UNION BANKSHARES CORPORATION A union of Community Banks [PHOTO] [PHOTO] [PHOTO] [PHOTO] ANNUAL REPORT 1997 UNION BANK & TRUST COMPANY ASHLAND HANOVER COMMONS U.S. Route 1 & Ashcake Road 9534 Chamberlayne Road Ashland, Virginia 23005 Mechanicsville, Virginia 23111 (804) 798-4488 (804) 730-1700 KENMORE AVENUE ATLEE 700 Kenmore Avenue 10469 Atlee Station Road Fredericksburg, Virginia 22401 Ashland, Virginia 23005 (540) 371-0108 (804) 550-2300 LADYSMITH U.S. Route 1 BOWLING GREEN Ladysmith, Virginia 22501 211 North Main Street (804) 448-3100 Bowling Green, Virginia 22427 LEAVELLS (804) 633-5031 10415 Courthouse Road Spotsylvania, Virginia 22553 BROCK ROAD (540) 898-2700 Brock Road and Route 3 PORT ROYAL Fredericksburg, Virginia 22553 U.S. Route 301 (540) 972-2958 Port Royal, Virginia 22535 (804) 742-5546 CHANCELLOR MANQUIN 4210 Plank Road U.S. Route 360 Fredericksburg, Virginia 22407 Manquin, Virginia 23106 (540)786-2265 (804) 769-3031 MASSAPONAX FALMOUTH Massaponax Church Road & Cambridge & Layhill Road U.S. Route 1 Falmouth, Virginia 22405 Spotsylvania, Virginia 22407 (540) 374-1300 (540) 891-0300 FOUR MILE FORK 4540 Lafayette Boulevard Fredericksburg, Virginia 22408 (540) 898-5100 NORTHERN NECKS STATE BANK BURGESS* WAL*MART IN TAPPAHANNOCK 15043 Northumberland Highway 1660 Tappahannock Blvd. Burgess, VA 22432 Tappahannock, VA 22560 (804) 453-4181 (804) 443-9433 KILMARNOCK* WARSAW - MAIN OFFICE 284 North Main Street 5839 Richmond Road Kilmarnock, VA 22842 Warsaw, VA 22572 (804) 435-2681 (804) 333-4066 MONTROSS WARSAW - TIME SQUARE Rt. 3, Kings Hwy. 4256 Richmond Road Montross, VA 22520 Warsaw, VA 22572 (804) 493-9301 (804) 333-3019 REEDVILLE* WHITE STONE* 876 Main Street 485 Chesapeake Drive Reedville, VA 22539 White Stone, VA 22578 (804) 453-4151 (804) 435-1626 TAPPAHANNOCK U.S. Rt. 17 & Earl Street Tappahannock, VA 22560 (804) 443-4361 KING GEORGE UNION INVESTMENT STATE BANK SERVICES, INC. COLONIAL BEACH* 111 Davis Court 840 McKinney Blvd. Bowling Green, VA 22427 Colonial Beach,VA 22443 (804) 633-5031 (804) 224-0101 KING GEORGE UNION 10045 Kings Highway MORTGAGE COMPANY King George, VA 22485 211 N. Main Street (540) 775-9300 Bowling Green, VA 22427 (804) 633-5031 *Effective 2/14/98 - ------------------------------------------------------------------------------- [UNION BANK & TRUST COMPANY LOGO] [NORTHERN NECK STATE BANK LOGO] [UNION MORTGAGE COMPANY LOGO] [UNION INVESTMENT SERVICES, INC. LOGO] [KING GEORGE STATE BANK LOGO]
QUARTERLY EARNING SUMMARY 1997 1996 (in thousands, except per share data) FOURTH THIRD SECOND FIRST TOTAL FOURTH THIRD SECOND FIRST TOTAL ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Interest income $ 11,348 $ 11,427 $ 10,578 $ 10,410 $ 43,763 $10,550 $10,456 $10,018 $ 9,972 $40,996 Interest expense 5,425 5,297 5,084 4,934 20,740 4,833 4,978 4,791 4,728 19,330 ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Net interest income 5,923 6,130 5,494 5,476 23,023 5,717 5,478 5,227 5,244 21,666 Provision for loan losses 452 310 220 200 1,182 332 242 190 131 895 ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Net interest income after provision for loan losses 5,471 5,820 5,274 5,276 21,841 5,385 5,236 5,037 5,113 20,771 Other income 1,228 959 1,186 1,005 4,378 935 751 1,170 603 3,459 Other expenses 4,131 4,221 4,014 3,774 16,140 4,053 3,696 3,414 3,339 14,502 ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Income before income taxes 2,568 2,558 2,446 2,507 10,079 2,267 2,291 2,793 2,377 9,728 Income tax expense 567 615 444 570 2,196 609 547 586 530 2,272 ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Net income $ 2,001 $ 1,943 $ 2,002 $ 1,937 $ 7,883 $ 1,658 $ 1,744 $ 2,207 $ 1,847 $ 7,456 ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Net income per share - $ 0.56 $ 0.55 $ 0.56 $ 0.54 $ 2.21 $ 0.46 $ 0.49 $ 0.62 $ 0.52 $ 2.09 basic ------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
[PHOTO] UNION BANKSHARES CORPORATION BUSINESS PROFILE Union Bankshares Corporation is a multi-bank holding company committed to the delivery of financial services through affiliated independent community banks and other financial services companies. The Company serves the Central and Northern Neck regions of Virginia through its three banking subsidiaries, Union Bank & Trust Company, Northern Neck State Bank and King George State Bank and its non-bank companies, Union Investment Services, Inc. and Union Mortgage Company, LLC. The banking subsidiaries are state-chartered, Federal Reserve member banks whose deposits are insured by the Federal Deposit Insurance Corporation. Each is a full-service commercial bank offering commercial and consumer deposit accounts and loans, credit cards, automated teller machines and many other services to its customers. Through its 14 locations, Union Bank & Trust Company serves customers in a primary service area which stretches from its headquarters in Bowling Green along the I-95 corridor from Fredericksburg to central Hanover County and east to King William County. Northern Neck State Bank serves the Northern Neck and Middle Peninsula regions through five locations in Warsaw, Montross and Tappahannock. King George State Bank located in King George County enhances the Company's market presence in both Fredericksburg and Northern Neck service areas. In addition, Union Bankshares Corporation acquired five additional branches from Signet Bank in February 1998 with four joining the Northern Neck State Bank subsidiary (Kilmarnock, White Stone, Burgess and Reedville) and one at Colonial Beach joining King George State Bank. Each of these banks has a strong tradition of financial performance and customer service to their communities. Union Investment Services is a full-service brokerage firm providing a wide variety of investment choices to investors throughout the Company's service area. Union Mortgage Company offers a full array of mortgage products to residents of our markets. As of December 31, 1997, Union Bankshares Corporation and subsidiaries had 250 employees, 1,976 shareholders of record, and assets totaling $595 million. MISSION STATEMENT [PHOTO] "The primary mission of Union Bankshares Corporation and its [CAPTION] subsidiaries is to enhance shareholder value by remaining a strong, independent financial services organization, G. WILLIAM BEALE providing exemplary customer service, a rewarding work environment for its employees and a growing return for its shareholders." [PHOTO] UNION BANKSHARES CORPORATION UNION BANKSHARES CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- RESULTS OF OPERATIONS (dollars in thousands, except per share amounts) Interest income $ 43,763 $ 40,996 $ 38,083 $ 31,927 $ 30,397 Interest expense 20,740 19,330 17,855 13,089 13,009 ------------ ----------- ----------- ------------ ----------- Net interest income 23,023 21,666 20,228 18,838 17,388 Provision for loan losses 1,182 895 977 1,102 1,571 ------------ ----------- ----------- ------------ ----------- Net interest income after provision for loan losses 21,841 20,771 19,251 17,736 15,817 Other income 4,378 3,459 2,618 2,949 2,061 Other expenses 16,140 14,502 13,037 12,073 10,834 ------------ ----------- ----------- ------------ ----------- Income before income taxes 10,079 9,728 8,832 8,612 7,044 Income tax expense 2,196 2,272 2,079 1,899 1,529 ------------ ----------- ----------- ------------ ----------- Net income $ 7,883 $ 7,456 $ 6,753 $ 6,713 $ 5,515 ============ =========== =========== ============ =========== KEY PERFORMANCE RATIOS Return on average assets (ROA) 1.40% 1.41% 1.41% 1.55% 1.35% Return on average equity (ROE) 12.74% 13.79% 13.56% 15.03% 13.51% Efficiency ratio 56.24% 54.07% 53.50% 53.20% 51.95% PER SHARE DATA Net income per share - Basic $ 2.21 $ 2.09 $ 1.91 $ 1.90 $ 1.56 Net income per share - Diluted 2.20 2.08 1.90 1.89 1.55 Cash dividends declared 0.74 0.64 0.56 0.51 0.45 Book value at year-end 18.32 16.42 15.07 13.37 12.13 FINANCIAL CONDITION Total assets $ 595,481 $ 540,893 $ 505,374 $ 462,880 $ 424,582 Total deposits 472,143 439,607 415,755 390,232 367,933 Total loans, net of unearned income 395,338 352,277 327,132 295,389 258,063 Stockholders' equity 65,508 58,566 53,683 47,232 42,814 ASSET QUALITY Allowance for loan losses $ 4,565 $ 4,388 $ 4,060 $ 4,110 $ 3,822 Allowance as % of total loans 1.15% 1.25% 1.24% 1.39% 1.48% OTHER DATA Market value per share at year-end $ 43.88 $ 25.00 $ 26.00 $ 24.00 $ 23.25 Price to earnings ratio 19.9 12.0 13.6 12.6 14.9 Price to book value ratio 240% 152% 173% 180% 192% Dividend payout ratio 33.48% 30.62% 28.80% 26.84% 28.84% Weighted average shares outstanding 3,569,476 3,564,417 3,543,033 3,533,035 3,530,630
Letter from Management - ---------------------- DEAR SHAREHOLDER, What an interesting year in Virginia banking! Three of the top five Virginia-based banks were acquired by banks from North Carolina. A number of the larger, Virginia-based thrifts were acquired by banks from West Virginia and North Carolina. Enormous amounts of newsprint have been devoted to the changing landscape of Virginia banking and what it means to the future of Virginia. While change in Virginia's banking industry is upon us, Virginia-based banks are not a dying breed. We say that community banking in the Commonwealth of Virginia is alive, is strong, and is prepared to step into the void that has been created by the sale of the large Virginia-based banks. Virginia's consumers and business community need only to look to community banks to meet their needs. There is no doubt that community banks in Virginia, whether independent or affiliated, (such as the community banks within the Union Bankshares family), can meet the financial needs of the citizens of Virginia. We would anticipate that in 1998 community banks will likely benefit from opportunities created by the merger activities of the larger, regional banks. The community banks of Virginia, like Union Bank & Trust, Northern Neck State Bank and King George State Bank, have a long history of providing financial support to the communities they serve. Clearly, we as community bankers are deeply committed to the businesses and individuals within our communities - as they are our life blood. There will be no drop in the financial services options available to meet the needs of individuals and the small and medium-sized businesses, or to provide leadership and funding to the many civic and charitable organizations throughout our market. Within the pages of this letter, you will see pictures and quotes from individuals and business owners who are not only stockholders of Union Bankshares Corporation, but customers of our member banks. These individuals take pride in being an owner of "their" community bank. They enjoy the friendly, service-oriented atmosphere of their community bank while understanding the investment can build their personal nest egg and support economic growth in their community. [PHOTO] [PHOTO CAPTION] JOHN C. NEAL AND HOMER L. HITE (SEATED). D. ANTHONY PEAY, G. WILLIAM BEALE AND E. PEYTON MOTLEY (STANDING). [PHOTO] [PHOTO CAPTION] "COMMUNITY BANKS PLAY AN IMPORTANT ROLE IN OUR COMMUNITY. I APPRECIATE NORTHERN NECK STATE BANK'S LEVEL OF COMMITMENT" Richard W. Gouldin, Jr. Vice President Potomac Supply Corporation We are fortunate to count a large number of our nearly 3,000 total shareholders as customers of our member banks. We are privileged to have the individuals featured in these pages serve as representatives of that large number of shareholder customers. Though an unlikely occurrence, it would be ideal for Union Bankshares Corporation if every customer were a shareholder and every shareholder were a customer. The most significant event of 1997 was our successful negotiation for the purchase of five Signet Bank branches located in the Northern Neck region of Virginia. In mid-February 1998, four of these branches merged into Northern Neck State Bank. The fifth branch, located in Colonial Beach, is now a part of King George State Bank. The acquisition has added approximately $60 million in deposits and $5 million in loans to the organization's balance sheet. This acquisition dramatically increases the presence of Northern Neck State Bank, giving it the largest branch network in the area. Adding this key location to King George State Bank makes it more convenient for customers and increases awareness and market share in the growing community it serves. While the announced Signet branch acquisition was significant, it was not the only major activity in which your company was involved. In the summer of 1997 Union Bankshares Corporation completed its computer conversion, bringing our data processing in-house. Although the conversion process resulted in greater than expected short-term costs, the long-term benefit will be significant. Our fourth quarter 1997 earnings seem to indicate that the corner has been turned and the effects of the conversion are behind us. In spite of the costs and distractions associated with the conversion, 1997 saw a respectable 6% increase in net income. Management is continuing to look for synergy in our operations. Consultants have been engaged to help us reduce item processing costs through enhanced technology, elimination of duplicative work and reduced postage expense. In this same vein, our three subsidiary banks will undergo an extensive review of our procedures and processes in 1998. The goal of this review is to discover new and cost-effective ways in which to do business. [PHOTO] [PHOTO CAPTION] "DEALING WITH PEOPLE I KNOW GIVES ME A COMFORTABLE FEELING ABOUT MY BANKING AND MY INVESTMENT." David Storke President Storke Funeral Home [CHART] in thousands 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------ ASSETS $424,582 $462,880 $505,374 $540,893 $595,481 DEPOSITS 367,933 390,232 415,755 439,607 472,143 LOANS 258,063 295,389 327,132 352,277 395,338 Technology continues to be a major focus of our industry as we seek to increase productivity and control costs. However, for the next 18 months Year 2000 issues will be at the forefront of our technology issues. Our Year 2000 task force is addressing these issues throughout our organization to determine areas which may be vulnerable. Testing of the various systems, which is crucial, but the most time-consuming and the most expensive part of the process, will be completed by mid-year 1999. Union Investment Services continued to grow and produce profits for your organization during 1997. It has become obvious that individuals who enjoy the personal touch of community banking also enjoy investment services with a personal touch. The accessibility and the community banking nature of Union Investment Services is attracting a large number of new clients each year. With increased referrals from the branch networks of the three banks, we expect the positive trend to continue. After considering the option of acquiring a mortgage brokerage operation, in January 1997, the decision was made to establish Union Mortgage Company. We are pleased to report that Union Mortgage Company turned a profit in its first year of operation, and are excited about the prospects for the future. We are optimistic that the anticipated low interest rate environment for 1998, coupled with an increased awareness, will result in an excellent year for Union Mortgage Company. 