SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer I.D. No.)
211 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $4 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The Aggregate Market Value of the Voting Stock Held by Nonaffiliates of
the Registrant was $83,126,033 as of February 28, 1997.
As of February 28, 1997, Union Bankshares Corporation had 3,564,915 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1996 are incorporated into Part II, Items 6 through 8
of this Form 10-K, and (2) portions of the Proxy Statement for the 1997 annual
meeting are incorporated into Part III, Items 10 through 13 of this Form 10-K.
<PAGE>
UNION BANKSHARES CORPORATION
FORM 10-K
INDEX
-----
PART 1
Page
----
Item 1. Business................................................... 1
Item 2. Properties................................................. 7
Item 3. Legal Proceedings.......................................... 8
Item 4. Submission of Matters to a Vote of
Security Holders....................................... 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................ 9
Item 6. Selected Financial Data.................................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................. 10
Item 8. Financial Statements and Supplementary
Data................................................... 10
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................................. 10
PART III
Item 10. Directors and Executive Officers of the Registrant ........ 10
Item 11. Executive Compensation..................................... 11
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................... 11
Item 13. Certain Relationships and Related
Transactions.................................... 11
PART IV
Item 14. Exhibits, Financial Statements Schedules
and Reports on Form 8-K......................... 12
<PAGE>
PART I
Item 1. - Business
GENERAL
Union Bankshares Corporation (the "Company") is a bank holding company
organized under Virginia law which conducts a financial services business
through its wholly-owned subsidiaries, Union Bank & Trust Company ("Union
Bank"), Northern Neck State Bank ("Northern Neck"), King George State Bank
("King George") and Union Investment Services, Inc. ("Union Investment").
The Company was formed in connection with the July 12, 1993 merger of
Northern Neck Bankshares Corporation with and into Union Bancorp, Inc. to form
Union Bankshares Corporation. On September 1, 1996, King George State Bank also
became a wholly-owned subsidiary of the Company. Under the terms of the
agreement, the Company exchanged 5.5 shares of its common stock for each
outstanding share of King George State Bank, Inc. stock. The transaction
qualified as a tax-free exchange and was accounted for as a
pooling-of-interests.
Each of the subsidiary banks is a full service retail commercial bank
offering a wide range of banking and related financial services, including
checking, savings, certificates of deposit and other depository services,
commercial, industrial, residential mortgage and consumer loans.
Union Bank & Trust Company had assets of $358 million, deposits of $285
million and shareholders' equity of $34 million on December 31, 1996. The Bank
was organized and chartered under the laws of Virginia in 1902. Union Bank's
primary trade area is Caroline County, Hanover County, King William County,
Spotsylvania County, Stafford County and the City of Fredericksburg, Virginia.
In addition to its main office located in Bowling Green, Virginia, Union Bank
operates twelve other branches in its primary trade area.
Northern Neck State Bank was organized and chartered under the laws of
Virginia in 1909. As of December 31, 1996, Northern Neck State Bank had assets
of $133 million, deposits of $113 million, and shareholders' equity of $17
million. Northern Neck State Bank primarily serves the Northern Neck area of the
State of Virginia, in a trade area which encompasses the counties of Richmond,
Westmoreland, Essex and Northumberland. In addition to its main office, the Bank
1
<PAGE>
operates four branches in its primary trade area, including a branch in the
Tappahannock Wal*Mart Superstore which opened in October 1996.
King George State Bank had assets of $48 million, deposits of $42 million
and shareholders' equity of $5 million on December 31, 1996. The Bank was
organized and chartered under the laws of Virginia in 1973 and operates from a
single location in King George County. King George State Bank's primary trade
area is King George County and extends into Fredericksburg, Virginia.
Union Investment began providing securities brokerage and investment
advisory services in February, 1993. It is a full service discount brokerage
company which offers a full range of investment services, and sells mutual
funds, bonds and stocks.
Union Mortgage Company, LLC began operations on January 1, 1997, providing
a wide array of mortgage products to customers in the service areas of the
subsidiary banks.
COMPETITION
The banking business in Virginia and nationally is very competitive. In
its market area the Company competes with large regional financial institutions,
savings and loans and other independent community banks, as well as credit
unions, mutual funds and life insurance companies. Competition for deposits and
loans is affected by factors such as interest rates offered, the number and
location of branches and types of products offered, as well as the reputation of
the institution.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following description briefly discusses certain
provisions of federal and state laws and certain regulations and proposed
regulations and the potential impact of such provisions on the Company and its
subsidiary banks, Union Bank, Northern Neck Bank and King George Bank
(collectively, the "Subsidiary Banks").
Bank Holding Companies
As a bank holding company registered under the Bank Holding Company Act of
1956 (the "BHCA"), the Company is subject to regulation
2
<PAGE>
by the Federal Reserve Board. The Federal Reserve Board has jurisdiction under
the BHCA to approve any bank or nonbank acquisition, merger or consolidation
proposed by a bank holding company. The BHCA generally limits the activities of
a bank holding company and its subsidiaries to that of banking, managing or
controlling banks, or any other activity which is so closely related to banking
or to managing or controlling banks as to be a proper incident thereto.
The BHCA currently prohibits the Federal Reserve Board from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. However, under recently enacted federal
legislation, the restriction on interstate acquisitions will be abolished
effective one year from enactment of such legislation, and thereafter, bank
holding companies from any state will be able to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state concentration limits. Banks also will be able to branch
across state lines effective June 1, 1997 (unless state law would permit such
interstate branching at an earlier date), provided certain conditions are met,
including that applicable state law must expressly permit such interstate
branching. Virginia has adopted legislation that will permit branching across
state lines effective July 1, 1995, provided there is reciprocity with the state
in which the out-of-state bank is based.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the Federal Deposit Insurance
Corporation (the "FDIC") insurance fund in the event the depository institution
becomes in danger of default or in default. For example, under a policy of the
Federal Reserve Board with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. In
addition, the "cross-guarantee" provisions of federal law, require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by either the Savings Association Insurance
Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a result of the default of a
commonly controlled insured depository institution in danger of default.
3
<PAGE>
The FDIC may decline to enforce the cross-guarantee provisions if it determines
that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The Federal Deposit Insurance Act ("FDIA") also provides that amounts
received from the liquidation or other resolution of any insured depository
institution by any receiver must be distributed (after payment of secured
claims) to pay the deposit liabilities of the institution prior to payment of
any other general creditor or stockholder. This provision would give depositors
a preference over general and subordinated creditors and stockholders in the
event a receiver is appointed to distribute the assets of the bank.
The Company is registered under the bank holding company laws of Virginia.
Accordingly, the Company and the Subsidiary Banks are subject to regulation and
supervision by the State Corporation Commission of Virginia (the "SCC").
Capital Requirements
The Federal Reserve Board, the Office of the Comptroller of the Currency
(the "OCC") and the FDIC have issued substantially similar risk-based and
leverage capital guidelines applicable to United States banking organizations.
In addition, those regulatory agencies may from time to time require that a
banking organization maintain capital above the minimum levels because of its
financial condition or actual or anticipated growth. Under the risk-based
capital requirements of these federal bank regulatory agencies, the Company and
each of the Subsidiary Banks are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 8%. At least half of the total
capital is required to be "Tier 1 capital", which consists principally of common
and certain qualifying preferred shareholders' equity, less certain intangibles
and other adjustments. The remainder ("Tier 2 capital") consists of a limited
amount of subordinated and other qualifying debt (including certain hybrid
capital instruments) and a limited amount of the general loan loss allowance.
The Tier 1 and total capital to risk-weighted asset ratios of the Company as of
December 31, 1996 were 15.15% and 16.29%, respectively, exceeding the minimum
requirements.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including requirements that they
have the highest regulatory examination rating and are not contemplating
significant growth or expansion. All other institutions are
4
<PAGE>
expected to maintain a leverage ratio of at least 100 to 200 basis points above
the minimum. The leverage ratio of the Company as of December 31, 1996, was
10.70%, which is above the minimum requirements. The guidelines also provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
Limits on Dividends and Other Payments
The Company is a legal entity, separate and distinct from its subsidiary
institutions. Substantially all of the revenues of the Company result from
dividends paid to it by the Subsidiary Banks. There are various legal
limitations applicable to the payment of dividends to the Company, as well as
the payment of dividends by the Company to its respective shareholders.
Under federal law, the Subsidiary Banks may not, subject to certain
limited exceptions, make loans or extensions of credit to, or investments in the
securities of, the Company or take securities of the Company as collateral for
loans to any borrower. The Subsidiary Banks are also subject to collateral
security requirements for any loans or extensions of credit permitted by such
exceptions.
The Subsidiary Banks are subject to various statutory restrictions on
their ability to pay dividends to the Company. Under the current supervisory
practices of the Subsidiary Banks' regulatory agencies, prior approval from
those agencies is required if cash dividends declared in any given year exceed
net income for that year plus retained earnings of the two proceeding years. The
payment of dividends by the Subsidiary Banks or the Company may also be limited
by other factors, such as requirements to maintain capital above regulatory
guidelines. Bank regulatory agencies have the authority to prohibit the
Subsidiary Banks or the Company from engaging in an unsafe or unsound practice
in conducting their business. The payment of dividends, depending on the
financial condition of the subsidiary banks, or the Company, could be deemed to
constitute such an unsafe or unsound practice.
Under the FDIA, insured depository institutions such as the Subsidiary
Banks are prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" (as such term is used in the statute). Based on the
Subsidiary Banks' current financial condition,
5
<PAGE>
the Company does not expect that this provision will have any impact on its
ability to obtain dividends from the Subsidiary Banks.
The Subsidiary Banks
The Subsidiary Banks are supervised and regularly examined by the Federal
Reserve Board and the SCC. The various laws and regulations administered by the
regulatory agencies affect corporate practices, such as the payment of
dividends, incurring debt and acquisition of financial institutions and other
companies, and affect business practices, such as the payment of interest on
deposits, the charging of interest on loans, types of business conducted and
location of offices.
The Subsidiary Banks are also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of the local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility.
As an institution with deposits insured by the BIF, the Bank also is
subject to insurance assessments imposed by the FDIC. The FDIC has implemented a
risk-based assessment schedule, imposing assessments ranging from 0.0% to 0.27%
of an institution's average assessment base. The actual assessment to be paid by
each BIF member is based on the institution's assessment risk classification,
which is determined based on whether the institution is considered "well
capitalized," "adequately capitalized" or "undercapitalized," as such terms have
been defined in applicable federal regulations, and whether such institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. Under this structure, the Subsidiary Banks will pay no
deposit insurance premiums other than the $2,000 statutory minimum assessment.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal law
to make prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized,"
6
<PAGE>
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." All such terms are defined under uniform
regulations defining such capital levels issued by each of the federal banking
agencies.
Item 2. - Properties
The Company, through its subsidiaries, owns or leases buildings that are
used in the normal course of business. The main office is located at 212 N. Main
Street, Bowling Green, Virginia, in a building owned by Union Bank. The
Company's subsidiaries own or lease various other offices in the counties and
cities in which they operate. Northern Neck State Bank has its main office in
Warsaw, Virginia and operates four branches; Union Bank has its main office in
Bowling Green, Virginia and operates 12 branches. Union Investment's office is
located in Bowling Green, Virginia. See Notes to Consolidated Financial
Statements for information with respect to the amounts at which bank premises
and equipment are carried and commitments under long-term leases.
The properties on the following page are those owned or leased by the Company
and its subsidiaries as of December 31, 1996.
7
<PAGE>
Locations
---------
Corporate Headquarters
212 North Main Street, Bowling Green, Virginia
Banking Offices - Union Bank & Trust Company
211 North Main Street, Bowling Green, Virginia
Route 1, Ladysmith, Virginia
Route 301, Port Royal, Virginia
4540 Lafayette Boulevard, Fredericksburg, Virginia
Route 1 & Ashcake Road, Ashland, Virginia
4210 Plank Road, Fredericksburg, Virginia
10415 Courthouse Road, Fredericksburg, Virginia
10374 Leadbetter Road, Ashland, Virginia
700 Kenmore Avenue, Fredericksburg, Virginia
Route 360, Manquin, Virginia
Route 301, Hanover, Virginia
Cambridge & Layhill Road, Falmouth, Virginia
Massaponax Church Road & Route 1, Spotsylvania, Virginia
Banking Offices - Northern Neck State Bank
5839 Richmond Road, Warsaw, Virginia
4256 Richmond Road, Warsaw, Virginia
Route 3, Kings Highway, Montross, Virginia
Route 17 & Earl Street, Tappahannock, Virginia
1660 Tappahannock Blvd, Tappahannock, Virginia
Union Investment Services, Inc.
111 Davis Court, Bowling Green, Virginia
Union Mortgage Company, LLC.
111 Davis Court, Bowling Green, Virginia
Item 3. - Legal Proceedings
In the ordinary course of its operations, the Company and its subsidiaries
are parties to various legal proceedings. Based on the information presently
available, and after consultation with legal counsel, management believes that
the ultimate outcome in such proceedings, in the aggregate, will not have a
material adverse effect on the business or the financial condition or results of
operations.
