshares, Inc. for the year ended December 31, 1992, which are included in Note 17 to the consolidated financial statements. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Union Bancshares, Inc. for year ended December 31, 1992, in conformity with generally accepted accounting principles.
/S/ Coopers & Lybrand
Omaha, Nebraska January 29, 1993
- A27 - PAGE
Union Bancshares, Inc. and Subsidiaries
Management's Report on Financial Statements and Internal Accounting Control
The financial statements, management's discussion and analysis, and statistical data of UBI and subsidiaries contained herein have been prepared in conformity with generally accepted accounting principles at the direction of management, which has the responsibility for these representations. In preparing the financial information, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for and is cognizant of the materiality of those events and transactions.
In meeting its responsibility for the reliability of the financial statements, management depends on UBI's system of internal accounting control. This system is designed to provide reasonable assurance that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that assets are safeguarded. Such a system includes the communication of policies and procedures to appropriate personnel, the careful selection and training of qualified personnel, the assignment of authority and responsibility, the accountability for performance, and a strong program of internal audits. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting control should not exceed the benefits expected to be derived and that the evaluation of those factors requires estimates and judgments by management.
Management has confidence that the internal accounting controls currently in place, along with its strong audit programs, provide reasonable assurance that the financial statements presented herein and transactions underlying such statements are in accordance with management's authorization and generally accepted accounting principles.
- A28 - PAGE
Union Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
For the year 1994, UBI's net income was $5,689,000, up 9.56% from the $5,192,000 earned in 1993. The earnings for 1994 produced a return on average assets of .92% and a return on average equity of 13.13%. This compares to a .97% return on average assets and a 13.50% return on average equity for 1993. The increase in earnings for the year was due to a combination of factors. Those factors included an increase in the dollar amount of the net interest margin, a small reduction in the provision for loan losses, gains from the sale of two bankcard loan portfolios, and gains on the sale of securities available for sale. These factors are discussed in further detail in the following paragraphs.
On April 4, 1994 UNB, UBI's wholly-owned banking subsidiary, acquired the assets and liabilities of First Community Federal Savings and Loan Association through merger. The addition of the approximate $149,000,000 in assets is the major reason for the dollar increase in the net interest margin. The net interest margin was up $1,521,000 in 1994. The interest rate spread, that is the rate earned on interest earning assets less the rate paid on interest bearing liabilities, declined in 1994, putting pressure on the net interest margin. This resulted from the increase in interest rates paid on deposits as the Federal Reserve drove interest rates up, and the local market pressures that kept interest rates charged on loans low. Management looks for continued pressures on the next interest margin in 1995 due to market conditions.
The $100,000 reduction in the loan loss provision was directly related to the lowest net charge-off percentage level (.44% of average loans) since 1982. While management believes its systems for monitoring, reviewing and analyzing credits contributed to this low number, it also believes an improved economic environment assisted in holding this number down. Management believes that this number will continue to remain low in 1995.
The bankcard portfolio sales resulted in pretax gains of approximately $1,005,000 in June, and $713,000 in September. The sales occurred when an affinity card group put up for bid the servicing that was being provided by UNB for these portfolios. The affinity group was exercising their rights under the agreement between them and UNB, at its expiration, to seek continued servicing from any provider, including UNB, if they so desired. Another institution won the bid for servicing and was required to purchase the outstanding portfolio balances from UNB. The total outstandings at the time of sale was approximately $8,036,000 for the portfolio sold in June and $5,541,000 for the portfolio sold in September. This is a nonrecurring gain. The sale of the portfolio had a negative impact on the net interest margin in 1994, and will continue to have a negative impact to the net interest margin in 1995.
- A29 - PAGE
Union Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The security sales were made from the available for sale portfolio in anticipation of the merger of First Community with and into UNB. This was done to position the combined portfolio for asset liability needs of the combined institutions. The gains totaled approximately $416,000. UNB evaluates on an ongoing basis its available for sale portfolio for sale opportunities to take advantage of opportunities for repositioning its balance sheet to enhance long term profitability.
Trust fees and service charge income were up in 1994 compared to 1993 due to increased business. Trust fees were up 16.2% while service charge income was up 7.0%. UNB continues to look for increased fee income through new products and services, new markets and new sales.
