UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer Identification No.)
211 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $2 PAR VALUE
Union Bankshares Corporation (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
As of June 30, 1998, Union Bankshares Corporation had 7,182,576 shares of
Common Stock outstanding.
UNION BANKSHARES CORPORATION
FORM 10-Q
June 30, 1998
INDEX
PART 1 - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 (Unaudited)........................... 1
Consolidated Statements of Income and Comprehensive Income
for the three and six months ended June 30,
1998 and 1997 (Unaudited) .............................. 2
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited)......... 3
Notes to Consolidated Financial Statements (Unaudited)............ 4-5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 6-15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K............................... 16
Signatures............................................................. 16
Index to
Exhibits............................................................... 17
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
June 30 December 31, June 30
ASSETS 1998 1997 1997
- -------- ---- ---- ----
Cash and cash equivalents:
Cash and due from banks $ 24,587 $ 20,147 $ 20,504
Interest-bearing deposits in other banks 1,159 695 645
Federal funds sold 3,560 612 2,722
-------------- ---------------- ----------------
Total cash and cash equivalents 29,306 21,454 23,871
-------------- ---------------- ----------------
Securities available for sale, at fair value 146,054 142,108 138,158
Investment securities
fair value of $11,385, $10,682
and $10,570, respectively 11,174 10,441 10,803
-------------- ---------------- ----------------
Total securities 157,228 152,549 148,961
-------------- ---------------- ----------------
Loans, net of unearned income 449,599 395,338 370,636
Less allowance for loan losses 4,939 4,565 4,297
-------------- ---------------- ----------------
Net loans 444,660 390,773 366,339
-------------- ---------------- ----------------
Bank premises and equpiment, net 20,621 16,934 15,891
Other real estate owned 1,390 1,746 1,550
Other assets 18,032 12,025 10,947
-------------- ---------------- ----------------
Total assets $ 671,237 $ 595,481 $ 567,559
============== ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing demand deposits $ 77,770 $ 60,962 $ 56,056
Interest-bearing deposits:
Savings accounts 53,682 46,693 45,884
NOW accounts 73,351 60,010 57,327
Money market accounts 58,912 50,387 47,624
Time deposits of $100,000 and over 65,147 58,421 53,997
Other time deposits 223,942 195,670 191,578
-------------- ---------------- ----------------
Total interest-bearing deposits 475,034 411,181 396,410
-------------- ---------------- ----------------
Total deposits 552,804 472,143 452,466
-------------- ---------------- ----------------
Short-term borrowings 16,323 27,245 31,566
Long-term borrowings 28,460 23,715 17,850
Other liabilities 5,559 6,870 3,575
-------------- ---------------- ----------------
Total liabilities 603,146 529,973 505,457
-------------- ---------------- ----------------
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares;
issued and outstanding, 7,182,576, 7,151,874
and 7,142,950 shares, respectively 14,365 14,304 14,262
Surplus 337 388 127
Retained earnings 51,659 49,105 46,663
Accumulated other comprehensive income
Net unrealized gains on securities available for
sale, net of taxes 1,730 1,711 1,050
-------------- ---------------- ----------------
Total stockholders' equity 68,091 65,508 62,102
-------------- ---------------- ----------------
Total liabilities and stockholders' equity $ 671,237 $ 595,481 $ 567,559
============== ================ ================
See accompanying notes to consolidated financial statements.
