UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NO. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1598552
(State of Incorporation) (I.R.S. Employer Identification No.)
211 NORTH MAIN STREET
P.O. BOX 446
BOWLING GREEN, VIRGINIA 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON
STOCK, $2 PAR VALUE
Union Bankshares Corporation (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 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.
As of March 31, 1999, Union Bankshares Corporation had 7,530,356 shares
of Common Stock outstanding.
UNION BANKSHARES CORPORATION
FORM 10-Q
MARCH 31, 1999
INDEX
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PART 1 - FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and 1998 (Unaudited)
and December 31, 1998 (Audited)...................................... 1
Consolidated Statements of Income and Comprehensive Income
for the three months ended March 31, 1999 and 1998 (Unaudited)....... 2
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 (Unaudited)............... 3
Notes to Consolidated Financial Statements (Unaudited)........................ 4-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 8-15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 16
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.............................................. 17
SIGNATURES............................................................................. 17
INDEX TO EXHIBITS...................................................................... 18
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
MARCH 31, December 31, March 31,
ASSETS 1999 1998 1998
- -------- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Cash and cash equivalents:
Cash and due from banks $ 23,738 $ 39,607 $ 24,251
Interest-bearing deposits in other banks 2,315 1,413 1,328
Federal funds sold 9,916 - 9,599
------------ -------------- --------------
TOTAL CASH AND CASH EQUIVALENTS 35,969 41,020 35,178
------------ -------------- --------------
SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE 191,783 161,228 144,814
INVESTMENT SECURITIES
fair value of $1,995, $16,452 and $18,038, respectively 14,851 16,142 18,753
------------ -------------- --------------
TOTAL SECURITIES 206,634 177,370 163,567
------------ -------------- --------------
LOANS, NET OF UNEARNED INCOME 479,971 479,822 441,590
Less allowance for loan losses 6,708 6,407 4,848
------------ -------------- --------------
NET LOANS 473,263 473,415 436,742
------------ -------------- --------------
BANK PREMISES AND EQUPIMENT, NET 22,520 21,057 19,826
OTHER REAL ESTATE OWNED 912 1,101 1,344
OTHER ASSETS 40,640 19,984 19,187
------------ -------------- --------------
TOTAL ASSETS 779,938 $ 733,947 $ 675,844
============ ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
NON-INTEREST-BEARING DEMAND DEPOSITS 80,410 $ 81,329 $ 75,241
INTEREST-BEARING DEPOSITS:
Savings accounts 59,029 61,281 59,370
NOW accounts 85,914 81,514 72,137
Money market accounts 63,439 64,331 63,736
Time deposits of $100,000 and over 95,687 80,926 69,188
Other time deposits 234,120 238,248 220,958
------------ -------------- --------------
TOTAL INTEREST-BEARING DEPOSITS 538,189 526,300 485,389
------------ -------------- --------------
TOTAL DEPOSITS 618,599 607,629 560,630
------------ -------------- --------------
SHORT-TERM BORROWINGS 17,269 19,476 9,943
LONG-TERM BORROWINGS 47,220 28,325 28,640
OTHER LIABILITIES 22,109 5,158 6,409
------------ -------------- --------------
TOTAL LIABILITIES 705,197 660,588 605,622
------------ -------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $2 par value. Authorized 24,000,000 shares;
issued and outstanding, 7,530,356, 7,507,394 and 7,153,874 shares,
respectively 15,061 15,015 14,308
Surplus 599 311 389
Retained 57,537 55,690 53,811
Accumulated other comprehensive income
Net unrealized gains on securities available for sale, net of taxes 1,544 2,343 1,714
------------ -------------- --------------
TOTAL STOCKHOLDERS'
EQUITY 74,741 73,359 70,222
------------ -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 779,938 $ 733,947 $ 675,844
============ ============== ==============
See accompanying notes to consolidated financial statements.