8
<PAGE>
Item 4. - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter.
PART II
Item 5. - Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on the over-the-counter market and is
quoted on the NASDAQ National Market System of (where under the symbol "UBSH".
The following table sets forth the high and low sale prices of the
Company's common stock and the dividends paid:
Sales Price
-------------
High Low Dividend
----- --- --------
1996:
First Quarter $26.25 $24.50 ----
Second Quarter 27.75 23.50 $.30
Third Quarter 27.00 24.50 ----
Fourth Quarter 26.25 25.00 .34
1995:
First Quarter $27.00 $22.00 ----
Second Quarter 26.50 22.00 $.28
Third Quarter 27.50 23.50 ----
Fourth Quarter 28.00 24.25 .28
As of December 31, 1996, there were 1,875 shareholders of record of common
stock. The Company expects to continue its policy of paying regular dividends,
although there is no assurance as to future dividends because they are dependent
upon future earnings, capital requirements and financial condition, and certain
regulatory restrictions.
9
<PAGE>
Item 6. - Selected Financial Data
This information is incorporated herein by reference from the section
captioned "Selected Financial Data" on page 1 in the Annual Report to
Shareholders for the year ended December 31, 1996.
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
This information is incorporated herein by reference from the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 5 through 16 in the Annual Report to
Shareholders for the year ended December 31, 1996.
Item 8. - Financial Statements and Supplementary Data
This information is incorporated herein by reference from the Consolidated
Financial Statements on pages 17 through 33 and the Quarterly Earnings Summary
on the inside front over of the Annual Report to Shareholders for the year ended
December 31, 1996.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There are no disagreements between the Company and its independent
accountants, KPMG Peat Marwick LLP.
PART III
Item 10. - Directors and Executive Officers of the Registrant
This information, as applicable to directors, is incorporated herein by
reference to the Proxy Statement for the Annual Meeting of Shareholders to be
held April 8, 1997 from the section entitled "Election of Directors" and
"Executive Compensation". Executive officers of the Company as of December 31,
1996 are listed on the following page:
10
<PAGE>
Title and Principal Occupation
------------------------------
Name (Age) During Past Five Years
- --------- ----------------------
G.William Beale (47) President and Chief Executive Officer of the Company since
its inception; President of Union Bank & Trust since 1991.
E.Peyton Motley (52) Executive Vice President and Chief Operating Officer of the
Company since its inception; President of Northern Neck
State Bank.
Homer L. Hite (57) Senior Vice President of the Company since 1996; President
and Chief Executive Officer of King George State Bank since
1974.
D.Anthony Peay (37) Vice President and Chief Financial Officer since December
1994; Certified Public Accountant, Senior Manager -
Deloitte & Touche (1990-94).
Item 11 - Executive Compensation
This information is incorporated herein by reference to the Proxy
Statement for the Annual Meeting of Shareholders to be held April 8, 1997 from
the section entitled "Executive Compensation".
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
This information is incorporated herein by reference to the Proxy
Statement for the Annual Meeting of Shareholders to be held April 8, 1997 from
section "Election of Directors".
Item 13 - Certain Relationships and Related Transactions
This information is incorporated herein by reference to the Proxy
Statement for the Annual Meeting of Shareholders to be held April 8, 1997 from
the section entitled "Interest of Directors and officers in Certain
Transactions".
11
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements of Union Bankshares
Corporation and subsidiaries included in the 1996 Annual Report to
Shareholders are incorporated herein by reference (see Exhibit 13):
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not
applicable, or the required information is shown in the consolidated
financial statements or notes thereto.
(3) Exhibits
The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation (incorporated by reference
to Form S-4 Registration Statement - 33-60458)
3.2 By-Laws (incorporated by reference to Form S-4
Registration Statement - 33-60458)
10.1 Form of Employment Agreement of G. William Beale and
E. Peyton Motley, respectively.
13 1996 Annual Report to Shareholders
22 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter ended
December 31, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Union Bankshares Corporation
By: /s/ G. William Beale Date: March 28, 1997
-------------------------
G. William Beale President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in such capacities named below on March 28, 1997.
Signature Title
/s/ G. William Beale President, Chief Executive Officer and
- ------------------------
G. William Beale Director
Executive Vice President, Chief Operating
- -------------------------
E. Peyton Motley Officer and Director
/s/ D. Anthony Peay Vice President and Chief Financial Officer
- -------------------------
D. Anthony Peay
Chairman of the Board of Directors
- -------------------------
Walton Mahon
Vice Chairman of the Board of Directors
- -------------------------
Charles H. Ryland
/s/ W. Tayloe Murphy, Jr. Director
- -------------------------
W. Tayloe Murphy, Jr.
/s/ Ronald L. Hicks Director
- -------------------------
Ronald L. Hicks
/s/ M. Raymond Piland, III Director
- -------------------------
M. Raymond Piland, III
/s/ A.D. Whittaker Director
- -------------------------
A.D. Whittaker
CHANGE IN CONTROL EMPLOYMENT AGREEMENT
This Agreement ("Agreement") is entered into as of the 17th day of
October, 1996, by and between Union Bankshares Corporation, a Virginia
corporation (the "Company"), and G. William Beale (the "Executive").
1. Purpose
The Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders. In this connection, the Company recognizes
that, as is the case with many publicly held corporations, the possibility of a
Change in Control (as defined herein) of the Company may arise and the
uncertainty and questions which it may raise among management may result in the
departure or distraction of management personnel to the detriment of the Company
and its shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce and
encourage the continued attention and dedication of certain members of the
management of the Company to their assigned duties without distraction in
circumstances arising from the possibility of a Change in Control of the
Company. In particular, the Board believes it important, should the Company or
its shareholders receive a proposal for transfer of control of the Company, that
the Executive be able to assess and advise the Board whether such proposal would
be in the best interests of the Company and its shareholders and to take such
other action regarding such proposal as the Board might determine to be
appropriate, without being influenced by the uncertainties of the Executive's
own situation. Nothing in this Agreement shall be construed as creating an
express or implied contract of employment and, except as otherwise agreed in
writing between the Executive and the Company, the Executive shall not have any
right to be retained in the employ of the Company prior to a Change in Control
of the Company.
2. Term of Agreement
The term of this Agreement shall be deemed to have commenced on October
1, 1996 (the "Commencement Date") and shall continue in effect through December
31, 1999; provided, however, that commencing on January 1, 2000, and each
January 1st thereafter, the term of this Agreement shall automatically be
extended for one additional year unless, not later than September 30 of such
year, the Company shall have given notice that this Agreement shall not be
extended. Notwithstanding the delivery of any notice of non-renewal, if a Change
in Control of the Company occurs during the original or any extended term of
this Agreement, this Agreement shall continue in effect for a period of 36
months beyond the month in which such Change in Control occurred. In no event
shall the term of this Agreement extend beyond the end of the month in which the
Executive's 65th birthday occurs.
<PAGE>
3. Change in Control
No benefits shall be payable hereunder unless there shall have been a
Change in Control of the Company as set forth below. For all purposes of this
Agreement, a "Change in Control" shall mean:
(a) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person"), of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
the then outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock"); provided, however, that the following acquisitions shall
not constitute a Change in Control: (i) any acquisition directly from the
Company (excluding an acquisition by virtue of the exercise of a conversion
privilege), (ii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company, or (iii) any acquisition by any
corporation pursuant to a transaction described in subsection (c) of this
Section 3 if, upon consummation of the transaction, all of the conditions
described in subsection (c) are satisfied;
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute a majority of such Board;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least two-thirds of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding for this purpose
any such individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(c) Approval by the shareholders of the Company of either (1) a
reorganization, merger, share exchange or consolidation of the Company by, with
or into any other corporation or (2) the sale or disposition of all or
substantially all of the assets of the Company (any of the foregoing
transactions, a "Reorganization"); provided, however, that approval by the
shareholders of a Reorganization shall not constitute a Change in Control if,
upon consummation of the Reorganization, each of the following conditions is
satisfied:
(i) more than 60% of the then outstanding shares of common stock
of the corporation resulting from the Reorganization is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were
beneficial owners of the Outstanding Company Common Stock
immediately prior to the Reorganization in substantially the
same proportions as their ownership, immediately prior to such
transaction, of the Outstanding Company Common Stock;
(ii) no Person (excluding any employee benefit plan (or related
trust) of the Company) beneficially owns, directly or
indirectly, 20% or more of either (1) the then outstanding
shares of common stock of the corporation resulting from the
transaction or (2) the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors; and
(iii) at least a majority of the members of the board of directors
of the corporation resulting from the Reorganization were
members of the Incumbent Board at the time of the execution of
the initial agreement providing for the Reorganization.
4. Termination Following Change in Control
If any of the events described in Section 3 hereof constituting a
Change in Control of the Company shall have occurred, the Executive shall be
entitled to the benefits provided in Section 5 hereof upon the subsequent
termination of the Executive's employment with the Company during the term of
this Agreement, unless such termination is (i) because of death of the
Executive, (ii) by the Company for Cause or Disability or (iii) by the Executive
other than for Good Reason (all as such capitalized terms are hereinafter
defined).
(a) Disability. Termination by the Company of the Executive's
employment based on "Disability" shall mean termination because of the
Executive's inability to perform his duties with the Company on a full time
basis for 180 consecutive days or a total of at least 240 days in any twelve
month period as a result of the Executive's incapacity due to physical or mental
illness (as determined by an independent physician selected by the Board).
(b) Cause. Termination by the Company of the Executive's employment for
"Cause" shall mean termination for (i) gross incompetence, gross negligence,
willful misconduct in office or breach of a material fiduciary duty owed to the
Company or any subsidiary or affiliate thereof; (ii) conviction of a felony, a
crime of moral turpitude or commission of an act of embezzlement or fraud
against the Company or any subsidiary or affiliate thereof; (iii) any material
breach by the Executive of a material term of this Agreement, including, without
limitation, material failure to perform a substantial portion of his duties and
responsibilities hereunder; or (iv) deliberate dishonesty of the Executive with
respect to the Company or any subsidiary or affiliate thereof.
(c) Good Reason; Window Period. The Executive shall be entitled to
terminate his employment (i) for "Good Reason" as defined below or (ii) during
the "Window Period" by the Executive without any reason. For purposes of this
Agreement, the "Window Period" shall mean the 45-day period immediately
following the first anniversary of the date on which a Change in Control
occurred. For purposes of this Agreement, termination for "Good Reason" shall
mean termination based on:
(i) a determination by the Executive, in his reasonable judgment,
that there has been an adverse change in the Executive's
status or position(s) as an executive officer of the Company
as in effect immediately prior to the Change in Control,
including without limitation, any adverse change in his status
or position as a result of a diminution in his duties or
responsibilities (other than, if applicable, any such change
directly attributable to the fact that the Company is no
longer publicly owned) or the assignment to the Executive of
any duties or responsibilities that are inconsistent with such
status or position(s).
(ii) a reduction by the Company in the Executive's base salary as
in effect immediately prior to the Change in Control or a
reduction in the Executive's Recent Average Bonus (defined as
the bonus paid or payable, including by reason of deferral, to
the Executive by the Company in respect of the two calendar
years immediately preceding the year in which the Change in
Control occurs);
(iii) the failure by the Company to pay to the Executive any portion
of his compensation or to pay to the Executive any portion of
an installment of deferred compensation under any deferred
compensation program of the Company within 10 days of the date
such compensation is due (it being understood and agreed that
each annual bonus shall be paid no later than the end of the
third month of the year next following the year for which the
annual bonus is awarded, unless the Executive shall elect to
defer the receipt of such annual bonus);
(iv) the Company's requiring the Executive to be based at any
office that is greater than thirty-five (35) miles from where
the Executive's office is located immediately prior to the
Change in Control, except for required travel on the Company's
business to an extent substantially consistent with the
business travel obligations which the Executive undertook on
behalf of the Company prior to the Change in Control;
(v) the failure by the Company to obtain an agreement reasonably
satisfactory to the Executive from any successor to assume and
agree to perform this Agreement; or
(vi) the failure by the Company to continue in effect any Plan (as
hereinafter defined) in which the Executive is participating
at the time of the Change in Control of the Company (or
Plans providing the Executive with at least substantially
similar benefits) other than as a result of the normal
expiration of any such Plan in accordance with its terms as
in effect at the time of the Change in Control, or the taking
of any action, or the failure to act, by the Company which
would adversely affect the Executive's continued
participation in any of such Plans on at least as favorable a
basis to the Executive as is the case on the date of the
Change in Control, or which would materially reduce the
Executive's benefits in the future under any of such Plans or
deprive the Executive of any material benefit enjoyed by
the Executive at the time of the Change in Control.
For purposes of this Section 4(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive.
For purposes of this Agreement, "Plan" shall mean any compensation plan
or any employee benefit plan such as a thrift, pension, profit sharing, medical,
disability, accident, life insurance plan or a relocation plan or policy or any
other plan, program or policy of the Company intended to benefit employees.