1
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
(Dollars in thousands)
Quarter Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 10,110 $ 8,305 $ 19,561 $ 16,524
Interest on securities:
U.S. government and agency securities 242 857 581 1,827
Obligations of states and political subdivisions 999 986 1,973 1,949
Other securities 1,039 374 2,041 559
Interest on Federal funds sold 48 46 164 104
Interest on interest-bearing deposits in other banks 19 10 43 25
-------------- --------------- -------------- ---------------
Total interest income 12,457 10,578 24,363 20,988
-------------- --------------- -------------- ---------------
Interest expense:
Interest on deposits 5,324 4,493 10,315 8,901
Interest on other borrowings 657 591 1,392 1,117
-------------- --------------- -------------- ---------------
Total interest expense 5,981 5,084 11,707 10,018
-------------- --------------- -------------- ---------------
Net interest income 6,476 5,494 12,656 10,970
Provision for loan losses (note 2) 480 220 915 420
-------------- --------------- -------------- ---------------
Net interest income after provision
for loan losses 5,996 5,274 11,741 10,550
-------------- --------------- -------------- ---------------
Other income:
Service charges on deposit accounts 698 557 1,305 1,046
Other service charges and fees 512 214 960 627
Gains (losses) on securities transactions, net (27) (18) (25) 13
Gains on sales of other real estate owned
and bank premises, net - 299 16 408
Other operating income 128 134 136 97
-------------- --------------- -------------- ---------------
Total other income 1,311 1,186 2,392 2,191
-------------- --------------- -------------- ---------------
Other expenses:
Salaries and benefits 2,640 2,048 5,052 4,081
Occupancy expenses 317 290 611 536
Furniture and equipment expenses 481 442 840 746
Other operating expenses 1,627 1,234 2,955 2,425
-------------- --------------- -------------- ---------------
Total other expenses 5,065 4,014 9,458 7,788
-------------- --------------- -------------- ---------------
Income before income taxes 2,242 2,446 4,675 4,953
Income tax expense 416 444 890 1,014
-------------- --------------- -------------- ---------------
Net income $ 1,826 $ 2,002 $ 3,785 $ 3,939
============== =============== ============== ===============
Other Comprehensive Income
Unrealized holding (gains) losses arising during
the period net of taxes of $4 and $10 for
three and six months of 1998 and $500 and
$403 for the three and six months of 1997 $ (7) $ 972 $ 2 $ 783
Less reclassification adjustments for (gains)
losses included in net of taxes of $9 and $8 for
three and six months of 1998 and $6 and ($4)
for the three and six months of 1997 18 12 17 (9)
-------------- --------------- -------------- ---------------
Comprehensive Income $ 1,837 2,986 3,804 4,713
============== =============== ============== ===============
Diluted Earnings per share $ 0.25 $ 0.28 $ 0.53 $ 0.55
============== =============== ============== ===============
Dividends per share 0.19 0.18 0.19 0.18
============== =============== ============== ===============
See accompanying notes to consolidated financial statements.
2
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1998 and 1997
(Dollars in thousands)
1998 1997
---- ----
Operating activities:
Net income $ 3,785 $ 3,939
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment 743 723
Amortization of intangibles 153 22
Provision for loan losses 915 420
Gains on sales of securities available for sale 25 13
Gains on sale of other real estate owned (16) (408)
Increase in other assets (6,148) (235)
Decrease in other liabilities (1,311) (1,105)
------------ -----------
Net cash and cash equivalents provided
by operating activities (1,854) 3,369
------------ -----------
Investing activities:
Net increase in securities (4,697) (7,065)
Net increase in loans (54,848) (19,345)
Acquisition of bank premises and equipment (4,430) (2,393)
Proceeds from sales of other real estate owned 418 4,282
------------ -----------
Net cash and cash equivalents used in
investing activities (63,557) (24,521)
------------ -----------
Financing activities:
Net increase in non-interest-bearing deposits 16,808 1,051
Net increase in interest-bearing deposits 63,853 11,808
Net (decrease) increase in short-term borrowings (10,922) 4,163
Increase (decrease) in long-term borrowings 4,880 6,800
Issuance (purchase) of common stock+B15 10 (38)
Cash Dividends paid (1,231) (1,139)
Repayment of long-term borrowings (135) (75)
------------ -----------
Net cash and cash equivalents provided by
financing activities 73,263 22,570
------------ -----------
Increase in cash and cash equivalents 7,852 1,418
Cash and cash equivalents at beginning of period 21,454 22,453
------------ -----------
Cash and cash equivalents at end of period $ 29,306 $ 23,871
============ ===========
See accompanying notes to consolidated financial statements.
3
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The information contained in the financial statements is unaudited and does
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
in the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of the
interim periods presented have been made. Operating results for the three-
and six- month periods ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report to Shareholders. Certain previously reported
amounts have been reclassified to conform to current period presentation.
2. ALLOWANCE FOR LOAN LOSSES
The following summarizes activity in the allowance for loan losses for the
six months ended June 30, (in thousands):
1998 1997
---- ----
Balance, January 1 $ 4,565 $4,388
Provisions charged to operations 915 420
Recoveries credited to allowance 149 99
Loans charged off (690) (610)
---- ----
Balance, June 30 $ 4,939 $4,297
======= ======
3. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of shares outstanding during the period. Weighted
average shares used for the computation of basic EPS were 7,177,489 and
7,134,516 for the three months ended June 30, 1998 and 1997 and 7,165,493
and 7,133,366 for the six months ended June 30, 1998 and 1997. Diluted EPS
is computed using the weighted number of common shares outstanding during
the period, including the effect of dilutive potential common shares
outstanding attributable to stock options. Weighted average shares used for
the computation of diluted EPS were 7,209,886 and 7,160,183 for the three
months ended June 30, 1998 and 1997 and 7,200,795 and 7,157,879 for the six
months ended June 30, 1998 and 1997.