1997 also saw a number of the prognostications that had been made in prior years come true. First was the availability of the Signet branches which we had pursued for several years. The second was our stock price. In prior years, we believed that our stock was under-valued and an excellent investment. 1997 saw two market makers agree, and initiate analytical coverage of Union Bankshares Corporation. The result was a 76% increase in the market value of your stock during the course of 1997. [CHART ] 1993 1994 1995 1996 1997 NET INCOME PER SHARE $ 1.55 $ 1.89 $ 1.90 $ 2.08 $ 2.20 DIVIDENDS PER SHARE 0.45 0.51 0.56 0.64 0.74 [PHOTO] [PHOTO CAPTION] "IN THESE CHANGING TIMES, IT'S GOOD TO KNOW THE FINANCIAL SERVICES AT MY BANK KEEP GETTING BETTER. IT IS WISE TO INVEST LOCALLY." Thelma & Lloyd Boxley Retired School Teachers Caroline County [PHOTO] UNION BANKSHARES CORPORTION As we look forward to 1998, we continue to believe that additional branches of larger banks will become available. We also believe there will be increased opportunities to attract other community banks to the Union Bankshares family. With banking consolidations likely to continue, we believe that Union Bankshares will be a very attractive option to those community banks who wish to retain their independence and autonomy, and who wish to continue to provide a high level of banking services to their community. By joining a holding company such as Union Bankshares, community banks can meet their goals while taking advantage of the economies of scale and cost savings that can come from an affiliation with an organization such as ours. We will continue to pursue those opportunities which are economically feasible and consistent with our corporate philosophy. As always, we appreciate your continued patronage and support and welcome your ideas and suggestions so we can move forward in these exciting times. [CHART]
1993 1994 1995 1996 1997 YIELD ON EARNING ASSETS 8.27% 8.24% 8.75% 8.75% 8.70% COST OF INTEREST BEARING LIABILITIES 3.92 3.83 4.69 4.64 4.69
/s/ William Beale G. William Beale /s/ Peyton Motley E. Peyton Motley /s/ Homer L. Hite Homer L. Hite [PHOTO] [PHOTO CAPTION] "I APPRECIATE THE UNION BANKSHARES APPROACH TO DOING BUSINESS. IT STRENGTHENS MY INVESTMENT, MY BANKING RELATIONSHIPS, AND MY COMMUNITY." Sue Williams Attorney-At-Law King George County RETAIL LOCATIONS [MAP] [PHOTO] [PHOTO CAPTION] "NORTHERN NECK STATE BANK IS PLEASED TO HAVE THE OPPORTUNITIES THAT FOUR NEW BRANCHES WILL BRING." Peyton Motley President Northern Neck State Bank *Effective 2/14/98 [PHOTO] UNION BANKSHARES CORPORTION DIRECTORS OF UNION BANKSHARES CORPORATION [PHOTO] [PHOTO CAPTION] (STANDING, L TO R): W. TAYLOE MURPHY, JR., RONALD L. HICKS, G. WILLIAM BEALE, E. PEYTON MOTLEY, AND HOMER L. HITE. (SEATED, L TO R): M. RAYMOND PILAND III, CHARLES H. RYLAND, A.D. WHITTAKER, AND WALTON MAHON. DIRECTORS OFFICERS WALTON MAHON G. WILLIAM BEALE Chairman President and Chief Executive Officer CHARLES H. RYLAND E. PEYTON MOTLEY Vice Chairman Executive Vice President and Chief Operating Officer G. WILLIAM BEALE HOMER L. HITE Senior Vice President RONALD L. HICKS D. ANTHONY PEAY HOMER L. HITE Vice President, Chief Financial Officer and Corporate Secretary E. PEYTON MOTLEY JOHN A. LANE W. TAYLOE MURPHY, JR. Vice President M. RAYMOND PILAND, III MYLES L. GAYTHWAITE Vice President A.D. WHITTAKER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of Union Bankshares Corporation and subsidiaries (the "Company" or "Union Bankshares"). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented elsewhere in this Annual Report. OVERVIEW Union Bankshares Corporation's financial performance in 1997 was highlighted by two typically competing themes: change and consistency - change through consolidation of existing operations and pursuit of expansion opportunities; consistency in customer service and profitability. The Company continued to take advantage of opportunities to consolidate functions to achieve cost savings while maintaining or improving customer service. This was particularly true in the technology area as each of the Company's subsidiaries was converted to a shared in-house data processing system between November 1996 and the end of 1997. This system provides management with the ability to grow at a lower incremental data processing cost than with a service bureau and provides improved access to management information. Change was also evident in the consolidation of many Virginia banks in 1997, providing expansion opportunities for Union Bankshares in its existing and adjacent markets. This was most clearly demonstrated by the Company's announced acquisition of five Signet Bank branches, which closed in February 1998. Though the financial impact of this transaction will not be felt until future periods it represents a significant opportunity for the Company to leverage its capital, expand its existing markets and provide community banking services to the people in those communities. Despite the changes noted above and the associated cost of those efforts, 1997 was another year of record earnings for Union Bankshares Corporation. The Company reported net income of $7.9 million or $2.21 per share, up 5.7% from $7.5 million in 1996. Core profitability continued to improve as net interest income increased by 6.3% and service fees by 27.6% from 1996 levels. Profitability as measured by the Company's return on average assets (ROA) was 1.40% in 1997, with a return on average equity (ROE) of 12.74% as compared to 1.41% and 13.79%, respectively, in 1996. These returns remain strong relative to the Company's peer group averages and have been achieved despite the continued asset and capital growth which the Company has experienced. It is anticipated that the acquisition of the Signet branches in the Northern Neck will enhance ROE in the future through more effective leverage of the Company's capital. Continued increases in earning assets, combined with a stable interest rate spread in 1997 contributed significantly to the strong earnings performance for the year. The Company's net interest margin on a taxable equivalent basis was down slightly from 4.79% in 1996 to 4.73% in 1997; however changes in volume exceeded changes in rates, generating an additional $1.4 million in net interest income. Loans, net of unearned income, totaled $395.3 million at December 31, 1997, an increase of 12.2% from December 31, 1996. Despite serving as a source of funds for loans, securities growth was stable as the Company utilized certain leveraging strategies to purchase securities funded by short-term borrowings. Though the spread on such transactions is reduced from the more typical scenario with loans funded by deposits, the effect on net income and ROE is favorable. Deposits grew from $439.6 million at December 31, 1996, to $472.1 million at December 31, 1997, an increase of 7.4% while average deposits increased from $431.3 million to $455.7 million over the same period. Competition for retail deposits among financial service providers continues to increase as consumers direct their investments to products offered by non-banks such as money market and mutual funds. Consequently, banks are increasingly funding loan demand with other borrowings such as Federal funds purchased, securities sold under agreements to repurchase and Federal Home Loan Bank advances, in addition to deposits. UNION BANKSHARES CORPORATION Capital growth at 11.8% again outpaced asset growth at 10.1% despite the use of wholesale leverage strategies and increased shareholder dividends. Capital remains a double-edged sword for the Company as financial strength is weighed against ROE. The closing price of the Company's stock at December 31, 1997, was $43.88 per share, resulting in a market to book value ratio of 240%. Management has worked with the investment community to share the performance record of the Company and improve the efficiency of the market with positive results in 1997. The Company's performance in 1996 was strong with net income of $7.5 million or $2.09 per share, up 10.4% from $6.7 million in 1995. Increased earnings were due principally to increased levels of earning assets. Return on average equity increased from 13.56% to 13.79% while return on average assets was constant at 1.41%. Core profitability continued to improve as net interest income increased by 7.1% and service fees by 19.1% from 1995 levels. NET INTEREST INCOME Net interest income represents the principal source of earnings for the Company. Net interest income equals the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income and the net interest margin. During 1997, net interest income, on a taxable-equivalent basis, totaled $24.7 million, an increase of 5.6% from $23.4 million in 1996. The Company's net interest margin declined slightly to 4.73% in 1997, as compared to 4.79% in 1996 and 4.80% in 1995. The yield on earning assets declined to 8.70% while the cost of interest-bearing liabilities rose slightly from 4.64% in 1996 to 4.69% in 1997. Average interest-bearing liabilities increased by $25.9 million, or 6.2% while average earning assets grew by $34.3 million, or 7.0%. As a result, the Company was able to realize an increase of $1.4 million in net interest income compared to 1996 (see Volume and Rate Analysis table). The following table depicts interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated. UNION BANKSHARES CORPORATION AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31, 1997 1996 1995 ------------------------------ ---------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE ----------- --------- -------- --------- -------- ------- --------- --------- (dollars in thousands) ASSETS: Securities: Taxable .................... $ 79,895 $ 5,190 6.50% $ 72,482 $ 4,493 6.20% $ 74,433 $ 4,755 6.39% Tax-exempt(1) ............. 66,328 5,433 8.19% 64,963 5,397 8.31% 60,966 4,903 8.04% ----------- --------- -------- --------- -------- ------- --------- --------- ----- Total securities ....... 146,223 10,623 7.27% 137,445 9,890 7.20% 135,399 9,658 7.13% Loans, net..................... 371,761 34,602 9.31% 343,856 32,444 9.43% 310,819 29,561 9.51% Federal funds sold ........... 3,753 199 5.30% 5,941 317 5.34% 5,515 327 5.93% Interest-bearing deposits in other banks.............. 693 46 6.63% 813 44 5.41% 459 32 6.97% ----------- --------- -------- --------- -------- ------- --------- --------- ----- Total earning assets .... 522,430 45,470 8.70% 488,055 42,695 8.75% 452,192 39,578 8.75% Allowance for loan losses ..... (4,466) (4,305) (4,289) Total non-earning assets ...... 46,903 43,578 34,950 ----------- --------- --------- Total assets .................. $ 564,867 $ 527,328 $ 482,853 =========== ========= ========= Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking.................... $ 56,495 $ 1,452 2.57% $ 47,685 $ 1,202 2.52% $ 43,503 $ 1,187 2.73% Regular savings ............ 46,452 1,436 3.09% 56,108 1,945 3.47% 57,312 2,146 3.74% Money market savings ....... 51,119 1,723 3.37% 55,048 1,802 3.27% 58,265 1,978 3.39% Certificates of deposit: $100,000 and over........... 54,545 2,903 5.32% 50,083 2,604 5.20% 42,289 2,317 5.48% Under $100,000.............. 191,304 10,898 5.70% 170,032 9,938 5.84% 154,016 8,737 5.67% ----------- --------- --------- -------- --------- --------- Total interest-bearing deposits ............. 399,915 18,412 4.60% 378,956 17,491 4.62% 355,385 16,365 4.60% Other borrowings .............. 42,449 2,328 5.48% 37,528 1,839 4.90% 25,598 1,490 5.82% ----------- --------- --------- -------- --------- --------- Total interest-bearing .. liabilities .......... 442,364 20,740 4.69% 416,484 19,330 4.64% 380,983 17,855 4.69% --------- -------- --------- Non-interest bearing liabilities: Demand deposits............. 55,773 52,305 47,472 Other liabilities........... 4,859 4,461 4,224 ----------- --------- --------- Total liabilities........ 502,996 473,250 432,679 Stockholders' equity .......... 61,871 54,078 50,174 ----------- --------- --------- Total liabilities and stockholders' equity ....... $ 564,867 $ 527,328 $ 482,853 =========== ========= ========= Net interest income............ $ 24,730 $ 23,365 $ 21,723 ========= ======== ========= Interest rate spread .......... 4.01% 4.11% 4.06% Interest expense as a percent of average earning assets... 3.97% 3.96% 3.95% Net interest margin............ 4.73% 4.79% 4.80%