(d) Notice of Termination. Any termination by the Company on the one
hand or by the Executive following a Change in Control for Good Reason or during
the Window Period shall be communicated by written Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive during the Window Period or for Good Reason, the date of receipt of
the Notice of Termination or any later date specified therein, as the case may
be, (ii) if the Executive's employment is terminated by the Company other than
for Cause or Disability, the date specified in the Notice of Termination (which
shall not be less than 30 nor more than 60 days from the date such Notice of
Termination is given), and (iii) if the Executive's employment is terminated for
Disability, 30 days after Notice of Termination is given, provided that the
Executive shall not have returned to the full-time performance of his duties
during such 30-day period.
5. Compensation Upon Termination.
(a) If, during the Employment Period, the Company shall terminate the
Executive's employment other than for Cause or Disability or the Executive shall
terminate his employment either for Good Reason or during the Window Period,
then the Company shall pay to and provide for the Executive, without regard to
any contrary provisions of any Plan, the following:
(i) the sum of: (1) the Executive's base salary through the
Date of Termination at the rate in effect just prior to the
time a Notice of Termination is given; (2) the amount, if
any, of any incentive or bonus compensation theretofore
earned which has not yet been paid; (3) the product of the
annual bonus paid or payable, including by reason of
deferral, for the most recently completed year and a
fraction, the numerator of which is the number of days in the
current year through the Date of Termination and the
denominator of which is 365; and (4) any benefits or awards
(including both the cash and stock components) which
pursuant to the terms of any Plans have been earned or
become payable, but which have not yet been paid to the
Executive (including amounts which previously had been
deferred at the Executive's request) (the sum of the amounts
described in clauses (1), (2), (3) and (4) are referred
to as the "Accrued Obligations");
(ii) in lieu of any further salary payments subsequent to the Date
of Termination, an amount equal to 2.9 times the Executive's
Earnings (as defined below) (the "Severance Allowance"); and
(iii) the Company shall maintain in full force and effect, at
the sole cost of the Company (except for the regular
contributions of the Executive as described below, if any),
for the continued benefit of the Executive and his dependents
for a period terminating on the earliest of (a) 24 months
after the Date of Termination, or (b) the commencement date
of equivalent benefits from a new employer, all insured
and self-insured employee welfare benefit Plans in which
the Executive was entitled to participate immediately prior
to the Date of Termination, provided that the Executive's
continued participation is possible under the general terms
and provisions of such Plans (and any applicable funding
media) and the Executive continues to pay an amount equal to
his regular contribution under such Plans prior to the
Change in Control for such participation. In the event that
the Executive's participation in any such Plan is barred,
the Company, at its sole cost and expense, shall arrange
to have issued for the benefit of the Executive and his
dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to
those which the Executive otherwise would have been entitled
to receive under such Plans pursuant to this Section
5(a)(iii) or, if such insurance is not available at a
reasonable cost to the Company, the Company shall
otherwise provide the Executive and his dependents with
equivalent benefits (on an after-tax basis). The Executive
shall not be required to pay any premiums or other charges in
an amount greater than that which the Executive would have
paid in order to participate in such Plans.
(b) For purposes of Section 5(a)(ii), "Earnings" means the annual base
salary in effect on the Date of Termination, plus the average of the bonuses
received by the Executive for each of the two years prior to the Date of
Termination.
(c) The Severance Allowance (as defined in Section 5(a)(ii)) shall be
paid to the Executive not later than the thirtieth day following the Date of
Termination; provided, however, that if the amounts of such payment cannot be
finally determined on or before such day, the Company shall pay to the Executive
on such day an estimate, as determined in good faith by the Company, of the
Severance Allowance owed and shall pay the remainder of such payments (together
with interest thereon at the rate provided in Section 1274(b)(2)(B) of the
Internal Revenue Code of 1986, as amended (the "Code"), as soon as the amount
thereof can be determined, but in no event later than the sixtieth day after the
Date of Termination. The Executive may elect to receive, in lieu of a lump-sum
payment, the Severance Allowance in consecutive, equal monthly installments over
a period not to exceed 24 months, beginning on the first day of month following
the Date of Termination. The Accrued Obligations (as defined in Section 5(a)(i))
shall be paid to the Executive within 10 days after the Date of Termination.
(d) Except as specifically provided in Section 5(a)(iii) above, the
amount of any payment provided for in this Section 5 shall not be reduced,
offset or subject to recovery by the Company by reason of any compensation
earned by the Executive as the result of employment by another employer after
the Date of Termination, or otherwise.
(e) In the event any payment or distribution by the Company to or for
the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
5(e)) (a "Payment") would be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended, or any interest or penalties
are incurred by the Executive with respect to such excise tax (collectively, the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any income taxes and interest or penalties
imposed with respect to such taxes) and the Excise Tax imposed on the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed on the Payments. All determinations required to be made under
this Section 5(e), including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment, shall be made by KPMG Peat Marwick LLP (the
"Accounting Firm"), or such other accounting firm as may be mutually agreed to
between the Executive and the Company. All fees and expenses of such accounting
firm shall be borne solely by the Company, and any determination by the
Accounting Firm shall be binding upon the Company and the Executive. Any
Gross-Up Payment, as determined pursuant to this Section 5(e), shall be paid by
the Company to the Executive within ten days of the receipt of the Accounting
Firm's determination.
6. Binding Agreement
(a) This Agreement shall be binding upon and inure to the benefit of
the Executive (and his personal representative), the Company and any successor
organization or organizations which shall succeed to substantially all of the
business and property of the Company, whether by means of merger, consolidation,
acquisition of all or substantially of all of the assets of the Company or
otherwise, including by operation of law.
(b) For purposes of this Agreement, the term "Company" shall include
any subsidiaries of the Company and any corporation or other entity which is the
surviving or continuing entity in respect of any merger, consolidation or form
of business combination in which the Company ceases to exist; provided, however,
that for purposes of determining whether a Change in Control has occurred
herein, the term "Company" shall refer to Union Bankshares Corporation or its
successors.
7. Fees and Expenses; Mitigation
(a) The Company shall pay or reimburse the Executive, on a current
basis, for all costs and expenses, including without limitation court costs and
reasonable attorneys' fees, incurred by the Executive (i) in contesting or
disputing any termination of the Executive's employment or (ii) in seeking to
obtain or enforce any right or benefit provided by this Agreement, in each case
regardless of whether or not the Executive's claim is upheld by a court of
competent jurisdiction; provided, however, the Executive shall be required to
repay any such amounts to the Company to the extent that a court issues a final
and non-appealable order setting forth the determination that the position taken
by the Executive was frivolous or advanced by him or her in bad faith.
(b) The Executive shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to the Executive in connection
with this Agreement, by seeking other employment or otherwise.
8. Notice
Any notices, requests, demands and other communications provided for by
this Agreement shall be sufficient if in writing and delivered in person or sent
by registered or certified mail, postage prepaid (in which case notice shall be
deemed to have been given on the third day after mailing), or by overnight
delivery by a reliable overnight courier service (in which case notice shall be
deemed to have been given on the day after delivery to such courier service) to
the Executive at the last address the Executive has filed in writing with the
Company, attention of the Chairman of the Board.
9. Miscellaneous
No provision of this Agreement may be modified, waived or discharged
unless such modification, waiver or discharge is agreed to in a writing signed
by the Executive and the Chairman of the Board or President of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or of compliance with, any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement.
10. Governing Law
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Virginia.
11. Validity
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by Union Bankshares Corporation by its duly authorized officer, and
by the Executive, as of the date first above written.
UNION BANKSHARES CORPORATION
By: /s/ Walton Mahon
-----------------------------
Walton Mahon
Chairman of the Board
EXECUTIVE:
/s/ G. William Beale
---------------------------
G. William Beale
Union Bankshares Corporation and Subsidiaries
Selected Financial Data
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994 1993 1992
---------- ---------- ---------- ----------- -----------
Results of Operations (dollars in thousands, except per share amounts)
Interest income $ 40,996 $ 38,083 $ 31,927 $ 30,397 $ 31,434
Interest expense 19,330 17,855 13,089 13,009 15,086
---------- ---------- ---------- ----------- -----------
Net interest income 21,666 20,228 18,838 17,388 16,348
Provision for loan losses 895 977 1,102 1,571 2,054
---------- ---------- ---------- ----------- -----------
Net interest income after
provision for loan losses 20,771 19,251 17,736 15,817 14,294
Other income 3,459 2,618 2,949 2,061 2,105
Other expenses 14,502 13,037 12,073 10,834 9,738
---------- ---------- ---------- ----------- ------------
Income before income taxes 9,728 8,832 8,612 7,044 6,661
Income tax expense 2,272 2,079 1,899 1,529 1,565
---------- ---------- ---------- ----------- -----------
Net income $ 7,456 $ 6,753 $ 6,713 $ 5,515 $ 5,096
========== ========== ========== =========== ===========
Key Performance Ratios
Return on average assets (ROA) 1.41% 1.41% 1.55% 1.35% 1.33%
Return on average equity (ROE) 13.79% 13.56% 15.03% 13.51% 13.58%
Efficiency ratio 54.06% 53.56% 51.96% 52.14% 49.43%
Per Share Data
Net income per share $ 2.09 $ 1.91 $ 1.90 $ 1.56 $ 1.44
Cash dividends declared 0.64 0.56 0.51 0.45 0.40
Book value at year-end 16.42 15.07 13.37 12.13 11.01
Financial Condition
Total assets $ 540,893 $ 505,374 $ 462,880 $ 424,582 $ 395,678
Total deposits 439,607 415,755 390,232 367,933 344,134
Total loans, net of unearned income 352,277 327,132 295,389 258,063 247,421
Stockholders' equity 58,566 53,683 47,232 42,814 38,873
Asset Quality
Allowance for loan losses $ 4,388 $ 4,060 $ 4,110 $ 3,822 $ 3,704
Allowance as % of total loans 1.25% 1.24% 1.39% 1.48% 1.50%
Other Data
Market value per share at year-end (1) $ 25.00 $ 26.00 $ 24.00 $ 23.25 n/a
Price to earnings ratio 12.0 13.6 12.6 14.9 n/a
Price to book value ratio 152% 173% 180% 192% n/a
Dividend payout ratio 30.62% 28.80% 26.84% 28.84% 27.77%
Weighted shares outstanding 3,564,417 3,543,033 3,533,035 3,530,630 3,530,630
</TABLE>
(1) Stock was not traded on an active market until October 1993
[photo]
[caption: The new 17,000 sq. ft. Union Bankshares Operations Center opened in
the summer of 1996]
1
<PAGE>
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. Operating
results include those of King George State Bank for all periods presented.
Overview
Union Bankshares Corporation's mission statement is to:
o enhance shareholder value,
o remain a strong independent banking organization,
o be a leading provider of financial services,
o provide exemplary customer service,
o provide a rewarding work environment for its employees, and
o provide a growing return for its shareholders.
In 1996 Union Bankshares Corporation continued to strive to achieve these
objectives. The Company's focus of providing high quality financial services to
its customers through enhanced products and improved delivery channels was
evident in 1996. King George State Bank became a member of the Union Bankshares
family in September, expanding the Company's presence to that market and
enhancing its existing markets. The Company continued cost effective expansion
opportunities through the addition of three in-store branches, including a
Wal*Mart Superstore location.
1996 was also a year of planning and preparation. Plans were announced to
convert all subsidiaries to an in-house data processing system, providing
management the opportunity to improve the quality and availability of management
information while sharing the associated costs among the consolidated group.
Northern Neck State Bank converted its data files in November and the remaining
banks will be converted by mid-year 1997. This and other consolidation efforts
represent management's commitment to establishing the infrastructure necessary
to continue to operate efficiently as the Company grows.
Despite the costs associated with the above efforts, 1996 was another year of
record earnings for Union Bankshares Corporation. The Company reported net
income of $7.5 million or $2.09 per share, up 10.4% from $6.7 million in 1995.
Core profitability from primary lines of business continued to improve as net
interest income increased by 7.1% and service fees by 19.1% from 1995 levels.
[photo]
[caption: King George State Bank]
Profitability as measured by the Company's return on average assets (ROA) was
1.41% in 1996, while its return on average equity (ROE) was 13.79%. These ratios
were in line with 1.41% and 13.56%, respectively, reported in 1995, and remain
strong relative to the Company's peer group averages. These returns have
consistently exceeded 1.30% (ROA) and 13.30% (ROE) over the last five years and
have been achieved despite the strong asset and capital growth which the Company
has experienced over this time.
Continued increases in earning assets combined with a stable interest rate
spread in 1996 to contribute significantly to the strong earnings performance in
1996. The Company's net interest margin on a taxable equivalent basis was
5
<PAGE>
virtually unchanged from 4.80% in 1995 to 4.79% in 1996, however changes in
volume exceeded changes in rates, generating an additional $1.6 million in net
interest income.