1
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Quarter Ended
March 31
-------------------------------
1999 1998
---- ----
INTEREST INCOME:
Interest and fees on loans $ 10,443 9,542
Interest on securities:
U.S. government and agency securities 342 452
Obligations of states and political subdivisions 1,121 995
Other securities 1,147 1,002
Interest on Federal funds sold 59 189
Interest on interest-bearing deposits in other banks 28 25
-------------- --------------
TOTAL INTEREST INCOME 13,140 12,205
-------------- --------------
INTEREST EXPENSE:
Interest on deposits 5,678 5,086
Interest on other borrowings 605 735
-------------- --------------
TOTAL INTEREST EXPENSE 6,283 5,821
-------------- --------------
NET INTEREST INCOME 6,857 6,384
PROVISION FOR LOAN LOSSES (note 2) 762 435
-------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,095 5,949
-------------- --------------
OTHER INCOME:
Service charges on deposit accounts 692 601
Other service charges and fees 392 428
Gains on securities transactions, net 19 2
Gains (losses) on sales of other real estate owned
and bank premises, net (2) 16
Other operating income 2,437 57
-------------- --------------
TOTAL OTHER INCOME 3,538 1,104
-------------- --------------
OTHER EXPENSES:
Salaries and benefits 4,508 2,480
Occupancy expenses 396 296
Furniture and equipment expenses 464 364
Other operating expenses 1,835 1,368
-------------- --------------
TOTAL OTHER EXPENSES 7,203 4,508
-------------- --------------
Income before income taxes and cumulative effect of accounting change 2,430 2,545
Income tax expense 511 499
-------------- --------------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 1,919 2,046
-------------- --------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD, NET 104 0
NET INCOME $ 1,815 $ 2,046
============== ==============
OTHER COMPREHENSIVE INCOME
Unrealized holding gains arising during the period
net of taxes of $297 and $5 for 1999 and 1998 $ 812 $ 9
Less reclassification adjustments for (gains) losses included in
net of taxes of $6 and $0 for 1999 and 1998 13 2
Total Other Comprehensive Income 799 7
============== ==============
COMPREHENSIVE INCOME $ 2,614 $ 2,053
============== ==============
BASIC EARNINGS PER SHARE
-------------- --------------
Before cumulative effect of change in accounting $ 0.26 $ 0.27
-------------- --------------
Cumulative effect of change in accounting method (0.02)
-------------- --------------
Net income $ 0.24 $ 0.27
-------------- --------------
Diluted Earnings per share
-------------- --------------
Before cumulative effect of change in accounting $ 0.26 $ 0.27
-------------- --------------
Cumulative effect of change in accounting method (0.02)
-------------- --------------
Net income $ 0.24 $ 0.27
-------------- --------------
DIVIDENDS PER SHARE $ - $
-------------- --------------
See accompanying notes to consolidated financial statements.
2
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands)
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 1,815 $ 2,046
Adjustments to reconcile net income to net cash and
cash equivalents used in operating activities:
Depreciation of bank premises and equipment 401 299
Amortization of intangibles 365 43
Provision for loan losses 762 435
Gains on sales of securities available for sale (19) (2)
(Gains) Losses on sale of other real estate owned 2 (16)
Increase in other assets (20,946) (7,251)
Increase (Decrease) in other liabilities 17,272 (665)
----------- ------------
NET CASH AND CASH EQUIVALENTS USED IN
OPERATING (348) (5,111)
ACTIVITIES
----------- ------------
INVESTING ACTIVITIES:
Net increase in securities (30,411) (2,039)
Net increase in loans (610) (42,625)
Acquisition of bank premises and equipment (1,864) (3,149)
Proceeds from sales of other real estate owned 190 418
----------- ------------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (32,695) (47,395)
----------- ------------
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest-bearing deposits (919) 9,535
Net increase in interest-bearing deposits 11,889 61,840
Net decrease in short-term borrowings (2,207) (17,302)
Increase in long-term borrowings 18,925 4,925
Issuance of common stock 1,005 5
Repurchase of common stock (671) -
Repayment of long-term borrowings (30) -
----------- ------------
NET CASH AND CASH EQUIVALENTS PROVIDED BY
FINANCING ACTIVITIES 27,992 59,003
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,051) 6,497
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,020 28,681
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,969 $ 35,178
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest 6,131 5,746
Income taxes 802 499
See accompanying notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The information contained in the financial statements is unaudited and
does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the results of the interim periods presented have been
made. Operating results for the three month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. UNION BANKSHARES CORPORATION AND
SUBSIDIARIES
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1998 Annual Report to Shareholders. Certain previously reported
amounts have been reclassified to conform to current period presentation.
