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 September 30, 1997 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, $4 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 September 30, 1997, Union Bankshares Corporation had 3,571,492 shares of Common Stock outstanding. UNION BANKSHARES CORPORATION FORM 10-Q September 30, 1997 INDEX PART 1 - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996.......................................... 1 Consolidated Statements of Income for the three- and nine-months ended September 30, 1997 and 1996....... 2 Consolidated Statements of Cash Flows for the three- and nine-months ended September 30, 1997 and 1996....... 3 Notes to Consolidated Financial Statements.......................... 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............5-13 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K................................ 14 Signatures............................................................... 14 Index to Exhibits........................................................ 15 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements UNION BANKSHARES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (Dollars in thousands)
September 30, December 31, September 30, ASSETS 1997 1996 1996 Cash and cash equivalents: Cash and due from banks $ 21,749 $ 19,333 $ 17,876 Interest-bearing deposits in other banks 808 1,016 1,264 Federal funds sold 4,004 2,104 5,734 ------------ -------------- ------------ Total cash and cash equivalents 26,561 22,453 24,874 ------------ -------------- ------------ Securities available for sale, at fair value 138,047 129,268 126,901 Investments securities, fair value of $10,376 and $11,689 and $12,176, respectively 10,150 11,423 11,938 ------------ -------------- ------------ Total securities 148,197 140,691 138,839 ------------ -------------- ------------ Loans, net of unearned income 384,790 352,277 351,376 Less allowance for loan losses (note 2) 4,438 4,388 4,309 ------------ -------------- ------------ Net loans 380,352 347,889 347,067 ------------ -------------- ------------ Bank premises and equpiment, net 16,470 14,221 13,881 Other real estate owned 2,535 4,056 4,059 Other assets 8,859 11,583 11,725 ------------ -------------- ------------ Total assets $ 582,974 $ 540,893 $ 540,445 ============ ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing demand deposits $ 58,410 $ 55,005 $ 62,971 Interest-bearing deposits: Savings accounts 46,900 54,364 58,723 NOW accounts 60,590 49,834 43,387 Money market accounts 49,199 54,431 53,519 Time deposits of $100,000 and over 58,882 51,812 43,244 Other time deposits 194,636 174,161 177,558 ------------ -------------- ------------ Total interest-bearing deposits 410,207 384,602 376,431 ------------ -------------- ------------ Total deposits 468,617 439,607 439,402 ------------ -------------- ------------ Short-term borrowings 21,279 27,403 28,850 Long-term borrowings 23,745 11,125 11,125 Other liabilities 4,995 4,192 3,886 ------------ -------------- ------------ Total liabilities 518,636 482,327 483,263 ------------ -------------- ------------ Stockholders' equity: Common stock, $4 par value. Authorized 12,000,000 shares; issued and outstanding, 3,571,475 and 3,566,915 shares, respectively 14,286 14,267 14,251 Surplus 248 160 84 Retained earnings 48,461 43,863 43,414 Unrealized gains on securities available for sale, net of taxes 1,343 276 (567) ------------ -------------- ------------ Total stockholders' equity 64,338 58,566 57,182 ------------ -------------- ------------ Commitments and contingencies Total liabilities and stockholders' equity $ 582,974 $ 540,893 $ 540,445 ============ ============== ============
See accompanying notes to consolidated financial statements. UNION BANKSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) (Dollars in thousands)