4
4. RECENT ACCOUNTING STATEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that a company recognize all derivative instruments
as either assets or liabilities in the consolidated balance sheet, and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
the resulting designation. For companies with a fiscal year ending on
December 31, SFAS 133 is effective as of January 1, 2000. Earlier adoption,
as of the beginning of a fiscal quarter, is encouraged but is not mandatory.
The impact of adopting SFAS 133 will be dependent on the specific derivative
instruments in place at the date of adoption. At this time, Management
believes the adoption of this new standard will not have a material impact
on the financial condition or results of operations of the Company, and does
not anticipate adopting SFAS 133 before January 1, 2000.
5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Union Bankshares Corporation (the "Company") is a multi-bank holding
company organized under Virginia law which provides financial services through
its wholly-owned subsidiaries, Union Bank & Trust Company, Northern Neck State
Bank, King George State Bank, Union Investment Services, Inc., and Union
Mortgage Company, LLC. The three subsidiary banks, Union Bank & Trust Company,
Northern Neck State Bank and King George State Bank, are full service retail
commercial banks offering a wide range of banking and related financial
services, including demand and time deposits, as well as commercial, industrial,
residential construction, residential mortgage and consumer loans. Union
Investment Services, Inc., is a full service discount brokerage company which
offers a full range of investment services, and sells mutual funds, bonds and
stocks. Union Mortgage Company, LLC provides a wide array of mortgage products
to the Company's primary trade area.
The Company's primary trade area stretches from Fredericksburg, south to
Hanover County and east throughout Northern Neck area of Virginia. The Corporate
Headquarters are located in Bowling Green, Virginia. Through its banking
subsidiaries, the Company operates 26 branches in its primary trade area.
During the second quarter of 1998 the Company announced a two-for-one
stock split to shareholders of record as of May 21, 1998. The Company also
announced that the it had filed the necessary application to form a new
community bank in Williamsburg, Virginia, named The Bank of Williamsburg. The
Company anticipates to begin operations of this wholly owned subsidiary during
the second quarter of 1999.
On July 1, 1998, the company completed its acquisition of Rappahannock
Bankshares, Inc. Rappahannock National Bank is a $20 million bank in
Washington, Virginia. The Company exchanged 316.418 shares of its common
stock for each outstanding share of Rappahannock Bankshares, Inc. stock.
The impact of this transaction will not have a material effect on the
financial condition or results of operations of the Company.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of Union Bankshares Corporation and subsidiaries (the "Company"). The analysis
focuses on the Consolidated Financial Statements, the footnotes thereto, and the
other financial data herein. Highlighted in the discussion are material changes
from prior reporting periods and any identifiable trends affecting the Company.
Amounts are rounded for presentation purposes, while the percentages presented
are computed based on unrounded amounts.
Results of Operations
Net income for the second quarter of 1998 was $1.8 million, down from $2.0
million for the same period in 1997. Excluding after tax gains on sales of other
real estate of $197,000 in the second quarter of 1997, net income increased by
slightly more than 1% in the second quarter of 1998. Diluted earnings per share
amounted to $.25 in the second quarter of 1998, as compared to $.28 in the
second quarter of 1997. The Company's annualized return on assets for the second
quarter of 1998 was 1.11% as compared to 1.43% a year ago. The Company's
annualized return on equity totaled 10.83% and 13.13% for the three months ended
June 30, 1998 and 1997, respectively. These performance ratios reflect strong
asset and capital growth and remain strong performance ratios by industry and
peer standards.
Net income for the first six months of 1998 was $3.8 million, down from $3.9
million for the same period in 1997. Excluding after tax gains on sales of other
real estate of $269,000 in the first six months of 1997, net income increased by
6
slightly more than 3.1% in the first six months of 1998. Diluted earnings per
share amounted to $.53 in the first six months of 1998, as compared to $.55 in
1997. The Company's annualized return on assets for the first six months of 1998
was 1.18% as compared to 1.43% a year ago. The Company's annualized return on
equity totaled 11.46% and 13.17% for the six months ended June 30, 1998 and
1997, respectively.