As of January 1999, the Company adopted SOP 98-5 - Reporting on the Costs
of Start-up Activities. This SOP requires that the costs of start-up
activities be expensed as incurred. This is a change from past practices
which allowed the amortization of these costs over a specified time. As a
result, two additional lines are on the Consolidated Statements of Income
and Comprehensive Income: Income before effect of accounting change and
Cumulative effect of change in accounting method, net of taxes. This one
time effect impacts the first quarter 1999 and the year 1999 as a result
of costs accumulated in 1998 related to the Bank of Williamsburg. ( see
Management Discussion)
2. ALLOWANCE FOR LOAN LOSSES
The following summarizes activity in the allowance for loan losses for the
three months ended March 31, (in thousands):
1999 1998
---- ----
Balance, January 1 $6,407 $4,798
Provisions charged to operations 762 435
Recoveries credited to allowance 87 47
Loans charged off (548) (432)
Balance, March 31 $ 6,708 $4,848
======== ======
`
4
3. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of shares outstanding during the period. Weighted
average shares used for the computation of basic EPS were 7,528,729 and
7,468,590 for the three months ended March 31, 1999 and 1998. Diluted EPS
is computed using the weighted number of common shares outstanding during
the period, including the effect of dilutive potential common shares
outstanding attributable to stock options. Weighted average shares used
for the computation of diluted EPS were 7,645,214 and 7,517,049 for the
three months ended March 31, 1999 and 1998.
4. PURCHASE OF MORTGAGE CAPITAL INVESTORS, INC
On February 11, 1999, the Company completed the purchase of Mortgage
Capital Investors, Inc. a mortgage origination business with 16 locations
in the states of Virginia, Maryland, North Carolina, South Carolina and
Florida. This business was purchased to enhance the Company's existing
mortgage operations and increase non-interest income. It contributed
approximately $400,000 in net income in the first quarter of 1999 which is
the first period it is presented as part of the company. This represented
earnings for the period February 11 to March 31, 1999. This acquisition
was accounted for under the purchase method of accounting. The purchase
price was $5,000,000. At closing the Company paid, $1,000,000 in cash and
$1,000,000 in common stock. In addition, $3,000,000 is to be distributed
over the next three years in cash and common stock, and discounted value
of which is included in other liabilities at March 31, 1999. At closing
61,490 shares were issued with cash paid for fractional shares. As a
result of the transaction, goodwill in the amount of $1,044,887 was
reccorded and is being amortized using the straight line method over 10
years at $104,488 per year.
5. SEGMENT REPORTING DISCLOSURES
Union Bankshares Corporation has two reportable segments: traditional full
service banks and mortgage loan origination business. The bank business is
made up of five banks. These banks provide loan, deposit , investment,
trust and custodial services to retail and commercial customers at all the
state of Virginia locations. The mortgage company provides a variety of
mortgage loan products in a multi state market. These loans are warehoused
and sold over short term, normally less than 90 days.
Profit and loss is measured by net income after taxes including gains and
losses on the Company's investment portfolio. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies. Intersegment transactions are recorded at
cost and eliminated as part of the consolidation process.
The Company's reportable segments are both service based but the mortgage
company provides a very specific and definative service which contributes
a significant amount to the total income of the combined entity. While the
banks offer a distribution network for the mortgage service, the mortgage
company does not offer a similar abiltiy for the banks at this time.
Finally, a major distinction is the source of income. The mortgage
business is purely a fee based business while the banks are profit
driven by interest income.
5
The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ( Statement 131).
Statement 131 establishes standards for for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports.
The following is a summary of segment profit (dollars in thousands):
QUARTER ENDED MARCH 31, 1999
Banks Mortgage Total
----- -------- -----
Net interest income after provision for loan loss $ 6,142 $ - $6,142
Total non-interest income 1,006 2,352 3,358
Total other expenses 4,947 1,771 6,718
Segment profit (after taxes) 1,648 404 2052
Total Assets 763,329 23,452 786,781
The following summary reconciles segment profit (loss) to income after taxes
(dollars in thousands):
Income after taxes
Segment profit $2,052
Other (237)
------
Net Income $1,815
======
6. RECENT ACCOUNTING STATEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that a company recognize all derivative
instruments as either assets or liabilities in the consolidated balance
sheet, and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. For companies with a fiscal
year ending on December 31, SFAS 133 is effective as of January 1, 2000.