Quarter Ended Nine Months Ended September 30, September 30, ----------------- ----------------- 1997 1996 1997 1996 ---- ---- ---- ----- Interest income: Interest and fees on loans $ 9,037 $ 8,216 $ 25,561 $ 24,046 Interest on securities: U.S. Government agencies and corpor 674 911 2,501 2,796 States and political subdivisions 972 896 2,921 2,707 Other securities 618 342 1,177 631 Interest on Federal funds sold 118 95 222 239 Interest on interest-bearing deposits 8 23 33 27 -------- --------- -------- -------- Total interest income 11,427 10,456 32,415 30,446 -------- --------- -------- -------- Interest expense: Interest on deposits 4,736 4,395 13,637 13,047 Interest on other borrowings 561 583 1,678 1,450 -------- --------- -------- -------- Total interest expense 5,297 4,978 15,315 14,497 -------- --------- -------- -------- Net interest income 6,130 5,478 17,100 15,949 Provision for loan losses (note 2) 310 242 730 563 -------- --------- -------- -------- Net interest income after provision for loan losses 5,820 5,236 16,370 15,386 -------- --------- -------- -------- Other income: Service fees 782 628 2,184 1,904 Gains (losses) on sale of securities (10) 6 3 (97) Gains (losses) on sales of other real estate owned and bank premises, net 16 4 424 68 Other operating income 171 113 539 649 -------- --------- -------- -------- Total other income 959 751 3,150 2,524 -------- --------- -------- -------- Other expenses: Salaries and benefits 2,229 1,919 6,310 5,579 Occupancy expenses 264 197 800 637 Furniture and equipment expenses 293 327 1,039 788 FDIC assessments 26 3 53 5 Other operating expenses 1,409 1,250 3,807 3,441 -------- --------- -------- -------- Total other expenses 4,221 3,696 12,009 10,450 -------- --------- -------- -------- Income before income taxes 2,558 2,291 7,511 7,460 Income tax expense 615 547 1,629 1,663 -------- --------- -------- -------- Net income $ 1,943 $ 1,744 $ 5,882 $ 5,797 -------- --------- -------- -------- -------- --------- -------- -------- Net income per share of common stock $ 0.54 $ 0.49 $ 1.65 $ 1.63 -------- --------- -------- -------- -------- --------- -------- -------- Cash dividends per share of common stock $ - $ - $ 0.36 $ 0.30 -------- --------- -------- -------- -------- --------- -------- --------
See accompanying notes to consolidated financial statements. UNION BANKSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 (Dollars in thousands)
1997 1996 ---- ---- Operating activities: Net income $ 5,882 $ 5,797 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation of bank premises and equipment 1,093 645 Provision for loan losses 730 563 (Gains) losses on sales of securities available for sale (3) 66 (Gains) losses on sale of other real estate owned (423) 1 Other, net 1,749 232 ------------ ------------ Net cash and cash equivalents provided by operating activities 9,028 7,304 ------------ ------------ Investing activities: Net (increase) decrease in securities (7,628) 2,760 Net (increase) decrease in loans (33,668) (24,558) Acquisition of bank premises and equipment (3,342) (3,740) Proceeds from sales of other real estate owned 5,389 106 ------------ ------------ Net cash and cash equivalents used in investing activities (39,249) (25,432) ------------ ------------ Financing activities: Net increase (decrease) in non-interest-bearing deposits 3,405 13,066 Net increase (decrease) in interest-bearing deposits 25,605 10,581 Net increase (decrease) in short-term borrowings (6,124) (2,258) Purchase of common stock (39) - Cash dividends paid (1,138) (858) Proceeds from long-term borrowings 12,800 - Repayment of long-term borrowings (180) (150) ------------ ------------ Net cash and cash equivalents provided by financing activities 34,329 20,381 ------------ ------------ Increase (decrease) in cash and cash equivalents 4,108 2,253 Cash and cash equivalents at beginning of period 22,453 15,623 ------------ ------------ Cash and cash equivalents at end of period $ 26,561 $ 17,876 ============ ============
See accompanying notes to consolidated financial statements. UNION BANKSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 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- and nine-month periods ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report to Stockholders. Certain previously reported amounts have been reclassified to conform to current period presentation. 