(1) Income and yields are reported on a taxable equivalent basis. UNION BANKSHARES CORPORATION The following table analyzes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities compared to changes in interest rates. Nonaccrual loans are included in average loans outstanding. VOLUME AND RATE ANALYSIS* (TAXABLE EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------- 1997 VS. 1996 1996 VS. 1995 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN: DUE TO CHANGES IN: ------------------------------------- ------------------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL --------- -------- -------- --------- --------- --------- (in thousands) EARNING ASSETS: Securities: Taxable........................ $ 475 $ 222 $ 697 $ (123) $ (139) $ (262) Tax-exempt .................... 112 (76) 36 329 165 494 Loans, net........................ 2,583 (425) 2,158 3,118 (235) 2,883 Federal funds sold................ (10) (108) (118) 24 (34) (10) Interest-bearing deposits in other banks................. (7) 9 2 20 (8) 12 --------- -------- -------- --------- --------- --------- Total earning assets........ 3,153 (378) 2,775 3,368 (251) 3,117 --------- -------- -------- --------- --------- --------- INTEREST-BEARING LIABILITIES: Interest checking................. 226 24 250 108 (93) 15 Regular savings................... (313) (196) (509) (44) (157) (201) Money market savings.............. (131) 52 (79) (107) (69) (176) CDs $100,000 and over............ 237 62 299 409 (122) 287 CDs < $100,000.................... 1,217 (257) 960 930 271 1,201 --------- -------- -------- --------- --------- --------- Total interest-bearing deposits................ 1,236 (315) 921 1,296 (170) 1,126 Other borrowings.................. 357 132 489 611 (262) 349 --------- -------- -------- --------- --------- --------- Total interest-bearing liabilities............. 1,593 (183) 1,410 1,907 (432) 1,475 --------- -------- -------- --------- --------- --------- Change in net interest income ........................ $ 1,560 $ (195) $ 1,365 $ 1,461 $ 181 $ 1,642 ========= ======== ======== ========= ========= =========
* The change in interest, due to both rate and volume, has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each. INTEREST SENSITIVITY An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which can be effected by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact on net interest income in periods of rising or falling interest rates. The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management's expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors. The Company uses computer simulations to measure the effect of various interest rate scenarios on net interest income. This modeling reflects interest rate changes and the related impact on net income over specified time horizons. UNION BANKSHARES CORPORATION At December 31, 1997, the Company had $150.2 million more liabilities than assets subject to repricing within one year and was, therefore, in a liability-sensitive position. A liability-sensitive Company's net interest margin and net interest income generally will be impacted favorably by declining interest rates, while that of an asset-sensitive Company generally will be impacted favorably by increasing interest rates. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1997 (1) --------------------------------------------------------------------------- WITHIN 90-365 1-5 OVER 90 DAYS DAYS YEARS 5 YEARS TOTAL ----------- ----------- ----------- ----------- ----------- (in thousands) EARNING ASSETS: Loans, net of unearned income (3)...... $ 87,480 $ 48,468 $ 141,747 $ 115,503 $ 393,198 Investment securities ................. 276 1,514 6,799 1,852 10,441 Securities available for sale.......... 1,683 6,659 57,111 76,655 142,108 Federal funds sold..................... 612 - - - 612 Other short-term investments........... 596 - 99 - 695 ------------ ----------- ----------- ----------- ----------- Total earning assets............... 90,647 56,641 205,756 194,010 547,054 ============ =========== =========== =========== =========== INTEREST-BEARING LIABILITIES: Interest checking (2) ................. 17,242 553 42,215 - 60,010 Regular savings (2) ................... 18,514 1,714 26,465 - 46,693 Money market savings................... 49,481 181 725 - 50,387 Certificates of deposit: $100,000 and over.................. 13,703 30,262 14,456 - 58,421 Under $100,000..................... 44,709 93,919 57,042 - 195,670 Short-term borrowings ................. 22,645 4,600 - - 27,245 Long-term borrowings .................. - - 21,975 1,740 23,715 ------------ ----------- ----------- ----------- ----------- Total interest-bearing liabilities .................... 166,294 131,229 162,878 1,740 462,141 ------------ ----------- ----------- ----------- ----------- Period gap............................. (75,647) (74,588) 42,878 192,270 Cumulative gap......................... $ (75,647) $ (150,235) $ (107,357) $ 84,913 $ 84,913 ============ =========== =========== =========== =========== Ratio of cumulative gap to total earning assets.............. (13.83)% (27.46)% (19.62)% 15.52% =========== =========== =========== ===========
(1) The repricing dates may differ from maturity dates for certain assets due to prepayment assumptions. (2) The Company has determined 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 OTHER INCOME Other income increased by 26.6% from $3.5 million in 1996 to $4.4 million in 1997. This increase is largely attributable to a gain on the sale of other real estate totaling $446,000 in 1997. In addition, Union Mortgage Company, which began operations in January 1997, provided an increase in mortgage origination income of $359,000. Union Investment Services also showed an increase of $89,000 in income from commissions as it continued to expand its operations to meet the needs of the communities the Company serves. The remaining increase in non-interest income is reflective of management's efforts to maximize fee-based income and from steady growth in its principal source of non-interest income, service fees. Other income increased by 32.1% from $2.6 million in 1995 to $3.5 million in 1996. This increase was largely attributable to an increase of $150,000 in commissions earned by Union Investment Services; $47,000 from the sale of a pool of loans; and $262,000 in non-taxable life insurance proceeds related to a directors deferred compensation plan. UNION BANKSHARES CORPORATION OTHER EXPENSES Other expenses totaled $16.1 million in 1997, up 11.3% over $14.5 million in 1996. Increases in personnel and operating costs are largely attributable to the growth of the Company and to its continuing investment in technology and people. Management considers a portion of such costs to be an investment in the future as we establish the infrastructure necessary to provide new products and more convenient service to our customers, and to manage a much larger organization. With the completion of the data processing conversions in 1997, management feels it is beginning to see the returns on this investment. The Company's efficiency ratio has been consistently below 60% which has allowed the Company to make the necessary investments in technology without significantly affecting earnings. Other expenses totaled $14.5 million in 1996, up 11.2% over $13.0 million in 1995 and, like 1997, was reflective of the overall growth of the Company and emphasis on putting the right systems and the right people in place to achieve our corporate goals. LOAN PORTFOLIO Loans, net of unearned income, totaled $395.3 million at December 31, 1997, an increase of 12.2% over $352.3 million at December 31, 1996. Loans, net of unearned income, totaled $352.3 million at December 31, 1996, an increase of 7.7% over $327.1 million at December 31, 1995. Though loan demand slowed in 1996 from the levels attained in 1995 and 1994, the Company continued to experience strong loan demand. Union Bankshares has achieved a rate of growth consistent with the economies of the markets within which it operates and has maintained or increased its market share in each. LOAN PORTFOLIO
DECEMBER 31, --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (in thousands) Commercial.................................. $ 45,478 $ 37,263 $ 36,920 $ 40,276 $ 37,472 Loans to finance agriculture production and other loans to farmers ............ 1,590 3,080 2,878 3,083 3,344 Real estate: Real estate construction .............. 7,270 6,435 7,849 5,453 7,432 Real estate mortgage: Residential (1 - 4 family)......... 134,638 117,125 102,419 92,007 86,348 Home equity lines.................. 21,061 21,964 22,561 22,503 21,905 Multi-family....................... 1,777 1,353 1,274 1,406 1,179 Commercial(1)...................... 101,629 83,118 76,652 60,653 53,165 Agricultural....................... 2,292 2,262 2,776 2,943 3,123 ------------ ----------- ----------- ----------- ----------- Total real estate.................. 268,667 232,257 213,531 184,965 173,152 Loans to individuals: Consumer............................... 77,125 76,383 70,143 64,683 43,754 Credit card............................ 2,682 2,567 2,235 1,714 1,490 ------------ ----------- ----------- ----------- ----------- Total loans to individuals......... 79,807 78,950 72,378 66,397 45,244 All other loans............................. 879 2,125 2,619 2,024 509 ------------ ----------- ----------- ----------- ----------- Total loans........................ 396,421 353,675 328,326 296,745 259,721 Less unearned income........................ 1,083 1,398 1,194 976 1,246 ------------ ----------- ----------- ----------- ----------- Total net loans........................ $ 395,338 $ 352,277 $ 327,132 $ 295,769 $ 258,475 ============ =========== =========== =========== ===========
(1) This category generally consists of commercial and industrial loans where real estate constitutes a secondary source of collateral. MATURITY SCHEDULE OF LOANS
1 YEAR OR LESS 1 - 5 YEARS AFTER 5 YEARS TOTAL ------------------- ------------------ ------------------ --------------- (in thousands) December 31, 1997................ $ 135,941 $ 143,191 $ 117,289 $ 396,421 December 31, 1996................ 140,871 140,247 72,557 353,675 December 31, 1995................ 143,478 125,960 58,888 328,326
Loans secured by real estate comprised 68.0% of the total loan portfolio at December 31, 1997, up from 65.9% in 1996. Of this total, single-family, residential loans comprised 34.1% of the total loan portfolio at December 31, 1997, up slightly from 33.2% in 1996 and reflective of the efforts of the Company's new subsidiary, Union Mortgage Company. Loans secured by commercial real estate comprised 25.7% of the total loan portfolio at December 31, 1997, as compared to 23.6% in 1996, and consist principally of commercial and industrial loans where real estate constitutes a secondary source of collateral. The Company attempts to reduce its exposure to the risk of the local real estate markets by limiting the aggregate size of its commercial real estate portfolio, and by making such loans primarily on owner-occupied properties. Real estate construction loans accounted for only 1.8% of total loans outstanding at December 31, 1997. The Company's charge-off rate for all loans secured by real estate has historically been low. The Company's consumer loan portfolio, its second largest category, consists principally of installment loans. Total loans to individuals for household, family and other personal expenditures totaled 19.5% of total loans at December 31, 1997, down from 21.7% in 1996. Commercial loans, secured by non-real estate business assets comprised 11.5% of total loans at the end of 1997, an increase from 10.6% at the end of 1996. Loans to the agricultural industry totaled less than 1.5% of the loan portfolio in each of the last five years. The Company is focused on providing community-based financial services and discourages the origination of loans outside of its principal trade area. The Company maintains a policy not to originate or purchase loans to foreign entities or loans classified by regulators as highly leveraged transactions. To slow the growth of the real estate loans in the loan portfolio, facilitate asset/liability management and generate additional fee income, the Company sells a portion of conforming first mortgage residential real estate loans to the secondary market as they are originated. The Company expanded this activity in 1997, with the formation of Union Mortgage Company, LLC ("Union Mortgage"). Union Mortgage serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market while retaining loans meeting the banks' current asset/liability management needs. This venture has provided the banks' customers with enhanced mortgage products and the Company with improved efficiencies through the consolidation of this function. ASSET QUALITY - ALLOWANCE/PROVISION FOR LOAN LOSSES The allowance for loan losses represents management's estimate of the amount adequate to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Company's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits and current and anticipated economic conditions. There are additional risks of future loan losses which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. Management maintains a list of loans which have a potential weakness that may need special attention. This list is used to monitor such loans and is used in the determination of the sufficiency of the Company's allowance for loan losses. As of December 31, 1997, the allowance for loan losses was $4.6 million, or 1.15% of total loans as compared to $4.4 million, or 1.25% in 1996. At December 31, 1997, the Company's allowance for loan losses exceeded the sum of net loan charge-offs over the last four years. UNION BANKSHARES CORPORATION ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ---------- ---------- ----------- ----------- (dollars in thousands) Balance, beginning of year.......................... $ 4,388 $ 4,060 $ 4,110 $ 3,822 $ 3,704 Loans charged-off: Commercial..................................... 247 114 645 442 841 Real estate.................................... 4 59 185 273 242 Consumer ...................................... 957 795 422 355 585 ------------- ---------- ----------- ------------ ----------- Total loans charged-off.................... 1,208 968 1,252 1,070 1,668 ------------- ---------- ----------- ------------ ----------- Recoveries: Commercial..................................... 8 275 114 18 57 Real estate.................................... 49 10 16 92 29 Consumer....................................... 146 116 95 146 129 ------------- ---------- ----------- ------------ ----------- Total recoveries........................... 203 401 225 256 215 ------------- ---------- ---------- ------------ ----------- Net loans charged-off............................... 1,005 567 1,027 814 1,453 Provision for loan losses........................... 1,182 895 977 1,102 1,571 ------------- ---------- ----------- ------------ ----------- Balance, end of year................................ $ 4,565 $ 4,388 $ 4,060 $ 4,110 $ 3,822 ============= ========== =========== ============ =========== Ratio of allowance for loan losses to total loans outstanding at end of year .............. 1.15% 1.25% 1.24% 1.39% 1.48% Ratio of net charge-offs to average loans outstanding during year ................. 0.27% 0.16% 0.33% 0.30% 0.66%