Earlier adoption, as of the beginning of a fiscal quarter, is encouraged
but is not mandatory. The impact of adopting SFAS 133 will be dependent on
the specific derivative instruments in place at the date of adoption. At
this time, Management believes the adoption of this new standard will not
have a material impact on the financial condition or results of operations
of the Company, and does not anticipate adopting SFAS 133 before January
1, 2000.
6
7. FORWARD- LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Although the Company believes that its expectations with
respect to certain forward-looking statements are based upon reasonable
assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results, performance or
achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Union Bankshares Corporation (the "Company") is a multi-bank holding
company organized under Virginia law which provides financial services through
its wholly-owned subsidiaries, Union Bank & Trust Company, Northern Neck State
Bank, King George State Bank, Rappahannock National Bank, the Bank of
Williamsburg ,Union Investment Services, Inc., and Mortgage Capital Investors.
The five subsidiary banks, Union Bank & Trust Company, Northern Neck State Bank
, King George State Bank, Rappahannock National Bank and the Bank of
Williamsburg are full service retail commercial banks offering a wide range of
banking and related financial services, including demand and time deposits, as
well as commercial, industrial, residential construction, residential mortgage
and consumer loans. Union Investment Services, Inc., is a full service discount
brokerage company which offers a full range of investment services, and sells
mutual funds, bonds and stocks. Mortgage Capital Investors provides a wide array
of mortgage products through its 16 offices in Virginia, Maryland, North
Carolina, South Carolina and Florida.
The Company's primary trade area stretches from Rappahannock County to
Fredericksburg, south to Hanover County , east to Williamsburg and throughout
the Northern Neck area of Virginia. The Corporate Headquarters are located in
Bowling Green, Virginia. Through its banking subsidiaries, the Company operates
29 branches in its primary trade area. In addition to the primary banking trade
area, the addition of Mortgage Capital Investors expands the mortgage
origination business to four additional states.
In February 1999, the Company opened the Bank of Williamsburg in
temporary headquarters in the Williamsburg Crossing Shopping Center. This
location is one of the faster growing areas of Virginia and it is expected that
this bank will contribute to the profit of the Company within its first two
years.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of the Company. The analysis focuses on the consolidated financial statements,
the footnotes thereto, and the other financial data herein. Highlighted in the
discussion are material changes from prior reporting periods and any
identifiable trends affecting the Company. Amounts are rounded for presentation
purposes, while the percentages presented are computed based on unrounded
amounts.
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $1.8 million, down from
$2.0 million for the same period in 1998. The decline in net income for the
period is due principally to an increase of $327,000 in the provision for loan
loss over the first quarter of 1998; a $104,000 cumulative change in accounting
method and increases in other expenses. Diluted earnings per share amounted to
$.24 in the first quarter of 1999, as compared to $.27 in the first quarter of
1998. The Company's annualized return on assets for the first quarter of 1999
was .94% as compared to 1.28% a year ago. The Company's annualized return on
equity totaled 9.88% and 11.99% for the three months ended March 31, 1999 and
1998, respectively.
8
Net income for the first quarter of 1999 before the cumulative effect of a
change in accounting was $1.9 million, down 6.2% from $2.0 million a year ago.
During the first quarter the Company adopted a new accounting standard
(Statement of Position 98-5) which required it to expense certain previously
capitalized start-up costs totaling $158,000, or $104,000 net of applicable
taxes. Earnings per share before the cumulative adjustment for a change in
accounting method on a diluted basis decreased to $.26 from $.27 for the same
quarter in 1998.
Declining interest rates continue to negatively impact the net interest margin
as loans and investments mature, are prepaid or are repriced at lower rates,
while deposit competition remains tight. Recent expansion activities, including
branch acquisitions and de novo openings, have generated a short term drag on
earnings. Other infrastructure costs, principally continued investments in
technology and people, contributed to a relatively flat earnings quarter, but
have positioned the Company to provide more competitive products and services to
its marketplace. While the benefits of technology investments tends to lag
behind the costs, the long term benefit is significant in terms of the Company's
ability to compete effectively in the changing financial services marketplace.