Loans, net of unearned income, totaled $352.3 million at December 31, 1996 an
increase of 7.7% from December 31, 1995. Despite serving as a source of funds
for loans, securities growth was stable as the Company utilized certain
leveraging strategies to purchase securities funded by short-term borrowings.
Though the spread on such transactions is reduced from the more typical scenario
whereby loans are funded by deposits, the effect on net income and ROE was
favorable.
Deposits grew from $415.8 million at December 31, 1995, to $439.6 million at
December 31, 1996, an increase of 5.7%. Average deposits increased from $402.8
million in 1995 to $429.8 million in 1996, but competition for deposits among
financial service providers continues to force the Company to fund a portion of
its loan demand with other borrowings such as Federal funds purchased,
securities sold under agreements to repurchase and Federal Home Loan Bank
advances.
Capital remains a double-edged sword for the Company as financial stability is
weighed against ROE. Capital growth at 9.1% continued to outpace asset growth at
7.0%, but at a slower pace due to the use of wholesale leverage strategies and
increased shareholder dividends. The closing price of the Company's stock at
December 31, 1996 was $25.00 per share, resulting in a market to book value
ratio of 152%. Management has worked with the investment community to share the
performance record of the Company and improve the efficiency of the market. As a
result, the spread between the bid (buy) and ask (sell) price quote has been
reduced from approximately $4.00 two years ago to $.75 in February 1997.
The Company's performance in 1995 was strong with net income of $6.8 million, up
slightly from 1994 which included an after-tax gain on the sale of other real
estate owned (OREO) of $388,000. Excluding this gain, net income increased by
6.8%. The increased earnings were due primarily to increased levels of earning
assets. Return on average equity decreased in 1995 to 13.56% from 15.03% in 1994
(14.13% in 1994 excluding the OREO gain). Return on average assets in 1995 was
1.41% compared to 1.55% in 1994 (1.46% in 1994 excluding the OREO gain).
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 1996, net interest income, on a taxable-equivalent basis, totaled $23.3
million, an increase of 7.4% from $21.7 million in 1995. The Company's net
interest margin was stable at 4.79% in 1996, as compared to 4.80% in 1995 and
5.01% in 1994. The yield on earning assets was unchanged at 8.75% while the cost
of interest-bearing liabilities declined slightly from 4.69% in 1995 to 4.64%.
Average interest-bearing liabilities increased by $35.5 million, or 9.3% while
average earning assets grew by $35.9 million, or 7.9%. As a result, the Company
was able to realize an increase of $1.6 million in net interest income compared
to 1996 (see Volume and Rate Analysis table).
During 1995, net interest income, on a taxable-equivalent basis, increased 7.3%
to $21.7 million from $20.3 million in 1994. The Company's net interest margin
declined slightly to 4.80% from 5.01% in 1994. The yield on earning assets
increased to 8.75% in 1995 from 8.24% in 1994 while the cost of interest-bearing
liabilities grew more rapidly to 4.69% from 3.83% in 1994. Average
interest-bearing liabilities increased by $39.2 million, or 11.1% but were
outpaced by average earning assets which grew by $47.3 million, or 11.7%. As a
result, the Company was able to realize an increase of $1.4 million in net
interest income compared to 1994 (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.
6
<PAGE>
Average Balances, Income and Expenses, Yields
and Rates (Taxable Equivalent Basis)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ------------------------------- ------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- -------- ------ ---------- -------- --------- -------- -------- ------
<S> <C> (dollars in thousands)
Assets:
Securities:
Taxable .............................. $ 72,482 $ 4,493 6.20% $ 74,433 $ 4,755 6.39% $ 73,159 $ 4,565 6.24%
Tax-exempt(1) ....................... 64,963 5,397 8.31% 60,966 4,903 8.04% 58,221 4,728 8.12%
--------- -------- ------ ---------- -------- ----- --------- --------
Total securities ................ 137,445 9,890 135,399 9,658 7.13% 131,380 9,293 7.07%
Loans, net. .............................. 343,856 32,444 9.43% 310,819 29,561 9.51% 267,753 23,835 8.90%
Federal funds sold ...................... 5,941 317 5.34% 5,515 327 5.93% 5,072 209 4.12%
Interest-bearing deposits
in other banks........................ 813 44 5.41% 459 32 6.97% 689 39 5.66%
--------- --------- ------ ---------- ------- ----- --------- --------
Total earning assets ............. 488,055 42,695 8.75% 452,192 39,578 8.75% 404,894 33,376 8.24%
Allowance for loan losses ................ (4,305) (4,289) (3,893)
Total non-earning assets ................. 43,578 34,950 33,064
--------- ---------- ---------
Total assets ............................. $ 527,328 $ 482,853 $ 434,065
========= ========== =========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking.............................. $ 47,685 $ 1,202 2.52% $ 43,503 $ 1,187 2.73% $ 42,335 $ 1,109 2.62%
Regular savings ...................... 56,108 1,945 3.47% 57,312 2,146 3.74% 68,002 2,301 3.38%
Money market savings ................. 55,048 1,802 3.27% 58,265 1,978 3.39% 65,888 2,029 3.08%
Certificates of deposit:
$100,000 and over..................... 50,083 2,604 5.20% 42,289 2,317 5.48% 29,975 1,325 4.42%
Under $100,000........................ 170,032 9,938 5.84% 154,016 8,737 5.67% 120,331 5,641 4.69%
--------- -------- ------- -------- --------- --------
Total interest-bearing
deposits ..................... 378,956 17,491 4.62% 355,385 16,365 4.60% 326,531 12,405 3.80%
Other borrowings ......................... 37,528 1,839 4.90% 25,598 1,490 5.82% 15,227 684 4.49%
--------- -------- ---------- -------- --------- --------
Total interest-bearing ...........
liabilities .................. 416,484 19,330 4.64% 380,983 17,855 4.69% 341,758 13,089 3.83%
-------- -------- --------
Non-interest bearing liabilities:
Demand deposits....................... 52,305 47,472 44,168
Other liabilities..................... 4,461 4,224 3,496
--------- ---------- ---------
Total liabilities................. 473,250 432,679 389,422
Stockholders' equity ..................... 54,078 50,174 44,643
--------- ---------- ---------
Total liabilities and
stockholders' equity ................. $ 527,328 $ 482,853 $ 434,065
========= ========== =========
Net interest income....................... $ 23,365 $ 21,723 $ 20,287
======== ======== ========
Interest rate spread ..................... 4.11% 4.06% 4.41%
Interest expense as a percent
of average earning assets............. 3.96% 3.95% 3.23%
Net interest margin....................... 4.79% 4.80% 5.01%
</TABLE>
(1) Income and yields are reported on a taxable equivalent basis.
7
<PAGE>
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)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1996 vs. 1995 1995 VS. 1994
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------- ----------------------------
Volume Rate Total Volume Rate Total
-------- ------ ------- -------- ------ -------
(in thousands)
<S> <C>
Earning Assets:
Securities:
Taxable.................................... $ (123) $(139) $ (262) $ 80 $ 110 $ 190
Tax-exempt ................................ 329 165 494 221 (46) 175
Loans, net .................................... 3,118 (235) 2,883 4,016 1,708 5,724
Federal funds sold............................. 24 (34) (10) 19 96 117
Interest-bearing deposits
in other banks............................. 20 (8) 12 (14) 7 (7)
------ ----- ------ ------ ------- ------
Total earning assets.................. 3,368 (251) 3,117 4,322 1,877 6,199
------ ----- ------ ------ ------- ------
Interest-Bearing Liabilities:
Interest checking.............................. 108 (93) 15 31 46 77
Regular savings................................ (44) (157) (201) (385) 229 (156)
Money market savings........................... (107) (69) (176) (247) 196 (51)
CDs $100,000 and over......................... 409 (122) 287 626 364 990
CDs < $100,000................................. 930 271 1,201 1,766 1,330 3,098
------ ----- ------ ------ ------- ------
Total interest-bearing
deposits.......................... 1,296 (170) 1,126 1,793 2,165 3,958
Other borrowings............................... 611 (262) 349 562 243 805
------ ----- ------ ------ ------- ------
Total interest-bearing
liabilities....................... 1,907 (432) 1,475 2,355 2,408 4,763
------ ----- ------ ------ ------- ------
Change in net interest
income .................................... $1,461 $ 181 $1,642 $1,967 $ (531) $1,436
====== ===== ====== ====== ======= ======
</TABLE>
* 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.
8
<PAGE>
At December 31, 1996, the Company had $ 81.5 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.
The following table presents the Company's interest sensitivity position at
December 31, 1996. This one-day position, which is continually changing, is not
necessarily indicative of the Company's position at any other time.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1996 (1)
-----------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
-------- -------- --------- -------- --------
(in thousands)
<S> <C>
Earning Assets:
Loans, net of unearned income (3)..................... $ 75,692 $ 64,885 $ 138,499 $ 72,781 $351,857
Investment securities ................................ 880 1,241 8,265 1,037 11,423
Securities available for sale......................... 5,399 6,040 36,165 81,664 129,268
Federal funds sold.................................... 2,104 - - - 2,104
Other short-term investments.......................... 917 - 99 - 1,016
------- -------- --------- -------- --------
Total earning assets........................... 84,992 72,166 183,028 155,482 495,668
======= ======== ========= ======== ========
Interest-Bearing Liabilities:
Interest checking (2) ................................ 5,453 454 43,927 - 49,834
Regular savings (2) .................................. 9,376 1,710 43,278 - 54,364
Money market savings.................................. 47,419 202 6,810 - 54,431
Certificates of deposit:
$100,000 and over.............................. 13,322 21,918 16,572 - 51,812
Under $100,000................................. 35,370 75,877 62,914 - 174,161
Short-term borrowings ................................ 17,994 9,409 - - 27,403
Long-term borrowings ................................. 75 75 10,600 375 11,125
------- -------- --------- -------- --------
Total interest-bearing
liabilities ................................ 129,009 109,645 184,101 375 423,130
-------- -------- --------- -------- --------
Period gap............................................ (44,017) (37,479) (1,073) 155,107
Cumulative gap........................................ $(44,017) $(81,496) $ (82,569) $ 72,538 $ 72,538
======== ======== ========= ======== ========
Ratio of cumulative gap to
total earning assets.......................... (8.88)% (16.44)% (16.66)% 14.63%
======== ======== ========= ========
</TABLE>
(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 32.1% from $2.6 million in 1995 to $3.5 million in
1996. This increase is largely attributable to an increase of $150,000 in
securities commissions recognized by Union Investment Services, Inc., $47,000
from the sale of a pool of loans and to $262,000 in non-taxable life insurance
proceeds related to one of the Company's directors deferred compensation plans.
The remaining 14.8% increase is reflective of management's efforts to maximize
fee-based income and steady growth in its primary source of other income,
service fees.
Other income decreased by 11.2% in 1995 from 1994 when the Company recognized a
pre-tax gain on the sale of other real estate totaling $588,000. Excluding this
1994 gain, other income increased by 10.9% over this period.
9
<PAGE>
Other Expenses
Other expenses totaled $14.5 million in 1996, up 11.2% over $13.0 million in
1995. Increases in personnel and operating costs are largely attributable to the
growth of the Company and to its investment in technology and people. Management
considers a portion of such costs to be an investment in the future as we
establish the infrastructure necessary to provide new products and more
convenient service to our customers, and to manage a much larger organization.
The Company's efficiency ratio has been consistently below 60% which has allowed
the Company to make the necessary investments in technology without
significantly affecting earnings.
In 1995 other expenses totaled $13.0 million, an increase of $964,000, or 8.0%
over 1994 totals. Excluding the $310,000 decline in FDIC premiums, the increase
was 10.6% which was consistent with the asset growth of 9.2% experienced in
1995. Personnel costs increased by $922,000 or 15.7% over 1994 levels.
Loan Portfolio
Loans, net of unearned income, totaled $352.3 million at December 31, 1996, an
increase of 7.7% over $327.1 million at December 31, 1995. Though loan demand
slowed in 1996 from the levels attained in 1995 and 1994, the Company continues
to experience strong loan demand. Union Bankshares has achieved a rate of growth
consistent with the economies of the markets within which it operates and has
maintained or increased its market share in each.
Loans, net of unearned income, totaled $327.1 million at December 31, 1995, an
increase of 10.6% over the 1994 total of $295.8 million. The increase was
principally due to continued loan demand during 1995, particularly in the real
estate portfolio which grew by 15.4%.
