EXHIBIT 13
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 five banking subsidiaries, Union
Bank & Trust Company, Northern Neck State Bank, King George State Bank, BANK OF
WILLIAMSBURG and Rappahannock National Bank and its non-bank companies, Union
Investment Services, Inc. and Mortgage Capital Investors. The banking
subsidiaries are 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. Each is also
independently operated by local management and boards of directors to meet the
needs of their communities.
Through its 16 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 nine locations spanning the Northern Neck. King
George State Bank has two locations, in King George County and Colonial Beach
enhancing the Company's market presence in both the Fredericksburg and Northern
Neck service areas. The Bank of Williamsburg was opened on February 28, 1999 at
the Williamsburg Crossing Shopping Center bringing a locally based community
bank back to the area. Rappahannock National serves the community surrounding
Washington, Virginia.
Union Investment Services is a full-service brokerage firm and provides a wide
variety of investment choices to investors throughout the Company's service
area. Mortgage Capital Investors (MCI), acquired on February 11, 1999, offers a
full array of mortgage products to residents of our markets and throughout its
16 origination offices. The former Union Mortgage operations is merging into
MCI.
As of December 31, 1998, Union Bankshares Corporation and subsidiaries had 295
employees, 2,178 shareholders of record, and assets totaling $734 million.
Mission Statement
"The primary mission of Union Bankshares Corporation and its subsidiaries is to
enhance shareholder value by remaining a strong, independent financial services
organization, providing exemplary customer service, a rewarding work environment
for its employees and a growing return for its shareholders."
Union Bankshares Corporation and Subsidiaries
Selected Financial Data
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Results of Operations (dollars in thousands, except per share amounts)
Interest income $ 51,062 $ 44,821 $ 42,068 $ 39,154 $ 32,903
Interest expense 24,463 21,057 19,650 18,155 13,417
--------- --------- --------- --------- ---------
Net interest income 26,599 23,764 22,418 20,999 19,486
Provision for loan losses 3,044 1,182 895 977 1,102
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 23,555 22,582 21,523 20,022 18,384
Other income 5,567 4,495 3,572 2,763 3,081
Other expenses 20,622 16,628 14,982 13,551 12,629
--------- --------- --------- --------- ---------
Income before income taxes 8,500 10,449 10,113 9,234 8,836
Income tax expense 1,678 2,283 2,374 2,192 1,958
--------- --------- --------- --------- ---------
Net income $ 6,822 $ 8,166 $ 7,739 $ 7,042 $ 6,878
========= ========= ========= ========= =========
Key Performance Ratios
Return on average assets (ROA) 1.00% 1.41% 1.38% 1.34% 1.43%
Return on average equity (ROE) 9.58% 12.80% 12.62% 12.50% 13.84%
Efficiency ratio 61.24% 56.20% 54.06% 52.77% 53.05%
Per Share Data
Net income per share $ 0.91 $ 1.10 $ 1.04 $ 0.95 $ 0.93
Net income per share - diluted 0.91 1.09 1.04 0.95 0.93
Cash dividends declared 0.38 0.37 0.32 0.28 0.26
Book value at period-end 9.77 9.16 8.23 7.57 6.72
Financial Condition
Total assets $ 733,947 $ 615,716 $ 559,782 $ 523,613 $ 480,844
Total deposits 607,629 489,256 455,718 431,330 405,722
Total loans, net of unearned income 479,822 399,351 356,038 331,452 299,605
Stockholders' equity 73,359 68,427 61,344 56,352 49,706
Asset Quality
Allowance for loan losses $ 6,407 $ 4,798 $ 4,612 $ 4,274 $ 4,320
Allowance as % of total loans 1.33% 1.20% 1.29% 1.28% 1.44%
other Data
Market value per share at period-end $ 17.50 $ 21.94 $ 12.50 $ 13.00 $ 12.00
Price to earnings ratio 19.2 19.9 12.0 13.7 12.9
Price to book value ratio 179% 240% 152% 172% 179%
Dividend payout ratio 41.76% 32.73% 30.76% 29.47% 27.96%
Weighted average shares outstanding 7,489,873 7,455,369 7,447,637 7,402,485 7,377,678
2
Letter from management
Dear Fellow Shareholder,
Union Bankshares Corporation (UBSH) is more diverse and larger than any
community bank or community bank holding company in Virginia, yet, the
geographic and earnings diversity, and size of UBSH is much less than regional
or state-wide banking groups. Like a gangly teenager we are bigger than our
friends, but not as large as our older brother. Like most adolescents we
experience many types of challenges related to growth and maturation.
Regardless of our size, in most ways, we look like a community bank. Our
style, local decision-making, individual bank autonomy, customer base, and the
communities we serve all mirror community banking. That's one of our major
strengths.
Relatively speaking, like most community banks we are a closely held
organization. The employees and directors of our affiliates hold over 13% of our
outstanding shares. This percentage grows consistently, as this group is an
active buyer of UBSH stock. Excluding shares held in street name, residents of
the home counties of our two largest banks hold over 35% of our stock and
shareholders residing in the markets we serve hold almost 60% of the company.
Truly, we are a community banking organization proud to call many of our
investors customers and co-workers. However, there are many ways in which we
more closely resemble a much larger organization.
Similar to a regional financial services company, UBSH began building
diversity in its earnings through the formation of Union Investment Services
("UISI") and Union Mortgage Company. Our acquisition of Mortgage Capital
Investors, a mortgage brokerage company with 16 offices in five states, led by
Kevin Keegan, will add significant non-interest income to our company. This
acquisition was completed on February 11, 1999.
All of the above speaks to the question that I am most often asked, "What is
happening to our stock?" Our company doesn't look like a regional bank. It more
closely resembles a community bank. Therefore, our stock is going to respond
differently than a regional bank, the Dow Jones Industrial Average or the S&P
500. Though trading volumes have increased significantly in the last four years,
for now, we are a relatively closely held, thinly traded stock with little
following outside of our immediate markets. At this time, supply, demand, and
takeover speculation will have a greater effect on our stock price than any
other factors.
1998 was a year of mixed results, with many more positives than negatives.
[PHOTO]
From left to right: D. Anthony Peay, Vice President; E. Peyton Motley, Executive
Vice President; John C. Neal, Executive Vice President - Union Bank and Trust;
David S. Wilson, Executive Vice President; G. William Beale, President and CEO;
Myles Gaythwaite, Vice President.
3
We proceeded through our assessment, validation and testing steps for the
Y2K issue. This process required some changes in software and hardware, all of
which were completed in 1998. UBSH does not operate any legacy systems, nor do
we write any of our own software. Our company uses only standard, widely used
software products. By June 30, 1999 UBSH expects to have completed testing of
all identified systems, implementing any changes that need to be put in place.
As a result of our efforts we expect that January 1, 2000 will be uneventful
from a systems standpoint.
On the acquisition front, we were successful in closing two transactions.
Five branches were purchased from Signet/First Union in February 1998. Unlike
most branch acquisitions where the buyer experiences deposit runoff, each of
these branches has grown since the purchase. This is a credit to the fine staff
that came to us from Signet. This purchase made our affiliate, Northern Neck
State Bank, the dominant bank in the Northern Neck of Virginia with a more than
10% market share in the entire Northern Neck, good growth potential and a
stronger branch network than any other organization.
Rappahannock National Bank of Washington, VA was acquired in July, 1998.
Under the leadership of Michael Leake we expect to offer a progressive approach
to financial services in this market.
The "North Carolina effect" impacted Union Bank & Trust Company in a very
positive way. As you know, three large Virginia banks were acquired by North
Carolina-based banks in March of 1998. As a result, Union Bank saw a more than
14% growth in loans and deposits in 1998. This growth helped solidify Union
Bank's number one market position in Fredericksburg -- one of the fastest
growing communities in the state. Union Bank also saw its Hanover market share
increase to more than 10%, and with the addition of our latest FasMart branch in
Mechanicsville, we are positioned to take advantage of the strong growth Hanover
County is experiencing.
Our company now serves five of the 16 fastest growing counties in Virginia.
We hold strong market share in our markets, with our deposit growth outpacing
the deposit growth of the communities we serve.
[CHART]
LOANS DEPOSITS ASSETS
1994 299,605 408,722 480,844
1995 331,452 431,550 523,613
1996 356,038 455,718 559,782
1997 399,351 469,256 615,716
1998 479,822 607,629 733,847
[PHOTO]
Pictured with an artist's rendering of the Bank's office to be completed in the
third quarter of 1999: J. Michael Johnson, President, Bank of Williamsburg; Tina
Lester, Branch Manager; and Johnella Carter, Teller (seated).
[PHOTO]
Mortgage Capital Investors is led by Kevin Keegan, pictured here (front row
center, gray suit) with some of his associates.
4
Bank of Williamsburg, which opened in February 1999 in James City County,
the 10th fastest growing market in Virginia, has been well received by the
community. We expect the bank to grow quickly and to reach profitability ahead
of schedule. It is also likely that our new mortgage company will open an office
in Williamsburg to take advantage of the residential growth in this dynamic
market.
Our non-bank subsidiaries performed well in 1998. Union Mortgage Company
which has been merged into Mortgage Capital, reflected increased profits in its
second year of operation. Union Investment Services, Inc., our investment
brokerage company improved performance as well. 1998 saw UISI expand its
brokerage staff and reach the small business market with management of qualified
employee deferred compensation plans, such as 401(k)'s. As a reflection of his
contribution and leadership, Bern Mahon has been named President of UISI. Our
investment in Banker's Title Insurance Agency-Fredericksburg continued to
provide steady returns, offering a competitive option for consumers.
We are disappointed by the special loan loss provision related to a sizable
loan. In the third quarter, a charge to earnings was made to increase the
allocation for losses in anticipation of possible losses on this loan.
Management of our organization has been working with the borrower and we feel
confident that we will be able to work through this matter.
With the exception of the special provision, earnings were at the level
anticipated by management. A number of factors contributed to the flat operating
earnings. The most significant factor was the narrowing interest margin.