Of particular significance during the quarter were the opening of a new bank
subsidiary, the Bank of Williamsburg, and the acquisition of Mortgage Capital
Investors. Both of these transactions represent strong opportunities to leverage
the Company's collective resources to generate new business and earnings growth
in new and existing markets. As with any de novo operation, the Bank of
Williamsburg is expected to incur operating losses for the first year, becoming
profitable during the second year of operation. The contribution of Mortgage
Capital Investors has been more immediate, as it contributed approximately
$400,000 to first quarter net income.
NET INTEREST INCOME
Net interest income on a tax-equivalent basis for the first quarter of
1999 increased by 8.8% to $7.4 million from $6.8 million for the same period a
year ago. By managing its interest rate spread and increasing the volume of
earning assets over interest-bearing liabilities, the Company has been able to
maintain a strong net interest margin. The current interest rate environment and
competition for deposits continue to put pressure on net interest margins.
Average earning assets during the first quarter of 1999 increased by $69.7
million to $673.5 million from the first quarter of 1998, while average
interest-bearing liabilities grew by $68.2 million to $576.7 million over this
same period. The Company's yield on average earning assets was 8.24%, down 24
basis points from 8.48% a year ago, while its cost of average interest-bearing
liabilities also decreased 22 basis points from 4.64% to 4.42%.
9
UNION BANKSHARES CORPORATION
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
----------------------------------------------------------------------------------------
THREE MONTHS MARCH 31,
---------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
ASSETS:
Securities:
Taxable . . . . . . . . . . . . $99,670 $1,538 6.26% $ 96,770 $1,517 6.36%
Tax-exempt(1) . . . . . . . . . 85,819 1,624 7.68% 71,467 1,432 8.13%
------------------------- -------------------------
Total securities . . . 185,489 3,162 6.91% 168,237 2,949 7.11%
Loans, net. . . . . . . . . . . . . . . . 481,763 10,444 8.79% 423,812 9,531 9.12%
Federal funds sold . . . . . . . . . . . 4,337 57 5.33% 10,608 116 4.43%
Interest-bearing deposits
in other banks . . . . . . . . . 1,919 26 5.49% 1,171 24 7.97%
------------------------- -----------------------
TOTAL EARNING ASSETS. . 673,508 13,689 8.24% 603,828 12,620 8.48%
Allowance for loan losses . . . . . . . . (6,714) (4,950)
TOTAL NON-EARNING ASSETS . . . . . . . . . 65,129 53,679
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . $731,923 13,689 $ 652,557 12,620
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest-bearing deposits:
Checking . . . . . . . . . . . . 82,283 461 2.27% $ 65,037 380 2.37%
Regular savings . . . . . . . . 57,841 398 2.79% 55,363 416 3.05%
Money market savings . . . . . . 64,041 515 3.26% 57,025 490 3.48%
Certificates of deposit:
$100,000 and over . . . . . . . 88,154 1,171 5.39% 65,531 896 5.50%
Under $100,000 . . . . . . . . . 238,686 3,133 5.32% 208,882 2,904 5.64%
------------------------- -----------------------
TOTAL INTEREST-BEARING
DEPOSITS . . . 531,005 5,678 4.34% 451,838 5,086 4.56%
Other borrowings . . . . . . . . . . . . . 45,673 606 5.38% 56,645 735 5.26%
------------------------- -----------------------
TOTAL INTEREST-BEARING
LIABILITIES. . 576,678 6,283 4.42% 508,483 5,821 4.64%
------------ ------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . 78,472 69,469
Other liabilities . . . . . . . 3,566 4,914
------------- ------------
TOTAL LIABILITIES . . 658,716 582,866
Stockholders' equity . . . . . . . . . . . 73,207 69,691
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . $731,923 $ 652,557
============= ============
NET INTEREST INCOME . . . . . . . . . . . $7,406 6,799
============ ============
Interest rate spread . . . . . . . . . . 3.82% 3.84%
Interest expense as a percent
of average earning assets . . . 3.78% 3.84%
Net interest margin . . . . . . . . . . . 4.46% 4.57%
(1) Income and yields are reported on a taxable equivalent basis.
