UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer Identification No.)
211 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $4 PAR VALUE
Union Bankshares Corporation (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
As of March 31, 1998, Union Bankshares Corporation had 3,576,937 shares of
Common Stock outstanding.
<PAGE>
UNION BANKSHARES CORPORATION
FORM 10-Q
March 31, 1998
INDEX
PART 1 - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 (unaudited).............................. 1
Consolidated Statements of Income and Comprehensive Income for the
three months ended March 31, 1998 and 1997 (unaudited)......... 2
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 (unaudited)......... 3
Notes to Consolidated Financial Statements (unaudited).............. 4-5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 6-13
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................. 14
Signatures................................................................ 14
Index to Exhibits......................................................... 15
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C>
ASSETS
- --------
Cash and cash equivalents:
Cash and due from banks $ 23,363 $ 20,147
Interest-bearing deposits in other banks 1,233 695
Federal funds sold 4,504 612
--------- ---------
Total cash and cash equivalents 29,100 21,454
--------- ---------
Securities available for sale, at fair value 143,463 142,108
Investment securities
fair value of $11,403 and $10,682, respectively 11,156 10,441
--------- ---------
Total securities 154,619 152,549
--------- ---------
Loans, net of unearned income 437,948 395,338
Less allowance for loan losses 4,611 4,565
--------- ---------
Net loans 433,337 390,773
--------- ---------
Bank premises and equpiment, net 19,784 16,934
Other real estate owned 1,344 1,746
Other assets 18,897 12,025
--------- ---------
Total assets $ 657,081 $ 595,481
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing demand deposits $ 70,561 $ 60,962
Interest-bearing deposits:
Savings accounts 52,184 46,693
NOW accounts 72,137 60,010
Money market accounts 63,736 50,387
Time deposits of $100,000 and over 66,438 58,421
Other time deposits 219,669 195,670
--------- ---------
Total interest-bearing deposits 474,164 411,181
--------- ---------
Total deposits 544,725 472,143
--------- ---------
Short-term borrowings 9,943 27,245
Long-term borrowings 28,640 23,715
Other liabilities 6,293 6,870
--------- ---------
Total liabilities 589,601 529,973
--------- ---------
Stockholders' equity:
Common stock, $4 par value. Authorized 12,000,000
shares; issued and outstanding, 3,576,937 and
3,575,937 shares, respectively 14,308 14,304
Surplus 389 388
Retained earnings 51,064 49,105
Accumulated other comprehensive income
Net unrealized gains on securities available
for sale, net of taxes 1,719 1,711
--------- ---------
Total stockholders' equity 67,480 65,508
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 657,081 $ 595,481
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three months ended March 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C>
Interest income:
Interest and fees on loans $ 9,451 $ 8,219
Interest on securities:
U.S. government and agency securities 1,193 970
Obligations of states and political subdivisions 974 963
Other securities 148 185
Interest on Federal funds sold 116 58
Interest on interest-bearing deposits in other banks 24 15
------- -------
Total interest income 11,906 10,410
------- -------
Interest expense:
Interest on deposits 4,991 4,408
Interest on other borrowings 735 526
------- -------
Total interest expense 5,726 4,934
------- -------
Net interest income 6,180 5,476
Provision for loan losses 435 200
------- -------
Net interest income after provision
for loan losses 5,745 5,276
------- -------
Other income:
Service charges on deposit accounts 575 484
Other service charges and fees 447 213
Gains on securities transactions, net 2 31
Gains on sales of other real estate owned
and bank premises, net 16 109
Other operating income 41 168
------- -------
Total other income 1,081 1,005
------- -------
Other expenses:
Salaries and benefits 2,412 2,033
Occupancy expenses 294 246
Furniture and equipment expenses 359 304
FDIC assessments 17 12
Other operating expenses 1,311 1,179
------- -------
Total other expenses 4,393 3,774
------- -------
Income before income taxes 2,433 2,507
Income tax expense 474 570
------- -------
Net income $ 1,959 $ 1,937
======= =======
Other Comprehensive income
Unrealized holding gains arising during the period
net of taxes of $5 for 1998 $ 8 $ (209)
Less reclassification adjustments for gains included in
net income, net of taxes of $1 for 1998 and $10
for 1997 (1) (21)
======= =======
Comprehensive income $ 1,966 $ 1,707
======= =======
Earnings per share
Basic $ 0.55 $ 0.54
======= =======
Diluted 0.54 0.54
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C>
Operating activities:
Net income $ 1,959 $ 1,937
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment 299 355
Amortization of intangibles 33 11
Provision for loan losses 435 200
(Gains) losses on sales of securities available for sale (2) 24
Gains on sale of other real estate owned (16) (124)
Increase in other assets (6,894) (636)
(Decrease) increase in other liabilities (578) 499
-------- --------
Net cash and cash equivalents provided