2. ALLOWANCE FOR LOAN LOSSES The following summarizes activity in the allowance for loan losses for the nine months ended September 30, (in thousands): 1997 1996 ------- -------- Balance, January 1 $ 4,388 $4,060 Provisions charged to operations 730 563 Recoveries credited to allowance 150 363 Loans charged off (829) (677) ------- -------- Balance, September 30 $ 4,439 $ 4,309 ======= ======== 3. EARNINGS PER SHARE Earnings per share outstanding has been computed by dividing net income by the weighted average number of shares outstanding for the period. Weighted average shares used for the computation were 3,571,492 and 3,567,049 for the three months ended September 30, 1997 and 1996 and 3,568,322 and 3,563,953 for the nine months ended September 30, 1997 and 1996. 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, Union Investment Services, Inc., and Union Mortgage Company, LLC. The three subsidiary banks, Unon Bank & Trust Company, Northern Neck State Bank and King George State Bank, 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. Union Mortgage Company, LLC provides a wide array of mortgage products to customers in the Company's primary trade area. The Company's primary trade area stretches from Fredericksburg, south to Hanover County and east to the Northern Neck area of Virginia. The Corporate Headquarters are located in Bowling Green, Virginia. Through its banking subsidiaries, the Company operates 19 branches in its primary trade area. On October 21, 1997, the Company announced it had entered into an agreement to purchase seven Signet Bank branches in the Northern Neck. As a condition of regulatory approval the Company will have to divest of two branches due to market concentration issues. It is anticipated that this transaction will be completed on or before February 13, 1998. Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union Bankshares Corporation and subsidiaries (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 third quarter of 1997 was $1.9 million, up from $1.7 million for the same period in 1996. Earnings per share amounted to $.54 in the third quarter of 1997 as compared to $.49 in the third quarter of 1996. The Company's annualized return on assets for the third quarter of 1997 was 1.34% as compared to 1.31% a year ago. The Company's annualized return on equity totaled 12.19% and 12.39% for the three months ended September 30, 1997 and 1996, respectively. Net income for the first nine months of 1997 totaled $5.9 million, up 1.5% from $5.8 million for the same period in 1996. Earnings per share totaled $1.65 in the first nine months of 1997 as compared to $1.63 in 1996. The Company's annualized return on assets for the first nine months of 1997 was 1.40% as compared to 1.47% a year ago. The Company's annualized return on equity totaled 12.82% and 13.96% for the nine months ended September 30, 1997 and 1996, respectively. Net Interest Income Net interest income on a tax-equivalent basis for the third quarter of 1997 increased by 14.1% to $6.8 million from $5.9 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. Average earning assets during the third quarter of 1997 increased by $39.6 million to $534.5 million from the third quarter of 1996, while average interest-bearing liabilities grew by $31.1 million to $452.7 million over this same period. The Company's yield on average earning assets was 8.97%, up from 8.74% a year ago, while its cost of average interest-bearing liabilities decreased slightly from 4.68 % to 4.65%. UNION BANKSHARES CORPORATION Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
Three Months Ended September 30, 1997 1996 ----------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Balance Expense Rate Balance Expense ----------------------------------------------------------------------- (Dollars in thousands) Assets: Securities: Taxable . . . . . . . . . . . . . . . . . . . . . $ 81,138 $ 1,333 6.52% $ 71,006 $ 1,157 Tax-exempt(1) . . . . . . . . . . . . . . . . 65,969 1,330 8.00% 66,381 1,415 --------------------------- ----------------------- Total securities . . . . . . . . . . . . . 147,107 2,663 7.18% 137,387 2,572 Loans, net. . . . . . . . . . . . . . . . . . . . . . 376,543 9,037 9.52% 348,841 8,210 Federal funds sold . . . . . . . . . . . . . . . 10,316 118 4.54% 7,482 103 Interest-bearing deposits - - - - in other banks . . . . . . . . . . . . . . . . 508 8 6.25% 1,187 15 --------------------------- ----------------------- Total earning assets . . . . . . . . 