10
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses totaled $ 762,000 for the first
quarter of 1999, up from $435,000 for the first quarter of 1998. These
provisions reflect the performance of the loan portfolio and management's
assessment of the credit risk in the portfolio. (See ASSET QUALITY)
NON-INTEREST INCOME
Non-interest income for the three months ended 1999 totaled $3.5
million, up from $1.1 million a year ago. This increase is due principally to
the increases in income from mortgage brokerage fees totaling $2.4 million from
the addition of Mortgage Capital Investors, Inc. The remaining increase in
non-interest income is due to increases in service fees on deposit accounts,
increases in other service fees and increased brokerage commissions. Management
continues to seek additional sources of non-interest income, including increased
emphasis on its credit card operations, mortgage banking activities and
brokerage services.
NON-INTEREST EXPENSE
Non-interest expense increased by 59.4% for the first three months of
1999, totaling $7.2 million as compared to $4.5 million for 1998. Personnel
costs comprised much of this change, with approximately $1.5 million due to the
acquisition of Mortgage Capital Investors. The remaining cost is attributable to
other bank and branch infrastructure expenses associated with the consolidation
of certain functions and the development and introduction of new products and
delivery systems, which are expected to enhance future earnings through
increased revenue and/or improved efficiencies. The Company continues to stress
budgetary expense controls.
FINANCIAL CONDITION
Total assets as of March 31, 1999 were $780.2 million, an increase of
15.4% from $675.8 million at March 31, 1998. Asset growth was fueled by good
loan growth , as loans totaled $473.3 million at March 31, 1999, an increase of
8.4% from $436.7 million at March 31, 1998 . Stockholders' equity totaled $75
million at March 31, 1999, which represents a book value of $9.96 per share.
Deposit growth remained steady. Total deposits at March 31, 1999 were
$618.6 million, up 10.3% from $560.6 million at March 31, 1998. Other borrowings
totaled $64.5 million at March 31, 1999, a 67.1% increase over $38.6 million at
March 31, 1998. This is reflective of the Company's effort to better leverage
its strong capital position. The Company continues to utilize other borrowings
to supplement deposit growth and, periodically, engages in wholesale leverage
transactions. These wholesale leverage transactions have typically been executed
at spreads of approximately 150 to 200 basis points and, although they have
negatively impacted the Company's net interest margin (as a percentage), they
have had a positive effect on earnings and return on equity.
Continued competition for deposits, particularly as it impacts
certificate of deposit rates, is reflected in the deposit mix. Management
continues to focus on increasing lower cost deposit products, including
non-interest bearing demand deposits and savings accounts. Increased competition
for funds, particularly by non-banks, continues to contribute to a narrowing of
the net interest margin, which has been largely offset by increases in the
volume of earning assets.
ASSET QUALITY
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio. General economic trends as
well as conditions affecting individual borrowers affect the level of credit
losses. The allowance is also subject to regulatory examinations and
determination as to adequacy, which may take in to account such factors as the
methodology used to calculate the allowance and comparison to peer groups.
The allowance for loan losses totaled $6.7 million at March 31, 1999 or
1.40% of total loans, as compared to 1.34% at December 31, 1998 and 1.10% at
March 31, 1998. At March 31, 1999, non-performing assets of $4,664 million
included foreclosed properties of $912,000 and a $689,000 investment in
income-producing property.
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
----- ---- --------
Non-accrual loans $3,063 $2,813 $3,672
Foreclosed properties 912 1,101 1,344
Real estate investment 689 730 942
-------- -------- -------
Non-performing assets $4, 664 $4,644 $5,958
======== ======== =======
Allowance for loan losses $6,708 $6,407 $4,848
Allowance as % of total loans 1.40% 1.34% 1.10%
Non-performing assets to loans
and foreclosed properties .97% .97% 1.35%
CAPITAL RESOURCES
Capital resources represent funds, earned or obtained, over which
financial institutions can exercise greater or longer control in comparison with
deposits and borrowed funds. The adequacy of the Company's capital is reviewed
by management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital
structure that will assure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1
capital, consisting of common equity and retained earnings, less certain
goodwill items.
At March 31, 1999, the Company's ratio of total capital to risk-weighted
assets was 15.39% and its ratio of Tier 1 capital to risk-weighted assets was
14.02%. Both ratios exceed the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at
March 31, 1999:
Tier 1 capital $ 79,979
Tier 2 capital $ 7,779
Total risk-based capital $ 87,758
Total risk-weighted assets $ 570,349
CAPITAL RATIOS:
Tier 1 risk-based capital ratio 14.02 %
Total risk-based capital ratio 15.39 %
Leverage ratio (Tier I capital to
average adjusted total assets) 11.03 %
Equity to assets ratio 9.61 %
The Company's book value per share at March 31, 1999 was $9.96.