Loan Portfolio
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ---------- ------------ ----------- -------------
(in thousands)
<S> <C>
Commercial .................................... $ 37,263 $ 36,920 $ 40,276 $ 37,472 $ 40,773
Loans to finance agriculture production
and other loans to farmers ................. 3,080 2,878 3,083 3,344 1,183
Real estate:
Real estate construction ................... 6,435 7,849 5,453 7,432 9,332
Real estate mortgage:
Residential (1 - 4 family)........... 117,125 102,419 92,007 86,348 92,329
Home equity lines.................... 21,964 22,561 22,503 21,905 21,752
Multi-family......................... 1,353 1,274 1,406 1,179 924
Commercial(1)........................ 83,118 76,652 60,653 53,165 33,492
Agricultural......................... 2,262 2,776 2,943 3,123 3,328
------------ --------- ------------ ----------- -------------
Total real estate.................... 232,257 213,531 184,965 173,152 161,157
Loans to individuals:
Consumer.................................... 76,383 70,143 64,683 43,754 45,126
Credit card................................. 2,567 2,235 1,714 1,490 1,238
------------ --------- ------------ ----------- -------------
Total loans to individuals........... 78,950 72,378 66,397 45,244 46,364
All other loans............................. 2,125 2,619 2,024 509 651
------------ --------- ------------ ----------- -------------
Total loans.......................... 353,675 328,326 296,745 259,721 250,128
Less unearned income.............................. 1,398 1,194 976 1,246 2,174
------------ --------- ------------ ----------- -------------
Total net loans............................. $ 352,277 $ 327,132 $ 295,769 $ 258,475 $ 247,954
============ ========= ============ =========== =============
</TABLE>
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a secondary source of collateral
10
<PAGE>
Maturity Schedule of Loans
<TABLE>
<CAPTION>
1 Year or Less 1 - 5 Years After 5 Years
--------------------- -------------------- ----------------------
Fixed Variable Fixed Variable Fixed Variable TOTALS
--------- --------- --------- --------- ---------- --------- ---------
(in thousands)
<S> <C>
December 31, 1996..................... $ 62,910 $ 77,961 $ 113,912 $ 26,335 $ 66,857 $ 5,700 $ 353,675
December 31, 1995..................... 79,003 64,475 109,998 15,962 54,055 4,833 328,326
December 31, 1994..................... 55,842 97,026 95,084 9,559 39,234 - 296,745
</TABLE>
Loans secured by real estate comprised 65.7% of the total loan portfolio at
December 31, 1996, up slightly from 65.0% in 1995. Of this total, single-family,
residential loans comprised 33.1% of the total loan portfolio at December 31,
1996, up from 31.2% in 1995. Loans secured by commercial real estate comprised
23.5% of the total loan portfolio at December 31, 1996, as compared to 23.3% in
1995, and consist principally of commercial and industrial loans where real
estate constitutes a secondary source of collateral. The Company attempts to
reduce its exposure to the risk of the local real estate markets by limiting the
aggregate size of its commercial real estate portfolio, and by making such loans
primarily on owner-occupied properties. Real estate construction loans accounted
for only 1.8% of total loans outstanding at December 31, 1995. The Company's
charge-off rate for all loans secured by real estate has historically been low.
The Company's consumer loan portfolio, its second largest category, consists
principally of installment loans. Total loans to individuals for household,
family and other personal expenditures totaled 21.6% of total loans at December
31, 1996 up slightly from 21.4% in 1995. Commercial loans, secured by non-real
estate business assets comprised 10.5% of total loans at the end of 1996, a
slight decline from 11.2% at the end of 1995. Loans to the agricultural industry
totaled less than 1.5% of the loan portfolio in each of the last five years.
The Company is focused on providing community-based financial services and
discourages the origination of loans outside of its principal trade area. The
Company maintains a policy not to originate or purchase loans to foreign
entities or loans classified by regulators as highly leveraged transactions.
To slow the growth of the real estate loans in the loan portfolio, facilitate
asset/liability management and generate additional fee income, the Company sells
a portion of conforming first mortgage residential real estate loans to the
secondary market as they are originated. Management expects this aspect of its
operations to expand in 1997, with the formation of Union Mortgage Company, LLC
("Union Mortgage"). Union Mortgage will consolidate the mortgage origination
process of the subsidiary banks, providing the banks' customers with enhanced
mortgage products and the Company with improved efficiencies.
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 the 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, 1996, the allowance for loan losses was $4.4 million, or
1.25% of total loans as compared to $4.1 million, or 1.24% in 1995. At December
31, 1996, the Company's allowance for loan losses exceeded the sum of net loan
charge-offs over the last four years.
11
<PAGE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C>
Balance, beginning of year.................................. $4,060 $4,110 $3,822 $3,704 $3,004
Loans charged-off:
Commercial............................................ 114 645 442 841 635
Real estate........................................... 59 185 273 242 50
Consumer ............................................. 795 422 355 585 890
------ ------ ------ ------ ------
Total loans charged-off........................ 968 1,252 1,070 1,668 1,575
------ ------ ------ ------ ------
Recoveries:
Commercial............................................ 275 114 18 57 123
Real estate........................................... 10 16 92 29 11
Consumer.............................................. 116 95 146 129 87
------ ------ ------ ------ ------
Total recoveries............................... 401 225 256 215 221
------ ------ ------ ------ ------
Net loans charged-off....................................... 567 1,027 814 1,453 1,354
Provision for loan losses................................... 895 977 1,102 1,571 2,054
------ ------ ------ ------ ------
Balance, end of year........................................ $4,388 $4,060 $4,110 $3,822 $3,704
====== ====== ====== ====== ======
Ratio of allowance for loan losses to total
loans outstanding at end of year ..................... 1.25% 1.24% 1.39% 1.48% 1.50%
Ratio of net charge-offs to average
loans outstanding during year ........................ .16% .33% .30% .66% .64%
</TABLE>
Provisions for loan losses are made based on management's periodic evaluation of
the adequacy of the Company's allowance for loan losses. The provision for loan
losses in 1996 totaled $895,000 as compared to $977,000 in 1995. This decrease
is reflective of management's assessment of the risk in the loan portfolio.
The allowance for loan losses as of December 31, 1995 was $4.1 million, or 1.24%
of total loans as compared to $4.1 million and 1.39%, respectively in 1994. The
provision for loan losses in 1995 was $977,000 as compared to $1.1 million in
1994.
Nonperforming Assets
Nonaccrual loans and foreclosed properties, were $4.5 million at December 31,
1996, up from $4.3 million at December 31, 1995. Non-accrual loans decreased by
$249,000 in 1996 while other real estate owned increased from $3.6 million to
$4.1 million. Foreclosed properties includes $1.9 million representing a single
property foreclosed on in 1995 and comprising over 1,800 acres in King George
County. This property was sold in February 1997 at no loss to the company.
Nonperforming assets also includes approximately $2.9 million representing an
investment in income-producing property and included in other assets. This
property consists of 30 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. During 1996 the Company paid off approximately $2.4 million in existing
third-party mortgages on the houses. 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.
12
<PAGE>
Nonperforming Assets
<TABLE>
<CAPTION> December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------------- ---------- ---------
(dollars in thousands)
<S> <C>
Nonaccrual loans............................................ $ 420 $ 669 $ 1,731 $ 2,920 $ 3,233
Foreclosed properties....................................... 4,056 3,620 1,842 1,533 1,694
Real estate investment...................................... 2,970 - - - -
--------- --------- ---------- ---------- ----------
Total nonperforming assets............................ $ 7,446 $ 4,289 $ 3,573 $ 4,453 $ 4,927
========= ========= ========== ========== ==========
Loans past due 90 days and
accruing interest..................................... $ 3,163 $ 3,126 $ 1,671 $ 3,193 $ 2,950
========= ========= ========== ========== ==========
Nonperforming assets to year-end
loans, foreclosed properties and
real estate investment................................ 2.07% 1.30% 1.20% 1.72% 1.98%
Allowance for loan losses to
nonaccrual loans...................................... 1044.76% 606.88% 237.44% 130.89% 114.57%
</TABLE>
Most of the nonperforming assets are secured by real estate within the Company's
trade area. Based on the estimated fair values of the related real estate,
management considers these amounts to be recoverable, with any individual
deficiency considered in the allowances for loan or real estate losses.
Nonperforming assets were $4.3 million at December 31, 1995, a net increase of
$716,000 from December 31, 1994. This increase was principally due to the
foreclosure on the aforementioned King George property in 1995.
Securities
During 1994, the Company adopted Statement of Financial Accounting Standards
No.115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No.115). As a result, the securities portfolio consists of two components,
investment securities and securities available for sale. Securities are
classified as investment securities based on management's intent and the
Company's ability, at the time of purchase, to hold such securities to maturity.
Securities which may be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, general
liquidity needs, and other similar factors are classified as available for sale
and are carried at estimated fair value.
In 1995, the Financial Accounting Standards Board issued a special report on the
implementation of SFAS No. 115 which permitted a one-time transfer of securities
between portfolios. As a result, in December 1995, the Company reclassified
approximately $71.9 million of its investment securities to securities available
for sale. In doing so, management believes it has positioned the Company to be
better able to respond to changes in financial markets and maximize liquidity
and profitability.
At December 31, 1996 $129.3 million, or over 91%, of the Company's securities
were classified as available for sale, as compared to $126.4 million at December
31, 1995. Investment securities totaled $11.4 million at December 31, 1996 and
consists of securities which management intends to hold to maturity.
At December 31, 1995 $126.4 million, or over 89%, of the Company's securities
were classified as available for sale, as compared to $28.1 million at December
31, 1994. This change reflects the aforementioned transfer of approximately
$71.9 million, as well as management's philosophy of designating the majority of
its post-SFAS 115 purchases as securities available for sale. Investment
securities totaled $15.1 million at December 31, 1995.
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.
13
<PAGE>
Maturities of Investment Securities and Securities Available for Sale
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------
Over 10
Years &
1 Year 1 - 5 5 - 10 Equity
or Less Years Years Securities Total
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C>
U.S. agency securities:
Amortized cost........................................ $ 4,122 $ 33,345 $ 7,281 $ 10,950 $ 55,698
Fair value............................................ 4,107 32,949 7,219 10,851 55,126
Weighted average yield(1)............................. 6.55% 6.56% 7.06% 6.85% 6.68%
U.S. Treasury securities:
Amortized cost........................................ $ 1,242 $ 3,120 $ - $ - $ 4,362
Fair value............................................ 1,243 3,095 - - 4,338
Weighted average yield(1)............................. 5.61% 5.45% - - 5.49%
Municipal bonds:
Amortized cost........................................ $ 5,611 $ 17,953 $ 29,611 $ 16,981 $ 70,156
Fair value. .......................................... 5,658 18,503 30,008 17,234 71,403
Weighted average yield(1)............................. 9.08% 8.14% 7.86% 7.89% 8.04%
Other securities:
Amortized cost........................................ $ 330 $ 3,909 $ - $ 5,811 $ 10,050
Fair value. .......................................... 330 3,941 - 5,819 10,090
Weighted average yield(1)............................. 5.48% 6.63% - 7.20% 6.92%
Total securities:
Amortized cost........................................ $ 11,305 $ 58,327 $ 36,892 $ 33,742 $ 140,266
Fair value............................................ 11,338 58,488 37,227 33,904 140,957
Weighted average yield(1)............................. 7.67% 6.99% 7.71% 7.43% 7.34%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
Deposits
Increased competition for customer deposits continues to be a challenge for the
Company, as reflected by continued increases in other borrowings in 1996 to fund
growth in earning assets. In 1996 growth in the loan portfolio exceeded 7.5% and
securities growth was flat while deposit growth was 5.7%. Although average
demand deposits and interest-bearing checking accounts experienced moderate
growth in 1996, the increasing competition for deposits and the current interest
rate environment have resulted in declines in lower cost savings and money
market accounts.
Total deposits grew from $415.8 million at December 31, 1995 to $439.6 million
at December 31, 1996. Over this same period, average interest-bearing deposits
were $379.0 million, or 6.6% over the 1995 average of $355.4 million. The
majority of this increase is represented by a $23.8 million increase in
certificates of deposit. Average balances for lower cost money market and
regular savings decreased by a total of $4.4 million. The Company's lowest cost
source of funds, non-interest-bearing and interest-bearing demand deposits both
increased, by a total of $9.0 million, providing the Company with lower cost
funds. The Company has no brokered deposits.
Further development of core deposits remains a primary objective, as they
represent a stable, lower cost source of funds for asset growth. The Company's
introduction of in-store branches in 1996 has provided opportunities to attract
deposits at a much lower initial investment than traditional branches. Union
Bank opened two branches in high-scale convenience stores in 1996, and Northern
Neck State Bank opened a branch in a Wal*Mart Superstore in 1996.
In 1995, most deposit categories showed increases as total deposits grew from
$390.2 million at December 31, 1994 to $415.8 million at December 31, 1995. Over
this same period, average interest-bearing deposits were $355.4 million, or 8.8%
over the 1994 average of $326.5 million.
