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