Net Interest Income
Net interest income on a tax-equivalent basis for the second quarter of
1998 increased by 15.2% to $7.0 million from $6.1 million for the same period a
year ago. By managing its interest rate spread and increasing the volume of
earning assets over interest-bearing liabilities, the Company has been able to
maintain a strong net interest margin. The current interest rate environment and
competition for deposits continues to put pressure on net interest margins.
Average earning assets during the second quarter of 1998 increased by $81.9
million to $598.3 million from the second quarter of 1997, while average
interest-bearing liabilities grew by $75.4 million to $515.9 million over this
same period. The Company's yield on average earning assets was 8.70%, up from
8.66% a year ago, while its cost of average interest-bearing liabilities also
increased slightly from 4.63% to 4.65%.
7
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable
Equivalent Basis)
-------------------------------------------------------------------------
Quarters Ended June 30,
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . $ 83,825 $ 1,369 6.55% $ 81,682 $ 1,371 6.73%
Tax-exempt(1) . . . . . . . . 71,126 1,436 8.10% 66,392 1,424 8.60%
------------------------- ----------------------------
Total securities . . 154,951 2,805 7.26% 148,074 2,795 7.57%
Loans, net. . . . . . . . . . . . . . . 436,768 10,110 9.28% 364,180 8,305 9.15%
Federal funds sold . . . . . . . . . . 5,257 48 3.66% 3,598 46 5.13%
Interest-bearing deposits - -
in other banks . . . . . . . . 1,360 19 5.60% 630 10 6.37%
------------------------- ----------------------------
Total earning assets . 598,336 12,982 8.70% 516,482 11,156 8.66%
Allowance for loan losses . . . . . . . (4,866) (4,425)
Total non-earning assets . . . . . . . . 66,675 43,461
----------- --------------
Total assets . . . . . . . . . . . . . . $ 660,145 $ 555,518
=========== ==============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . $ 73,551 438 2.39% $ 54,518 351 2.58%
Regular savings . . . . . . . . 52,573 394 3.01% 47,315 356 3.02%
Money market savings . . . . . 61,412 522 3.41% 50,029 415 3.33%
Certificates of deposit:
$100,000 and over . . . . . . . 65,352 890 5.46% 51,306 680 5.32%
Under $100,000 . . . . . . . . 221,398 3,080 5.58% 190,094 2,691 5.68%
------------------------- ------------------------
Total interest-bearing
deposits . . 474,286 5,324 4.50% 393,262 4,493 4.58%
Other borrowings . . . . . . . . . . . . 41,647 657 6.33% 47,269 591 5.01%
------------------------- ------------------------
Total interest-bearing
liabilities . 515,933 5,981 4.65% 440,531 5,084 4.63%
-------------- ----------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . 71,188 52,060
Other liabilities . . . . . . . 5,395 4,402
----------- --------------
Total liabilities . . 592,516 496,993
Stockholders' equity . . . . . . . . . . 67,629 58,525
----------- --------------
Total liabilities and
stockholders' equity . . . . . $ 660,145 $ 555,518
=========== ==============
Net interest income . . . . . . . . . . $ 7,001 $ 6,072
============== ==========
Interest rate spread . . . . . . . . . . 4.05% 4.03%
Interest expense as a percent
of average earning assets . . . 4.01% 3.95%
Net interest margin . . . . . . . . . . 4.69% 4.72%
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable
Equivalent Basis)
--------------------------------------------------------------------------------------
Quarters Ended June 30,
---------------------------------------------------
1996
---------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
---------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . $ 70,758 $ 1,057 6.01%
Tax-exempt(1) . . . . . . . . 64,983 1,300 8.05%
-------------------------
Total securities . . 135,741 2,357 6.98%
Loans, net. . . . . . . . . . . . . . . 342,680 7,993 9.38%
Federal funds sold . . . . . . . . . . 5,399 66 4.92%
Interest-bearing deposits
in other banks . . . . . . . . 433 4 3.72%
-------------------------
Total earning assets . 484,253 10,420 8.65%
Allowance for loan losses . . . . . . . (4,311)
Total non-earning assets . . . . . . . . 42,205
------------
Total assets . . . . . . . . . . . . . . $ 522,147
============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . 45,763 289 2.54%
Regular savings . . . . . . . . 56,464 495 3.53%
Money market savings . . . . . 55,062 448 3.27%
Certificates of deposit:
$100,000 and over . . . . . . . 49,232 647 5.29%
Under $100,000 . . . . . . . . 169,548 2,428 5.76%
-------------------------
Total interest-bearing
deposits . . 376,069 4,307 4.61%
Other borrowings . . . . . . . . . . . . 37,594 484 5.18%
-------------------------
Total interest-bearing
liabilities . 413,663 4,791 4.66%
-------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . 50,964
Other liabilities . . . . . . . 4,290
-----------
Total liabilities . . 468,917
Stockholders' equity . . . . . . . . . . 53,230
-----------
Total liabilities and
stockholders' equity . . . . . $ 522,147
===========
Net interest income . . . . . . . . . . $ 5,629
=============
Interest rate spread . . . . . . . . . . 4.00%
Interest expense as a percent
of average earning assets . . . 3.98%
Net interest margin . . . . . . . . . . 4.68%
(1) Income and yields are reported on a taxable equivalent basis.