Declining interest rates and aggressive pricing by competitors in the commodity
products - indirect lending, credit cards, and home equity loans, decreased our
overall margin by 17 basis points, or $1.1 million based on our earning asset
level. Our portfolio of residential mortgages saw a decrease of 56 basis points
in its yield.
Other factors that slowed earnings growth were merger and acquisition
expenses, operational expenses related to three new branches at Union Bank &
Trust Company and the narrow margin between the earning asset yield and cost of
funds at the branches acquired from Signet.
Your board and management are focused on building long term value in the
organization. We are willing to make moves that might have short term earnings
impact, to build a stronger franchise in the long term.
In 1999, your management team will focus on improving efficiency, providing
better customer service, enhancing our sales culture and internal growth. In
1998, a consulting company helped management draft a road map for process
improvement and back office consolidation. By year end, we expect item
processing, financial accounting, customer accounting, purchasing, a customer
service call center, and credit administration to be consolidated in a central
location. When completed, these moves will result in reduced non-interest
expense and improved efficiency.
[PHOTO]
Featured are the employees of Rappahannock National Bank. From left to right:
Frank Moffett, Helen Sealocks, Georgia Gilpin, Tommy Thompson, Pat Grigsby,
Sherry Shaw, and Mike Leake, Vice President.
[CHART]
DIVIDENDS PER SHARE NET INCOME PER SHARE
1994 0.26 0.83
1995 0.28 0.95
1996 0.32 1.04
1997 0.37 1.10
1998 0.38 0.91
5
The quality and depth of our back office team plays a major part in our
ability to grow and provide service to our customers. We are pleased that David
"Smokey" Wilson, a seasoned technology manager joined our team in January, 1999.
In late 1998, we invested over $1 million to upgrade our item processing
operation. This move will facilitate the consolidation of two processing centers
into one. Additionally, early in the second quarter our banks will begin
offering imaged statements to their customers. The result will be reduced mail
expense, improved customer service and the prospect of generating some modest
fee income by providing our commercial customers their monthly bank statements
on CD-ROM. Hardware upgrades are scheduled for Northern Neck State Bank in 1999,
and our platform and teller software will be standardized at all banks.
Narrow interest margins will continue to impact earnings in 1999.
Refinancing of mortgage loans currently in our portfolio will have the greatest
impact. Start up costs associated with the Bank of Williamsburg will also affect
earnings. Some of this will be offset by the addition of the Mortgage Capital
earnings stream as we anticipate 1999 will be another good year for mortgage
origination. Overall, we are well-positioned to meet the diverse financial
service needs in our communities.
On behalf of management and the Board, I would like to thank our
shareholders for their support. We believe we are making decisions appropriate
for building shareholder value over the long term.
I received a great deal of shareholder input this year. I appreciate your
active interest and questions. Thank you.
Sincerely,
/s/ G. William Beale
-------------------------------------
G. William Beale
[CHART]
COST OF INTEREST BEARING LIABILITIES YIELD ON EARNINGS ASSETS
1994 3.80 8.14
1995 4.63 8.66
1996 4.61 8.68
1997 4.66 8.64
1998 4.60 8.46
6
Retail Locations
[MAP]
7
Directors of Union Bankshares Corporation
[PHOTO]
(Standing, l to r): W. Tayloe Murphy, Jr., Ronald L. Hicks, G. William Beale,
and E. Peyton Motley. (Seated, l to r): M. Raymond Piland III, Charles H.
Ryland, A.D. Whittaker, and Walton Mahon.
Directors
RONALD L. HICKS
Chairman
CHARLES H. RYLAND
Vice Chairman
G. WILLIAM BEALE
WAL
Directo
E. PEYTON MOTLEY
W. TAYLOE MURPHY, JR.
M. RAYMOND PILAND, III
A.D. WHITTAKER
Officers
G. WILLIAM BEALE
President and Chief Executive Officer
E. PEYTON MOTLEY
Executive Vice President and Chief Operating Officer
D. ANTHONY PEAY
Vice President, Chief Financial Officer and
Corporate Secretary
DAVID "SMOKEY" WILSON
Senior Vice President
MYLES W. H. GAYTHWAITE
Vice President
JOHN A. LANE
Vice President
8
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 net income for 1998 totaled $6.8 million or $0.91
per share on a diluted basis, down 16.5% from $8.2 million or $1.09 per share on
a diluted basis for 1997. Profitability as measured by return on average assets
(ROA) for 1998 was 1.00% as compared to 1.41% a year earlier, while return on
average equity (ROE) for 1998 was 9.58% as compared to 12.80% in 1997. Core
profitability continued to improve as net interest income increased by 11.9% and
service fees on deposit accounts by 33.2%.
Union Bankshares Corporation's financial performance in 1998 was reflective of
the many changes experienced throughout the banking industry and the State of
Virginia during the year. Continued consolidation in the industry provided
opportunities for expansion within existing markets as demonstrated in the
acquisition of five branches from Signet/First Union. In addition, three de novo
branches were opened during the year. As expected, these branches created a
short-term drag on earnings, but have postured our Company to better serve our
customers and benefit from the growth in those communities. Since 1993, the
Company has opened seven de novo branches and purchased six other branches,
representing half of our existing branch network. Despite this growth, the
Company has continued to generate strong profits each year.
The Company's performance was also impacted by continued compression of the net
interest margin. Competitive pricing for loan products and alternative deposit
options for consumers impacted all financial services companies in 1998 and will
likely continue to have a negative impact in 1999. Our net interest margin, on a
taxable equivalent basis, declined from 4.73% to 4.56% during 1998. This 17
basis point decline represented nearly $1.1 million in potential net interest
income. Despite this net interest margin decline, the impact of increases in the
volume of earning assets exceeded the impact of declining rates, resulting in a
net increase of $3.0 million in net interest income on a taxable equivalent
basis.
The financial services industry has increasingly focused on noninterest income
as interest margins have compressed. Our investment brokerage and mortgage
brokerage operations contributed $555,000 and $669,000, respectively to
noninterest income in 1998, up from $361,000 and $359,000 in 1997. In addition,
our focus on providing competitive products and customer service has provided
additional sources of fee income.
During the third quarter of 1998, the Company recorded a special loan loss
provision of $975,000 related to a single credit relationship. While this
special provision negatively impacted earnings for 1998, it is not indicative of
any decline in the overall quality of the Company's loan portfolio. The Company
is aggressively pursuing collection on this credit, but chose to make this
provision due to the uncertainties surrounding the credit.
Assets grew to $733.9 million at December 31, 1998, up 19.2% from $615.7 million
a year ago. Loans grew to $479.8 million, up 20.2% over year end 1997 totals.
Deposits increased from $489.3 million at December 31, 1997 to $607.6 million at
December 31, 1998, a 24.2% increase. Capital growth slowed to 7.2% as management
leveraged the Company's strong capital position through the acquisition of five
branches. The Company's capital position remains strong with an equity to assets
ratio of 10.0%.
9
In 1998, Union Bankshares Corporation also received the necessary regulatory
approvals for the Bank of Williamsburg which opened in temporary headquarters in
the Williamsburg Crossing Shopping Center on February 22, 1999. The Bank's main
office is expected to be completed and opened during third quarter of 1999 on an
outparcel of that shopping center. Also in 1998, Union Bankshares announced it
had agreed to purchase Mortgage Capital Investors (MCI), a mortgage brokerage
company with 13 locations in Virginia, Maryland, North Carolina, South Carolina
and Florida. The acquisition closed on February 11, 1999.
The Company's performance in 1997 was strong with net income of $8.2 million or
$1.09 per share, on a diluted basis up 5.5% from 1996. Profitability as measured
by ROA was 1.41%, up from 1.38% in 1996, while ROE was 12.80%, up from 12.62% in
1996. These returns were achieved despite asset growth of 10.0% and capital
growth of 11.5%.
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 1998, net interest income, on a taxable equivalent basis, totaled $28.5
million, an increase of 11.6% from $25.5 million in 1997. The Company's net
interest margin declined slightly to 4.55% in 1998, as compared to 4.73% in 1997
and 4.79% in 1996. The yield on earning assets declined to 8.45% from 8.64% in
1997 while the cost of interest-bearing liabilities also declined slightly from
4.66% in 1997 to 4.62% in 1998. Average interest-bearing liabilities increased
by $77.5 million, or 17.1% while average earning assets grew by $88.1 million,
or 15.9%. As a result, the Company was able to realize an increase of $3.0
million in net interest income on a taxable equivalent basis compared to 1997
(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.