14
<PAGE>
Average Deposits and Rates Paid
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Amount Rate Amount Rate Amount Rate
------------------- ------------------- -------------------
(dollars in thousands)
<S> <C>
Non-interest-bearing accounts ................................ $ 52,305 - $ 47,472 - $ 44,168 -
Interest-bearing accounts:
Interest checking....................................... 47,685 2.52% 43,503 2.73% 42,335 2.64%
Money market............................................ 55,048 3.27% 58,265 3.39% 65,888 3.08%
Regular savings......................................... 56,108 3.47% 57,312 3.74% 68,002 3.38%
Certificates of deposit:
Less than $100,000................................ 170,032 5.84% 154,016 5.67% 120,331 4.69%
$100,000 and over................................. 50,083 5.20% 42,289 5.48% 29,975 4.42%
---------- ---------- ----------
Total interest-bearing........................................ 378,956 4.62% 355,385 4.60% 326,531 3.80%
---------- ---------- ----------
Total average deposits.................................. $ 431,261 $ 402,857 $ 370,699
========== ========== ==========
</TABLE>
Maturities of Certificates of Deposit of $100,000 and Over
<TABLE>
<CAPTION>
Percent
Within 3 - 6 6 - 12 Over 12 of Total
3 Months Months Months Months Total Deposits
--------- --------- --------- ---------- ---------- --------
(dollars in thousands)
<S> <C>
At December 31, 1996............................ $ 13,444 $ 11,663 $ 12,346 $ 14,359 $ 51,812 11.79%
At December 31, 1995............................ 10,513 9,514 8,172 18,307 46,506 11.19%
At December 31, 1994............................ 7,351 4,561 9,125 13,880 34,917 8.95%
</TABLE>
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 the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
to absorb potential losses, yet allow management to effectively leverage its
capital to maximize return to shareholders.
Analysis of Capital
<TABLE>
<CAPTION>
December 31,
----------------- ---------------
1996 1995
----------------- ---------------
(dollars in thousands)
<S> <C>
Tier 1 capital:
Common stock...................................... $ 14,267 $ 14,248
Additional paid-in capital........................ 160 66
Retained earnings................................. 43,863 38,722
Less: core deposit intangible..................... (263) (284)
---------------- ---------------
Total Tier 1 capital ............................. 58,027 52,752
---------------- ---------------
Tier 2 capital:
Allowance for loan losses ........................ 4,388 4,060
Allowable long-term debt.......................... - -
---------------- ---------------
Total Tier 2 capital ............................. 4,388 4,060
----------------- ---------------
Total risk-based capital.......................... $ 62,415 $ 56,812
================= ===============
Risk-weighted assets ................................... $ 383,046 $ 357,130
================= ===============
Capital ratios:
Tier 1 risk-based capital ratio................... 15.15% 14.77%
Total risk-based capital ratio.................... 16.29% 15.91%
Tier 1 capital to average adjusted total assets... 10.70% 10.87%
Equity to total assets ........................... 10.83% 10.62%
</TABLE>
15
<PAGE>
The Federal Reserve, along with the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, has adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital,
consisting of common equity, retained earnings and a limited amount of perpetual
preferred stock, less certain goodwill items. The Company had a ratio of
risk-weighted assets to total capital of 16.29% and 15.91% on December 31, 1996
and 1995, respectively. The Company's ratio of risk-weighted assets to Tier 1
capital was 15.15% and 14.77% at December 31, 1996 and 1995, respectively. Both
of these ratios exceeded the fully phased-in capital requirements in 1996 and
1995.
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 its customers' credit needs.
At December 31, 1996, cash and cash equivalents and securities classified as
available for sale were 28.1% of total assets, compared to 28.6% at December 31,
1995. Asset liquidity is also provided by managing loan and securities
maturities and cash flows.
Additional resources of liquidity available to the Company include its capacity
to borrow additional funds when necessary. The subsidiary banks maintain Federal
funds lines with several regional banks totaling in excess of $35.0 million at
December 31, 1996. At year end 1996, the Banks had outstanding $11.7 million of
borrowings pursuant to securities sold under agreements to repurchase
transactions with a maturity of one day. The Company also had a line of credit
with the Federal Home Loan Bank of Atlanta for $50.0 million at December 31,
1996.
Recent Accounting Pronouncements
In 1996, the Financial Accounting Standards Board issued Statement of Financial
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," which requires recognition of financial
assets and liabilities using a financial-components approach which focuses on
control of the assets transferred. Management believes the adoption of this new
standard in 1997 will not have a material impact on the financial conditions, or
results of operations of the Company.
Forward-Looking Statements
Certain statement 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.
16
<PAGE>
[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, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of King George State Bank, Incorporated, a
wholly-owned subsidiary, as of and for the years ended December 31, 1995 and
1994, which statements reflect total assets constituting 9% as of December 31,
1995 and total interest income constituting 9% and 10% in 1995 and 1994,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for King George State Bank,
Incorporated, is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Union Bankshares
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
January 20, 1997
17
<PAGE>
Consolidated Balance Sheets
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
December 31, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C>
ASSETS 1996 1995
--------------- --------------
Cash and cash equivalents (note 11):
Cash and due from banks $ 19,333 $ 15,253
Interest-bearing deposits in other banks 1,016 124
Federal funds sold 2,104 2,650
--------------- --------------
Total cash and cash equivalents 22,453 18,027
--------------- --------------
Securities available for sale, at fair value (note 2) 129,268 126,401
Investment securities, at amortized cost (note 2) 11,423 15,132
--------------- --------------
Total securities 140,691 141,533
--------------- --------------
Loans, net of unearned income (notes 3 and 10) 352,277 327,132
Less allowance for loan losses (note 4) 4,388 4,060
--------------- --------------
Net loans 347,889 323,072
--------------- --------------
Bank premises and equipment, net (note 5) 14,221 10,203
Other real estate owned 4,056 3,620
Other assets (note 7) 11,583 8,919
--------------- --------------
Total assets $ 540,893 $ 505,374
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing demand deposits $ 55,005 $ 49,905
Interest-bearing deposits:
Savings accounts 54,364 55,889
NOW accounts 49,834 43,046
Money market accounts 54,431 56,147
Time deposits of $100,000 and over 51,812 46,506
Other time deposits 174,161 164,262
--------------- --------------
Total interest-bearing deposis 384,602 365,850
--------------- --------------
Total deposits 439,607 415,755
--------------- --------------
Short-term borrowings (note 6) 27,403 31,108
Long-term borrowings (note 6) 11,125 1,275
Other liabilities (note 8) 4,192 3,553
--------------- --------------
Total liabilities 482,327 451,691
--------------- --------------
Stockholders' equity (notes 8 and 11):
Common stock, $4 par value. Authorized 12,000,000 shares;
issued and outstanding, 3,566,915 shares in 1996 and 3,561,970 in 1995 14,267 14,248
Surplus 160 66
Retained earnings 43,863 38,722
Unrealized gains on securities available for sale, net of taxes 276 647
--------------- --------------
Total stockholders' equity 58,566 53,683
--------------- --------------
Commitments and contingencies (notes 5 and 9)
Total liabilities and stockholders' equity $ 540,893 $ 505,374
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Income
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C>
Interest income:
Interest and fees on loans (note 3) $32,444 $29,561 $23,835
Interest on securities:
U.S. government and agency securities 4,079 4,306 4,159
Obligations of states and political subdivisions 3,757 3,194 2,962
Other securities 355 663 723
Interest on Federal funds sold 317 327 209
Interest on interest-bearing deposits in other banks 44 32 39
------- ------- -------
Total interest income 40,996 38,083 31,927
------- ------- -------
Interest expense:
Interest on deposits 17,491 16,365 12,405
Interest on other borrowings 1,839 1,490 684
------- ------- -------
Total interest expense 19,330 17,855 13,089
------- ------- -------
Net interest income 21,666 20,228 18,838
Provision for loan losses (note 4) 895 977 1,102
Net interest income after provision
for loan losses 20,771 19,251 17,736
------- ------- -------
Other income:
Service fees 2,553 2,143 1,897
Losses on securities transactions, net (note 2) (33) (16) (14)
Gains on sales of loans 47 - -
Gains (losses) on sales of other real estate owned
and bank premises, net (11) (11) 558
Other operating income 903 502 508
------- ------- -------
Total other income 3,459 2,618 2,949
------- ------- -------
Other expenses:
Salaries and benefits 7,587 6,794 5,872
Occupancy expenses 917 739 686
Furniture and equipment expenses 1,184 1,030 867
FDIC assessments 13 467 837
Other operating expenses 4,801 4,007 3,811
------- ------- -------
Total other expenses 14,502 13,037 12,073
------- ------- -------
Income before income taxes 9,728 8,832 8,612
Income tax expense (note 7) 2,272 2,079 1,899
------- ------- -------
Net income $7,456 $ 6,753 $ 6,713
======= ======= =======
Net income per share of common stock $2.09 1.91 $ 1.90
======= ======= =======
Cash dividends per share of common stock $0.64 0.55 $ 0.51
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Common stock gains (losses)
--------------- on securities
Retained available
Shares Amount Surplus Earnings for sale Total
-------- -------- --------- ---------- ------------- --------
<S> <C>
Balance - December 31, 1993,
as previously reported 3,255,630 $ 13,023 $ 181 $ 25,942 - $ 39,146
Pooling of interests with King George(note 13) 275,000 1,100 (500) 3,068 - 3,668
Cumulative effect of change in accounting
for securities available for sale,
net of taxes of $25 - - - - (48) (48)
Cash dividends declared - - - (1,806) - (1,806)
Issuance of common stock under
Dividend Reinvestment Plan 8,488 34 166 - - 200
Change in net unrealized losses
on securities available for sale,
net of taxed of $330 - - - - (640) (640)
Net income - 1994 - - - 6,713 - 6,713
----------- -------- -------- --------- -------- -----------
Balance - December 31, 1994 3,539,118 14,157 (153) 33,917 (688) 47,233
Cash dividends declared - - - (1,948) - (1,948)
Issuance of common stock under
Dividend Reinvestment Plan 9,412 37 193 - - 230
Issuance of common stock under
incentive stock option plan 13,440 54 26 - - 80
Change in net unrealized losses
on securities available for sale,
net of taxes of $688 - - - - 1,335 1,335
Net income - 1995 - - - 6,753 - 6,753
----------- -------- -------- --------- ---------- -----------
Balance - December 31, 1995 3,561,970 14,248 66 38,722 647 53,683
Cash dividends declared (2,315) (2,315)
Issuance of common stock under
Dividend Reinvestment Plan 11,145 45 227 272
Stock purchased under Stock
Repurchase Plan (6,200) (26) (133) (159)
Change in net unrealized gains on securities
available for sale, net of taxes of $185 (371) (371)
Net income - 1996 7,456 7,456
----------- -------- -------- --------- -------- -----------
Balance - December 31, 1996 3,566,915 $14,267 $ 160 $43,863 $ 276 $ 58,566
=========== ======== ======== ========= ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
Consolidated Statements of
Cash Flows
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------- -------------- ----------
<S> <C>
Operating activities:
Net income $ 7,456 $ 6,753 $ 6,713
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment 1,120 906 826
Provision for loan losses 895 977 1,102
Provision for losses on other real estate owned - - 200
Losses on securities transactions, net 33 16 14
Gains on sale of loans (47) - -
Losses on sales of bank premises, net - - 72
(Gains) losses on sales of other real estate owned, net (11) 11 (830)
Deferred income tax expense (benefit) (176) 20 62
Decrease (increase) in accrued interest receivable 88 (463) (307)
Other, net (1,791) 480 (414)
------------- -------------- ----------
Net cash and cash equivalents provided
by operating activities 7,765 8,700 7,438
------------- -------------- ----------
Investing activities:
Purchases of investment securities (357) (4,731) (30,792)
Proceeds from maturities of investment securities 4,072 18,032 15,570
Purchases of securities available for sale (47,286) (31,466) (9,579)
Proceeds from sales of securities available for sale 18,677 4,892 12,675
Proceeds from maturities of securities available for sale 24,989 5,621 8,884
Net increase in loans (26,300) (34,539) (39,926)
Purchases of bank premises and equipment (5,143) (2,552) (1,877)
Proceeds from sales of bank premises and equipment 2 - 7
Proceeds from sales of other real estate owned 212 355 1,665
------------- -------------- ----------
Net cash and cash equivalents used in
investing activities (31,134) (44,388) (43,373)
------------- -------------- ----------
Financing activities:
Net increase in non-interest-bearing deposits 5,100 690 6,119
Net increase in interest-bearing deposits 18,752 24,833 16,173
Net increase (decrease) in short-term borrowings (3,705) 10,564 9,640
Proceeds from long-term borrowings 10,000 - 1,500
Repayment of long-term borrowings (150) (150) (75)
Cash dividends paid (2,315) (1,948) (1,806)
Issuance of common stock under plans 272 310 200
Purchases of common stock (159) - -
------------- -------------- ----------
Net cash and cash equivalents provided
by financing activities 27,795 34,299 31,751
------------- -------------- ----------
Increase (decrease) in cash and cash equivalents 4,426 (1,389) (4,184)
Cash and cash equivalents at beginning of year 18,027 19,416 23,600
------------- -------------- ----------
Cash and cash equivalents at end of year $ 22,453 $ 18,027 $ 19,416
============= ============== ==========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 19,399 $ 17,535 $ 12,960
Income taxes $ 1,971 $ 1,903 $ 2,028
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Notes to Consolidated Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
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. Certain major policies and practices are described below:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Union Bankshares Corporation and its wholly-owned
subsidiaries. Union Bankshares Corporation is a bank holding
company that owns all of the outstanding common stock of its
banking subsidiaries, Union Bank and Trust Company ("Union
Bank"), Northern Neck State Bank ("Northern Neck") and King
George State Bank ("King George") and its non-banking
subsidiary, Union Investment Services, Inc. All significant
intercompany balances and transactions have been eliminated.