The allowance for loan losses as of December 31, 1996 was $4.4 million, or 1.25% of total loans as compared to $4.1 million, or 1.24% in 1995. The provision for loan losses in 1996 totaled $895,000 as compared to $977,000 in 1995. NON-PERFORMING ASSETS Non-performing assets were $4.9 million at December 31, 1997, down from $7.4 million at December 31, 1996. Non-accrual loans increased from $420,000 in 1996 to $2.1 million in 1997, due principally to loans made in connection with the sale of the Company's real estate investment. Foreclosed properties decreased from $4.1 million to $1.7 million as several properties were sold, including $1.9 million for a single property comprising over 1,800 acres in King George county. This property was sold in February 1997 at a gain of $120,000. Other sales of foreclosed property resulted in additional gains totaling $326,000 in 1997. NONPERFORMING ASSETS
DECEMBER 31, --------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (dollars in thousands) Nonaccrual loans............................ $ 2,140 $ 420 $ 669 $ 1,731 $ 2,920 Foreclosed properties....................... 1,746 4,056 3,620 1,842 1,533 Real estate investment...................... 1,050 2,970 - - - ------------ ----------- ----------- ----------- ----------- Total nonperforming assets............. $ 4,936 $ 7,446 $ 4,289 $ 3,573 $ 4,453 ============ =========== =========== =========== =========== Loans past due 90 days and accruing interest...................... $ 2,675 $ 3,163 $ 3,126 $ 1,671 $ 3,193 ============ =========== =========== =========== =========== Nonperforming assets to year-end loans, foreclosed properties and real estate investment................. 1.24% 2.07% 1.30% 1.20% 1.72% Allowance for loan losses to nonaccrual loans....................... 213.32% 1,044.76% 606.88% 237.44% 130.89%
As of December 31, 1997, nonperforming assets includes approximately $1.1 million representing an investment in income-producing property and included in other assets. This property consists of 13 single family homes which are either rented or listed for sale and are located near Fredericksburg, Virginia. The Company had previously acquired a limited interest in this property through settlement of a loan and, in 1996, acquired the remaining ownership and control from the general partner. The carrying value of this investment in real estate is supported by residential appraisals of the homes which are being sold in an orderly manner, and management expects no loss on this investment. Because the initial downpayment on many of these houses was insufficient to qualify for full accrual sale treatment, they are being carried as nonaccrual loans until such time as the borrowers' investment in the property exceeds the required threshold. Most of the nonperforming assets are secured by real estate within the Company's trade area. Based on the estimated fair values of the related real estate, management considers these amounts to be recoverable, with any individual deficiency considered in the allowances for loan or real estate losses. Nonaccrual loans and foreclosed properties were $4.5 million at December 31, 1996, up from $4.3 million at December 31, 1995. Non-accrual loans decreased by $249,000 in 1996 while other real estate owned increased from $3.6 million to $4.1 million. SECURITIES At December 31, 1997, $142.1 million, or over 93%, of the Company's securities were classified as available for sale, as compared to $129.3 million at December 31, 1996. Investment securities totaled $10.4 million at December 31, 1997 and consists of securities which management intends to hold to maturity. At December 31, 1996, $129.3 million, or over 91%, of the Company's securities were classified as available for sale, as compared to $126.4 million at December 31, 1995. Investment securities totaled $11.4 million at December 31, 1996 and consists of securities which management intends to hold to maturity. The Company seeks to diversify its portfolio to minimize risk and to maintain a large amount of securities issued by states and political subdivisions due to the tax benefits such securities provide. UNION BANKSHARES CORPORATION MATURITIES OF INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997 --------------------------------------------------------------------------- OVER 10 YEARS & 1 YEAR 1 - 5 5 - 10 EQUITY OR LESS YEARS YEARS SECURITIES TOTAL ----------- ----------- ----------- ----------- ----------- (dollars in thousands) U.S. government and agency securities: Amortized cost......................... $ 3,060 $ 9,373 $ 8,948 $ - $ 21,381 Fair value............................. 3,058 9,405 8,965 - 21,428 Weighted average yield(1).............. 5.59% 6.34% 7.06% - 6.53% Mortgage backed securities: Amortized cost......................... $ 2,002 $ 35,542 $ 12,516 $ - $ 50,060 Fair value............................. 2,003 35,704 12,520 - 50,227 Weighted average yield(1).............. 6.36% 6.67% 7.13% - 6.77% Municipal bonds: Amortized cost......................... $ 4,817 $ 15,440 $ 36,273 $ 15,093 $ 71,623 Fair value. ........................... 4,869 15,896 37,825 15,524 74,114 Weighted average yield(1).............. 8.89% 8.47% 7.96% 7.79% 8.09% Other securities: Amortized cost......................... $ 225 $ 3,023 $ 223 $ 3,426 $ 6,897 Fair value. ........................... 225 3,081 231 3,484 7,021 Weighted average yield(1).............. 6.20% 6.97% 7.20% 7.54% 7.23% Total securities: Amortized cost......................... $ 10,104 $ 63,378 $ 57,960 $ 18,519 $ 149,961 Fair value............................. 10,155 64,086 59,541 19,008 152,790 Weighted average yield(1).............. 7.33% 7.07% 7.64% 7.74% 7.39%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis. DEPOSITS Increased competition for customer deposits continues to be a challenge for the Company, as reflected by continued rise in other borrowings in 1997 to fund growth in earning assets. In 1997 growth in the loan portfolio exceeded 12.3% and securities growth was 8.4% while deposit growth was only 7.4%. Although average demand deposits and interest-bearing checking accounts experienced moderate growth in 1997, the increasing competition for deposits and the current interest rate environment have resulted in declines in lower cost savings and money market accounts. Total deposits grew from $439.6 million at December 31, 1996 to $472.1 million at December 31, 1997. Over this same period, average interest-bearing deposits were $399.9 million, or 5.5% over the 1996 average of $379.0 million. The majority of this increase is represented by a $25.7 million increase in certificates of deposit. Average balances for lower cost money market and regular savings decreased by a total of $13.6 million. The Company's lowest cost source of funds, non-interest-bearing and interest-bearing demand deposits both increased, by a total of $12.3 million. The Company has no brokered deposits. AVERAGE DEPOSITS AND RATES PAID
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ---------------------- --------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ----------------------- ---------------------- --------------------- (dollars in thousands) Non-interest-bearing accounts ................. $ 55,773 - $ 52,305 - $ 47,472 - Interest-bearing accounts: Interest checking......................... 56,495 2.57% 47,685 2.52% 43,503 2.73% Money market.............................. 51,119 3.37% 55,048 3.27% 58,265 3.39% Regular savings........................... 46,452 3.09% 56,108 3.47% 57,312 3.74% Certificates of deposit: Less than $100,000.................... 191,304 5.69% 170,032 5.84% 154,016 5.67% $100,000 and over..................... 54,545 5.32% 50,083 5.20% 42,289 5.48% ------------ ----------- ---------- Total interest-bearing......................... 399,915 4.60% 378,956 4.62% 355,385 4.60% ------------ ----------- ---------- Total average deposits.................... $ 455,688 $ 431,261 $ 402,857 ============ =========== ==========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
PERCENT WITHIN 3 - 6 6 - 12 OVER 12 OF TOTAL 3 MONTHS MONTHS MONTHS MONTHS TOTAL DEPOSITS ---------- ---------- ---------- ----------- ---------- --------- (dollars in thousands) At December 31, 1997................. $ 11,716 $ 29,308 $ 13,924 $ 3,473 $ 58,421 12.37% At December 31, 1996................. 13,444 11,663 12,346 14,359 51,812 11.79% At December 31, 1995................. 10,513 9,514 8,172 18,307 46,506 11.19%
Further development of core deposits remains a primary objective, as they represent a stable, lower cost source of funds for asset growth. The Company's introduction of in-store branches in 1996 has provided opportunities to attract deposits at a much lower initial investment than traditional branches. Union Bank opened two branches in high-scale convenience stores in 1996 and has two additional branches planned for 1998. Northern Neck State Bank opened a branch in a Wal*Mart Superstore in 1996. The addition of the Northern Neck branches of Signet is also expected to provide a strong core deposit customer base. Total deposits grew from $415.8 million at December 31, 1995 to $439.6 million at December 31, 1996. Over this same period, average interest-bearing deposits were $379 million, or 6.6% over the 1995 average of $355.4 million. CAPITAL RESOURCES Capital resources represents 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 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 to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders. 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-weighed categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity, retained earnings and a limited amount of perpetual preferred stock, less certain goodwill items. The Company had a ratio of risk-weighted assets to total capital of 16.68% and 16.29% on December 31, 1997 and 1996, respectively. The Company's ratio of risk-weighted assets to Tier 1 capital was 15.56% and 15.15% at December 31, 1997 and 1996, respectively. Both of these ratios exceeded the fully phased-in capital requirements in 1997 and 1996. UNION BANKSHARES CORPORATION The Company's strategic plan includes targeted capital levels between 8% and 9%. The addition of the five Signet branches will bring the Company's capital levels down into this range bringing with it an expected increase in return on average equity. ANALYSIS OF CAPITAL
DECEMBER 31, ----------- ---------- 1997 1996 ----------- ---------- (dollars in thousands) Tier 1 capital: Common stock.......................................... $ 14,304 $ 14,267 Surplus ............................................. 388 160 Retained earnings..................................... 49,105 43,863 Less: core deposit intangibles........................ (237) (263) ------------ ---------- Total Tier 1 capital ................................. 63,560 58,027 ------------ ---------- Tier 2 capital: Allowance for loan losses ............................ 4,565 4,388 Allowable long-term debt.............................. - - ------------ ---------- Total Tier 2 capital ................................. 4,565 4,388 ------------ ---------- Total risk-based capital.............................. $ 68,125 $ 62,415 ============ ========== Risk-weighted assets ...................................... $ 408,367 $ 383,046 ============ ========== Capital ratios: Tier 1 risk-based capital ratio....................... 15.56% 15.15% Total risk-based capital ratio........................ 16.68% 16.29% Tier 1 capital to average adjusted total assets....... 11.27% 10.70% Equity to total assets ............................... 10.68% 10.83%