by operating activities (4,764) 2,266
-------- --------
Investing activities:
Net increase in securities (2,070) (6,132)
Net increase in loans (42,999) (7,336)
Acquisition of bank premises and equipment (3,149) (726)
Proceeds from sales of other real estate owned 418 3,421
-------- --------
Net cash and cash equivalents used in
investing activities (47,800) (10,773)
-------- --------
Financing activities:
Net increase in non-interest-bearing deposits 9,599 857
Net increase in interest-bearing deposits 62,983 6,234
Net (decrease) increase in short-term borrowings (17,302) 7,778
Net increase (decrease) in long-term borrowings 4,925 (75)
(Sale) purchase of common stock 5 (40)
-------- --------
Net cash and cash equivalents provided by
financing activities 60,210 14,754
-------- --------
Increase in cash and cash equivalents 7,646 6,247
Cash and cash equivalents at beginning of period 21,454 22,453
-------- --------
Cash and cash equivalents at end of period $ 29,100 $ 28,700
======== ========
</TABLE>
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The information contained in the financial statements is unaudited and
does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the results of the interim periods presented have been
made. Operating results for the three-month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report to Shareholders. Certain previously reported
amounts have been reclassified to conform to current period presentation.
2. ALLOWANCE FOR LOAN LOSSES
The following summarizes activity in the allowance for loan losses for the
three months ended March 31, (in thousands):
1998 1997
---- ----
Balance, January 1 $ 4,565 $ 4,388
Provisions charged to operations 435 200
Recoveries credited to allowance 43 36
Loans charged off (432) (251)
------- -------
Balance, March 31 $ 4,611 $ 4,373
======= =======
3. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of shares outstanding during the period. Weighted
average shares used for the computation of basic EPS were 3,576,681 and
3,566,101 for the three months ended March 31, 1998 and 1997. Diluted EPS
is computed using the weighted number of common shares outstanding during
the period, including the effect of dilutive potential common shares
outstanding attributable to stock options. Weighted average shares used
for the computation of diluted EPS were 3,597,723 and 3,578,161 for the
three months ended March 31, 1998 and 1997.
4. RECENT ACCOUNTING STATEMENTS
As of January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", for all periods presented. This
statement establishes standards for reporting and displaying comprehensive
income and its components. The purpose of reporting comprehensive income
is to report all changes in equity of an enterprise that result from
recognized transactions and other economic events of the period. Other
comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in
comprehensive income but excluded from net income, such as unrealized
gains and losses on certain investments in debt and equity securities and
foreign currency items.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Union Bankshares Corporation (the "Company") is a multi-bank holding
company organized under Virginia law which provides financial services through
its wholly-owned subsidiaries, Union Bank & Trust Company, Northern Neck State
Bank, King George State Bank, Union Investment Services, Inc., and Union
Mortgage Company, LLC. The three subsidiary banks, Unon Bank & Trust Company,
Northern Neck State Bank and King George State Bank, are full service retail
commercial banks offering a wide range of banking and related financial
services, including demand and time deposits, as well as commercial, industrial,
residential construction, residential mortgage and consumer loans. Union
Investment Services, Inc., is a full service discount brokerage company which
offers a full range of investment services, and sells mutual funds, bonds and
stocks. Union Mortgage Company, LLC provides a wide array of mortgage products
to the Company's primary trade area.
During the first quarter of 1998 the Company completed its acquisition
from Signet Bank of five branches in the Northern Neck with four branches
becoming Northern Neck State Bank branches and one joining King George State
Bank. The Company also announced it had entered into a definitive agreement with
Rappahannock Bankshares, Inc., a $20 million bank holding company in Washington,
Virginia, to become a member of the Union Bankshares Corporation consolidated
group.
The Company's primary trade area stretches from Fredericksburg, south to
Hanover County and east throughout Northern Neck area of Virginia. The Corporate
Headquarters are located in Bowling Green, Virginia. Through its banking
subsidiaries, the Company operates 25 branches in its primary trade area.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of Union Bankshares Corporation and subsidiaries (the "Company"). The analysis
focuses on the Consolidated Financial Statements, the footnotes thereto, and the
other financial data herein. Highlighted in the discussion are material changes
from prior reporting periods and any identifiable trends affecting the Company.
Amounts are rounded for presentation purposes, while the percentages presented
are computed based on unrounded amounts.