534,474 $ 11,826 8.78% 494,897 $ 10,900 ------------- -------------- Allowance for loan losses . . . . . . . . . . (4,417) (4,387) Total non-earning assets . . . . . . . . . 43,843 44,812 -------------- --------- Total assets . . . . . . . . . . . . . . . . . . . $ 573,900 $ 535,322 ============== ========== Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking . . . . . . . . . . . . . . . . . . . . $ 60,012 $ 405 2.68% $ 48,418 $ 302 Regular savings . . . . . . . . . . . . . . . 46,494 358 3.05% 56,738 511 Money market savings . . . . . . . . . . 49,285 425 3.42% 53,857 439 Certificates of deposit: $100,000 and over . . . . . . . . . . . . . . 57,875 780 5.35% 50,893 652 Under $100,000 . . . . . . . . . . . . . . . 193,740 2,767 5.67% 171,707 2,483 --------------------------- ----------------------- Total interest-bearing deposits . . . . . . . . . . . . . . . . 407,406 4,735 4.61% 381,613 4,387 Other borrowings . . . . . . . . . . . . . . . . . 45,328 561 4.91% 39,986 581 --------------------------- ----------------------- Total interest-bearing liabilities . . . . . . . . . . . . . . . 452,734 5,296 4.64% 421,599 4,968 ------------- -------------- Non-interest bearing liabilities: Demand deposits . . . . . . . . . . . . . . 56,141 54,732 Other liabilities . . . . . . . . . . . . . . . . 4,719 4,391 -------------- --------------- Total liabilities . . . . . . . . . . . . . 513,594 480,722 Stockholders' equity . . . . . . . . . . . . . . 60,306 54,600 -------------- --------------- Total liabilities and stockholders' equity . . . . . . . . . . . $ 573,900 $ 535,322 ============== =============== Net interest income . . . . . . . . . . . . . . $ 6,530 $ 5,932 ============= ============== Interest rate spread . . . . . . . . . . . . . . . 4.14% Interest expense as a percent of average earning assets . . . . . . . . . 3.93% Net interest margin 4.85% Three Months Ended September 30, 1995 ----------------------------------------------- Interest Yield/ Average Income/ Yield/ Rate Balance Expense Rate ----------------------------------------------- Assets: Securities: Taxable . . . . . . . . . . . . . . . 6.46% $ 74,985 $ 1,198 6.34% Tax-exempt(1) . . . . . . . . . . . . 8.46% 62,114 1,234 7.88% ------ ----------------------- Total securities . . . . . . . 7.43% 137,099 2,432 7.04% Loans, net. . . . . . . . . . . . . . . . . 9.34% 315,593 7,595 9.55% Federal funds sold . . . . . . . . . . . . 5.46% 5,347 97 7.20% Interest-bearing deposits - in other banks . . . . . . . . . . . 5.01% 274 8 11.58% --------------------------- Total earning assets . . . . . 8.74% 458,313 $ 10,132 8.77% -------------- Allowance for loan losses . . . . . . . . . (4,454) Total non-earning assets . . . . . . . . . 35,935 ----------- Total assets . . . . . . . . . . . . . . . $ 489,794 =========== Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking . . . . . . . . . . . . . . 2.47% $ 43,179 $ 288 2.65% Regular savings . . . . . . . . . . . 3.57% 56,304 525 3.70% Money market savings . . . . . . . . 3.23% 57,163 482 3.35% Certificates of deposit: $100,000 and over . . . . . . . . . . 5.08% 42,000 608 5.74% Under $100,000 . . . . . . . . . . . 5.74% 161,978 2,346 5.75% ----------------------------- Total interest-bearing deposits . . . . . . . . . 4.56% 360,624 4,249 4.67% Other borrowings . . . . . . . . . . . . . 5.76% 27,446 386 5.58% ----------------------------- Total interest-bearing liabilities . . . . . . . . 4.68% 388,070 4,635 4.74% -------------- Non-interest bearing liabilities: Demand deposits . . . . . . . . . . . 48,179 Other liabilities . . . . . . . . . . 4,094 ---------------- Total liabilities . . . . . . . 440,343 Stockholders' equity . . . . . . . . . . . 49,451 ---------------- Total liabilities and stockholders' equity . . . . . . . . $ 489,794 ================ Net interest income . . . . . . . . . . . . $ 5,497 ============== Interest rate spread . . . . . . . . . . . 4.06% 4.03% Interest expense as a percent of average earning assets . . . . . . 3.98% 4.01% Net interest margin 4.76% 4.76%
(1) Income and yields are reported on a taxable equivalent basis. COMBINED The following table presents the Company's interest sensitivity position at September 30, 1997. This one-day position, which is continually changing, is not necessarily indicative of the Company's position at any other time.