Non-interest expense for 1994 was up 16.0% over 1993. The main reason for the increase was the added costs of merging in First Community. Management continues to look for ways to reduce its expenses through new technological advances, redesign of work flows or lower cost providers of services. Salaries and benefits were the largest dollar increase in 1994, up $1,841,000. Salaries and benefits of approximately $900,000 was attributable to the First Community acquisition. The remaining increase was due to normal salary and benefit increases.
In 1993, UBI earned $5,192,000, an increase of 20.7% over the $4,300,000 earned in 1992. This was a .97% return on average assets and a 13.50% return on average equity. This compares to a .79% return on average assets and a 12.45% return on average equity in 1992. The increased earnings in 1993 resulted from a higher net interest margin, a lower loan loss provision and higher non- interest income levels. The net interest margin was up due to increased volumes of earning assets and a change in the mix of assets from investments to loans.
In 1992, UBI earned $4,300,000, an increase of 22.8% over the $3,502,000 earned in 1991. This was a .79% return on average assets and a 12.45% return on average equity. This compares to a .63% return on average assets and a 11.59% return on average equity in 1991. The increased earnings in 1992 was also the result of a higher net interest margin and some higher non-interest income levels. The net interest margin was up 8.8% in 1992 over 1991 due to increased volumes of earning assets and again a change in the mix of assets from investments to loans.
- A30 - PAGE
Union Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The balance sheet was up on average $84,025,000 over 1993 due to the merger of First Community into UNB. UNB was experiencing a reduction in its deposit totals, which management attributes to customers reducing debt loads as well as investing in higher rate and higher risk products in stock and mutual funds. Increased rates on deposits in the later part of 1994 slowed the deposit reduction and began increases in deposits in late 1994. This has been an industry trend.
Management anticipates 1995 to be a very competitive year. Margins will continue to be pressured by competitive markets causing management to rely on further deployment of investment assets to loan assets to maintain margins. Management will look to increased sales of products and services in 1995 to improve earnings over 1994. They will also continue to look for technological improvements and efficiencies to take on additional volumes at current costs or to reduce costs where applicable.
UBI through its Community Development Corporation subsidiary, UBI Financial Services, Inc. ("UBIFS"), in joint partnership with Mennonite Housing Rehabilitation Services, Inc. ("Mennonite Housing"), is assisting with the construction of a low to moderate income elder housing project and a senior citizens center on 21st Street in Wichita. UBI is also working with the City of Wichita, Sedgwick County, State of Kansas and community individuals of the area to help build a new commercial business center at the same area on 21st Street. It is also working with the Federal National Mortgage Association to provide lease purchase low income home ownership for individuals in the area. In conjunction with 21st street community leaders and residents, UBI is assisting to help revitalize this low to moderate income area. UBIFS continues to look for similar projects in all the communities it serves.
UBI anticipates that the merger agreement with Commerce will be approved by its stockholders and all regulatory bodies. It is anticipated that the merger will take place late first quarter or early second quarter of 1995. The merger will provide new products and services to its customers as well as larger capital resources. Management will continue to look for acquisition opportunities in South Central Kansas.
The significant elements of income and expense affecting net income are detailed separately and in greater detail in the ensuing analyses.
- A31 - PAGE
Union Bancshares, Inc. and Subsidiaries
Consolidated Statement of Condition - Average Balances and Interest Rates
[FN] (1) Includes nonaccrual loans at principal amount outstanding. Interest on loans includes loan fees of $1,025 in 1994, $739 in 1993, and $566 in 1992.
(2) Income and rates are calculated using a marginal federal tax rate of 34%.
(3) Net interest margin equals net interest income divided by average earning assets.
- A32 - PAGE
Union Bancshares, Inc. and Subsidiaries
Consolidated Statement of Condition - Average Balances and Interest Rates
- A33 -
Union Bancshares, Inc. and Subsidiaries
Analysis of Net Interest Income
Net interest income, the most significant element of UBI's earnings, represents the difference between the interest earned on loans and other investments and the interest incurred for deposits and other sources of funds. For purposes of the analysis below, net interest income is adjusted to convert tax-exempt income to a fully tax-equivalent basis. This adjustment does not affect net income since a statement of income prepared on a tax-equivalent basis includes an offsetting amount in income tax expense.
The following table reflects net interest income on a tax- equivalent basis (1) for the years 1992 to 1994 (in thousands):
[FN] (1) Tax-equivalent basis is calculated using a marginal federal tax rate of 34%.