10
Average Balances, Income and Expenses, Yields
and Rates (Taxable Equivalent Basis)
Years Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ------------------------
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 .............. $ 94,814 $ 6,107 6.44% $ 87,272 $ 5,622 6.44% $ 79,601 $ 4,903 6.16%
Tax-exempt(1) ....... 74,068 5,847 7.89% 68,361 5,569 8.15% 66,559 5,508 8.27%
--------- -------------- -------- ------- ------ -------- -------
Total securities .. 168,882 11,954 7.08% 155,633 11,191 7.19% 146,160 10,411 7.12%
Loans, net............... 444,463 40,395 9.09% 375,328 34,939 9.31% 347,748 32,821 9.44%
Federal funds sold ..... 12,549 581 4.63% 7,148 384 5.37% 9,744 519 5.33%
Interest-bearing deposits
in other banks........ 1,058 71 6.71% 702 53 7.55% 822 46 5.72%
--------- -------- -------- ------- -------- -------
Total earning assets 626,952 53,001 8.45% 538,811 46,567 8.64% 504,474 43,797 8.68%
Allowance for loan losses (5,339) (4,693) (4,525)
Total non-earning assets 59,942 48,049 44,585
--------- -------- --------
Total assets ............ $ 681,555 $582,167 $544,534
========= ======== ========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking.............. $ 73,263 $ 1,745 2.38% $ 56,495 $ 1,452 2.57% $ 47,685 $ 1,202 2.52%
Regular savings ...... 58,490 1,749 2.99% 53,200 1,638 3.08% 64,260 2,190 3.41%
Money market savings . 60,674 2,065 3.40% 51,119 1,723 3.37% 55,048 1,802 3.27%
Certificates of deposit:
$100,000 and over..... 68,703 3,789 5.52% 56,481 2,967 5.25% 50,896 2,631 5.17%
Under $100,000........ 223,362 12,559 5.62% 192,441 10,949 5.69% 171,112 9,986 5.84%
--------- -------- -------- ------- -------- -------
Total interest-bearing
deposits ......... 484,492 21,907 4.52% 409,736 18,729 4.57% 389,001 17,811 4.58%
Other borrowings ........ 45,236 2,556 5.65% 42,449 2,328 5.48% 37,528 1,839 4.90%
--------- -------- -------- ------- -------- -------
Total interest-bearing
liabilities ...... 529,728 24,463 4.62% 452,185 21,057 4.66% 426,529 19,650 4.61%
-------- ------- -------
Non-interest bearing liabilities:
Demand deposits....... 75,278 60,512 56,801
Other liabilities..... 4,937 5,005 4,650
--------- -------- --------
Total liabilities... 609,943 517,702 487,980
Stockholders' equity .... 71,612 64,465 56,554
--------- -------- --------
Total liabilities and
stockholders' equity . $ 681,555 $582,167 $544,534
========= ======== ========
Net interest income...... $ 28,538 $25,510 $24,147
======== ======= =======
Interest rate spread .... 3.83% 3.98% 4.07%
Interest expense as a percent
of average earning assets 3.92% 3.91% 3.90%
Net interest margin...... 4.55% 4.73% 4.79%
(1) Income and yields are reported on a taxable equivalent basis.
11
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,
----------------------------------------------------------------
1998 vs. 1997 1997 VS. 1996
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------ ------------------------------
Volume Rate Total Volume Rate Total
------- ------- ------ -------- ------- -------
(in thousands)
EARNING ASSETS:
Securities:
Taxable.................. $ 485 $ - $ 485 $ 488 $ 231 $ 719
Tax-exempt .............. 454 (176) 278 146 (85) 61
Loans, net.................. 6,300 (844) 5,456 2,572 (454) 2,118
Federal funds sold.......... 256 (59) 197 (139) 4 (135)
Interest-bearing deposits
in other banks........... 24 (6) 18 (7) 14 7
------- ------- ------ -------- ------- -------
Total earning assets... 7,519 (1,085) 6,434 3,060 (290) 2,770
------- ------- ------ -------- ------- -------
INTEREST-BEARING LIABILITIES:
Interest checking........... 405 (112) 293 227 23 250
Regular savings............. 159 (48) 111 (354) (198) (552)
Money market savings........ 327 15 342 (131) 52 (79)
CDs $100,000 and over...... 669 153 822 293 43 336
CDs (less than)$100,000.... 1,742 (132) 1,610 1,217 (254) 963
------- ------- ------ -------- ------- -------
Total interest-bearing
deposits........... 3,302 (124) 3,178 1,252 (334) 918
Other borrowings............ 157 71 228 257 232 489
------- ------- ------ -------- ------- -------
Total interest-bearing
liabilities........ 3,459 (53) 3,406 1,509 (102) 1,407
------- ------- ------ -------- ------- -------
Change in net interest
income .................. $ 4,060 $(1,032) $3,028 $ 1,551 $ (188) $ 1,363
======= ======= ====== ======== ======= =======
* 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.
12
At December 31, 1998, the Company had $146.1 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.
Computer simulation shows UBSH's net interest income to increase when interest
rates rise and fall when interest rates decline, although the gap report shows
the Company to be liability sensitive. The explanation for this is interest rate
changes affect bank products differently. For example: if the prime rate changes
by 1.0% (100 bps), the change on certificates of deposit will be around 0.75%
(75 bps), while other interest bearing deposit accounts may only change 0.1% (10
bps). Also, despite their fixed terms, loan products are often refinanced as
rates decline.
Interest Sensitivity Analysis
DECEMBER 31, 1998 (1)
-------------------------------------------------------------
WITHIN 90-365 1-5 OVER
90 DAYS DAYS YEARS 5 YEARS TOTAL
--------- --------- --------- --------- ---------
(IN THOUSANDS)
EARNING ASSETS:
Loans, net of unearned income (3) $ 104,454 $ 38,229 $ 206,801 $ 127,525 $ 477,009
Investment securities .......... - 2,920 10,049 3,173 16,142
Securities available for sale... 2,176 3,097 41,393 114,562 161,228
Other short-term investments.... 1,413 - - - 1,413
--------- --------- --------- --------- ---------
Total earning assets........ 108,043 44,246 258,243 245,260 655,792
========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
Interest checking (2) .......... - - 81,514 - 81,514
Regular savings (2) ............ - 8,156 53,125 - 61,281
Money market savings............ - 64,331 - - 64,331
Certificates of deposit:
$100,000 and over........... 26,974 35,019 18,833 100 80,926
Under $100,000.............. 33,810 105,454 98,848 136 238,248
Short-term borrowings .......... 19,476 - - - 19,476
Long-term borrowings ........... 5,075 75 17,275 5,900 28,325
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities ............. 85,335 213,035 269,595 6,136 574,101
--------- --------- --------- --------- ---------
Period gap...................... 22,708 (168,789) (11,352) 239,124 -
Cumulative gap.................. $ 22,708 $(146,081) $(157,433) $ 81,691 $ 81,691
========= ========= ========= ========= =========
Ratio of cumulative gap to
total earning assets....... 3.46% -22.28% -24.01% 12.46%
========= ========= ========= =========
(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 23.9% from $4.5 million in 1997 to $5.6 million in
1998. This increase is largely attributable to the gains in deposit service
charges and other service charges of $721,000 and $613,000, respectively. The
later charges were fueled by continued growth in mortgage income of $272,640
over 1997 and Union Investment's increase of $194,143 over 1997. Deposit fees
grew from the larger base. 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.
In 1997, other income increased by 25.8% from $3.6 million in 1996 to $4.5
million. This increase was largely attributable to gains on the sales of other
real estate of $446,000, an increase in mortgage origination income of $359,000
and an increase of $89,000 in commissions earned by Union Investment Services.
13
Other Expenses
Other expenses totaled $20.6 million in 1998, up 24.0% over $16.6 million in
1997. Increases in personnel and operating costs are largely attributable to the
growth of the Company which bought five branches from Signet/First Union and
opened three other de novo branches. Management considers a portion of such
costs to be an investment in the future as we establish the base to provide new
products and more convenient service to our customers. Not considering the de
novo branches and branches purchased in 1998, other expenses were consistent
with 1997, with personnel expense up 12.5% over 1997 which was up 14.7% over
1996. Though the Company's efficiency ratio increased to 61.2% due largely to
this growth, we expect this measure to return to lower levels as these branches
mature.
Other expenses totaled $16.6 million in 1997, up 11.0% over $15.0 million in
1996 and, like 1998, 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 $479.8 million at December 31, 1998, an
increase of 20.1% over $399.4 million at December 31, 1997. 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.
Loans secured by real estate comprised 68.0% of the total loan portfolio at
December 31, 1998. Of this total, single-family, residential loans comprised
32.5% of the total loan portfolio at December 31, 1998, up slightly from 31.3%
in 1997. Loans secured by commercial real estate comprised 22.5% of the total
loan portfolio at December 31, 1998, as compared to 23.3% in 1997, 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
7.9% of total loans outstanding at December 31, 1998. The Company's charge-off
rate for all loans secured by real estate has historically been low.
Loan Portfolio
DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial.......................... $ 61,678 $ 45,541 $ 37,375 $ 37,041 $ 40,382
Loans to finance agriculture
production and other loans
to farmers ..................... 2,595 1,590 3,080 2,894 3,118
Real estate:
Real estate construction ....... 38,128 28,206 13,961 17,479 11,863
Real estate mortgage:
Residential (1 - 4 family).. 155,843 125,205 114,945 99,821 90,220
Home equity lines........... 18,737 21,061 21,964 22,561 22,503
Multi-family................ 3,979 1,905 1,501 1,440 1,509
Commercial(1)............... 108,063 93,568 80,830 72,992 59,233
Agricultural................ 2,536 2,292 2,262 2,776 2,943
--------- --------- --------- --------- ---------
TOTAL REAL ESTATE........... 327,286 272,237 235,463 217,069 188,271
Loans to individuals:
Consumer........................ 79,492 77,505 76,826 70,788 65,447
Credit card..................... 3,232 2,682 2,567 2,235 1,714
--------- --------- --------- --------- ---------
TOTAL LOANS TO INDIVIDUALS.. 82,724 80,187 79,393 73,023 67,161
All other loans..................... 6,559 879 2,125 2,619 2,029
--------- --------- --------- --------- ---------
TOTAL LOANS................. 480,842 400,434 357,436 332,646 300,961
Less unearned income................ 1,020 1,083 1,398 1,194 976
--------- --------- --------- --------- ---------
TOTAL NET LOANS................. $ 479,822 $ 399,351 $ 356,038 $ 331,452 $ 299,985
========= ========= ========= ========= =========
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a secondary source of collateral.
14
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 16.6% of total loans at December
31, 1998, down from 19.4% in 1997. Commercial loans, secured by non-real estate
business assets comprised 12.9% of total loans at the end of 1998, an increase
from 11.4% at the end of 1997. Loans to the agricultural industry totaled less
than 1.0% of the loan portfolio in each of the last five years.
Maturity Schedule of Loans
1 Year or Less 1 - 5 Years After 5 Years Total
---------------- --------------- --------------- ------------
(in thousands)
DECEMBER 31, 1998.......... $155,160 $179,068 $146,614 $ 480,842
December 31, 1997.......... 138,935 144,220 117,279 400,434
December 31, 1996.......... 142,608 142,271 72,557 357,436
Loans, net of unearned income, totaled $399.3 million at December 31, 1997, an
increase of 12.1% over $356.1 million at December 31, 1996, fueled largely by
residential mortgage growth.