Dividends to stockholders are typically declared and paid semi-annually in June
and December.
LIQUIDITY
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest bearing deposits with banks, federal funds
sold, investments and loans maturing within one year. The Company's ability to
obtain deposits and purchase funds at favorable rates determines its liability
liquidity. Additional sources of liquidity available to the Company include its
capacity to borrow additional funds when necessary through Federal funds lines
with several regional banks and a line of credit with the Federal Home Loan
Bank. Management considers the Company's overall liquidity to be sufficient to
satisfy its depositors' requirements and to meet its customers' credit needs.
At March 31, 1999, cash, interest-bearing deposits in other banks,
federal funds sold, securities available for sale and loans maturing or
repricing in one year were 23.1% of total earning assets. At March 31, 1999
approximately $135.9 million or 28.5% of total loans would mature or reprice
within the next year. The Company utilizes federal funds purchased, FHLB
advances, securities sold under agreements to repurchase and customer repurchase
agreements, in addition to deposits, to fund the growth in its loan portfolio,
and to fund securities purchases, periodically in wholesale leverage
transactions.
14
YEAR 2000
The Company's Year 2000 effort is proceeding in accordance with a written
plan, which has been adopted by the Company's Board of Directors. Progress
reports are provided to the Board on a regular basis. The Company has completed
its assessment of the critical computer systems. Testing is completed for all
critical systems except for one interface test which will be completed by June
30, 1999. All material business partners have been contacted: issues discussed
and surveys of their contingency plans reviewed. The vendors/partners have
provided Y2K compliance statements.
The Company's contingency planning phase is in its final review and the
modification phase to be completed in early June. Contingency plan alternatives
include using a backup processing site, preparing transactions manually, and
making applicable system modifications. All contingency plans have been reviewed
and are being modified for the second time. This phase should be completed by
June 30, 1999. At this time, Management believes the most likely worst case
scenario concerning Year 2000 will not have a material effect on the bank's
results of operations, liqudity, and financial condition for the year ending
December 31, 2000. However, the Bank is dependent on numerous outside vendors
whom it can not control. Additionally, no entity can address the virtually
unlimited possible circumstances related to Year 2000 issues, including risks
outside the Banks market place. These plans will continue to be reviewed to meet
new circumstances as they arise.
The Company is now working on customer awareness programs throughout the
markets that it serves. These are designed to make the customers aware of our
efforts to prepare for all potential situations and to give them our assurances
that the Company is prepared. In addition, a cash contingency model is being
developed to alert the Company to unusual changes in the cash demand patterns.
All processes should be completed by June 30th, while the cash analysis and
education of the community will be an ongoing function.
The Company has incurred internal staff costs as well as consulting and
other expenses related to the infrastructure and facilities enhancements
necessary to prepare its systems for the Year 2000. These cost , unless for
depreciable assets , were expensed as incurred. Approximately $72,000 of
expenses have been incurred as of March 31, 1999 and all costs have been
expensed as incurred.
15
The following table presents the Company's interest sensitivity position at
March 31, 1999. This one-day position, which is continually changing, is not
necessarily indicative of the Company's position at any other time.
Interest Sensitivity Analysis
March 31, 1999
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
(In thousands)
Earning Assets:
Loans, net of unearned income (3) . . . . $100,658 $ 35,254 $ 181,922 $159,074 $476,908
Investment securities . . . . . . . . . . - 1,005 973 - 1,978
Securities available for sale . . . . . . 5,414 7,386 101,663 90,427 204,890
Federal funds sold . . . . . . . . . . . 9,916 - - - 9,916
Other short-term investments . . . . . . 549 - - - 549
Total earning assets . . . . . . . . . . 116,537 43,645 284,558 249,501 694,241
---------- ------------- ------------- ------------ -----------
Interest-Bearing Liabilities:
Interest checking (2) . . . . . . . . . . $ - $ - $ 85,914 $ - $85,914
Regular savings (2) . . . . . . . . . . . - 4,053 54,976 - 59,029
Money market savings . . . . . . . . . . 63,439 - - - 63,439
.