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. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity which is sufficient to satisfy its depositors' requirements and to meet it customers' credit needs. At December 31, 1997, cash and cash equivalents and securities classified as available for sale were 27.5% of total assets, compared to 28.1% at December 31, 1996. Asset liquidity is also provided by managing loan and securities maturities and cash flows. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The subsidiary banks maintain Federal funds lines with several regional banks totaling in excess of $40.0 million at December 31, 1997. At year end 1997, the Banks had outstanding $11.7 million of borrowings pursuant to securities sold under agreements to repurchase transactions with a maturity of one day. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $64 million at December 31, 1997. YEAR 2000 Management has initiated a program to prepare the Company's computer systems and applications for the year 2000. The Company expects to incur 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. Testing and conversion of system applications is expected to cost approximately $250,000, with all systems expected to be compliant by June 1999. A significant portion of these costs are not likely to be incremental costs, but rather a redeployment of existing information technology resources. RECENT ACCOUNTING PRONOUNCEMENTS In 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires recognition of financial assets and liabilities using a financial-components approach which focuses on control of the assets transferred. After issuance of SFAS No.125, FASB issued SFAS No. 127 which deferred the effective date for SFAS No. 125 until fiscal years beginning after December 31, 1997. 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. Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," established standards for the reporting and presentation of comprehensive income, which is divided into net income and other comprehensive income. Other comprehensive income items are to be classified by their nature and by their related accumulated balances in the appropriate financial statements of a company. Generally, other comprehensive income includes transactions not typically recorded as a component of net income such as foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain debt and equity securities. SFAS 130 requires that such items be presented with equal prominence on a comparative basis in the appropriate financial statements for fiscal years beginning after December 15, 1997. Accordingly, the Company intends to comply with SFAS 130 beginning with its 1998 fiscal year. Management has not yet determined the impact, if any, of this statement on the Company. Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," establishes standards and disclosure requirements for the way companies report information about operating segments, including related product information, both in annual and interim reports issued to stockholders. Operating segments are components of a company about which separate financial information is available and which are used in determining resource allocations and performance results. Information such as segment net earnings, appropriate revenue and expense items and certain balance sheet items are required to be presented, and such amounts are required to be reconciled to the Company's combined financial information. This standard is effective for financial statements issued for periods ending after December 31, 1997, including interim periods. The Company will assess the methodologies and reporting for compliance with SFAS 131. 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. UNION BANKSHARES CORPORATION CONSOLIDATED BALANCE SHEETS UNION BANKSHARES CORPORATION AND SUBSIDIARIES DECEMBER 31, 1997 AND 1996 (dollars in thousands)
ASSETS 1997 1996 ----------- ----------- Cash and cash equivalents: Cash and due from banks $ 20,147 $ 19,333 Interest-bearing deposits in other banks 695 1,016 Federal funds sold 612 2,104 ----------- ----------- Total cash and cash equivalents 21,454 22,453 ----------- ----------- Securities available for sale, at fair value (note 2) 142,108 129,268 Investment securities, at amortized cost (note 2) 10,441 11,423 ----------- ----------- Total securities 152,549 140,691 ----------- ----------- Loans, net of unearned income (notes 3 and 10) 395,338 352,277 Less allowance for loan losses (note 4) 4,565 4,388 ----------- ----------- Net loans 390,773 347,889 ----------- ----------- Bank premises and equipment, net (note 5) 16,934 14,281 Other real estate owned 1,746 4,056 Other assets (note 7) 12,025 11,523 ----------- ----------- Total assets $ 595,481 $ 540,893 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing demand deposits $ 60,962 $ 55,005 Interest-bearing deposits: Savings accounts 46,693 54,364 NOW accounts 60,010 49,834 Money market accounts 50,387 54,431 Time deposits of $100,000 and over 58,421 51,812 Other time deposits 195,670 174,161 ----------- ----------- Total interest-bearing deposits 411,181 384,602 ----------- ----------- Total deposits 472,143 439,607 ----------- ----------- Short-term borrowings (note 6) 27,245 27,403 Long-term borrowings (note 6) 23,715 11,125 Other liabilities (note 8) 6,870 4,192 ----------- ----------- Total liabilities 529,973 482,327 ----------- ----------- Stockholders' equity (notes 8 and 12): Common stock, $4 par value. Authorized 12,000,000 shares; issued and outstanding, 3,575,937 shares in 1997 and 3,566,915 shares in 1996 14,304 14,267 Surplus 388 160 Retained earnings 49,105 43,863 Unrealized net gain on securities available for sale, net of taxes 1,711 276 ----------- ----------- Total stockholders' equity 65,508 58,566 ----------- ----------- Commitments and contingencies (notes 5 and 9) Total liabilities and stockholders' equity $ 595,481 $ 540,893 =========== ===========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (dollars in thousands, except per share amounts)
1997 1996 1995 ----------- ----------- ----------- Interest income: Interest and fees on loans (note 3) $ 34,602 $ 32,444 $ 29,561 Interest on securities: U.S. government and agency securities 3,138 4,079 4,306 Obligations of states and political subdivisions 3,864 3,757 3,194 Other securities 1,914 355 663 Interest on Federal funds sold 199 317 327 Interest on interest-bearing deposits in other banks 46 44 32 ----------- ----------- ----------- Total interest income 43,763 40,996 38,083 ----------- ----------- ----------- Interest expense: Interest on deposits 18,412 17,491 16,365 Interest on other borrowings 2,328 1,839 1,490 ----------- ----------- ----------- Total interest expense 20,740 19,330 17,855 ----------- ----------- ----------- Net interest income 23,023 21,666 20,228 Provision for loan losses (note 4) 1,182 895 977 ----------- ----------- ----------- Net interest income after provision for loan losses 21,841 20,771 19,251 Other income: Service charges on deposit accounts 2,065 1,914 1,785 Other service charges and fees 1,360 770 425 Losses on securities transactions, net (29) (33) (16) Gains on sales of loans - 47 - Gains (losses) on sales of other real estate owned and bank premises, net 446 (11) (11) Other operating income 536 772 435 ----------- ----------- ----------- Total other income 4,378 3,459 2,618 ----------- ----------- ----------- Other expenses: Salaries and benefits 8,702 7,587 6,794 Occupancy expenses 966 917 739 Furniture and equipment expenses 1,346 1,184 1,030 FDIC assessments 67 13 467 Other operating expenses 5,059 4,801 4,007 ----------- ----------- ----------- Total other expenses 16,140 14,502 13,037 ----------- ----------- ----------- Income before income taxes 10,079 9,728 8,832 Income tax expense (note 7) 2,196 2,272 2,079 ----------- ----------- ----------- Net income $ 7,883 $ 7,456 $ 6,753 =========== =========== =========== Basic net income per share (note 11) $ 2.21 $ 2.09 $ 1.91 ----------- ----------- ----------- Diluted net income per share (note 11) $ 2.20 $ 2.08 $ 1.90 ----------- ----------- ----------- Cash dividends per share of common stock $ 0.74 $ 0.64 $ 0.56 =========== =========== ===========
See accompanying notes to consolidated financial statements. UNION BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (dollars in thousands)
UNREALIZED GAINS (LOSSES) COMMON STOCK ON SECURITIES _______________________ RETAINED AVAILABLE SHARES AMOUNT SURPLUS EARNINGS FOR SALE, NET TOTAL ---------- ---------- --------- --------- ------------- --------- Balance - December 31, 1994 3,539,118 $ 14,157 $ (153) $ 33,917 $ (688) $ 47,233 Cash dividends declared - - - (1,948) - (1,948) Issuance of common stock under Dividend Reinvestment Plan 9,412 37 193 - - 230 Issuance of common stock under incentive stock option plan 13,440 54 26 - - 80 Change in net unrealized losses on securities available for sale, net of taxes of $688 - - - - 1,335 1,335 Net income - 1995 - - - 6,753 - 6,753 ---------- ---------- --------- --------- ------------- --------- Balance - December 31, 1995 3,561,970 14,248 66 38,722 647 53,683 Cash dividends declared - - - (2,315) - (2,315) Issuance of common stock under Dividend Reinvestment Plan 11,145 45 227 - - 272 Stock repurchased under Stock Repurchase Plan (6,200) (26) (133) - - (159) Change in net unrealized losses on securities available for sale, net of taxes $185 - - - - (371) (371) Net income - 1996 - - - 7,456 - 7,456 ---------- ---------- --------- --------- ------------- --------- Balance - December 31, 1996 3,566,915 14,267 160 43,863 276 58,566 Cash dividends declared - - - (2,641) - (2,641) Issuance of common stock under Dividend Reinvestment Plan 10,522 43 261 - - 304 Stock purchased under Stock Repurchase Plan (1,500) (6) (33) - - (39) Change in net unrealized gains on securities available for sale, net of taxes $728 - - - - 1,435 1,435 Net income -1997 - - - 7,883 - 7,883 ---------- ---------- --------- --------- ------------- --------- Balance - December 31, 1997 3,575,937 $ 14,304 $ 388 $ 49,105 $ 1,711 $ 65,508 ========== ========== ========= ========= ============= =========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (dollars in thousands)
1997 1996 1995 ----------- ----------- ----------- Operating activities: Net income $ 7,883 $ 7,456 $ 6,753 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation and amortization of bank premises and equipment 1,350 1,120 906 Provision for loan losses 1,182 895 977 Losses on securities transactions, net 29 33 16 Gains on sale of loans - (47) - (Gains) losses on sales of other real estate owned, net (446) (11) 11 Deferred income tax expense (benefit) (169) (176) 20 Decrease (increase) in accrued interest receivable (292) 88 (463) Other, net 2,109 (1,593) 480 ----------- ----------- ----------- Net cash and cash equivalents provided by operating activities 11,646 7,765 8,700 ----------- ----------- ----------- Investing activities: Purchases of investment securities (1,164) (357) (4,731) Proceeds from maturities of investment securities 2,136 4,072 18,032 Purchases of securities available for sale (37,265) (47,286) (31,466) Proceeds from sales of securities available for sale 2,857 18,677 4,892 Proceeds from maturities of securities available for sale 23,512 24,989 5,621 Net increase in loans (44,920) (26,300) (34,539) Purchases of bank premises and equipment (4,003) (5,143) (2,552) Proceeds from sales of bank premises and equipment - 2 - Proceeds from sales of other real estate owned 3,611 212 355 ----------- ----------- ----------- Net cash and cash equivalents used in investing activities (55,236) (31,134) (44,388) ----------- ----------- ----------- Financing activities: Net increase in non-interest-bearing deposits 5,956 5,100 690 Net increase in interest-bearing deposits 26,579 18,752 24,833 Net increase (decrease) in short-term borrowings (158) (3,705) 10,564 Proceeds from long-term borrowings 12,800 10,000 - Repayment of long-term borrowings (210) (150) (150) Cash dividends paid (2,641) (2,315) (1,948) Issuance of common stock 304 272 310 Purchases of common stock (39) (159) - ----------- ----------- ----------- Net cash and cash equivalents provided by financing activities 42,591 27,795 34,299 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (999) 4,426 (1,389) Cash and cash equivalents at beginning of year 22,453 18,027 19,416 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 21,454 $ 22,453 $ 18,027 =========== =========== =========== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 20,738 $ 19,399 $ 17,535 Income taxes $ 2,443 $ 1,971 $ 1,903