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
manage 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. 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. The addition of MCI should
significantly expand and enhance 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, 1998, the allowance for loan losses was $6.4 million, or
1.33% of total loans as compared to $4.8 million, or 1.20% in 1997. The
provision for loan losses increased from $1.2 million in 1997 to $3.0 million
due largely to a special provision against a single credit (SEE NON-PERFORMING
ASSETS).
15
The allowance for loan losses as of December 31, 1997 was $4.8 million, or 1.20%
of total loans as compared to $4.6 million, or 1.29% in 1996. The provision for
loan losses in 1997 totaled $1,182,000 as compared to $895,000 in 1996.
Allowance for Loan Losses
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- --------- ---------
(dollars in thousands)
BALANCE, BEGINNING OF YEAR................ $ 4,798 $ 4,612 $ 4,274 $ 4,320 $ 4,019
Loans charged-off:
Commercial............................ 597 247 114 643 441
Real estate........................... 34 4 59 185 273
Consumer ............................. 1,078 958 795 429 363
--------- -------- --------- --------- ---------
Total loans charged-off........... 1,709 1,209 968 1,257 1,077
--------- -------- --------- --------- ---------
RECOVERIES:
Commercial............................ 126 8 275 112 29
Real estate........................... 18 49 10 16 92
Consumer.............................. 130 156 126 106 184
--------- -------- --------- --------- ---------
TOTAL RECOVERIES.................. 274 213 411 234 305
--------- -------- --------- --------- ---------
NET LOANS CHARGED-OFF..................... 1,435 996 557 1,023 772
Provision for loan losses................. 3,044 1,182 895 977 1,073
--------- -------- --------- --------- ---------
BALANCE, END OF YEAR...................... $ 6,407 $ 4,798 $ 4,612 $ 4,274 $ 4,320
========= ======== ========= ========= =========
Ratio of allowance for loan losses to total
loans outstanding at end of year ..... 1.33% 1.20% 1.29% 1.28% 1.44%
Ratio of net charge-offs to average
loans outstanding during year ........ 0.32% 0.27% 0.16% 0.32% 0.28%
Nonperforming Assets
During the third quarter of 1998, the Company recorded a special provision for
loan losses of $975,000 related to a single credit relationship. Management
believes this special provision is not indicative of any decline in the overall
quality of the Company's loan portfolio. The Company is working with the
borrower to resolve this situation and is aggressively pursuing collection on
this credit, but chose to make this provision due to the uncertainties
surrounding the credit. The collateral supporting the credit has been appraised
and should protect the Company from any further loss on the credit.
Nonperforming Assets
December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(dollars in thousands)
Nonaccrual loans.................... $ 2,813 $ 2,244 $ 523 $ 669 $ 1,731
Foreclosed properties............... 1,101 1,746 4,056 3,620 1,842
Real estate investment.............. 730 1,050 2,970 - -
--------- --------- --------- --------- ---------
Total nonperforming assets...... $ 4,644 $ 5,040 $ 7,549 $ 4,289 $ 3,573
========= ========= ========= ========= =========
Loans past due 90 days and
accruing interest............... $ 2,979 $ 2,675 $ 3,165 $ 3,126 $ 1,671
========= ========= ========= ========= =========
Nonperforming assets to year-end
loans, foreclosed properties and
real estate investment.......... 0.97% 1.26% 2.10% 1.28% 1.18%
Allowance for loan losses to
nonaccrual loans................ 227.73% 213.81% 881.84% 638.86% 239.86%
16
As of December 31, 1998, nonperforming assets includes approximately $730,000
representing an investment in income-producing property and included in other
assets. This property consists of 11 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 allowance for loan losses.
Non-accrual loans and foreclosed properties were $4.0 million at December 31,
1997, down from $4.6 million at December 31, 1996. Non-accrual loans increased
by $1,721,000 in 1997 while other real estate owned decreased from $4.1 million
to $1.7 million.
Securities
At December 31, 1998, $161.2 million, or over 90%, of the Company's securities
were classified as available for sale, as compared to $143.7 million at December
31, 1997. Investment securities totaled $16.1 million at December 31, 1998 and
consists of securities which management intends to hold to maturity.
At December 31, 1997, $143.7 million, or over 88%, of the Company's securities
were classified as available for sale, as compared to $129.9 million at December
31, 1996. Investment securities totaled $17.8 million at December 31, 1997 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. It also purchases mortgage backed
securities because of the reinvestment opportunities from the cashflows and the
higher yield offered from these securities. The investment portfolio has a high
percentage of municipals and mortgage backed securities which is the main reason
for the high yield the portfolio attains compared to its peers.
17
Maturities of Investment Securities and Securities available for Sale
DECEMBER 31, 1998
-------------------------------------------------------------
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.................. $ 1,500 $ 10,100 $ 796 $ 998 $ 13,394
Fair value...................... 1,505 10,193 802 998 13,498
Weighted average yield(1)....... 6.13% 6.11% 6.19% 6.36% 6.14%
Mortgage backed securities:
Amortized cost.................. $ 3,697 $ 22,300 $ 13,462 $ 29,556 $ 69,015
Fair value...................... 3,724 22,474 13,563 29,635 69,396
Weighted average yield(1)....... 7.06% 6.77% 6.66% 6.45% 6.62%
Municipal bonds:
Amortized cost.................. $ 2,455 $ 17,337 $ 35,381 $ 27,115 $ 82,288
Fair value. .................... 2,474 17,910 37,435 27,650 85,469
Weighted average yield(1)....... 7.93% 7.90% 7.88% 7.14% 7.64%
Other securities:
Amortized cost.................. $ 504 $ 1,015 $ - $ 7,604 $ 9,123
Fair value. .................... 512 1,040 - 7,765 9,317
Weighted average yield(1)....... 7.62% 6.58% - 7.57% 7.46%
Total securities:
Amortized cost.................. $ 8,156 $ 50,751 $ 49,640 $ 65,273 $ 173,820
Fair value...................... 8,215 51,617 51,800 66,048 177,680
Weighted average yield(1)....... 7.19% 7.02% 7.52% 6.86% 7.11%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
Deposits
In 1998, the opening and purchase of branches fueled deposit growth; however
without these additions, the total deposits at existing branches still grew at a
9.2% increase over 1997 balances which was an improvement over the 7.4% growth
in 1997 over 1996. Competition for deposits is aggressive and the Company
continues to focus on products and services that attract deposit customers.
Total deposits grew from $489.3 million at December 31, 1997 to $607.6 million
at December 31, 1998. Over this same period, average interest-bearing deposits
were $484.5 million, or 18.2% over the 1997 average of $409.7 million. The
majority of this increase in average deposits is represented by a $43.1 million
increase in certificates of deposit and a $9.5 million increase in money market
accounts. In 1998, all categories increased with the Company's lowest cost
source of funds, non-interest-bearing demand deposits increasing by a total of
$15.6 million. The Company has no brokered deposits.
18
Average Deposits and Rates Paid
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------------ ------------------ -----------------
(dollars in thousands)
Non-interest-bearing accounts ......... $ 75,278 - $ 60,512 - $ 56,801 -
Interest-bearing accounts:
Interest checking.................. 73,263 2.38% 56,495 2.57% 47,685 2.52%
Money market....................... 60,674 3.40% 51,119 3.37% 55,048 3.27%
Regular savings.................... 58,490 2.99% 53,200 3.08% 64,260 3.41%
Certificates of deposit:
Less than $100,000............. 223,362 5.61% 192,441 5.69% 171,112 5.84%
$100,000 and over.............. 68,703 5.52% 56,481 5.25% 50,896 5.17%
--------- --------- --------
Total interest-bearing................. 484,492 4.51% 409,736 4.57% 389,001 4.58%
--------- --------- --------
Total average deposits............. $ 559,770 $ 470,248 $445,802
========= ========= ========
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, 1998.......... $ 26,974 $ 16,014 $ 19,005 $ 18,933 $ 80,926 13.32%
At December 31, 1997.......... 14,116 29,408 13,924 3,723 61,171 12.94%
At December 31, 1996.......... 15,917 11,663 12,346 14,459 54,385 12.37%
Total deposits grew from $455.7 million at December 31, 1996 to $489.3 million
at December 31, 1997. Over this same period, average interest-bearing deposits
were $409.7 million, or 5.3% over the 1996 average of $389.0 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 13.70% and 17.45% on December 31, 1998
and 1997, respectively. The Company's ratio of risk-weighted assets to Tier 1
capital was 12.47% and 16.28% at December 31, 1998 and 1997, respectively. Both
of these ratios exceeded the fully phased-in capital requirements in 1998 and
1997.
19
The Company's strategic plan includes targeted capital levels between 8% and 9%.
The addition of the five Signet branches brings the Company's capital levels
down, but still above the targeted range. Future earnings should increase the
return on average equity.
Analysis of Capital
DECEMBER 31,
--------- ---------
1998 1997
--------- ---------
(dollars in thousands)
TIER 1 CAPITAL:
Common stock................................. $ 15,015 $ 14,937
Surplus...................................... 311 55
Retained earnings............................ 55,690 51,728
---------- ---------
Total equity............................. 71,016 66,720
Less: core deposit intangibles............... (5,846) (237)
---------- ---------
Total Tier 1 capital ........................ 65,170 66,483
---------- ---------
TIER 2 CAPITAL:
Allowance for loan losses ................... 6,407 4,798
Allowable long-term debt..................... - -
---------- ---------
Total Tier 2 capital ........................ 6,407 4,798
---------- ---------
Total risk-based capital..................... $ 71,577 $ 71,281
========== =========
Risk-weighted assets ............................ $ 522,533 $ 408,422
========== =========
CAPITAL RATIOS:
Tier 1 risk-based capital ratio.............. 12.47% 16.28%
Total risk-based capital ratio............... 13.70% 17.45%
Tier 1 capital to average adjusted total assets 9.06% 11.45%
Equity to total assets ...................... 10.00% 11.11%
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, 1998, cash and cash equivalents and securities classified as
available for sale were 27.6% of total assets, compared to 27.9% at December 31,
1997. 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 approximately $48 million at
December 31, 1998. At year end 1998, the Banks had outstanding $14.9 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 $68 million at December 31, 1998.