On a tax-equivalent basis, net interest income for 1994 was $26,694,000, representing an increase over the previous year of $1,579,000 or 6.3%. The increase in net interest income in 1994 from 1993 is due mainly to the increased volume of assets from the merger acquisition of First Community that took place on April 4, 1994. The rise in interest rates in 1994 due to pressures from the Federal Reserve, caused deposit interest rates to rise while local market competition caused loan interest rates to rise more slowly. This combination of factors caused interest rate spreads to decline putting pressures on net interest margins. For the year 1995, it is anticipated that margins will continue to be squeezed from these same conditions.
Interest expense in 1994 increased by $3,422,000, or 23.2%, from 1993. This increase was due mainly from increased interest expense on deposits and FHLB advances acquired through the merger with First Community. Average interest costing liabilities were $491,352,000 representing an increase of $78,093,000, or 18.9%, above 1993. Average time deposits less than $100,000 rose $27,458,000, or 16.3%, in the current year. Deposits also began to increase in late 1994 and will add to higher interest costs in 1995.
- A34 - PAGE
THIS PAGE LEFT BLANK INTENTIONALLY
- A35 - PAGE
Union Bancshares, Inc. and Subsidiaries
Changes in Tax-equivalent Net Interest Income
The following table analyzes the increase in tax-equivalent net interest income in terms of the respective amounts attributable to changes in interest rates, changes in average balances, and changes in both rates and balances.
[FN] (1) Tax-equivalent basis is calculated using a marginal federal tax rate of 34%.
- A36 - PAGE
Union Bancshares, Inc. and Subsidiaries
Changes in Tax-equivalent Net Interest Income (Continued)
- A37 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Non-interest Income
Non-interest income for 1994 was $10,226,000, representing an increase of $2,322,000, or 29.4% from the same period in the preceding year. This increase resulted primarily from the gain on the sales of two bankcard portfolios. See page A 29 for further detail. Security gains were also up from the prior year. In the first quarter of 1994, UBI sold $11,593,000 of U.S. Agency and mortgage-backed securities from the "available for sale" category with the proceeds being partially reinvested in nontaxable municipal securities. This was done in anticipation of the merger that occurred on April 4, 1994 with First Community Federal, which had no nontaxable investment securities. Trust fees and service charge income was up over 1993 due to new and additional business. Bankcard fees decreased 19.1%. This is a result of the two bankcard portfolio sales in 1994 and from reduced fees charged to card holders as competition has almost eliminated annual fees. All other categories remained relatively unchanged.
Non-interest income in 1993 was $7,904,000, representing a decrease of $19,000, or .2%, under the preceding year. The largest decrease came from the security gains category which decreased $339,000 from 1992. This was due to the 1992 sale of collateralized mortgage obligations resulting from accelerated repayments and small principal sums remaining in certain issues. Increases in service charges and trust fees categories for 1993 helped offset the decreases in non-interest income caused by the security gains category. All other categories remained relatively unchanged.
Each major category of non-interest income is analyzed in the following table (in thousands):
Analysis of Non-interest Expense
Non-interest expense for 1994 totaled $25,712,000, an increase of $3,549,000 or 16.0% from 1993. The one category that made up a significant dollar portion of this increase was salaries and benefits. This increase was the result of the merger acquisition of First Community, as discussed on page A30, normal pay increases and the increasing costs of employee benefits and training.
- A38 -
Union Bancshares, Inc. and Subsidiaries
Analysis of Non-interest Expense (Continued)
Equipment and occupancy expenses were up primarily due to the merger acquisition of First Community . Also, equipment expense was up due to new systems put in place to improve customer service. Other expenses were up due to one time expenses resulting from the merger acquisition with First Community. All other categories remained relatively unchanged.
Non-interest expense in 1993 totaled $22,163,000, a decrease of $403,000, or 1.8%, under 1992. The largest decrease in non- interest expense occurred in marketing expenses. In 1992 there was extensive media advertising that took place that did not occur in 1993. Several other non-interest expense categories decreased in 1993 due to efforts to control costs in UBI. The largest dollar increase in non-interest expense came from salaries and benefits expenses. The increase of $522,000 was due to normal salary and benefits increases.
Each major category of non-interest expense is detailed in the following table (in thousands):
Analysis of Investment Securities
The book value of investment securities at December 31, 1994, 1993, and 1992, is presented below (in thousands):
- A39 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Investment Securities (Continued)
Except for total U.S. Treasury and U.S. Agency Obligations, no investment in a single issuer exceeds 10% of stockholders' equity.