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
---------------------------------------------
Six Months Ended June 30,
---------------------------------------------
1998
---------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
---------------------------------------------
Assets:
Securities:
Taxable . . . . . . . . . . . . . . . . . $ 85,921 $ 2,756 6.47%
Tax-exempt(1) . . . . . . . . . . . . . . 69,989 2,835 8.17%
----------------------------
Total securities . . . . . . . . 155,910 5,591 7.23%
Loans, net. . . . . . . . . . . . . . . . . . . . . 428,665 19,561 9.20%
Federal funds sold . . . . . . . . . . . . . . . 7,077 164 4.67%
Interest-bearing deposits - -
in other banks . . . . . . . . . . . . . . 1,369 43 6.33%
----------------------------
Total earning assets . . . . . . . 593,021 25,359 8.62%
Allowance for loan losses . . . . . . . . . . (4,788)
Total non-earning assets . . . . . . . . . 59,627
-----------
Total assets . . . . . . . . . . . . . . . . . . . $ 647,860
===========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . . . . $ 69,318 818 2.38%
Regular savings . . . . . . . . . . . . . . 50,913 759 3.01%
Money market savings . . . . . . . . . . 59,271 1,012 3.44%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . . . 64,719 1,758 5.48%
Under $100,000 . . . . . . . . . . . . . . 214,572 5,968 5.61%
----------------------------
Total interest-bearing
deposits . . . . . . . 458,793 10,315 4.53%
Other borrowings . . . . . . . . . . . . . . . . . 49,104 1,392 5.72%
----------------------------
Total interest-bearing
liabilities . . . . . . 507,897 11,707 4.65%
-----------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 68,221
Other liabilities . . . . . . . . . . . . . 5,167
-----------
Total liabilities . . . . . . . . 581,285
Stockholders' equity . . . . . . . . . . . . . . 66,575
-----------
Total liabilities and
stockholders' equity . . . . . . . . . . . $ 647,860
===========
Net interest income . . . . . . . . . . . . . . $13,652
=================
Interest rate spread . . . . . . . . . . . . . . . 3.98%
Interest expense as a percent
of average earning assets . . . . . . . . . 3.98%
Net interest margin . . . . . . . . . . . . . . . 4.64%
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
-------------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . . . . $ 78,158 $ 2,515 6.49% $ 73,117 $ 2,208 6.07%
Tax-exempt(1) . . . . . . . . . . . 66,414 2,739 8.32% 63,674 2,612 8.25%
-------------------------------- -------------------------
Total securities . . . . . 144,572 5,254 7.33% 136,791 4,820 7.09%
Loans, net. . . . . . . . . . . . . . . . . . 360,538 16,524 9.24% 337,390 15,830 9.44%
Federal funds sold . . . . . . . . . . . . . 4,119 104 5.09% 5,121 135 5.30%
Interest-bearing deposits
in other banks . . . . . . . . . . . 815 25 6.19% 579 13 4.52%
-------------------------------- -------------------------
Total earning assets . . . . 510,044 21,907 8.66% 479,881 20,798 8.72%
Allowance for loan losses . . . . . . . . . . (4,438) (4,213)
Total non-earning assets . . . . . . . . . 43,916 40,553
---------------- -----------
Total assets . . . . . . . . . . . . . . . . . $ 549,522 $ 516,221
================ ===========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . $ 53,165 680 2.58% 45,556 575 2.54%
Regular savings . . . . . . . . . . . 46,197 707 3.09% 46,293 999 3.57%
Money market savings . . . . . . . . 52,254 869 3.35% 55,066 900 3.29%
Certificates of deposit:
$100,000 and over . . . . . . . . . . 50,602 1,324 5.28% 48,195 1,283 5.35%
Under $100,000 . . . . . . . . . . . 188,610 5,321 5.69% 167,856 4,895 5.86%
-------------------------------- -------------------------
Total interest-bearing
deposits . . . . 390,828 8,901 4.59% 362,966 8,652 4.67%
Other borrowings . . . . . . . . . . . . . . . 43,745 1,117 5.15% 36,485 874 4.82%
-------------------------------- -------------------------
Total interest-bearing
liabilities . . . 434,573 10,018 4.65% 399,451 9,526 4.68%
---------------- --------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . 52,463 49,983
Other liabilities . . . . . . . . . . 4,530 4,065
---------------- -----------
Total liabilities . . . . . 491,566 453,499
Stockholders' equity . . . . . . . . . . . . . 57,956 52,722
---------------- -----------
Total liabilities and
stockholders' equity . . . . . . . . $ 549,522 $ 506,221
================ ===========
Net interest income . . . . . . . . . . . . . $ 11,889 $11,272
================ ==============
Interest rate spread . . . . . . . . . . . . . 4.01% 4.04%
Interest expense as a percent
of average earning assets . . . . . . 3.96% 3.99%
Net interest margin . . . . . . . . . . . . . 4.70% 4.72%
(1) Income and yields are reported on a taxable equivalent basis.