Year 2000
Many companies have existing computer applications which use only two digits to
identify a year in the date field. They were designed and developed without
considering the impact of the change of the century. If not corrected these
computer applications may fail or create erroneous results in the Year 2000.
Because UBSH relies on information processing and communications the Year 2000
issue is of concern. To address Y2K concerns, management established a Year 2000
team in September of 1997. The project's scope includes all information
technology (IT).
The awareness and assessment phases for its material IT systems
("mission-critical systems") are complete and the company is currently in the
remediation and testing phases. We anticipate that we will complete the
remediation and testing phases for our mission-critical IT systems by March 31,
1999.
20
Additionally we have been in contact with our material business partners to
determine their state of readiness and the potential impact on the Company.
Where we have determined that a relationship with a business partner is material
to our ability to conduct normal operations, we have sent letters to the
business partner requesting an update on the status of its own Year 2000
initiative. Where necessary, we are following-up to obtain further information.
There can be no assurances that all material business partners will be
compliant. Such noncompliance could have an effect on the Company's financial
position and results of operations. We expect to complete our review of material
business partners by March 31, 1999.
The Bank is preparing its contingency plans should mission critical systems not
be ready to process Year 2000 transactions. Contingency plan alternatives
include using a backup processing site, preparing transactions manually, and
making system modifications. At this time, Management believes the most likely
worst case scenario concerning Year 2000 would not have a material effect on the
Bank's results of operations, liquidity, and financial condition for the year
ending December 31, 2000. However, the Bank is dependent on numerous outside
vendors whom we cannot control. Additionally, the Management of the Bank
believes that no entity can address the virtually unlimited possible
circumstances related to Year 2000 issues, including risks outside the Bank's
marketplace. While unlikely, it is acknowledged that the Bank's failure to
successfully implement its Year 2000 plan or to adequately assess the likelihood
of events relating to the Year 2000 issue, could have a material adverse impact
on operations.
We expect 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 that
will qualify as depreciable assets for accounting purposes, with the related
depreciation expense recognized over the estimated lives of the related assets.
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. Approximately $65,000 of this amount
was incurred as of December 31, 1998. The remainder of the estimated cost of the
project is expected to be incurred in 1999. All costs of the Year 2000 project
have been expensed as incurred.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in years
beginning after June 15, 1999. The Company expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
The Accounting Standards Executive Committee (AcSEC) of the AICPA has issued
Statement of Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES.
In the past, some entities have capitalized certain start-up costs while other
entities expense start-up costs as incurred. Entities that have capitalized
certain start-up costs have used diverse amortization periods for those
capitalized costs. AcSEC developed SOP 98-5 to reduce these diversities in
financial reporting. SOP 98-5 requires that the costs of start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the fiscal year in which
the SOP is first adopted and should be reported as the cumulative effect of a
change in accounting principle as described in APB Opinion No. 20, Accounting
Changes. Management does not anticipate the impact of this pronouncement to be
material to the Company's financial position of results of operations.
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.
21
Consolidated Balance Sheets
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
December 31, 1998 and 1997
(dollars in thousands)
ASSETS 1998 1997
--------- ---------
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 39,607 $ 20,959
Interest-bearing deposits in other banks 1,413 790
Federal funds sold - 6,932
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 41,020 28,681
--------- ---------
SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE (NOTE 2) 161,228 143,711
INVESTMENT SECURITIES, AT AMORTIZED COST (NOTE 2)
Fair value of $16,452 and $18,057, respectively 16,142 17,769
--------- ---------
TOTAL SECURITIES 177,370 161,480
--------- ---------
LOANS, NET OF UNEARNED INCOME (NOTES 3 AND 10) 479,822 399,351
Less allowance for loan losses (note 4) 6,407 4,798
--------- ---------
NET LOANS 473,415 394,553
--------- ---------
BANK PREMISES AND EQUIPMENT, NET (NOTE 5) 21,057 16,978
OTHER REAL ESTATE OWNED 1,101 1,746
OTHER ASSETS (NOTE 7) 19,984 12,278
--------- ---------
TOTAL ASSETS $ 733,947 $ 615,716
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NON-INTEREST-BEARING DEMAND DEPOSITS $ 81,329 $ 65,706
INTEREST-BEARING DEPOSITS:
Savings accounts 61,281 55,014
NOW accounts 81,514 60,010
Money market accounts 64,331 50,387
Time deposits of $100,000 and over 80,926 61,171
Other time deposits 238,248 196,968
--------- ---------
TOTAL INTEREST-BEARING DEPOSITS 526,300 423,550
--------- ---------
TOTAL DEPOSITS 607,629 489,256
--------- ---------
SHORT-TERM BORROWINGS (NOTE 6) 19,476 27,245
LONG-TERM BORROWINGS (NOTE 6) 28,325 23,715
OTHER LIABILITIES (NOTE 8) 5,158 7,073
--------- ---------
TOTAL LIABILITIES 660,588 547,289
--------- ---------
STOCKHOLDERS' EQUITY (NOTES 8 AND 12):
Common stock, $2 par value. Authorized 24,000,000 shares;
issued and outstanding, 7,507,394 shares in 1998 and
7,468,292 shares in 1997 15,015 14,937
Surplus 311 55
Retained earnings 55,690 51,728
Accumulated other comprehensive income:
Unrealized net gain on securities available for sale,
net of taxes of $1,207 and $879, respectively 2,343 1,707
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 73,359 68,427
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 9)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 733,947 $ 615,716
========= =========
See accompanying notes to consolidated financial statements.
22
Consolidated Statements of Income and Comprehensive Income
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1998, 1997 and 1996
(dollars in thousands, except per share amounts)
1998 1997 1996
--------- --------- ---------
Interest income:
Interest and fees on loans (note 3) $ 40,395 $ 34,939 $ 32,821
Interest on securities:
U.S. government and agency securities 1,505 3,569 4,489
Obligations of states and political
subdivisions 4,145 3,954 3,837
Other securities 4,365 1,922 356
Interest on Federal funds sold 581 384 519
Interest on interest-bearing deposits in
other banks 71 53 46
--------- --------- ---------
Total interest income 51,062 44,821 42,068
--------- --------- ---------
Interest expense:
Interest on deposits 21,907 18,729 17,811
Interest on other borrowings 2,556 2,328 1,839
--------- --------- ---------
Total interest expense 24,463 21,057 19,650
--------- --------- ---------
Net interest income 26,599 23,764 22,418
Provision for loan losses (note 4) 3,044 1,182 895
--------- --------- ---------
Net interest income after provision
for loan losses 23,555 22,582 21,523
Other income:
Service charges on deposit accounts 2,894 2,173 2,009
Other service charges and fees 1,973 1,360 780
Gains (losses) on securities transactions, net 71 (29) (33)
Gains on sales of loans - - 47
Gains (losses) on sales of other real
estate owned and bank premises, net 297 446 (11)
Other operating income 332 545 780
--------- --------- ---------
Total other income 5,567 4,495 3,572
--------- --------- ---------
Other expenses:
Salaries and benefits 10,902 8,990 7,871
Occupancy expenses 1,280 971 922
Furniture and equipment expenses 1,617 1,435 1,214
Other operating expenses 6,823 5,232 4,975
--------- --------- ---------
Total other expenses 20,622 16,628 14,982
--------- --------- ---------
Income before income taxes 8,500 10,449 10,113
Income tax expense (note 7) 1,678 2,283 2,374
--------- --------- ---------
Net income $ 6,822 $ 8,166 $ 7,739
Other comprehensive income:
Unrealized holding gains (losses) arising
during the period, net of taxes of
$352, $729 and $202 for 1998, 1997
and 1996 683 1,416 (393)
Less reclassification adjustments for (gains)
losses included in net income, net of
taxes of $24, $10 and $11 for 1998,
1997 and 1996 (47) 19 (22)
--------- --------- ---------
Total other comprehensive income 636 1,435 (415)
Comprehensive income $ 7,458 $ 9,601 $ 7,324
========= ========= =========
Basic net income per share (note 11) $ 0.91 $ 1.10 $ 1.04
--------- --------- ---------
Diluted net income per share (note 11) $ 0.91 $ 1.09 $ 1.03
--------- --------- ---------
Cash dividends per share of common stock $ 0.38 $ 0.37 $ 0.32
========= ========= =========
See accompanying notes to consolidated financial statements.