State and municipal securities make up approximately 20.7% of the total investment portfolio. UNB's investment policy states that out-of-state municipal securities purchased shall have an A rating or better by either Standard & Poor's or Moody's rating service or be approved by the Investment Committee if municipal securities with less than an A rating are considered. The quality ratings on Kansas municipal bonds shall be left to the investment officer.
At December 31, 1994, $11,496,000, or 27.3%, of the state and municipal securities were nonrated with $6,255,000, or 54.4%, of the nonrated municipal securities being Kansas issues. The majority of the nonrated municipal securities are smaller bond issues that are not rated by Standard & Poors or Moody's but are considered to be of appropriate investment quality and actively traded in a liquid market.
A complete breakout of the ratings for state and municipal securities at December 31, 1994, is shown below (in thousands):
The maturity distribution of UBI's investment securities at December 31, 1994, is presented below. In addition, the weighted average yield of each maturity range of 1994 is presented on a fully tax-equivalent basis.
- A40 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Investment Securities (Continued)
Mortgage-backed securities have been included in the maturity table based on their expected life. However, this classification may not be indicative of the interest rate risk characteristics of the portfolio.
At December 31, 1994, the held-to-maturity mortgage-backed securities category was comprised totally of fixed-rate mortgage- backed securities and included no collateralized mortgage obligations (CMOs). The average expected life of the $8,146,000 in the held-to-maturity mortgage-backed securities was approximately 2.5 years and does not present UBI with significant interest rate or prepayment risk.
- A41 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Investment Securities (Continued)
The December 31, 1994, available-for-sale mortgage-backed securities portfolio was comprised principally of securities issued and guaranteed by various U.S. government agencies with an estimated average maturity of approximately 3.5 years. Included in the December 31, 1994 available-for-sale mortgage-backed securities were $5,460,000 in CMOs. Of the $33,126,000 in available-for-sale mortgage-backed securities, approximately $22,000,000 are floating- rate mortgage-backed securities. The yields on these floating rate securities float on a short-term (less than one year) basis with various reported indices, which reduces the interest rate risk associated with these investments.
Analysis of Loans
Outstanding loans distinguished by selected categories at December 31 for each of the last five years, their maturities, and interest sensitivity of those loan categories at year-end December 31, 1994, are set forth in the following analyses (in thousands):
- A42 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Loans (Continued)
UBI has had a significant increase in installment loans starting in 1991 through 1994. UBI has been aggressively pursuing indirect dealer loan business during this period. UBI will continue to emphasize this area of the retail market in the future because of the potential to generate additional loan growth for UBI.
In 1988, when UNB began emphasizing mortgage loans, Sedgwick County, Kansas was defined as the market area. The acquisitions in 1990 expanded the mortgage lending market to Reno County, Kansas with a few loans in counties adjacent to Sedgwick and Reno counties. In 1994 with the acquisition of First Community, UNB expanded into the mortgage lending market of Cowley County, Kansas. UNB considers Sedgwick, Reno and Cowley counties as its primary mortgage loan markets. The majority of these loans are 1-4 family residential mortgage loans. At December 31, 1994, approximately 45% are adjustable rate mortgages with the remaining 55% being fixed rate. Bankcard loans decreased due to the two portfolio sales as discussed on page A-29.
Analysis of Underperforming Assets
UBI continues to place strong emphasis on the close monitoring of underperforming assets. It is UBI's policy to treat as underperforming assets (a) loans that are accounted for on a nonaccrual basis, (b) loans, the terms of which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, (c) other real estate, and (d) loans which are past due 90 days or more and still accruing interest.
Under-performing assets at December 31, 1994, were $2,253,000, an increase of $40,000 from $2,213,000 at December 31, 1993. Nonaccrual loans increased $464,000, while loans 90 days past due decreased $505,000 over the prior year. At December 31, 1993, underperforming assets were $156,000 higher than the $2,057,000 reported at December 31, 1992. The increase at December 31, 1993, was not substantial and the level of underperforming assets to total loans and the allowance for loan losses remain at very acceptable levels. The decrease in 1991, was attributable to reduced levels of past due loans and charge-offs of loans classified as underperforming in 1990. All underperforming loans of $100,000 or more are specifically reviewed by management in analyzing the adequacy of the allowance for loan losses. This is discussed additionally on pages A-9 and A-44 under Allowance for Loan Losses.