Certificates of deposit:
$100,000 and over . . . . . . . . 34,568 46,341 14,778 - 95,687
Under $100,000 . . . . . . . . . 26,493 121,007 86,351 269 234,120
Short-term borrowings . . . . . . . . . . 17,149 120 - - 17,269
Long-term borrowings . . . . . . . . . . 5,000 150 37,070 5,000 47,220
Total interest-bearing
liabilities . . . . . . . . . . . 146,649 171,671 279,089 5,269 602,678
---------- ----------- ---------- ------- ---------
Period gap . . . . . . . . . . . . . . . . (30,113) (128,026) 5,471 244,238
Cumulative gap . . . . . . . . . . . . . . $(30,113) $(158,139) $(152,668) $91,570 $91,570
========== =========== =========== ========= ========
Ratio of cumulative gap to
total earning assets . . . . . . . -4.34% -22.78% -21.99% 13.19%
========= =========== =========== ========= ========
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) The Company has found that interest-bearing checking deposits and regular
savings deposits are not sensitive to changes in related market rates and
therefore, it has placed them predominantly in the "1-5 Years" column.
(3) Excludes non-accrual loans
15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EARNINGS SIMULATION ANALYSIS
Management uses simulation analysis to measure the sensitivity of net
interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is
subject to the accuracy of the assumptions that underlie the process, but it
provides a better analysis of the sensitivity of earnings to changes in interest
rates than other analysis such as the static gap analysis.
Assumptions used in the model, including loan and deposit growth rates,
are derived from seasonal trends and management's outlook, as are the
assumptions used to project yields and rates for new loans and deposits. All
maturities, calls and prepayments in the securities portfolio are assumed to be
reinvested in like instruments. Mortgage loans and mortgage backed securities
prepayment assumptions are based on industry estimates of prepayment speeds for
portfolios with similar coupon ranges and seasoning. Different interest rate
scenarios and yield curves are used to measure the sensitivity of earnings to
changing interest rates. Interest rates on different asset and liability
accounts move differently when the prime rate changes and are accounted for in
the different rate scenarios.
The following table represents the interest rate sensitivity on net
interest income for the Company using different rate scenarios as of March 31,
1999:
% CHANGE IN
CHANGE IN PRIME RATE NET INTEREST INCOME
+200 basis points +2.56%
Flat 0
-200 basis points -1.41%
MARKET VALUE SIMULATION
Market value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Market values
are calculated based on discounted cash flow analysis. The net market value is
the market value of all assets minus the market value of all liabilities. The
change in net market value over different rate environments is an indication of
the longer term repricing risk in the balance sheet. The same assumptions are
used in the market value simulation as in the earnings simulation.
The following chart reflects the change in net market value over different
rate environments as of March 31, 1999:
CHANGE IN NET MARKET VALUE
CHANGE IN PRIME RATE (DOLLARS IN THOUSANDS)
-------------------- ----------------------
+200 basis points $ -18,704
+100 basis points -8,263
Flat 376
-100 basis points 12,562
-200 basis points 17,382
17
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) No Form 8-K was required to be filed during the most recently
completed quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION BANKSHARES CORPORATION
(Registrant)
May 17, 1999 s/ G. William Beale
---------------- ------------------------------------
(Date) G. WILLIAM BEALE,
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
May 17, 1999 s/ D. Anthony Peay
----------------- ------------------------------------
(Date) D. ANTHONY PEAY,
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
18
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
FORM 10-Q /MARCH 31, 1999
EXHIBIT
NO. DESCRIPTION
- ------- ------------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession - NOT APPLICABLE
4 Instruments defining the rights of security holders,
including indentures NOT APPLICABLE
10 Material contracts NOT APPLICABLE
11 Statement re: computation of per share earnings NOT APPLICABLE
15 Letter re: unaudited interim financial
information NOT APPLICABLE
18 Letter re: change in accounting principles NOT APPLICABLE
19 Previously unfiled documents NOT APPLICABLE
20 Report furnished to security holders NOT APPLICABLE
22 Published report re: matters submitted to
vote of security holders NONE
23 Consents of experts and counsel NOT APPLICABLE
24 Power of Attorney NOT APPLICABLE
99 Additional Exhibits NONE