23
Consolidated Statements of Changes
in Stockholders' Equity
UNION BANKSHARES CORPORATION AND SUBSIDIARIES Years ended December 31, 1998,
1997 and 1996 (dollars in thousands)
ACCUMULATED
COMMON STOCK OTHER
___________________ RETAINEDCOMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME TOTAL
-------- -------- ------- -------- ---------- --------
BALANCE - DECEMBER 31, 1995, 7,123,940 $ 14,248 $ 66 $ 38,722 $ 647 $ 53,683
AS PREVIOUSLY REPORTED
Pooling of interest with Rappahannock
(Note 1) 316,418 633 (333) 2,057 (4) 2,353
Cash dividends declared - - - (2,315) - (2,315)
Issuance of common stock under
Dividend Reinvestment Plan 22,290 45 227 - - 272
Stock repurchased under Stock
Repurchase Plan (12,400) (26) (133) - - (159)
Change in net unrealized losses on
securities available for sale,
net of taxes $185 - - - - (371) (371)
Net income - 1996 - - - 7,739 - 7,739
------- -------- ------- -------- ---------- --------
BALANCE - DECEMBER 31, 1996 7,450,248 14,900 (173) 46,203 272 61,202
Cash dividends declared - - - (2,641) - (2,641)
Issuance of common stock under
Dividend Reinvestment Plan 21,044 43 261 - - 304
Stock purchased under Stock
Repurchase Plan (3,000) (6) (33) - - (39)
Change in net unrealized gains on
securities available for sale,
net of taxes $728 - - - - 1,435 1,435
Net income -1997 - - - 8,166 - 8,166
------- -------- ------- -------- ---------- --------
BALANCE - DECEMBER 31, 1997 7,468,292 14,937 55 51,728 1,707 68,427
Cash dividends declared - - - (2,860) - (2,860)
Issuance of common stock under
Dividend Reinvestment Plan 17,326 35 289 - - 324
Issuance of common stock under
Incentive Stock Option Plan 21,776 43 (33) - - 10
Change in net unrealized gains on
securities available for sale,
net of taxes $328 - - - - 636 636
Net income -1998 - - - 6,822 - 6,822
------- -------- ------- -------- ---------- --------
BALANCE - DECEMBER 31, 1998 7,507,394 $ 15,015 $ 311 $ 55,690 $2,343 $ 73,359
======= ======== ======= ======== ========== ========
See accompanying notes to consolidated financial statements.
24
Consolidated Statements of Cash Flows
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1998, 1997 and 1996
(dollars in thousands)
1998 1997 1996
--------- --------- ---------
Operating activities:
Net income $ 6,822 $ 8,166 $ 7,739
Adjustments to reconcile net income to net
cash and cash equivalents provided by
operating activities:
Depreciation and amortization of
bank premises and equipment 1,482 1,359 1,131
Provision for loan losses 3,044 1,182 895
(Gains) losses on securities
transactions, net 71 29 33
Gains on sale of loans - - (47)
Gains on sales of other real estate
owned, net (297) (446) (11)
Deferred income tax expense (benefit) (567) (173) (173)
Decrease (increase) in accrued interest
receivable 114 (292) 88
Other, net (9,044) 2,188 (1,671)
--------- --------- ---------
Net cash and cash equivalents provided
by operating activities 1,625 12,013 7,984
--------- --------- ---------
Investing activities:
Purchases of investment securities (1,646) (8,949) (8,078)
Proceeds from maturities of investment securities 3,269 6,695 11,022
Purchases of securities available for sale (82,381) (37,565) (48,265)
Proceeds from sales of securities available for
sale 56,472 2,857 18,677
Proceeds from maturities of securities available
for sale 8,838 26,662 27,564
Net increase in loans (82,056) (45,164) (25,730)
Purchases of bank premises and equipment (5,642) (4,003) (5,143)
Proceeds from sales of bank premises and equipment 80 - 2
Proceeds from sales of other real estate owned 1,092 3,611 212
--------- --------- ---------
Net cash and cash equivalents used in
investing activities (101,974) (55,856) (29,739)
--------- --------- ---------
Financing activities:
Net increase in non-interest-bearing deposits 15,623 6,242 5,518
Net increase in interest-bearing deposits 102,750 27,440 18,976
Net decrease in short-term borrowings (7,769) (158) (3,705)
Proceeds from long-term borrowings 4,745 12,800 10,000
Repayment of long-term borrowings (135) (210) (150)
Cash dividends paid (2,860) (2,791) (2,490)
Issuance of common stock 334 304 272
Purchases of common stock - (39) (159)
--------- --------- ---------
Net cash and cash equivalents provided
by financing activities 112,688 43,588 28,262
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 12,339 (255) 6,507
Cash and cash equivalents at beginning of year 28,681 28,936 22,429
--------- --------- ---------
Cash and cash equivalents at end of year $ 41,020 $ 28,681 $ 28,936
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 24,267 $ 21,053 $ 19,719
Income taxes $ 2,747 $ 2,517 $ 2,162
See accompanying notes to consolidated financial statements.
25
Notes to Consolidated Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1998, 1997 and 1996
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"), King George State Bank ("King George"), Rappahannock National
Bank ("Rappahannock") and its non-banking subsidiaries, Union
Investment Services, Inc. and Union Mortgage Company, LLC. All
significant intercompany balances and transactions have been
eliminated. Rappahannock was merged with and into the Company on July
1, 1998. 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 Rappahannock for all periods
presented.
The accompanying consolidated financial statements for prior periods
reflect certain reclassifications in order to conform with the 1998
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. The net unrealized gains or losses on
securities available for sale, net of deferred taxes, are included in
accumulated comprehensive income in stockholders' equity. 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
26
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) Intangible assets
Core deposit intangibles are included in other assets and are being
amortized on a straight-line basis over the period of expected
benefit, which approximates 15 years. Core deposits, net of
amortization amounted to $5,846,000 and $237,000 at December 31, 1998
and 1997, respectively.
(G) 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.
(H) 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.
(I) 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 $150,000, $880,000 and $635,000 during the
years ended December 31, 1998, 1997 and 1996, respectively, as a
result of loan foreclosures. These represent non-cash investing
activities for purposes of the consolidated statements of cash flows.
27
(J) 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.
(K) Earnings per share
Basic earings per share (EPS) is computed by dividing net income 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.
(L) Segment Information
Statement of Financial Accounting Standards No. 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. This standard is effective for financial statements
issued for periods beginning after December 15, 1997, including
interim periods. Management has determined that for the purpose of
this disclosure the Company has only one segment.
(M) Comprehensive Income
Comprehensive income represents all changes in equity of an
enterprise that result from recognized transactions and other
economic events of the period. Other comprehensive income refers to
revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but
excluded from net income, such as unrealized gains and losses on
certain investments in debt and equity securites.
(N) 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 value at December 31, 1998 and 1997 are
summarized as follows (in thousands):
1998
- ----------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
U.S. government and agency securities $ 5,747 $ 40 $ - $ 5,787
Obligations of states and
political subdivisions 8,765 241 - 9,006
Corporate and other bonds 1,630 29 - 1,659
--------- --------- --------- ---------
$ 16,142 $ 310 $ - $ 16,452
========= ========= ========= =========
1997
- ----------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
U.S. government and agency securities $ 5,678 $ 27 $ - $ 5,705
Obligations of states and
political subdivisions 8,235 218 5 8,448
Corporate and other bonds 3,856 50 2 3,904
--------- --------- --------- ---------
$ 17,769 $ 295 $ 7 $ 18,057
========= ========= ========= =========
28
The amortized cost, estimated fair value and gross unrealized gains and
losses of securities available for sale at December 31, 1998 and 1997 are
summarized as follows (in thousands):
1998
- ----------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
U.S. government and agency securities $ 7,647 $ 64 $ - $ 7,711
Obligations of states and
political subdivisions 73,523 2,979 39 76,463
Corporate and other bonds 4,175 98 - 4,273
Mortgage-backed securities 69,015 489 108 69,396
Federal Reserve Bank stock 484 - - 484
Federal Home Loan Bank stock 2,517 - - 2,517
Other securities 317 67 - 384
--------- --------- --------- ---------
$ 157,678 $ 3,697 $ 147 $ 161,228
========= ========= ========= =========
1997
- ----------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
U.S. government and agency securities $ 22,631 $ 78 $ 36 $ 22,673
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 424 - - 424
Federal Home Loan Bank stock 2,806 16 - 2,822
Other securities 322 54 - 376
--------- --------- --------- ---------
$ 141,128 $ 2,868 $ 285 $ 143,711
========= ========= ========= =========
The amortized cost and estimated fair value of investment securities and
securities available for sale at December 31, 1998, 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 $ 2,920 $ 2,942 $ 5,236 $ 5,273
Due after one year through five years 10,049 10,221 40,702 41,393
Due after five years through ten years 1,388 1,424 48,252 50,379
Due after ten years 1,785 1,865 60,170 60,798
--------- --------- --------- ---------
16,142 16,452 154,360 157,843
Federal Reserve Bank stock - - 484 484
Federal Home Loan Bank stock - - 2,517 2,517
Other securities - - 317 384
--------- --------- --------- ---------
$ 16,142 $ 16,452 $ 157,678 $ 161,228
========= ========= ========= =========
Investment securities with an amortized cost of approximately $43,297,000
at December 31, 1998 were pledged to secure public deposits, repurchase
agreements and for other purposes.
29
Sales of securities available for sale produced the following results for
the years ended December 31, 1998, 1997 and 1997 (in thousands):
1998 1997 1996
--------- --------- ---------
Proceeds $ 56,472 $ 2,857 $ 18,677
========= ========= =========
Gross gains $ 195 $ 58 $ 126
Gross losses (124) (87) (159)
--------- --------- ---------
Net gains (losses) $ 71 $ (29) $ (33)
========= ========= =========
3 Loans
Loans are stated at their face amount, net of unearned income, and consist
of the following at December 31, 1998 and 1997 (in thousands):
1998 1997
---------- ---------
Real estate loans $ 327,286 $ 272,237
Commercial loans 61,678 45,541
Loans to individuals for household,
family and other personal expenditures 82,724 80,187
All other loans 9,154 2,469
---------- ---------
480,842 400,434
Less unearned income on loans 1,020 1,083
---------- ---------
$ 479,822 $ 399,351
========== =========
At December 31, 1998 and 1997, the recorded investment in loans which have
been identified as impaired loans, in accordance with Statement of
Financial Accounting Standards No. 114, "ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN" (SFAS 114), as amended by SFAS 118, totaled
$2,813,000 and $2,244,000, respectively.
Nonaccrual loans totaled approximately $2,813,000 at December 31, 1998.
The gross interest income that would have been recorded during 1998, 1997
and 1996 had the Company's nonaccrual loans been current with their
original terms, was approximately $397,000, $208,000 and $96,000,
respectively. The amount of interest income recorded by the Company during
1998, 1997 and 1996 on nonaccrual loans was approximately $61,000,
$102,000 and $44,000, respectively.