Interest Sensitivity Analysis September 30, 1997 -------------------------------------------------------------------------------- Within 90-365 1-5 Over 90 Days Days Years 5 Years Total ----------- --------------- --------------- --------------- ---------------- (In thousands) Earning Assets: Loans, net of unearned income (3) . . . . $ 74,539 $ 48,639 $ 138,051 $ 121,237 $ 382,466 Investment securities . . . . . . . . . . 315 578 8,015 1,242 10,150 Securities available for sale. . . . . . . 6,532 11,584 35,045 84,886 138,047 Federal funds sold . . . . . . . . . . . . 4,004 - - - 4,004 Other short-term investments . . . . . . . 808 - - - 808 ----------- --------------- --------------- --------------- ---------------- Total earning assets . . . . . . . . . . . 86,198 60,801 181,111 207,365 535,475 ----------- --------------- --------------- --------------- ---------------- Interest-Bearing Liabilities: Interest checking (2) . . . . . . . . . . - 506 60,084 - 60,590 Regular savings (2) . . . . . . . . . . . 4,815 1,934 40,151 - 46,900 Money market savings . . . . . . . . . . . 48,317 192 690 - 49,199 Certificates of deposit: $100,000 and over . . . . . . . . . . . 15,765 27,906 15,211 - 58,882 Under $100,000 . . . . . . . . . . . . 39,727 102,605 52,304 - 194,636 Short-term borrowings. . . . . . . . . . . 16,679 4,600 - - 21,279 Long-term borrowings . . . . . . . . . . . 30 120 16,455 7,140 23,745 ----------- --------------- --------------- --------------- ---------------- Total interest-bearing liabilities . . . . . . . . . . . . . . 125,333 137,863 184,895 7,140 455,231 -------------------------------------------------------------------------------- Period gap . . . . . . . . . . . . . . . .. (39,135) (77,062) (3,784) 200,225 Cumulative gap . . . . . . . . . . . . . . $ (39,135) $ (116,197) $ (119,981) $ 80,244 $ 80,244 =========== =============== =============== =============== ================ Ratio of cumulative gap to total earning assets . . . . . . . . . -7.31% -21.70% -22.41% 14.99% =========== =============== =============== ===============
(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 INTERNAL NOTE: Due to differences in the grouping of g/l accounts, the initial GAP table above contained immaterial differences compared to the balance sheet; differences have been adjusted to the 1-5 year category. Provision for Possible Loan Losses The provision for possible loan losses totaled $310,000 for the third quarter of 1997, up from $242,000 for the third quarter of 1996. The provision for the first nine months of 1997 totaled $730,000, up from $563,000 a year ago. These provisions reflect increased charge-offs, principally in the consumer loan portfolio and management's assessment of the credit risk in the portfolio. (See Asset Quality) Non-Interest Income Non-interest income for the third quarter of 1997 totaled $959,000 up from $751,000 a year ago. Over the first nine months of 1997 non-interest income totaled $3.2 million up from $2.5 million a year ago. The nine-month total reflects $424,000 in gains on sales of real estate owned including $299,000 in the second quarter. The second quarter of 1996 included approximately $261,000 in proceeds from life insurance. 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 discount brokerage services. Non-Interest Expense Non-interest expense increased by 14.2% for the third quarter of 1997, totaling $4.2 million as compared to $3.7 million for the quarter ended September 30, 1996. Personnel costs comprised much of this change, increasing approximately 16.2% over the third quarter of 1996. Non-interest expense for the first nine months of 1997 increased by 14.9% over 1996 levels for the same period. Much of these costs are attributable to infrastructure 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. Over the period from November 1996 to July 1997 the Company consolidated its data processing operations for all subsidiaries to a single in-house system. The personnel, equipment and other costs associated with these conversions are reflected in 1997 results. Management expects to begin to realize increased operating efficiencies through improved access to information and economies of scale beginning in early 1998. The Company continues to stress budgetary expense controls and operates at considerably more efficient levels than its peers, as measured by the efficiency ratio (ratio of non-interest expenses to net interest income plus non-interest income). For the first nine months of 1997 the Company's efficiency ratio was 