King George was merged with and into the Company on September
1, 1996. The merger was accounted for as a
pooling-of-interests and, accordingly, the amounts in the
consolidated financial statements include the accounts and
results of King George for all periods presented.
The accompanying consolidated financial statements for prior
periods reflect certain reclassifications in order to conform
with the 1996 presentation.
(b) Investment Securities and Securities Available for Sale
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115).
In accordance with SFAS 115, when securities are purchased,
they are classified as investment securities when management
has the intent and the Company has the ability to hold them to
maturity. Investment securities are carried at cost, adjusted
for amortization of premiums and accretion of discounts, which
are recognized as adjustments to interest income using a
method that approximates the interest method.
Securities available for sale are those that management
intends to hold for an indefinite period of time, including
securities used as part of the Company's asset/liability
strategy, and that may be sold in response to changes in
interest rates, liquidity needs or other similar factors.
Securities available for sale are recorded at estimated fair
value with net unrealized gains or losses reported as a
separate component of stockholders' equity, net of taxes.
Gains and losses on the sale of securities are determined
using the specific identification method.
(c) Loans
Interest on loans is calculated using the simple interest
method on daily balances of principal amounts outstanding. The
accrual of interest is discontinued when the collection of
principal and/or interest is legally barred or considered by
management to be highly unlikely. After a loan is classified
as nonaccrual, interest income is generally recognized only
when collected.
Loan origination fees and direct loan origination costs for
completed loans are netted and then deferred and amortized
into interest income as an adjustment of yield.
(d) Allowance for Loan Losses
The provision for loan losses charged to operations is an
amount sufficient to bring the allowance for loan losses to an
estimated balance that management considers adequate to absorb
potential losses in the portfolio. Loans are charged against
the allowance when management believes the collectibility of
the principal is unlikely. Recoveries of amounts previously
charged off are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the composition of the loan portfolio, the value
and adequacy of collateral, current economic conditions,
historical loan loss experience, and other risk factors.
22
<PAGE>
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.
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), as amended by
SFAS 118. SFAS No. 114 requires the measurement 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. A loan is considered impaired,
based on current information and events, if it is probable
that the Company will be unable to collect the scheduled
payments of principal or interest when due under the
contractual terms of the loan agreement. The effect of the
adoption of SFAS No. 114 as amended was not material to the
Company's financial statements.
(e) Bank Premises and Equipment
Bank premises and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using either the
straight-line or accelerated depreciation method based on the
type of asset involved. It is the policy of the Company to
capitalize additions and improvements and to depreciate the
cost thereof over their estimated useful lives. Maintenance,
repairs and renewals are expensed as they are incurred.
(f) Income Taxes
Deferred income tax assets and liabilities are computed
annually 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. Income tax
expense is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets
and liabilities.
(g) Other Real Estate Owned
Foreclosed assets are carried at the lower of (a) fair value
minus estimated costs to sell or (b) cost at the time of
foreclosure. Such determination is made on an individual asset
basis. If the fair value of the asset minus the estimated
costs to sell the asset is less than the cost of the asset,
the deficiency is recognized as a valuation allowance. If the
fair value of the asset minus the estimated costs to sell the
asset subsequently increases and is more than its carrying
amount, the valuation allowance is reduced, but not below
zero. Increases or decreases in the valuation allowance are
charged or credited to income. Recovery of the carrying value
of such real estate is dependent to a great extent on
economic, operating, and other conditions that may be beyond
the Company's control.
(h) Consolidated Statements of Cash Flows
For purposes of reporting cash flows, the Company defines cash
and cash equivalents as cash, due from banks, interest-bearing
deposits in other banks and Federal funds sold. Other real
estate owned increased in the amount of $635,000, $2,375,000
and $1,139,000 during the years ended December 31, 1996, 1995
and 1994, respectively, as a result of loan foreclosures. The
Company also transferred $71,872,000 in investment securities
to securities available for sale during 1995. Other assets
increased by $471,304 during the year ended December 31, 1994,
also as a result of loan foreclosures. These represent
non-cash investing activities for purposes of the consolidated
statements of cash flows.
23
<PAGE>
(i) Pension Plan
The Company computes the net periodic pension cost of its
pension plan in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for
Pensions." Costs of the plan are determined by independent
actuaries.
(j) Per Share Data
Per share data has been computed on the basis of the weighted
average number of shares outstanding. Weighted average shares
used for the computation were 3,564,417 in 1996, 3,543,033 in
1995, 3,533,035 in 1994.
(k) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions of
certain amounts in the financial statements. Actual results
could differ from these estimates.
2. Investment Securities and Securities Available for Sale
The amortized cost, estimated fair values, and gross unrealized gains
and losses of investment securities at December 31, 1996 and 1995 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C>
U.S. government and agency securities $ 849 $ - $ 10 $ 839
Obligations of states and
political subdivisions 8,606 276 17 8,865
Corporate and other bonds 1,968 23 6 1,985
--------------- --------------- --------------- ---------------
$ 11,423 $ 299 $ 33 $ 11,689
=============== =============== =============== ===============
1995
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and agency securities $ 2,000 $ 14 $ 30 $ 1,984
Obligations of states and
political subdivisions 10,471 407 12 10,866
Corporate and other bonds 2,653 59 4 2,708
Mortgage-backed securities 8 - - 8
--------------- --------------- --------------- ---------------
$ 15,132 $ 480 $ 46 $ 15,566
=============== =============== =============== ===============
</TABLE>
24
<PAGE>
The amortized cost, estimated fair values, and gross unrealized gains
and losses of securities available for sale at December 31, 1996 and
1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C>
U.S. government and agency securities $ 18,405 $ 45 $ 109 $ 18,340
Obligations of states and
political subdivisions 61,553 1,233 247 62,539
Corporate and other bonds 1,498 21 7 1,512
Mortgage-backed securities 44,347 171 741 43,777
Federal Reserve Bank stock 361 - - 361
Federal Home Loan Bank stock 2,402 - - 2,402
Other securities 277 68 9 336
--------------- --------------- --------------- ---------------
$ 128,843 $ 1,538 $ 1,113 $ 129,268
=============== =============== =============== ===============
1995
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and agency securities $ 21,988 $ 182 $ 83 $ 22,088
Obligations of states and
political subdivisions 54,017 1,640 161 55,495
Corporate and other bonds 2,454 8 9 2,453
Mortgage-backed securities 44,552 237 844 43,945
Federal Reserve Bank stock 361 - - 361
Federal Home Loan Bank stock 1,845 - - 1,845
Other securities 204 10 - 214
--------------- --------------- --------------- ---------------
$ 125,421 $ 2,077 $ 1,097 $ 126,401
=============== =============== =============== ===============
</TABLE>
The amortized cost and estimated fair value of investment securities
and securities available for sale at December 31, 1996, 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.
<TABLE>
<CAPTION>
Investment Securities Securities Available for Sale
----------------------------------- -----------------------------------
Amortized Estimated Amortized Estimated
Cost Fair value Cost Fair value
--------------- --------------- --------------- ---------------
<S> <C>
Due in one year or less $ 2,120 $ 2,135 $ 9,185 $ 9,203
Due after one year through five years 8,240 8,484 50,087 50,004
Due after five years through ten years 734 743 36,158 36,484
Due after ten years 329 327 30,373 30,478
--------------- --------------- -------------- ---------------
11,423 11,689 125,803 126,169
Federal Reserve Bank stock - - 361 361
Federal Home Loan Bank stock - - 2,402 2,402
Other securities - - 277 336
--------------- --------------- --------------- ---------------
$ 11,423 $ 11,689 $ 128,843 $ 129,268
=============== =============== =============== ===============
</TABLE>
Investment securities with an amortized cost of approximately
$48,123,000 at December 31, 1996 and $42,612,000 at December 31, 1995
were pledged to secure public deposits, repurchase agreements and for
other purposes.
25
<PAGE>
Sales of securities available for sale produced the following results
for the years ended December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<Captin>
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Proceeds $ 18,677 $ 4,892 $ 12,675
=============== =============== ===============
Gross gains $ 126 $ 37 $ 54
Gross losses (159) (53) (68)
--------------- --------------- ---------------
Net losses $ (33) $ (16) $ (14)
=============== =============== ===============
</TABLE>
3. Loans
Loans are stated at their face amount, net of unearned income, and
consist of the following at December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C>
Real estate loans $ 232,257 $ 213,531
Commercial loans 37,263 36,920
Loans to individuals for household,
family and other personal expenditures 78,950 72,378
All other loans 5,205 5,497
--------------- ---------------
353,675 328,326
Less unearned income on loans 1,398 1,194
--------------- ---------------
$ 352,277 $ 327,132
=============== ===============
</TABLE>
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114), as amended by SFAS 118. This pronouncement
requires that impaired loans within the scope of the statements be
presented in the financial statements at the present value of expected
future cash flows or at the fair value of the loan's collateral. A
valuation allowance is required to the extent that the measure of the
impaired loans is less than the recorded investment. SFAS 114 does not
apply to larger groups of homogenous loans such as real estate
mortgage, installment, home equity and bank card loans, which are
collectively evaluated for impairment. The initial adoption of SFAS 114
did not require an increase to the Company's allowance for loan losses.
At December 31, 1996 and 1995, the recorded investment in loans which
have been identified as impaired loans, in accordance with SFAS 114,
totaled $420,000 and $669,000, respectively.
Nonaccrual loans totaled approximately $420,000 at December 31, 1996
and approximately $669,000 at December 31, 1995. The gross interest
income that would have been recorded during 1996, 1995 and 1994 had the
Company's nonaccrual loans been current with their original terms, was
approximately $58,000, $60,000 and $160,000, respectively. The amount
of interest income recorded by the Company during 1996, 1995 and 1994
on nonaccrual loans was $44,000, $8,014 and $0, respectively.
4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 are summarized below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Balance, beginning of year $ 4,060 $ 4,110 $ 3,822
Provision charged to operations 895 977 1,102
Recoveries credited to allowance 401 225 256
--------------- --------------- ---------------
Total 5,356 5,312 5,180
Loans charged off 968 1,252 1,070
--------------- --------------- ---------------
Balance, end of year $ 4,388 $ 4,060 $ 4,110
=============== =============== ===============
</TABLE>
26
<PAGE>
5. Bank Premises and Equipment
Bank premises and equipment as of December 31, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C>
Land $ 3,371 $ 3,107
Land improvements and buildings 9,827 7,183
Furniture and equipment 7,968 6,036
Leasehold improvements 273 -
Construction in progress 54 190
--------------- ---------------
21,493 16,516
Less accumulated depreciation 7,272 6,313
--------------- ---------------
Bank premises and equipment, net $ 14,221 $ 10,203
=============== ===============
</TABLE>
Depreciation and amortization expense for 1996, 1995 and 1994 was
$1,120,000, $906,000 and $826,000, 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,
1996 are approximately $151,000 for 1997, $113,000 for 1998, and
$71,000 for 1999.
6. Other Borrowings
Short-term borrowings consist of the following at December 31, 1996,
1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ----------------
<S> <C>
Federal funds purchased $ 6,295 $ 6,590 $ 1,175
Securities sold under agreements to repurchase 11,698 10,368 12,342
Other short-term borrowings 9,410 14,150 7,027
---------------- --------------- ---------------
Total $ 27,403 $ 31,108 $ 20,544
=============== =============== ===============
Weighted interest rate 5.27% 5.43% 5.86%
Average for the year ended December 31:
Outstanding $ 26,344 $ 23,832 $ 13,863
Interest rate 4.58% 5.85% 4.37%
Maximum month-end outstanding $ 31,023 $ 31,108 $ 22,095
</TABLE>
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 in excess of
$35 million at December 31, 1996.
Long-term borrowings at December 31, 1996 represent Federal Home Loan
Bank Advances totalling $11,125,000. Interest on advances totaling
$1,125,000 is payable monthly at 6.17%, with semiannual principal
payments of $75,000 and the final payment due in 2004. Interest on the
remaining advances of $10,000,000 is payable quarterly at 5.60% and
matures on June 1, 2001, with a one year call provision at June 1,
1997. Outstanding long-term borrowings at December 31, 1995 totaled
$1,275,000.