8
COMBINED
The following table presents the Company's interest sensitivity position at June
30, 1998. This one-day position, which is continually changing, is not
necessarily indicative of the Company's position at any other time.
Interest Sensitivity Analysis
June 30, 1998
------------------------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
----------- ----------- -------------- --------------------------
(In thousands)
Earning Assets:
Loans, net of unearned income (3) . . . . $101,410 $ 37,737 $ 166,118 $ 141,704 $ 446,969
Investment securities . . . . . . . . . . . 405 2,255 5,300 3,214 11,174
Securities available for sale. . . . . . . 2,481 4,215 53,523 85,835 146,054
Federal funds sold . . . . . . . . . . . . 3,560 - - - 3,560
Other short-term investments . . . . . . . 1,060 - 99 - 1,159
---------- ---------------------------- -------------- -------------
Total earning assets . . . . . . . . . . . 108,916 44,207 225,040 230,753 608,916
---------- ---------------------------- -------------- -------------
Interest-Bearing Liabilities:
Interest checking (2) . . . . . . . . . . . - - 73,351 - 73,351
Regular savings (2) . . . . . . . . . . . . - - 53,682 - 53,682
Money market savings . . . . . . . . . . . 58,912 - - - 58,912
Certificates of deposit: - - - -
$100,000 and over . . . . . . . . . 15,679 35,215 14,253 - 65,147
Under $100,000 . . . . . . . . . . . 45,424 95,169 83,349 - 223,942
Short-term borrowings. . . . . . . . . . . 16,233 90 - - 16,323
Long-term borrowings . . . . . . . . . . . - 5,000 16,750 6,710 28,460
---------- ---------------------------- -------------- -------------
Total interest-bearing
liabilities . . . . . . . . . . . . 136,248 135,474 241,385 6,710 519,817
---------- ---------------------------- -------------- -------------
Period gap . . . . . . . . . . . . . . . . (27,332) (91,267) (16,345) 224,043
Cumulative gap . . . . . . . . . . . . . . $(27,332) $(118,599) $(134,944) $ 89,099 $ 89,099
========== ============================ ============== =============
Ratio of cumulative gap to
total earning assets . . . . . . . . -4.49% -19.48% -22.16% 14.63%
========== ============================ ==============
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) The Company has found that interest-bearing checking deposits and regular
savings deposits are not sensitive to changes in related market rates and
therefore, it has placed them predominantly in the "1-5 Years" column.
(3) Excludes non-accrual loans
9
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is
subject to the accuracy of the assumptions that underlie the process, but it
provides a better analysis of the sensitivity of earnings to changes in interest
rates than other analysis such as the static gap analysis.
Assumptions used in the model, including loan and deposit growth rates,
are derived from seasonal trends and management's outlook, as are the
assumptions used to project yields and rates for new loans and deposits. All
maturities, calls and prepayments in the securities portfolio are assumed to be
reinvested in like instruments. Mortgage loans and mortgage backed securities
prepayment assumptions are based on industry estimates of prepayment speeds for
portfolios with similar coupon ranges and seasoning. Different interest rate
scenarios and yield curves are used to measure the sensitivity of earnings to
changing interest rates. Interest rates on different asset and liability
accounts move differently when the prime rate changes and are accounted for in
the different rate scenarios.