See accompanying notes to consolidated financial statements. UNION BANKSHARES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies and practices of Union Bankshares Corporation and subsidiaries (the "Company") conform to generally accepted accounting principles and to general practice within the banking industry. Major policies and practices are described below: (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Union Bankshares Corporation and its wholly-owned subsidiaries. Union Bankshares Corporation is a bank holding company that owns all of the outstanding common stock of its banking subsidiaries, Union Bank and Trust Company ("Union Bank"), Northern Neck State Bank ("Northern Neck") and King George State Bank ("King George") and its non-banking subsidiaries, Union Investment Services, Inc. and Union Mortgage Company, LLC. All significant intercompany balances and transactions have been eliminated. King George was merged with and into the Company on September 1, 1996. The merger was accounted for as a pooling-of-interests and, accordingly, the amounts in the consolidated financial statements include the accounts and results of King George for all periods presented. The accompanying consolidated financial statements for prior periods reflect certain reclassifications in order to conform with the 1997 presentation. (B) INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE When securities are purchased, they are classified as investment securities when management has the intent and the Company has the ability to hold them to maturity. Investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using a method that approximates the interest method. Securities available for sale are those that management intends to hold for an indefinite period of time, including securities used as part of the Company's asset/liability strategy, and that may be sold in response to changes in interest rates, liquidity needs or other similar factors. Securities available for sale are recorded at estimated fair value with net unrealized gains or losses reported as a separate component of stockholders' equity, net of taxes. Gains and losses on the sale of securities are determined using the specific identification method. (C) LOANS Interest on loans is calculated using the simple interest method on daily balances of principal amounts outstanding. The accrual of interest is discontinued when the collection of principal and/or interest is legally barred or considered by management to be highly unlikely. After a loan is classified as nonaccrual, interest income is generally recognized only when collected. Loan origination fees and direct loan origination costs for completed loans are netted and then deferred and amortized into interest income as an adjustment of yield. (D) ALLOWANCE FOR LOAN LOSSES The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectibility of the principal is unlikely. Recoveries of amounts previously charged off are credited to the allowance. Management's determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The Company measures the value of impaired loans based on the present value of the expected future cash flows discounted at the loan's effective rate, or the fair value of the loan's collateral and establishes an allowance for loan losses based on this measurement period. The Company includes, as a component of its allowance for loan losses, amounts it deems adequate to cover estimated losses related to impaired loans. Interest income on impaired loans is recognized on a cash basis. (E) BANK PREMISES AND EQUIPMENT Bank premises and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using either the straight-line or accelerated method based on the type of asset involved. It is the policy of the Company to capitalize additions and improvements and to depreciate the cost thereof over their estimated useful lives. Maintenance, repairs and renewals are expensed as they are incurred. (F) INCOME TAXES Deferred income tax assets and liabilities are recorded for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. (G) OTHER REAL ESTATE OWNED Foreclosed assets are carried at the lower of (a) fair value minus estimated costs to sell or (b) cost at the time of foreclosure. Such determination is made on an individual asset basis. If the fair value of the asset minus the estimated costs to sell the asset is less than the cost of the asset, the deficiency is recognized as a valuation allowance. If the fair value of the asset minus the estimated costs to sell the asset subsequently increases and is more than its carrying amount, the valuation allowance is reduced, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income. Recovery of the carrying value of such real estate is dependent to a great extent on economic, operating and other conditions that may be beyond the Company's control. (H) CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, the Company defines cash and cash equivalents as cash, due from banks, interest-bearing deposits in other banks and Federal funds sold. Other real estate owned increased in the amount of $880,000, $635,000 and $2,375,000 during the years ended December 31, 1997, 1996 and 1995, respectively, as a result of loan foreclosures. The Company also transferred $71,872,000 in investment securities to securities available for sale during 1995. These represent non-cash investing activities for purposes of the consolidated statements of cash flows. UNION BANKSHARES CORPORATION (I) PENSION PLAN The Company computes the net periodic pension cost of its pension plan in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." Costs of the plan are determined by independent actuaries. (J) EARNINGS PER SHARE The Company adopted the provisions of Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," for the year ended December 31, 1997 and restated all previous years. SFAS 128 establishes new standards for computing and presenting earnings per share (EPS). The statement replaces the presentation of primary EPS with basic EPS and presentation of fully diluted EPS with diluted EPS. Basic EPS is computed by dividing net income, less required dividends on redeemable preferred stock, by the weighted average number of common shares outstanding during the year. Diluted EPS is computed using the weighted average number of common shares outstanding during the year, including the dilutive effect of stock options. (K) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions of certain amounts in the financial statements. Actual results could differ from these estimates. 2 INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE The amortized cost, gross unrealized gains and losses of investment securities and estimated fair values at December 31, 1997 and 1996 are summarized as follows (in thousands):
1997 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ------------ ----------- U.S. government and agency securities $ 349 $ - $ - $ 349 Obligations of states and political subdivisions 8,236 218 4 8,450 Corporate and other bonds 1,856 29 2 1,883 ------------ ----------- ------------ ----------- $ 10,441 $ 247 $ 6 $ 10,682 ============ =========== ============ ===========
1996 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ------------ ----------- U.S. government and agency securities $ 849 $ - $ 10 $ 839 Obligations of states and political subdivisions 8,606 276 17 8,865 Corporate and other bonds 1,968 23 6 1,985 ------------ ----------- ------------ ----------- $ 11,423 $ 299 $ 33 $ 11,689 ============ =========== ============ ===========
The amortized cost, estimated fair value and gross unrealized gains and losses of securities available for sale at December 31, 1997 and 1996 are summarized as follows (in thousands):
1997 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ------------ ----------- U.S. government and agency securities $ 21,032 $ 77 $ 30 $ 21,079 Obligations of states and political subdivisions 63,387 2,282 5 65,664 Corporate and other bonds 1,498 27 - 1,525 Mortgage-backed securities 50,060 411 244 50,227 Federal Reserve Bank stock 415 - - 415 Federal Home Loan Bank stock 2,806 16 - 2,822 Other securities 322 54 - 376 ------------ ----------- ------------ ----------- $ 139,520 $ 2,867 $ 279 $ 142,108 ============ =========== ============ ===========
1996 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ----------- ------------ ----------- U.S. government and agency securities $ 18,405 $ 45 $ 109 $ 18,341 Obligations of states and political subdivisions 61,553 1,233 247 62,539 Corporate and other bonds 1,498 21 7 1,512 Mortgage-backed securities 44,347 171 741 43,777 Federal Reserve Bank stock 361 - - 361 Federal Home Loan Bank stock 2,402 - - 2,402 Other securities 277 68 9 336 ------------ ----------- ------------ ----------- $ 128,843 $ 1,538 $ 1,113 $ 129,268 ============ =========== ============ ===========
The amortized cost and estimated fair value of investment securities and securities available for sale at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
INVESTMENT SECURITIES SECURITIES AVAILABLE FOR SALE ----------------------------- ----------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE ----------- ----------- ------------ ----------- Due in one year or less $ 1,791 $ 1,812 $ 8,313 $ 8,343 Due after one year through five years 6,799 6,976 56,579 57,110 Due after five years through ten years 1,190 1,223 56,770 58,318 Due after ten years 661 671 14,314 14,724 ------------ ----------- ------------ ----------- 10,441 10,682 135,976 138,495 Federal Reserve Bank stock - - 361 361 Federal Home Loan Bank stock - - 2,806 2,806 Other securities - - 377 446 ------------ ----------- ------------ ----------- $ 10,441 $ 10,682 $ 139,520 $ 142,108 ============ =========== ============ ===========
Investment securities with an amortized cost of approximately $52,383,000 at December 31, 1997 were pledged to secure public deposits, repurchase agreements and for other purposes. UNION BANKSHARES CORPORATION Sales of securities available for sale produced the following results for the years ended December 31, 1997, 1996 and 1995 (in thousands): 1997 1996 1995 ----------- ----------- ------------ Proceeds $ 2,857 $ 18,677 $ 4,892 ============ =========== ============ Gross gains $ 58 $ 126 $ 37 Gross losses (87) (159) (53) ------------ ----------- ------------ Net losses $ (29) $ (33) $ (16) ============ =========== ============ 3 LOANS Loans are stated at their face amount, net of unearned income, and consist of the following at December 31, 1997 and 1996 (in thousands):
1997 1996 ----------- ----------- Real estate loans $ 268,667 $ 232,257 Commercial loans 45,478 37,263 Loans to individuals for household, family and other personal expenditures 79,807 78,950 All other loans 2,469 5,205 ----------- ----------- 396,421 353,675 Less unearned income on loans 1,083 1,398 ----------- ----------- $ 395,338 $ 352,277 =========== ===========
On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), as amended by SFAS 118. This pronouncement requires that impaired loans within the scope of the statements be presented in the financial statements at the present value of expected future cash flows or at the fair value of the loan's collateral. A valuation allowance is required to the extent that the measure of the impaired loans is less than the recorded investment. SFAS 114 does not apply to larger groups of homogenous loans such as real estate mortgage, installment, home equity and bank card loans, which are collectively evaluated for impairment. The initial adoption of SFAS 114 did not require an increase to the Company's allowance for loan losses. At December 31, 1997 and 1996, the recorded investment in loans which have been identified as impaired loans, in accordance with SFAS 114, totaled $2,140,000 and $420,000, respectively. Nonaccrual loans totaled approximately $2,140,000 at December 31, 1997. The gross interest income that would have been recorded during 1997, 1996 and 1995 had the Company's nonaccrual loans been current with their original terms, was approximately $95,000, $58,000 and $60,000, respectively. The amount of interest income recorded by the Company during 1997, 1996 and 1995 on nonaccrual loans was $101,000, $44,000 and $8,014, respectively. 4 ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 are summarized below (in thousands):
1997 1996 1995 ----------- ----------- ------------ Balance, beginning of year $ 4,388 $ 4,060 $ 4,110 Provision charged to operations 1,182 895 977 Recoveries credited to allowance 203 401 225 ------------ ----------- ------------ Total 5,773 5,356 5,312 Loans charged off 1,208 968 1,252 ------------ ----------- ------------ Balance, end of year $ 4,565 $ 4,388 $ 4,060 ============ =========== ============
5 BANK PREMISES AND EQUIPMENT Bank premises and equipment as of December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 ----------- ----------- Land $ 4,877 $ 3,371 Land improvements and buildings 10,462 9,827 Furniture and equipment 9,681 8,110 Leasehold improvements 382 273 Construction in progress 177 54 ----------- ----------- 25,579 21,635 Less accumulated depreciation and amortization 8,645 7,354 ----------- ----------- Bank premises and equipment, net $ 16,934 $ 14,281 =========== ===========
Depreciation and amortization expense for 1997, 1996 and 1995 was $1,350,000, $1,120,000 and $906,000, respectively. Future minimum rental payments required under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 1997 are approximately $137,000 for 1998, $114,000 for 1999 and $116,000 for 2000. 6 OTHER BORROWINGS Short-term borrowings consist of the following at December 31, 1997, 1996 and 1995 (dollars in thousands):
1997 1996 1995 ----------- ----------- ----------- Federal funds purchased $ 9,000 $ 6,295 $ 6,590 Securities sold under agreements to repurchase 11,645 11,698 10,368 Other short-term borrowings 6,600 9,410 14,150 ----------- ----------- ----------- Total $ 27,245 $ 27,403 $ 31,108 =========== =========== =========== Weighted interest rate 5.94% 5.27% 5.43% Average for the year ended December 31: Outstanding $ 20,716 $ 26,344 $ 23,832 Interest rate 4.99% 4.58% 5.85% Maximum month-end outstanding $ 28,422 $ 31,023 $ 31,108
Federal funds purchased and securities sold under agreements to repurchase are due within one year. The subsidiary banks maintain Federal funds lines with several regional banks totaling approximately $40 million at December 31, 1997. The Company had a line of credit with the Federal Home Loan Bank of Atlanta for $64 million at December 31, 1997. Long-term debt consisted of the following at December 31, 1997 and 1996 (dollars in thousands):
1997 1996 ----------- ----------- Federal Home Loan Bank borrowings: Floating rate, due April 24, 2000 $ 5,000 $ - 5.60%, due June 6, 2001 10,000 10,000 5.97%, due July 10, 2002 6,000 - 5.81%, due January 10, 2004 325 375 6.08%, due February 15, 2004 325 375 6.61%, due March 17, 2004 325 375 Floating Rate Note Payable to commercial bank, due July 1, 2004 1,740 - ----------- ----------- Total long-term debt $ 23,715 $ 11,125 =========== ===========
UNION BANKSHARES CORPORATION 7 INCOME TAXES The components of the 1997, 1996 and 1995 income tax expense (benefit) are as follows:
1997 1996 1995 ----------- ----------- ----------- Current taxes - Federal $ 2,365 $ 2,448 $ 2,059 Deferred taxes - Federal (169) (176) 20 ----------- ----------- ----------- Income tax expense $ 2,196 $ 2,272 $ 2,079 =========== =========== ===========
The reasons for the difference between actual income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are shown below.