57.1%. Financial Condition Total assets as of September 30, 1997 were $583.0 million, an increase of 7.8% from $540.9 million at December 31, 1996 and 7.9% from $540.4 million at September 30, 1996. Asset growth continued to be fueled by steady loan demand, as loans totaled $384.8 million at September 30, 1997, an increase of 9.2% from $352.3 million at December 31, 1996, and 9.5% from $351.4 million at September 30, 1996. Stockholders' equity totaled $64.3 million at September 30, 1997 which represents a book value of $ 18.01 per share. Deposit growth, though outpaced by loan growth, remained steady. Total deposits at September 30, 1997 were $468.6 million, up 6.6% from $439.6 million at December 31, 1996 and 6.7% from $439.4 million a year earlier. Other borrowings totaled $45.0 million a 16.9% increase over $38.5 million at the end of 1996 and a 12.6% increase from $40.0 million at September 30, 1996. The Company continues to utilize other borrowings to supplement deposit growth and, periodically, in wholesale leverage transactions. These wholesale leverage transactions are typically executed at spreads of approximately 150 to 200 basis points and, although they may negatively impact the Company's net interest margin, they have 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 credit losses is an estimate of an amount adequate to provide for potential losses in the loan portfolio. The level of credit losses is affected by general economic trends as well as conditions affecting individual borrowers. 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 $4.4 million at September 30, 1997 or 1.15% of total loans, as compared to 1.25% at December 31, 1996 and 1.23% at September 30, 1996. At September 30, 1997, non-performing assets of $5.0 million included foreclosed properties of $1.2 million and a $1.40 million investment in income-producing property. The decrease from December 31, 1996 is principally due to the sale of a single property comprising over 1800 acres in King George County and which had been carried at $1.9 million and continuing sales of homes which comprise the aforementioned income-producing property. September 30, December 31, September 30, 1997 1996 1996 ------------ ------------ ------------- Non-accrual loans $2,324 $ 420 $ 477 Foreclosed properties 1,151 4,056 4,059 Real estate investment 1,384 2,970 - ------------ ------------ ------------- Non-performing assets $4,859 $7,446 $4,536 ------------ ------------ ------------- ------------ ------------ ------------- Allowance for loan losses $4,439 $4,388 $4,309 Allowance as % of total loans 1.15% 1.25% 1.23% 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 September 30, 1997, the Company's ratio of total capital to risk-weighted assets was 16.04% and its ratio of Tier 1 capital to risk-weighted assets was 14.98%. Both ratios exceed the fully phased-in capital requirements. The following summarizes the Company's regulatory capital and related ratios at September 30, 1997: Tier 1 capital $ 62,752 Tier 2 capital $ 4,438 Total risk-based capital $ 67,190 Total risk-weighted assets $418,847 Capital Ratios: Tier 1 risk-based capital ratio 14.98% Total risk-based capital ratio 16.04% Leverage ratio (Tier I capital to average adjusted total assets) 10.94% Equity to assets ratio 10.81% The Company's book value per share at September 30, 1997 was $18.01. Dividends to stockholders are typically declared and paid semi-annually in June and December. On October 27, 1997, a dividend was declared of $0.38 per share payable on December 1, 1997 to shareholders of record as of November 21, 1997. Total dividends for 1997 amount to $0.72. 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 September 30, 1997, cash, interest-bearing deposits in other banks, federal funds sold, securities available for sale and loans maturing or repricing in one year were 53.7% of total earning assets. At September 30, 1997 approximately $123.2 million or 32.0% 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. 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) November 14, 1997 /s/ G. William Beale --------------------------- --------------------------- (Date) G. William Beale, President, Chief Executive Officer and Director November 14, 1997 /s/ D. Anthony Peay - --------------------------- --------------------------- (Date) D. Anthony Peay, Vice President and Chief Financial Officer UNION BANKSHARES CORPORATION AND SUBSIDIARIES Index to Exhibits Form 10-Q / September 30, 1997 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