4 Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 are summarized below (in thousands):
1998 1997 1996
--------- --------- ---------
Balance, beginning of year $ 4,798 $ 4,612 $ 4,274
Provision charged to operations 3,044 1,182 895
Recoveries credited to allowance 274 213 411
--------- --------- ---------
Total 8,116 6,007 5,580
Loans charged off 1,709 1,209 968
--------- --------- ---------
Balance, end of year $ 6,407 $ 4,798 $ 4,612
========= ========= =========
30
5 Bank Premises and Equipment
Bank premises and equipment as of December 31, 1998 and 1997 are as
follows (in thousands):
1998 1997
--------- ---------
Land $ 5,386 $ 4,902
Land improvements and buildings 13,328 10,551
Leasehold improvements 383 382
Furniture and equipment 11,031 9,835
Construction in progress 762 177
--------- ---------
30,890 25,847
Less accumulated depreciation and amortization 9,833 8,869
--------- ---------
Bank premises and equipment, net $ 21,057 $ 16,978
========= =========
Depreciation and amortization expense for 1998, 1997 and 1996 was
$1,482,000, $1,359,000 and $1,133,000, 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, 1998 are
approximately $139,000 for 1999, $141,000 for 2000, $144,000 for 2001,
$25,000 for 2002, $25,000 for 2003, and $500,000 thereafter.
6 Other Borrowings
Short-term borrowings consist of the following at December 31, 1998, 1997
and 1996 (dollars in thousands):
1998 1997 1996
--------- --------- ---------
Federal funds purchased $ 4,500 $ 9,000 $ 6,295
Securities sold under agreements
to repurchase 14,856 11,645 11,698
Other short-term borrowings 120 6,600 9,410
--------- --------- ---------
Total $ 19,476 $ 27,245 $ 27,403
========= ========= =========
Weighted interest rate 3.92% 5.94% 5.27%
Average for the year ended December 31:
Outstanding $ 15,150 $ 20,716 $ 26,344
Interest rate 5.26% 4.99% 4.58%
Maximum month-end outstanding $ 41,621 $ 28,422 $ 31,023
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 $48 million at December
31, 1998. The Company also had a line of credit with the Federal Home Loan
Bank of Atlanta for $68 million at December 31, 1998. Long-term debt
consisted of the following at December 31, 1998 and 1997 (dollars in
thousands):
1998 1997
--------- ---------
Federal Home Loan Bank borrowings:
Floating rate, due April 24, 2000 $ 5,000 $ 5,000
5.51%, due March 26, 2008 5,000 -
5.60%, due June 6, 2001 10,000 10,000
5.97%, due July 10, 2002 6,000 6,000
5.81%, due January 10, 2004 275 325
6.08%, due February 15, 2004 275 325
6.61%, due March 17, 2004 275 325
Floating Rate Note Payable
to Crestar, due July 1, 2004 1,500 1,740
--------- ---------
Total long-term debt $ 28,325 $ 23,715
========= =========
31
7 Income Taxes
The components of the 1998, 1997 and 1996 income tax expense (benefit) are
as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Current taxes - Federal $ 2,245 $ 2,456 $ 2,547
Deferred taxes - Federal (567) (173) (173)
--------- --------- ---------
Income tax expense $ 1,678 $ 2,283 $ 2,374
========= ========= =========
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 (in thousands):
1998 1997 1996
--------- --------- ---------
Computed "expected" tax expense $ 2,890 $ 3,553 $ 3,439
Increase (reduction) in taxes resulting
from:
Tax-exempt interest (1,203) (1,181) (1,151)
Other, net (9) (89) 86
--------- --------- ---------
Income tax expense $ 1,678 $ 2,283 $ 2,374
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
--------- ---------
Deferred tax assets:
Loans, principally due to the allowance for
loan losses $ 1,799 $ 1,192
Benefit plans 484 430
Other 135 259
--------- ---------
Total deferred tax assets 2,418 1,881
--------- ---------
Deferred tax liabilities:
Unrealized gains on securities available for sale 1,207 879
Bank premises and equipment, principally due to
depreciation 326 291
Other 96 161
--------- ---------
Total deferred tax liabilities 1,629 1,331
--------- ---------
Net deferred tax asset (included in
other assets) $ 789 $ 550
========= =========
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.
32
8 Employee Benefits
The Company has a noncontributory, defined benefit pension plan covering
all full-time employees. Significant assumptions used in determining net
periodic pension cost and projected benefit obligation for 1998 and 1997
were:
1998 1997
--------- ---------
Expected long-term rate of return on assets 9.0% 9.0%
Discount rate 7.5% 7.5%
Salary increase rate 5.0% 5.0%
Average remaining service 21 YEARS 22 years
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31,
1998 and 1997 (in thousands):
1998 1997
--------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 3,756 $ 3,179
Service cost 384 323
Interest cost 281 237
Actuarial (gain) loss (275) 43
Benefits paid (26) (26)
--------- ---------
Benefit obligation at end of year 4,120 3,756
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 3,271 2,723
Actual return on plan assets (136) 394
Employer contribution - 180
Benefits paid (26) (26)
--------- ---------
Fair value of plan assets at end of year 3,109 3,271
--------- ---------
Funded status (1,011) (485)
Unrecognized net obligation at transition 6 8
Unrecognized actuarial loss (692) (872)
Unrecognized prior service cost 279 300
--------- ---------
Accrued pension liability (included in other
liabilities) (1,418) (1,049)
========= =========
Net periodic pension cost for 1998, 1997 and 1996 included the following
components (in thousands):
1998 1997 1996
--------- --------- ---------
Service cost $ 384 $ 323 $ 287
Interest cost 281 238 218
Expected return on assets (293) (281) (298)
Net amortization and deferral (3) 33 69
--------- --------- ---------
Net periodic pension cost $ 369 $ 313 $ 276
========= ========= =========
There were no contributions to the plan in 1998. Contributions to the plan
totaled were approximately $180,000 for 1997. The Company also contributes
to an employees' profit-sharing plan which covers all full-time employees
with vesting at various intervals over seven years. Contributions are made
annually at the discretion of the subsidiary banks' Board of Directors.
The payments to the plan for the years 1998, 1997 and 1996 were
approximately $567,000, $621,000 and $521,000, respectively.
The Company has an obligation to certain members of the subsidiary banks'
Boards of Directors under deferred compensation plans in the amount of
$1,030,000 and $1,014,000 at December 31, 1998 and 1997, respectively. A
portion of the benefits will be funded by life insurance.
33
The Company has a stock option plan (the "Plan") adopted in 1993 that
authorizes the reservation of up to 400,000 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
1998, 1997 and 1996 and other information for December 31, 1998 are as
follows (shares exercised reflects 4,272 shares retired in a cashless
exchange):
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ------- --------- -------- -------- -------
Year ended December 31, 1998 1997 1996
----------------- -------------------- ------------------
Options outstanding, January 1 73,240 $ 8.66 63,240 $ 8.06 50,240 $ 6.91
Granted 98,940 20.13 10,000 12.50 13,000 12.50
Exercised (26,048) 8.03 - - - -
----------------- -------------------- ------------------
Options outstanding,
December 31 146,132 $ 17.25 73,240 $ 8.66 63,240 $ 8.06
================= ==================== ==================
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 EXERCISABLECONTRACTUAL LIFE PRICE
-------------- ----------- ------------- -------- ---------- ------------- -------
$ 6.53 5,040 1.27 yrs. $ 6.53 5,040 1.27 yrs. $ 6.53
11.00 20,000 6.05 11.00 12,000 6.05 11.00
12.50 22,152 7.50 12.50 7,021 7.35 12.50
20.13 98,940 9.06 20.13 - - -
----------- ----------
$ 6.53 - 20.13 146,132 8.14 $ 17.25 24,061 5.43 $ 10.50
============== =========== ============= ======== ========== ============= =======
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 based upon the following assumptions using
the Black-Scholes option pricing model: expected volatility of 23%;
dividend yield of 2.4%; risk-free interest rate of 4.99% and an expected
option life of 9.1 years.
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.
34
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, 1998 and 1997, the Company had
outstanding loan commitments approximating $46,978,000 and $46,601,000,
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 $5,962,000 and $6,198,000 at December 31, 1998 and
1997, 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 Rappahannock 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 $8,847,000 and $7,646,000 as of December 31, 1998 and
1997, respectively. During 1998 new advances to such related parties
amounted to $12,432,000 and repayments amounted to $11,231,000.
11 Earnings per share
The following is a reconciliation of the denominators of the basic and
diluted EPS computations for December 31, 1998, 1997 and 1996:
WEIGHTED AVERAGE
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------- --------- ---------
(DOLLARS AND SHARES INFORMATION IN THOUSANDS)
For the Year Ended December 31, 1998
Basic EPS $ 6,822 7,490 $ .91
Effect of dilutive stock options - 26 -
--------- --------- ---------
Diluted EPS $ 6,822 7,516 $ .91
--------- --------- ---------
For the Year Ended December 31, 1997
Basic EPS $ 8,166 7,455 $ 1.10
Effect of dilutive stock option - 27 -
--------- --------- ---------
Diluted EPS $ 8,166 7,482 $ 1.09
--------- --------- ---------
For the Year Ended December 31, 1996
Basic EPS $ 7,739 7,448 $ 1.04
Effect of dilutive stock options - 38 -
--------- --------- ---------
Diluted EPS $ 7,739 7,486 $ 1.03
--------- --------- ---------
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
35
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 of total and
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Company meets all capital
adequacy requirements to which it is subject.