1997 1996 1995 ----------- ----------- ----------- Computed "expected" tax expense $ 3,427 $ 3,308 $ 3,003 Increase (reduction) in taxes resulting from: Tax-exempt interest (1,152) (1,128) (976) Other, net (79) 92 52 ----------- ----------- --------- Income tax expense $ 2,196 $ 2,272 $ 2,079 =========== =========== =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 ----------- ----------- Deferred tax assets: Loans, principally due to the allowance for loan losses $ 1,156 $ 999 Benefit plans 407 633 Deferred loan fees and costs 28 43 Other 231 88 ----------- ----------- Total deferred tax assets 1,822 1,763 ----------- ----------- Deferred tax liabilities: Unrealized gains on securities available for sale 877 148 Bank premises and equipment, principally due to depreciation 291 309 Condemnation gains 52 52 Other real estate owned, principally due to sales treatment - 158 Other 109 43 ----------- ----------- Total deferred tax liabilities 1,329 710 ----------- ----------- Net deferred tax asset (included in other assets) $ 493 $ 1,053 =========== ===========
In assessing the realizability of deferred tax assets, management considers the scheduled reversal of temporary differences, projected future taxable income, and tax planning strategies. Management believes it is more likely than not the Company will realize its deferred tax assets and, accordingly, no valuation allowance has been established. 8 EMPLOYEE BENEFITS The Company has a noncontributory, defined benefit pension plan covering all full-time employees. Contributions to the plan totaled $156,944 and $196,166 for 1997 and 1996, respectively. Significant assumptions used in determining net periodic pension cost and projected benefit obligation for 1997 and 1996 were:
1997 1996 ----------- ----------- Expected long-term rate of return on assets 9.0% 9.0% Discount rate 7.5% 7.5% Salary increase rate 5.0% 6.0% Average remaining service 22 years 21 years
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996 (in thousands):
1997 1996 ----------- ----------- Vested benefit obligation $ (1,649) $ (1,385) Nonvested accumulated plan benefits (100) (72) ----------- ----------- Accumulated benefit obligation $ (1,749) $ (1,457) =========== =========== Projected benefit obligation $ (3,585) $ (2,960) Plan assets at fair value 3,046 2,483 ----------- ----------- Excess of projected benefit obligation over plan assets (539) (477) Unrecognized net obligation 5 6 Unrecognized prior service cost 267 285 Unrecognized net gain (714) (655) ----------- ----------- Accrued pension liability (included in other liabilities) $ (981) $ (841) =========== ===========
Net periodic pension cost for 1997, 1996 and 1995 included the following components (in thousands):
1997 1996 1995 ----------- ----------- ----------- Service cost $ 297 $ 265 $ 212 Interest cost 221 205 178 Actual return on assets (223) (275) (339) Net amortization and deferral 2 71 165 ----------- ----------- ----------- Net periodic pension cost $ 297 $ 266 $ 216 =========== =========== ===========
The Company also contributes to an employees' profit-sharing plan which covers all full-time employees. Contributions are made annually at the discretion of the subsidiary banks' Board of Directors. The payments to the plan for the years 1997, 1996 and 1995 were approximately $621,000, $521,000 and $580,000, respectively, which represents approximately 15% of the compensation of participants in each year. The Company has an obligation to certain members of the subsidiary banks' Boards of Directors under deferred compensation plans in the amount of $1,014,000 and $1,034,000 at December 31, 1997 and 1996, respectively. A portion of the benefits will be funded by life insurance. UNION BANKSHARES CORPORATION The Company has a stock option plan (the "Plan") adopted in 1993 that authorizes the reservation of up to 200,000 shares of common stock and provides for the granting of incentive options to certain employees. Under the Plan, the option price cannot be less than the fair market value of the stock on the date granted. An option's maximum term is ten years from the date of grant. Options granted under the Plan may be subject to a graded vesting schedule. A summary of changes for the Plan for the years 1997, 1996 and 1995 and other information for December 31, 1997 are as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- ---------- ----------- ---------- --------- Year ended December 31, 1997 1996 1995 --------------------- ------------------------ ---------------------- Options outstanding, January 1 31,620 $ 16.11 25,120 $ 13.81 28,560 $ 8.12 Granted 5,000 25.00 6,500 25.00 10,000 22.00 Exercised - - - - 13,440 7.81 --------------------- ------------------------ ---------------------- Options outstanding, December 31 36,620 $ 17.32 31,620 $16.11 25,120 $ 13.81 ===================== ======================== ======================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- -------------------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER REMAINING EXERCISE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE CONTRACTUAL LIFE PRICE ----------------- ------------ ---------------- --------- ------------ ---------------- --------- $ - 7.46 12,600 .83 yrs. $ 7.46 12,600 .83 yrs. $ 7.46 - 13.05 2,520 2.25 13.05 2,520 2.25 13.05 22.00 - 25.00 21,500 7.85 23.60 5,300 7.33 22.74 ------------ ------------ $ 7.46 - 25.00 36,620 5.05 $ 17.32 20,420 2.69 $ 12.11 ================= ============ ================ ========= ============ ================ =========
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the Company's stock options. Had compensation cost been determined based on the fair value at the grant dates consistent with the alternative method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net income and net income per share as reported in the accompanying Consolidated Statements of Income would not have been impacted by a material amount. 9 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company 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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of the Company's involvement in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. 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 may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. At December 31, 1997 and 1996, the Company had outstanding loan commitments approximating $46,492,000 and $36,592,000, respectively. Standby letters of credit written are conditional commitments issued by the Company 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 loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $6,198,000 and $6,772,000 at December 31, 1997 and 1996, respectively. A geographic concentration exists within the Company's loan portfolio as most of the Bank's business activity is with customers located in areas from Fredericksburg to Hanover County, Virginia and in the Northern Neck area of Virginia. 10 RELATED PARTY TRANSACTIONS The Company has entered into transactions with its directors, principal officers and affiliated companies in which they are principal stockholders. Such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties totaled $7,646,000 and $7,847,000 as of December 31, 1997 and 1996, respectively. During 1997 new advances to such related parties amounted to $5,280,000 and repayments amounted to $5,481,000. 11 EARNINGS PER SHARE In February 1997, the Finanacial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." The statement establishes new standards for computing and presenting earnings per share ("EPS"). The following is a reconciliation of the denominators of the basic and diluted EPS computations for December 31, 1997, 1996, and 1995:
WEIGHTED AVERAGE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ----------- ----------- (dollars and shares information in thousands) For the Year Ended December 31, 1997 Basic EPS $ 7,883 3,565 $ 2.21 Effect of dilutive stock options 16 ----------- ----------- ----------- Diluted EPS $ 7,883 3,581 $ 2.20 ----------- ----------- ----------- For the Year Ended December 31, 1996 Basic EPS $ 7,456 3,564 $ 2.09 Effect of dilutive stock options 12 ----------- ----------- ----------- Diluted EPS $ 7,456 3,576 $ 2.08 ----------- ----------- ----------- For the Year Ended December 31, 1997 Basic EPS $ 6,753 3,543 $ 1.91 Effect of dilutive stock options 19 ----------- ----------- ----------- Diluted EPS $ 6,753 3,562 $ 1.90 ----------- ----------- -----------
12 REGULATORY MATTERS The bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table on page 36) of total and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. UNION BANKSHARES CORPORATION The most recent notification from the Federal Reserve Bank as of September 30, 1996, categorized the Company as well capitalized under the regulatory framework for prompt corrective action (PCA). To be categorized as adequately capitalized the Company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's category. The Company's actual capital amounts and ratios are also presented in the table.