7. Income Taxes
The components of the 1996, 1995 and 1994 income tax expense (benefit)
are as follows in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Current taxes - Federal $ 2,448 $ 2,059 $ 1,837
Deferred taxes - Federal (176) 20 62
--------------- --------------- ---------------
Income tax expense $ 2,272 $ 2,079 $ 1,899
=============== =============== ===============
</TABLE>
27
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Computed "expected" tax expense $ 3,308 $ 3,003 $ 2,928
Increase (reduction) in taxes resulting from:
Tax-exempt interest (1,128) (976) (999)
Other, net 92 52 (30)
--------------- --------------- ---------------
Income tax expense $ 2,272 $ 2,079 $ 1,899
=============== =============== ===============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities at
December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C>
Deferred tax assets:
Loans, principally due to the allowance for loan losses $ 999 $ 864
Benefit plans 633 596
Deferred loan fees and costs 43 70
Other 88 77
--------------- ---------------
Total deferred tax assets 1,763 1,607
--------------- ---------------
Deferred tax liabilities:
Unrealized gains on securities available for sale 148 333
Bank premises and equipment, principally due to depreciation 309 336
Condemnation gains 52 52
Other real estate owned, principally due to sales treatment 158 157
Other 43 37
--------------- ---------------
Total deferred tax liabilities 710 915
--------------- ---------------
Net deferred tax asset (included in other assets) $ 1,053 $ 692
=============== ===============
</TABLE>
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 has been established.
8. Employee Benefits
The Company has a noncontributory, defined benefit pension plan
covering all full-time employees. Contributions to the plan totaled
$196,166 and $107,201 for 1996 and 1995, respectively.
Significant assumptions used in determining net periodic pension cost
and projected benefit obligation for 1996 and 1995 were:
Expected long-term rate of return on assets 9%
Discount rate 7.5%
Salary increase rate 6%
Average remaining service 21 years
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31,
1996 and 1995 (in thousands):
28
<PAGE>
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C>
Vested benefit obligation $ (1,385) $ (1,409)
Nonvested accumulated plan benefits (72) (16)
--------------- ---------------
Accumulated benefit obligation $ (1,457) $ (1,425)
=============== ===============
Projected benefit obligation $ (2,960) $ (2,751)
Plan assets at fair value 2,483 2,277
--------------- ---------------
Excess of projected benefit obligation over plan assets (477) (474)
Unrecognized net obligation 6 7
Unrecognized prior service cost 285 303
Unrecognized net gain (655) (659)
--------------- ---------------
Accrued pension (included in other liabilities) $ (841) $ (823)
=============== ===============
</TABLE>
Net periodic pension cost for 1996, 1995 and 1994 included the
following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Service cost $ 265 $ 212 $ 203
Interest cost 205 178 163
Actual return on assets (275) (339) (57)
Net amortization and deferral 71 165 (132)
--------------- --------------- ---------------
Net periodic pension cost $ 266 $ 216 $ 177
=============== =============== ===============
</TABLE>
The Company also contributes to an employees' profit-sharing plan which
covers all full-time employees. Contributions are made annually at the
discretion of the subsidiaries banks' Board of Directors. The payments
to the plan for the years 1996, 1995 and 1994 were approximately
$521,000, $580,000 and $422,000, respectively, which represents
approximately 15% of the compensation of participants in each year.
The Company has an obligation to certain members of the subsidiary
banks' Boards of Directors under deferred compensation plans in the
amount of $1,034,000 and $979,000 at December 31, 1996 and 1995,
respectively. A portion of the benefits will be funded by life
insurance.
In 1993, the Company adopted an incentive stock plan which reserves up
to 200,000 shares of common stock for issuance to certain employees.
Approximately 45,000 shares had been granted under this plan as of
December 31, 1996 at prevailing market prices including 6,500 and
10,000 shares granted in 1996 and 1995, respectively. Exercise prices
range from $7.46 to $25.00 per share. No stock options were exercised
during 1996. Stock options representing 13,440 shares were exercised in
1995.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the Company's
stock options. Had compensation cost been determined based on the fair
value at the grant dates consistent with the alternative method of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per
share as reported in the accompanying Consolidated Statements of Income
would not have been impacted by a material amount.
9. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contractual amounts
of these instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
29
<PAGE>
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit and standby letters of credit written is represented by the
contractual amount of these instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. Unless noted otherwise, the
Company does not require collateral or other security to support
financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments may expire without being completely drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. At December 31, 1996 and 1995, the Company had
outstanding loan commitments approximating $36,592,000 and $20,361,000,
respectively.
Standby letters of credit written are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
The amount of standby letters of credit whose contract amounts
represent credit risk totaled approximately $6,772,000 and $3,206,000
at December 31, 1996 and 1995, respectively.
A geographic concentration exists within the Company's loan portfolio
as most of the Bank's business activity is with customers located in
areas from Fredericksburg to Hanover County, Virginia and in the
Northern Neck area of Virginia.
10. Related Party Transactions
The Company has entered into transactions with its directors, principal
officers and affiliated companies in which they are principal
stockholders. Such transactions were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related
parties totaled $6,677,000 and $6,611,000 as of December 31, 1996 and
1995, respectively. During 1996 new advances to such related parties
amounted to $5,295,000 and repayments amounted to $5,229,000.
11. Regulatory Matters
The bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative measures of
the Company's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative
judgments by regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
1996, that the Company meets all capital adequacy requirements to which
it is subject.
The most recent notification from the Federal Reserve Bank as of
September 30, 1996, categorized the Company as well capitalized under
the regulatory framework for prompt corrective action (PCA). To be
categorized as adequately capitalized the Company must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's
category.
30
<PAGE>
The Company's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
Required for capital Required in order to be
Actual adequacy purposes well capitalized under PCA
-------------------- -------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- --------- --------- ------------ ------------
<S> <C>
As of December 31, 1996
Total capital to
risk weighted assets $ 62,415 16.29% $ 30,644 8.00% $ 38,305 10.00%
Tier 1capital to
risk weighted assets 58,027 15.15% 15,322 4.00% 22,983 6.00%
Tier 1capital to
average assets 58,027 10.70% 21,692 4.00% 27,115 5.00%
As of December 31, 1995
Total capital to
risk weighted assets $ 56,812 15.91% $ 28,570 8.00% $ 35,713 10.00%
Tier 1capital to
risk weighted assets 52,752 14.77% 14,285 4.00% 21,428 6.00%
Tier 1capital to
average assets 52,752 10.87% 19,412 4.00% 24,265 5.00%
</TABLE>
12. Disclosure 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
31
<PAGE>
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,
1996 and 1995, 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, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- --------------
<S> <C>
Financial assets:
Cash and cash equivalents $ 22,453 $ 22,453 $ 18,027 $ 18,027
Investment securities 11,423 11,689 15,132 15,566
Securities available for sale 129,268 129,268 126,401 126,401
Net loans 352,277 350,717 327,132 319,150
Financial liabilities:
Deposits 439,607 436,605 415,755 411,020
Borrowings 38,528 38,528 32,383 32,383
</TABLE>
13. Merger
On September 1, 1996 King George State Bank, Inc. merged with and into
Union Bankshares in a transaction accounted for as a
pooling-of-interests. Pursuant to the merger, each share of common
stock of King George was exchanged for 5.5 shares of common stock of
the Company. A total of 275,000 shares of the Company's common stock
was issued in connection with the merger. Previously reported
information for the periods presented below for Union Bankshares and
King George was as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
June 30, 1996 December 31, 1995 December 31, 1994
------------------------------ ------------------------------ -----------------------------
Union King Union King Union King
Bankshares George Bankshares George Bankshares George
-------------- -------------- -------------- ------------- -------------- ------------
<S> <C>
Net interest income $ 9,435 $ 1,036 $ 18,188 $ 2,040 $ 16,903 $ 1,935
Provision for loan losses 231 90 574 403 597 505
Other income 1,425 348 2,442 176 2,774 176
Other expenses 6,170 584 11,899 1,138 11,031 1,042
Income tax expense 984 132 1,910 169 1,774 126
-------------- -------------- -------------- ------------- -------------- ------------
Net income $ 3,475 $ 578 $ 6,247 $ 506 $ 6,275 $ 438
============== ============== ============== ============= ============== ============
Net income per share $ 1.06 $ 11.56 $ 1.91 $ 10.11 $ 1.93 $ 8.76
============== ============== ============== ============= ============== ============
Cash dividends per share $ .30 $ 2.35 $ .56 $ 2.30 $ .52 $ 2.25
============== ============== ============== ============= ============== ============
</TABLE>
14. Parent Company Financial Information
The primary source of funds for the dividends paid by Union Bankshares
Corporation (the "Parent Company") is dividends received from its
subsidiary banks. The payment of such dividends by the subsidiary banks
and the ability of the banks to loan or advance funds to the Parent
Company are subject to certain statutory limitations which contemplate
that the current year earnings and earnings retained for the two
preceding years may be paid to the Parent Company without regulatory
approval. Financial information for the Parent Company follows:
32
<PAGE>
UNION BANKSHARES CORPORATION ("PARENT COMPANY ONLY")
Balance Sheets
December 31, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C>
Assets
Cash $ $ 84 $ 207
Certificates of deposit 472 450
Securities available for sale 211 1,108
Premises and equipment 1,058 -
Other assets 313 323
Due from subsidiaries 51 73
Investment in subsidiaries 56,581 51,525
--------------- ---------------
Total assets $ 58,770 $ 53,686
=============== ===============
Liabilities and Stockholders' equity:
Other liabilities $ 204 $ 3
Common stock 14,267 14,248
Surplus 160 66
Retained earnings 43,863 38,722
Unrealized losses on securities available for sale 276 647
--------------- ---------------
Total liabilities and stockholders' equity $ 58,770 $ 53,686
=============== ===============
</TABLE>
Condensed Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- --------------
<S> <C>
Income:
Interest income $ 67 $ 93 $ 27
Dividends received from subsidiaries 2,315 1,948 3,524
Equity in undistributed net income of subsidiaries 5,453 4,886 3,209
--------------- --------------- --------------
Total income 7,835 6,927 6,760
Operating expenses 379 174 47
--------------- --------------- --------------
Net income $ 7,456 $ 6,753 $ 6,713
=============== =============== ==============
</TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- --------------
<S> <C>
Operating activities:
Net income $ 7,456 $ 6,753 $ 6,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (5,453) (4,886) (3,209)
Decrease (increase) in other assets 34 (260) (136)
Other (net) 197 (1) 45
--------------- --------------- --------------
Net cash provided by operating activities 2,234 1,606 3,413
--------------- --------------- --------------
Investing activities:
Purchase of securities (63) (100) (1,496)
Proceeds from maturity of securities 1,006 498 -
Purchase of equipment (1,076) - -
Capital contributions to subsidiaries - (50) -
--------------- --------------- --------------
Net cash provided (used) by investing activities (133) 348 (1,496)
--------------- --------------- --------------
Financing activities:
Cash dividends paid (2,315) (1,948) (1,806)
Issuance of common stock under plans 272 310 200
Repurchase of common stock (159) - -
--------------- --------------- --------------
Net cash used in financing activities (2,202) (1,638) (1,606)
--------------- --------------- --------------
Increase (decrease) in cash and cash equivalents (101) 316 311
Cash and cash equivalents at beginning of year 657 341 30
--------------- --------------- --------------
Cash and cash equivalents at end of year $ 556 $ 657 $ 341
=============== =============== ==============
</TABLE>
33
<PAGE>
Exhibit 22
Subsidiaries of Union Bankshares Corporation
State of Incorporation
----------------------
Union Bank & Trust Company Virginia
Northern Neck State Bank Virginia
King George State Bank Virginia
Union Investment Services, Inc. Virginia
Union Mortgage Company, LLC Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 19,333
<INT-BEARING-DEPOSITS> 1,016
<FED-FUNDS-SOLD> 2,104
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,268
<INVESTMENTS-CARRYING> 11,423
<INVESTMENTS-MARKET> 11,689
<LOANS> 352,277
<ALLOWANCE> 4,388
<TOTAL-ASSETS> 540,893
<DEPOSITS> 439,607
<SHORT-TERM> 27,403
<LIABILITIES-OTHER> 4,192
<LONG-TERM> 11,125
0
0
<COMMON> 14,267
<OTHER-SE> 44,299
<TOTAL-LIABILITIES-AND-EQUITY> 540,893
<INTEREST-LOAN> 32,444
<INTEREST-INVEST> 8,191
<INTEREST-OTHER> 361
<INTEREST-TOTAL> 40,996
<INTEREST-DEPOSIT> 17,491
<INTEREST-EXPENSE> 1,839
<INTEREST-INCOME-NET> 21,666
<LOAN-LOSSES> 895
<SECURITIES-GAINS> (33)
<EXPENSE-OTHER> 14,502
<INCOME-PRETAX> 9,728
<INCOME-PRE-EXTRAORDINARY> 9,728
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,456
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 8.75
<LOANS-NON> 420
<LOANS-PAST> 3,163
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 420
<ALLOWANCE-OPEN> 4,060
<CHARGE-OFFS> 968
<RECOVERIES> 401
<ALLOWANCE-CLOSE> 4,388
<ALLOWANCE-DOMESTIC> 4,388
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