The following table represents the interest rate sensitivity on net
interest income for the Company using different rate scenarios:
% Change in
Change in Prime Rate Net Interest Income
-------------------- -------------------
+200 basis points +2.9
Flat 0
-200 basis points -2.5%
Market Value Simulation
Market value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Market values
are calculated based on discounted cash flow analysis. The net market value is
the market value of all assets minus the market value of all liabilities. The
change in net market value over different rate environments is an indication of
the longer term repricing risk in the balance sheet. The same assumptions are
used in the market value simulation as in the earnings simulation.
The following chart reflects the change in net market value over different
rate environments:
Change in Net Market Value
Change in Prime Rate (dollars in thousands)
-------------------- ----------------------
+200 basis points $-17,202
+100 basis points -7,437
Flat 696
-100 basis points 10,223
-200 basis points 17,974
11
Provision for Possible Loan Losses
The provision for possible loan losses totaled $480,000 for the second
quarter of 1998, up from $220,000 for the second quarter of 1997. The provision
for the first six months of 1998 totaled $915,000, up from $420,000 a year ago.
These provisions reflect the performance of the loan portfolio and management's
assessment of the credit risk in the portfolio. (See Asset Quality)
Non-Interest Income
Non-interest income for the six months ended 1998 totaled $2.4 million, up
from $2.2 a year ago. This increase is due principally to the increases in
income from mortgage brokerage and was partially offset by net gains of
approximately $408,000 on sales of real estate owned in the first six months of
1997. The remaining increase in non-interest income is due to increases in
service fees on deposit accounts, increases in other service fees and increased
brokerage commissions. Management continues to seek additional sources of
non-interest income, including increased emphasis on its credit card operations,
mortgage banking activities and brokerage services.
Non-Interest Expense
Non-interest expense increased by 21.4% for the six months of 1998,
totaling $9.5 million as compared to $7.8 million for 1997. Personnel costs
comprised much of this change, increasing approximately 23.8% over the first
half of 1997, due principally to the Signet branch acquisition and continued
growth. The remaining cost is attributable to infrastructure associated with the
consolidation of certain functions and the development and introduction of new
products and delivery systems, which are expected to enhance future earnings
through increased revenue and/or improved efficiencies. The Company continues to
stress budgetary expense controls and operates at considerably more efficient
levels than its peers, as measured by the efficiency ratio (ratio of
non-interest expenses to net interest income plus non-interest income). For the
second quarter of 1998 the Company's efficiency ratio was 58.6%.
Financial Condition
Total assets as of June 30, 1998 were $671.2 million, an increase of 12.7%
from $595.5 million at December 31, 1997 and 18.3% from $567.6 million at June
30, 1997. Asset growth was fueled by the Signet branch acquisition and steady
loan demand, as loans totaled $449.6 million at June 30, 1998, an increase of
13.7% from $395.3 million at December 31, 1997, and 21.3% from $370.6 million at
June 30, 1997. Stockholders' equity totaled $68.1 million at June 30, 1998 which
represents a book value of $9.48 per share.
Asset and deposit growth in the second quarter was principally a result of
the acquisition of the former Signet branches which added $60.9 million in
deposits to the balance sheet. Proceeds from this acquisition were invested in a
variety of investment products including government securities, mortgage backed
securities and whole loans. These branches add significantly to the Company's
presence in the Northern Neck region, and although they may cause a short-term
drag on earnings, they provide significant potential for growth in market share.
12
Deposit growth, irrespective of the Signet acquisition, remained steady.
Total deposits at June 30, 1998 were $552.8 million, up 17.1% from $472.1
million at December 31, 1997 and 22.2% from $452.5 million a year earlier. Other
borrowings totaled $44.8 million at June 30, 1998 a 12.1% decrease over $51.0
million at the end of 1997 and a 9.4% decrease from $49.4 million at June 30,
1997. The Company continues to utilize other borrowings to supplement deposit
growth and, periodically, engages in wholesale leverage transactions. These
wholesale leverage transactions have typically been executed at spreads of
approximately 150 to 200 basis points and, although they have negatively
impacted the Company's net interest margin (as a percentage), they have had a
positive effect on earnings and return on equity.
Continued competition for deposits, particularly as it impacts certificate
of deposit rates, is reflected in the deposit mix. Management continues to focus
on increasing lower cost deposit products, including non-interest bearing demand
deposits and savings accounts. Increased competition for funds, particularly by
non-banks, continues to contribute to a narrowing of the net interest margin
which has been largely offset by increases in the volume of earning assets.
Asset Quality
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio. The level of credit losses
is affected by general economic trends as well as conditions affecting
individual borrowers. The allowance is also subject to regulatory examinations
and determination as to adequacy, which may take in to account such factors as
the methodology used to calculate the allowance and comparison to peer groups.