The most recent notification from the Federal Reserve Bank as of June 30,
1998, 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, 1998
Total capital to risk weighted assets
Consolidated $ 71,577 13.70% $ 41,797 8.00% $ 52,246 10.00%
Union Bank & Trust 37,318 11.24% 26,558 8.00% 33,197 10.00%
Northern Neck State Bank 17,247 13.30% 10,374 8.00% 12,967 10.00%
King George State Bank 7,258 14.25% 4,075 8.00% 5,094 10.00%
Rappahannock National Bank 2,932 48.53% 483 8.00% 604 10.00%
Tier 1capital to risk weighted assets
Consolidated 65,170 12.47% 20,905 4.00% 31,357 6.00%
Union Bank & Trust 33,919 10.22% 13,279 4.00% 19,918 6.00%
Northern Neck State Bank 15,739 12.14% 5,187 4.00% 7,780 6.00%
King George State Bank 5,900 11.58% 2,037 4.00% 3,056 6.00%
Rappahannock National Bank 2,791 46.19% 242 4.00% 363 6.00%
Tier 1capital to average adjusted assets
Consolidated 65,170 9.06% 28,773 4.00% 35,966 5.00%
Union Bank & Trust 33,919 7.57% 17,934 4.00% 22,417 5.00%
Northern Neck State Bank 15,739 8.31% 7,578 4.00% 9,473 5.00%
King George State Bank 5,900 8.10% 2,914 4.00% 3,643 5.00%
Rappahannock National Bank 2,791 15.55% 718 4.00% 897 5.00%
AS OF DECEMBER 31, 1997
Total capital to risk weighted assets
Consolidated $ 71,281 17.45% $ 32,679 8.00% $ 40,849 10.00%
Union Bank & Trust 40,980 15.06% 21,771 8.00% 27,214 10.00%
Northern Neck State Bank 20,220 21.24% 7,615 8.00% 9,518 10.00%
King George State Bank 5,753 15.39% 2,991 8.00% 3,738 10.00%
Rappahannock National Bank 2,894 48.96% 473 8.00% 591 10.00%
Tier 1capital to risk weighted assets
Consolidated 66,483 16.28% 16,335 4.00% 24,502 6.00%
Union Bank & Trust 38,310 14.08% 10,886 4.00% 16,328 6.00%
Northern Neck State Bank 18,706 19.65% 3,807 4.00% 5,711 6.00%
King George State Bank 5,372 14.37% 1,495 4.00% 2,243 6.00%
Rappahannock National Bank 2,661 45.02% 236 4.00% 355 6.00%
Tier 1capital to average adjusted assets
Consolidated 66,483 11.45% 23,226 4.00% 29,032 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%
Rappahannock National Bank 2,661 15.77% 675 4.00% 843 5.00%
36
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, 1998 and 1997,
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, 1998 and 1997 are as
follows:
1998 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
Financial assets:
Cash and cash equivalents $ 41,020 $ 41,020 $ 28,681 $ 28,681
Investment securities 16,142 16,452 17,769 18,057
Securities available for sale 161,228 161,228 143,711 143,711
Net loans 479,822 483,013 399,351 404,671
Financial liabilities:
Deposits 607,629 611,834 489,256 491,869
Borrowings 47,801 48,145 50,960 50,923
37
14 Subsequent event
On February 11, 1999, the Company announced that it had acquired Mortgage
Capital Investors ("MCI"), an independent mortgage banking company
headquartered in Springfield, Virginia. Mortgage Capital Investors
originates, underwrites, closes and sells residential mortgage loans
through a network of thirteen (13) loan application centers located in
Virginia, Maryland, North Carolina, South Carolina and Florida. MCI
reported total mortgage loan originations of $323 million (unaudited) in
its fiscal year ended March 31, 1998 and originations for the first nine
months of its fiscal year ending March 31, 1999 exceeding $400 million
(unaudited). MCI will operate as a subsidiary of Union Bank and Trust
Company and will consolidate the existing mortgage operations of Union
Mortgage Company into its operations.
15 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, 1998 and 1997
(dollars in thousands)
1998 1997
--------- ---------
ASSETS:
Cash $ 1,927 $ 73
Certificates of deposit 29 125
Securities available for sale 273 283
Premises and equipment, net 3,809 3,353
Other assets 2,239 331
Due from subsidiaries 115 177
Investment in subsidiaries 66,765 65,701
--------- ---------
Total assets $ 75,157 $ 70,043
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 1,798 $ 1,616
Common stock 15,015 14,937
Surplus 311 55
Retained earnings 55,690 51,728
Unrealized gains on securities available for sale 2,343 1,707
--------- ---------
Total liabilities and stockholders' equity $ 75,157 $ 70,043
========= =========
Condensed Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------- -------- ---------
INCOME:
Interest income $ 11 $ 11 $ 67
Dividends received from subsidiaries 7,250 3,434 2,315
Equity in undistributed net income of
subsidiaries 511 5,052 5,736
Other income - 62 2
--------- -------- ---------
Total income 7,772 8,559 8,120
Interest expense 115 64 -
Operating expenses 835 329 381
--------- -------- ---------
Total expense 950 393 381
--------- -------- ---------
Net income $ 6,822 $ 8,166 $ 7,739
========= ======== =========
38
Condensed Statements of CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------- -------- ---------
OPERATING ACTIVITIES:
Net income $ 6,822 $ 8,166 $ 7,739
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed net income
of subsidiaries (511) (4,902) (5,561)
Decrease (increase) in other assets (1,312) (144) 34
Other (net) 299 (162) 197
--------- -------- ---------
Net cash provided by operating
activities 5,298 2,958 2,409
--------- -------- ---------
INVESTING ACTIVITIES:
Purchase of securities - - (63)
Proceeds from maturity of securities - 55 1,006
Purchase of equipment (894) (2,585) (1,076)
--------- -------- ---------
Net cash used by investing
activities (894) (2,530) (133)
--------- -------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in borrowings (120) 1,740 -
Cash dividends paid (2,860) (2,791) (2,490)
Issuance of common stock under plans 334 304 272
Repurchase of common stock under plans - (39) (159)
--------- -------- ---------
Net cash used in financing
activities (2,646) (786) (2,377)
--------- -------- ---------
Increase (decrease) in cash and cash
equivalents 1,758 (358) (101)
Cash and cash equivalents at beginning of year 198 556 657
--------- -------- ---------
Cash and cash equivalents at end of year $ 1,956 $ 198 $ 556
========= ======== =========
Independent Auditors' Report
[KPMG 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, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 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 provide a reasonable basis for our opinion.
In our opinion, 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Richmond, Virginia
February 9, 1999, except as to Note 14, which is as of February 11, 1999
39
Directory of Union Bankshares Corporation
Northern Neck
State Bank
- --------------------------------------------------------------------------------
Officers
E. Peyton Motley, PRESIDENT
N. Byrd Newton, SENIOR VICE PRESIDENT &
SECRETARY
Russell G. Brown, VICE PRESIDENT
William E. Harrison, VICE PRESIDENT & CASHIER
C. Wayne Penick, VICE PRESIDENT
Marion B. Rowe, VICE PRESIDENT
Gail S. Smith, VICE PRESIDENT
William M. Wright, VICE PRESIDENT
Directors
William E. Bowen
S. Bryan Chandler
Richard A. Farmar, Jr.
W. D. Gray
Edward L. Hammond
William H. Hughes
E. Peyton Motley
W. Tayloe Murphy, Jr.
Louis G. Packett
Dexter C. Rumsey, III
Charles H. Ryland
Charles H. Williams, III
William M. Wright
Honorary Directors
Robert B. Delano
James V. Garland, Jr.
Thomas S. Herbert
King George
State Bank
- --------------------------------------------------------------------------------
Officers
Sylvia Buffkin, VICE PRESIDENT
David F. Clare, VICE PRESIDENT
Scott Q. Nininger, VICE PRESIDENT
Directors
E.R. Morris, Jr., CHAIRMAN
John S. Cheadle
Frederick G. Davies
William B. Gallahan
C. Newell Thompson
E.P. Woodworth
Mortgage
Capital Investors
Officers
Kevin P. Keegan, PRESIDENT &
CHIEF EXECUTIVE OFFICER
Directors
G. William Beale, CHAIRMAN
Kevin P. Keegan
John C. Neal
Brian T. O'Reilly
D. Anthony Peay
Union Bank & Trust
Company
- --------------------------------------------------------------------------------
Officers
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
John M. Randolph, SENIOR VICE PRESIDENT
R. Tyler Ware, SENIOR VICE PRESIDENT
David K. Bohmke, VICE PRESIDENT
Thomas J. Boyd, III, VICE PRESIDENT
Jeannette B. Burke, VICE PRESIDENT
F. Kent Cox, VICE PRESIDENT
Charles Gravatt, VICE PRESIDENT
Sherry C. Gravatt, VICE PRESIDENT
Raymond C. Ratcliffe, Jr., VICE PRESIDENT
George Washington, Jr., VICE PRESIDENT
Directors
Ronald L. Hicks, CHAIRMAN
Walton Mahon, VICE CHAIRMAN
G. William Beale
Daniel I. Hansen
Michael N. Manns
M. Raymond Piland, III
James E. Small, III
A.D. Whittaker
Honorary Directors
Estelle H. Kay
Guy C. Lewis, Jr.
H. Ashton Taylor
R.F. Upshaw, Jr.
Union Investment
Services, Inc.
Officers
Bernard W. Mahon, Jr., PRESIDENT
Randall W. Vaughan, VICE PRESIDENT
Directors
G. William Beale, CHAIRMAN
David F. Clare
Ronald L. Hicks
Estelle H. Kay
Bernard W. Mahon, Jr.
Michael N. Manns
William M. Wright
Bank of
Williamsburg
- --------------------------------------------------------------------------------
Officers
J. Michael Johnson, PRESIDENT
Directors
Henry Aceto, Jr.
G. William Beale
A. G. W. Christopher
Randall K. Cooper
L. Mark Griggs
J. Michael Johnson
Christopher A. Mayer
Alison Morrison
D. Anthony Peay
Joseph R. Potter, Jr.
Rappahannock
National Bank
- --------------------------------------------------------------------------------
Officers
Michael T. Leake, VICE PRESIDENT
Directors
Elisabeth J. Jones, CHAIRMAN
G. William Beale
Alphaeus F. Cannon
James W. Fletcher, III
Thomas B. Massie
Mary L. Payne
George E. Williams