Loans are placed on nonaccrual status when principal or interest is due and has remained unpaid for 90 days or more unless the loan is well secured and/or in the process of collection.
- A43 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Underperforming Assets (Continued)
Loans are also placed on nonaccrual status when there is reasonable doubt as to the ability of the borrower to pay interest or principal. At the time a loan is classified as nonaccrual, interest previously recorded but not collected is reversed. Interest payments received on such loans are generally recorded as a reduction in carrying value unless such carrying value is deemed to be collectible.
Loans on which the accrual of interest has been discontinued amounted to $1,149,000 at December 31, 1994. If interest on these loans had been accrued, such income would have approximated $98,000 in 1994. No interest was recognized on these loans after transferring them to nonaccrual status.
Underperforming assets for five-year period ended December 31, 1994, are set forth in the following table (in thousands):
Analysis of Allowance for Loan Losses
In the normal course of business, banks recognize that a relatively small percentage of the loans they make will eventually be charged off. These future charge-offs are currently provided for through the allowance for loan losses. Additions made to this allowance are charged to operating expenses under the provision for loan losses. Loans are charged against the allowance when they are deemed to be uncollectible. Recoveries are credited directly to the allowance.
The required level for the allowance for loan losses is determined by management on the basis of a detailed review of the risk factors affecting the loan portfolio. In addition to evaluating the financial condition of individual borrowers, management assesses the entire portfolio as to past loan loss experience, volumes, mix and maturity, concentration of credit, prevailing economic conditions, both locally and nationally, and off-balance sheet risk. Management specifically reviews all underperforming assets of $100,000 or more for loan loss adequacy as well as for potential partial or complete charge-off. The results of these reviews along with the other above factors enable management to establish the allowance at a level considered adequate to absorb loan losses.
- A44 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Allowance for Loan Losses (Continued)
At December 31, 1994, the allowance for loan losses was $5,500,000, or 1.40%, of outstanding loans. This compares with $4,400,000, or 1.48%, of outstanding loans reported at the end of 1993. The provision for loan losses totaled $2,312,000 in the current year, a decrease of $100,000 from the $2,412,000 reported a year earlier. The reduction in the allowance to loans percentage between December 31, 1993 and December 31, 1994, is due to the increased portfolio size from the merger acquisition of First Community. A majority of the loans acquired in the merger were 1-4 performing first mortgage real estate loans which require a smaller allowance. Net charge-offs during 1994 amounted to $1,559,000, or .44%, of average net loans, the lowest net charge off percentage level since 1982. This compares with net charge-offs of $1,412,000, or .49%, of average net loans for the preceding year.
Based upon managements detailed review and analysis of the loan portfolio at December 31, 1994, the allowance for loan losses was set at a level of $5,500,000 as managements best estimate of the potential losses which might be present in the loan portfolio at that point in time. Management believes it is important to take a conservative approach in evaluating the risk profile of the company.
The activity in the allowance for loan losses during each of the past five years is presented in the following analysis: (In thousands)
- A45 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Allowance for Loan Losses (Continued)
The following tables allocate UBI's allowance for loan losses in dollars and percentages among the various loan categories based upon managements review and analysis of the potential risk in the loan portfolio at year-end.
Allocation of the allowance for loan losses between loan categories is shown in the following table (in thousands). This allocation is not fixed, and UBI considers the entire allowance available to absorb losses in any category.
The following tables compare the percentage of loans in each loan category to total loans and the allocation of the allowance for loan losses by type expressed as a percentage of the total allowance for loan losses:
- A46 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Deposits
Deposits at December 31, 1994, were $506,648,000, representing an increase of $72,832,000, or 16.8%, above 1993. On average for the year, deposits were $488,379,000, up $44,015,000 over 1993. The increase in deposits during 1994 came from acquiring deposits through the merger with First Community.
The maturity of time deposits of $100,000 or more is set forth in the following table (in thousands):
Analysis of Short-term Borrowings
Information for each category of short-term borrowings for which the average balance outstanding for the period was at least 30 percent of stockholders' equity at the end of the period is presented below (in thousands):
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Union Bancshares, Inc. and Subsidiaries
Analysis of Capital Resources
Stockholders' equity increased $4,833,000, or 11.8%, to $45,649,000 at December 31, 1994, from the $40,816,000 reported at December 31, 1993. The ratio of equity capital to total assets was 6.9 % at December 31, 1994, compared to 7.7% for the same period in 1993. This decrease was the result of increased levels of total assets from the merger acquisition of First Community on April 4, 1994. The dividend payout ratio of 7.5% is consistent with UBI's policy of maintaining an appropriate balance between earnings returned to stockholders in the form of dividends and earnings retained to provide internal capital growth.