REQUIRED FOR CAPITAL REQUIRED IN ORDER TO BE ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED UNDER PCA ------------------------ ----------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ---------- ---------- ---------- ----------- ---------- As of December 31, 1997 Total capital to risk weighted assets Consolidated $ 68,125 16.68% $ 32,669 8.00% $ 40,837 10.00% Union Bank & Trust 40,980 10.35% 31,686 8.00% 39,608 10.00% Northern Neck State Bank 20,220 13.28% 12,180 8.00% 15,225 10.00% King George State Bank 5,753 11.15% 4,126 8.00% 5,158 10.00% Tier 1capital to risk weighted assets Consolidated 63,560 15.56% 16,335 4.00% 24,502 6.00% Union Bank & Trust 38,310 9.67% 15,843 4.00% 23,765 6.00% Northern Neck State Bank 18,706 12.29% 6,090 4.00% 9,135 6.00% King George State Bank 5,372 10.42% 2,063 4.00% 3,095 6.00% Tier 1capital to average assets Consolidated 63,560 11.27% 22,554 4.00% 28,192 5.00% Union Bank & Trust 38,310 10.60% 14,450 4.00% 18,063 5.00% Northern Neck State Bank 18,706 12.92% 5,790 4.00% 7,238 5.00% King George State Bank 5,372 10.00% 2,148 4.00% 2,685 5.00% As of December 31, 1996 Total capital to risk weighted assets Consolidated $ 62,415 16.29% $ 30,652 8.00% $ 38,315 10.00% Union Bank & Trust 36,451 9.82% 29,683 8.00% 37,104 10.00% Northern Neck State Bank 18,844 13.66% 11,035 8.00% 13,794 10.00% King George State Bank 5,337 10.96% 3,895 8.00% 4,869 10.00% Tier 1capital to risk weighted assets Consolidated 58,027 15.15% 15,321 4.00% 22,981 6.00% Union Bank & Trust 33,846 9.12% 14,842 4.00% 22,262 6.00% Northern Neck State Bank 17,424 12.63% 5,517 4.00% 8,276 6.00% King George State Bank 4,974 10.22% 1,948 4.00% 2,921 6.00% Tier 1capital to average assets Consolidated 58,027 10.70% 21,692 4.00% 27,115 5.00% Union Bank & Trust 33,846 9.46% 14,318 4.00% 17,898 5.00% Northern Neck State Bank 17,424 13.08% 5,329 4.00% 6,662 5.00% King George State Bank 4,974 10.15% 1,960 4.00% 2,450 5.00%
13 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS For those short-term instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE For investment securities and securities available for sale, fair value is determined by quoted market price. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. DEPOSITS The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. BORROWINGS The carrying value of short-term borrowings are reasonable estimates of fair value. The fair value of long-term borrowings is estimated based on interest rates currently available for debt with similar terms and remaining maturities. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 1997 and 1996, the carrying amount and fair value of loan commitments and standby letters of credit were immaterial. The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996 are as follows:
1997 1996 ----------------------------- ----------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ------------ ----------- Financial assets: Cash and cash equivalents $ 21,454 $ 21,454 $ 22,453 $ 22,453 Investment securities 10,441 10,682 11,423 11,689 Securities available for sale 142,108 142,108 129,268 129,268 Net loans 395,338 396,084 352,277 350,717 Financial liabilities: Deposits 472,143 474,663 439,607 436,605 Borrowings 50,960 50,923 38,528 38,528
UNION BANKSHARE CORPORATION 14 PARENT COMPANY FINANCIAL INFORMATION The primary source of funds for the dividends paid by Union Bankshares Corporation (the "Parent Company") is dividends received from its subsidiary banks. The payment of such dividends by the subsidiary banks and the ability of the banks to loan or advance funds to the Parent Company are subject to certain statutory limitations which contemplate that the current year earnings and earnings retained for the two preceding years may be paid to the Parent Company without regulatory approval. Financial information for the Parent Company follows: UNION BANKSHARES CORPORATION ("PARENT COMPANY ONLY") BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (dollars in thousands)
1997 1996 ----------- ----------- Assets Cash $ 73 $ 84 Certificates of deposit 125 472 Securities available for sale 283 211 Premises and equipment, net 3,353 1,058 Other assets 331 313 Due from subsidiaries 177 51 Investment in subsidiaries 62,782 56,581 ----------- ----------- Total assets $ 67,124 $ 58,770 =========== =========== Liabilities and Stockholders' equity: Other liabilities $ 1,616 $ 204 Common stock 14,304 14,267 Surplus 388 160 Retained earnings 49,105 43,863 Unrealized gains on securities available for sale 1,711 276 ----------- ----------- Total liabilities and stockholders' equity $ 67,124 $ 58,770 =========== ===========
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Income: Interest income $ 11 $ 67 $ 93 Dividends received from subsidiaries 3,434 2,315 1,948 Equity in undistributed net income of subsidiaries 4,769 5,453 4,886 Other income 62 2 - ----------- ----------- ----------- Total income 8,276 7,837 6,927 Interest expense 64 - - Operating expenses 329 381 174 ----------- ----------- ----------- Total expense 393 381 174 ----------- ----------- ----------- Net income $ 7,883 $ 7,456 $ 6,753 =========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- Operating activities: Net income $ 7,883 $ 7,456 $ 6,753 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (4,769) (5,453) (4,886) Decrease (increase) in other assets (144) 34 (260) Other (net) (162) 197 (1) ----------- ----------- ----------- Net cash provided by operating activities 2,808 2,234 1,606 ----------- ----------- ----------- Investing activities: Purchase of securities - (63) (100) Proceeds from maturity of securities 55 1,006 498 Purchase of equipment (2,585) (1,076) - Capital contributions to subsidiaries - - (50) ----------- ----------- ----------- Net cash provided (used) by investing activities (2,530) (133) 348 ----------- ----------- ----------- Financing activities: Net increase in borrowings 1,740 - - Cash dividends paid (2,641) (2,315) (1,948) Issuance of common stock under plans 304 272 310 Repurchase of common stock under plans (39) (159) - ----------- ----------- ----------- Net cash used in financing activities (636) (2,202) (1,638) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (358) (101) 316 Cash and cash equivalents at beginning of year 556 657 341 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 198 $ 556 $ 657 =========== =========== ===========
INDEPENDENT AUDITORS' REPORT [LOGO] The Board of Directors Union Bankshares Corporation We have audited the accompanying consolidated balance sheets of Union Bankshares Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of King George State Bank, Incorporated, a wholly-owned subsidiary, for the year ended December 31, 1995, which statements reflect total interest income constituting 9% in 1995 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for King George State Bank, Incorporated, is based solely on the report of the other auditors. 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 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 audits and the report of the auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Richmond, Virginia KPMG PEAT MARWICK LLP February 4, 1998 UNION BANKSHARES CORPORTION DIRECTORY OF UNION BANKSHARES CORPORATION NORTHERN NECK STATE BANK UNION BANK & TRUST COMPANY OFFICERS E. Peyton Motley, President N. Byrd Newton, Senior Vice President & Secretary Russell G. Brown, Vice President William E. Harrison, Vice President & Cashier Marion B. Rowe, Vice President Gail S. Smith, Vice President William M. Wright, Vice President DIRECTORS William E. Bowen E. Peyton Motley S. Bryan Chandler W. Tayloe Murphy, Jr. Richard A. Farmar, Jr. Louis G. Packett W. D. Gray Charles H. Ryland Edward L. Hammond William M. Wright William H. Hughes HONORARY DIRECTORS Robert D. Delano James V. Garland, Jr. Thomas S. Herbert R. Carter Wellford KING GEORGE STATE BANK OFFICERS DIRECTORS Homer L. Hite John S. Cheadle President Frederick G. Davies David F. Clare William B. Gallahan Vice President Homer L. Hite Scott Q. Nininger E.R. Morris, Jr. Vice President Frank B. Taylor Priscilla O. Morgan Newell C. Thompson Cashier E.P. Woodworth UNION MORTGAGE COMPANY, LLC OFFICERS DIRECTORS John C. Neal G. William Beale President Chairman Edward G. Hilldrup Homer L. Hite Vice President E. Peyton Motley John C. Neal UNION BANK & TRUST COMPANY G. William Beale, President & Chief Executive Officer John C. Neal, Executive Vice President & Chief Operating Officer Robert K. Bailey, III, Senior Vice President William H. Hutton, Senior Vice President David K. Bohmke, Vice President Thomas J. Boyd, III, Vice President Jeannette B. Burke, Vice President F. Kent Cox, Vice President Sherry C. Gravatt, Vice President Almeda H. Pitts, Vice President & Cashier John M. Randolph, Vice President R. Tyler Ware, Vice President Raymond C. Ratcliffe, Jr., Vice President George Washington, Jr., Vice President DIRECTORS Ronald L. Hicks, Chairman Michael N. Manns Walton Mahon, Vice Chairman James E. Small, III G. William Beale M. Raymond Piland, III Daniel I. Hansen A.D. Whittaker Estelle H. Kay HONORARY DIRECTORS H. Ashton Taylor R.F. Upshaw, Jr. Guy C. Lewis, Jr. UNION INVESTMENT SERVICES, INC. OFFICERS DIRECTORS G. William Beale G. William Beale, President Chairman Bernard W. Mahon, Jr. David F. Clare Vice President Ronald L. Hicks Randall W. Vaughan Estelle H. Kay Financial Advisor Michael N. Manns Elaine M. Arnold William M. Wright Financial Advisor Rhonda Carr Office Manager STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS Union Bankshares Corporation P.O. Box 446 211 North Main Street Bowling Green, Virginia 22427-0446 (804) 633-5031 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 7:00 p.m. on Tuesday, April 21, 1998, at the Caroline County High School, Bowling Green, Virginia. All shareholders are cordially invited to attend. COMMON STOCK Union Bankshares' Common Stock is traded on the National Over-The-Counter Market and is quoted on the National Market System of NASDAQ (National Association of Securities Dealers Automated Quotations) where our symbol is UBSH. (CUSIP # 905399101) Union Bankshares is also listed in some newspapers under the NASDAQ National Market heading "UnBkCp" or "UnionBS". COMMON STOCK PRICES AND DIVIDENDS Union Bankshares Corporation began trading its stock via NASDAQ in October 1993. Dividends are typically paid on June 1st and December 1st of each year. There were 3,575,937 shares of stock outstanding on December 31, 1997, held by 1,976 shareholders of record. The most recent trades at February 27, 1998 were $42.50 per share which compares to a year earlier trading price of $26.25. The following schedule summarizes the high and low sales prices and dividends declared for the two years ended December 31, 1997.
DIVIDENDS MARKET VALUES DECLARED -------------------------------------------- 1997 1996 -------------------------------------------- HIGH LOW HIGH LOW 1997 1996 ----- ------ ------ ------ ----- ----- First Quarter $26.25 $ 25.00 $26.25 $24.50 $ - $ - Second Quarter 31.00 24.25 27.75 23.50 .36 .30 Third Quarter 33.75 28.75 27.00 24.50 - - Fourth Quarter 44.75 32.75 26.25 25.00 .38 .34 ------- ------- $ .74 $ .64 ======= =======
DIVIDEND REINVESTMENT PLAN Union Bankshares' dividend reinvestment plan provides each registered shareholder with an economical and convenient method of investing cash dividends in additional shares of the Company's common stock without fees and at a 5% discount from the prevailing market price. For a prospectus on the Dividend Reinvestment Plan, contact our Transfer Agent at the address indicated below. INVESTOR RELATIONS Union Bankshares' Annual Report, Form 10-K, and other corporate publications are available to shareholders on request, without charge, by writing: D. Anthony Peay Vice President and Chief Financial Officer Union Bankshares Corporation P.O. Box 446 Bowling Green, Virginia 22427-0446 (804) 632-2112 INDEPENDENT AUDITORS KPMG Peat Marwick LLP 1021 East Cary Street, Suite 1900 Richmond, VA 23219 TRANSFER AGENT Shareholders requiring information on stock transfer requirements, lost certificates, dividends and other shareholder matters should contact our transfer agent: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 1-800-368-5948 Union Bankshares is fortunate to serve some wonderfully historic and picturesque areas of Virginia. Featured on the cover and in the pages of the annual report are representative photos of our communities. The waterman in Cockrell Creek, Reedville, Stratford Hall, and the Montross produce stand are provided courtesy of the Northern Neck Tourism Council. Thanks goes to the Fredericksburg Office of Economic Development and Tourism for the photo of the Mary Washington House. The photo of historic Hanover Tavern was graciously provided by the Hanover Tavern Foundation. Union Bankshares wishes to thank those organizations for adding so much to our annual report. UNION BANKSHARES CORPORATION P.O. Box 446 211 North Main Street Bowling Green, Virginia 22427-0446 (804) 633-5031