The allowance for loan losses totaled $4.9 million at June 30, 1998 or
1.10% of total loans, as compared to 1.15% at December 31, 1997 and 1.16% at
June 30, 1997. At June 30, 1998, non-performing assets of $5.0 million included
foreclosed properties of $1.4 million and a $1.0 million investment in
income-producing property.
June 30, December 31, June 30,
1998 1997 1997
----- ---- --------
Non-accrual loans $2,630 $2,140 $ 284
Foreclosed properties 1,390 1,746 1,779
Real estate investment 954 1,050 2,017
------ ----- ------
Non-performing assets $4,974 $4,936 $4,080
====== ====== ======
Allowance for loan losses $4,939 $4,565 $4,297
Allowance as % of total loans 1.10% 1.15% 1.16%
Non-performing assets to loans
and foreclosed properties 1.10% 1.24% 1.10%
Capital Resources
Capital resources represent funds, earned or obtained, over which
financial institutions can exercise greater or longer control in comparison with
deposits and borrowed funds. The adequacy of the Company's capital is reviewed
by management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital
13
structure that will assure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1
capital, consisting of common equity and retained earnings, less certain
goodwill items.
At June 30, 1998, the Company's ratio of total capital to risk-weighted
assets was 13.52% and its ratio of Tier 1 capital to risk-weighted assets was
12.50%. Both ratios exceed the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at June
30, 1998:
Tier 1 capital $ 60,327
Tier 2 capital $ 4,939
Total risk-based capital $ 65,266
Total risk-weighted assets $ 482,560
Capital Ratios:
Tier 1 risk-based capital ratio 12.50%
Total risk-based capital ratio 13.52%
Leverage ratio (Tier I capital to
average adjusted total assets) 9.14%
Equity to assets ratio 9.66%
The Company's book value per share at June 30, 1998 was $9.48. Dividends
to stockholders are typically declared and paid semi-annually in June and
December.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. Additional sources of liquidity available to the Company include its
capacity to borrow additional funds when necessary through Federal funds lines
with several regional banks and a line of credit with the Federal Home Loan
Bank. Management considers the Company's overall liquidity to be sufficient to
satisfy its depositors' requirements and to meet its customers' credit needs.
At June 30, 1998, cash, interest-bearing deposits in other banks, federal
funds sold, securities available for sale and loans maturing or repricing in one
year were 51.7% of total earning assets. At June 30, 1998 approximately $139.1
million or 31.1% of total loans would mature or reprice within the next year.
The Company utilizes federal funds purchased, FHLB advances, securities sold
under agreements to repurchase and customer repurchase agreements, in addition
to deposits, to fund the growth in its loan portfolio, and to fund securities
purchases, periodically in wholesale leverage transactions.
Year 2000
The Company's Year 2000 effort is proceeding in accordance with a written
plan which has been adopted by the Company's Board of Directors. Progress
reports are provided to the Board on a regular basis. The Company has
completed its assessment of the critical computer systems, and expects
to have substantially completed necessary changes to and testing of
these systems by June 1999.
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. This estimate
includes some costs, such as the purchase of computer hardware, that will
qualify as depreciable assets for accounting purposes, with the related
depreciation expense recognized over the estimated lives of the related assets.
However, the majority of the costs will be expensed as incurred. A significant
portion of these costs are not likely to be incremental costs, but rather a
redeployment of existing information technology resources.
15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) No Form 8-K was required to be filed during the most recently
completed quarter.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Bankshares Corporation
(Registrant)
August 13, 1998 s/ G. William Beale
---------------------- -----------------------
(Date) G. William Beale,
President, Chief Executive Officer
and Director
August 13, 1998 s/ D. Anthony Peay
----------------------- ----------------------
(Date) D. Anthony Peay,
Vice President and Chief Financial Officer
16
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q /June 30, 1998
Exhibit
No. Description
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession - Not Applicable
4 Instruments defining the rights of security holders,
including indentures Not Applicable
10 Material contracts Not Applicable
11 Statement re: computation of per share earnings Not Applicable
15 Letter re: unaudited interim financial information Not Applicable
18 Letter re: change in accounting principles Not Applicable
19 Previously unfiled documents Not Applicable
20 Report furnished to security holders Not Applicable
22 Published report re: matters submitted to
vote of security holders None
23 Consents of experts and counsel Not Applicable
24 Power of Attorney Not Applicable
99 Additional Exhibits None
17