Risk-based capital guidelines established by the Federal Reserve Bank (FRB), UBI's primary regulator, started in 1991. Under these guidelines, the FRB will monitor three ratios for capital levels. They are Tier I capital, Tier II capital and a Leverage ratio. Currently the FRB is requiring a minimum Tier I capital guideline of 4.00%, a Tier II capital guideline of 8.00%, and a Leverage ratio of 3.00%. At December 31, 1994, UBI had a 9.6% Tier I capital ratio, a 10.9% Tier II capital ratio, and a 6.2% Leverage ratio. All the regulatory capital ratios are down from the levels recorded at 1993. The declines are primarily due to the merger acquisition of First Community which resulted in increased levels of risk based assets with no increase in equity capital. The acquisition also increased intangible assets which are deducted from equity capital in calculating risk based capital ratios. All of UBI's capital ratios are above the regulatory guidelines and placed UBI in the "well capitalized" category currently defined by regulators. Well capitalized institutions are defined as those institutions having a Tier I capital level of 6.0%, a Tier II capital level of 10.0% and a Leverage ratio of 5.0%. This is the highest capital level category defined by regulators. - A48 - PAGE
Union Bancshares, Inc. and Subsidiaries
Analysis of Liquidity
Liquidity for UBI's bank subsidiary, UNB, is represented by UNB's ability to generate a continuing stream of funds to satisfy its financial needs and the credit and deposit demands of its customers. Liquidity and interest sensitivity are managed in a coordinated asset/liability management program within the bank.
Asset liquidity is derived from loan repayments and scheduled maturities of loans and other assets, primarily investment securities. At December 31, 1994, loan repayments and scheduled loan maturities within one year or less totaled $115,284,000. At December 31, 1994, investment securities, federal funds sold, FHLB overnight deposits, securities purchased under resale agreements and other investments, all of which are maturing within one year or less, totaled $51,360,000. These short-term investment funds equaled 8.6% of aggregate interest-earning assets. This liquidity provides UNB with a substantial capacity to fund customers' new credit demands, internal financial needs, deposit payouts and to take advantage of other attractive market conditions as they arise.
On the liability side, the most significant sources of liquidity for UNB consist of customers' new savings and time deposits under $100,000 and the renewal of customers' maturing deposits. Other sources of liquidity include customers' certificates of deposit of $100,000 or more, FHLB advances, and the purchase of federal funds and securities sold under agreements to repurchase.
UBI relies on dividends and tax benefit payments from its subsidiaries and borrowings from unaffiliated banks to generate cash flow. Federal regulations restrict the payment of dividends by national banks by requiring approval of the Comptroller of the Currency if total dividends declared by a national bank in any calendar year exceed the bank's net profits for that year combined with its retained profits for the preceding two years. At December 31, 1994, dividends of approximately $8,456,000 were available from the bank subsidiary without such approval. UBI also has available for cash flow needs a $1,000,000 line-of-credit with Harris Bank and Trust Company of Chicago. As of December 31, 1994, the line of credit had a $0 balance.
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Union Bancshares, Inc. and Subsidiaries
Analysis of Interest Sensitivity
Interest sensitivity is the cornerstone of UBI's asset/liability margin management system. Key asset and liability decisions are reviewed in the framework of this system with the objective of optimizing long-term profitability at an acceptable level of risk.
The tables that follow summarize the asset/liability margin management status at December 31, 1994. Yields and rates shown in the table are interest income and expense only. Other factors such as loan fees are not included in the summary.
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Union Bancshares, Inc. and Subsidiaries
Analysis of Interest Sensitivity (Continued)
UBI has a positive cumulative repricing gap in the one-year horizon. Consequently, it is more sensitive to a decreasing rate environment which, if it occurred, would adversely impact the net interest margin. Simulation modeling has demonstrated that a sudden and large decrease in rates or a dramatic narrowing in the spread between asset yields and liability costs would result in an adverse impact on the net interest margin; however the adverse impact is more moderate if interest rates decrease gradually.
Five-Year Summary of Operations
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