Results of Operations
Net income for the first quarter of 1998 was $2.0 million, up from $1.9
million for the same period in 1997. Diluted earnings per share amounted to $.54
in the first quarter of 1998 and 1997. The Company's annualized return on assets
for the first quarter of 1998 was 1.24% as compared to 1.43% a year ago. The
Company's annualized return on equity totaled 11.79% and 13.22% for the three
months ended March 31, 1998 and 1997, respectively. Despite strong asset and
capital growth, these performance ratios remain strong performance ratios by
industry and peer standards.
Net Interest Income
Net interest income on a tax-equivalent basis for the first quarter of
1998 increased by 15.2% to $6.7 million from $5.8 million for the same period a
year ago. By managing its interest rate spread and increasing the volume of
earning assets over interest-bearing liabilities, the Company has been able to
maintain a strong net interest margin. Average earning assets during the first
quarter of 1998 increased by $84.1 million to $587.6 million from the first
quarter of 1997, while average interest-bearing liabilities grew by $71.2
million to $499.8 million over this same period. The Company's yield on average
earning assets was 8.57%, up from 8.56% a year ago, while its cost of average
interest-bearing liabilities also increased slightly from 4.62% to 4.65%.
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
-------------------------------------------------------------------------------------------
Quarters Ended March 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------------
<S> <C>
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . . $ 88,040 $ 1,388 6.39% $ 74,595 $ 1,144 6.15% $ 75,474 $ 1,151 6.13%
Tax-exempt(1) . . . . . . . . . 68,840 1,417 8.35% 66,437 1,315 7.94% 62,364 1,312 8.46%
-------------------- ------------------- -------------------
Total securities . . . . . 156,880 2,805 7.25% 141,032 2,459 6.99% 137,838 2,463 7.19%
Loans, net. . . . . . . . . . . . . . . 420,472 9,479 9.14% 356,855 8,219 9.24% 332,101 7,837 9.49%
Federal funds sold . . . . . . . . . . 8,918 116 5.28% 4,645 58 5.01% 4,842 69 5.73%
Interest-bearing deposits
in other banks . . . . . . . . . 1,378 24 7.00% 1,002 15 6.00% 725 9 4.99%
-------------------- ------------------- -------------------
Total earning assets . . . . 587,648 12,424 8.57% 503,534 10,751 8.56% 475,506 10,378 8.78%
Allowance for loan losses . . . . . . . (4,710) (4,451) (4,113)
Total non-earning assets . . . . . . . . 52,499 44,376 38,900
---------- --------- ---------
Total assets . . . . . . . . . . . . . .$ 635,437 $543,459 $510,293
========== ========= =========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . $ 65,037 381 2.37% $ 51,797 329 2.55% 45,348 286 2.54%
Regular savings . . . . . . . . . 49,234 366 3.01% 45,067 351 3.12% 56,120 504 3.61%
Money market savings . . . . . . 57,104 490 3.48% 54,504 455 3.35% 55,068 452 3.30%
Certificates of deposit:
$100,000 and over . . . . . . . . 64,079 868 5.49% 49,890 643 5.19% 47,159 636 5.42%
Under $100,000 . . . . . . . . . 207,673 2,886 5.64% 187,110 2,630 5.64% 166,164 2,467 5.97%
-------------------- ------------------- -------------------
Total interest-bearing
deposits . . . . . . 443,127 4,991 4.57% 388,368 4,408 4.56% 369,859 4,345 4.72%
Other borrowings . . . . . . . . . . . . 56,645 735 5.26% 40,181 526 5.24% 35,375 390 4.43%
-------------------- ------------------- -------------------
Total interest-bearing
liabilities . . . . 499,772 5,725 4.65% 428,549 4,934 4.62% 405,234 4,735 4.70%
-------- --------- --------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . 65,222 52,870 49,002
Other liabilities . . . . . . . . 4,936 4,660 3,844
---------- --------- ---------
Total liabilities . . . . . 569,930 486,079 458,080
Stockholders' equity . . . . . . . . . . 65,507 57,380 52,213
---------- --------- ---------
Total liabilities and
stockholders' equity . . . . . . $ 635,437 $543,459 $510,293
========== ========= =========
Net interest income . . . . . . . . . . $ 6,699 $ 5,817 $ 5,643
======== ========= ========
Interest rate spread . . . . . . . . . . 3.93% 3.94% 4.08%
Interest expense as a percent
of average earning assets . . . . 3.95% 3.93% 4.01%
Net interest margin . . . . . . . . . . 4.62% 4.63% 4.77%
</TABLE>
(1) Income and yields are reported on a taxable equivalent basis.
<PAGE>
COMBINED
The following table presents the Company's interest sensitivity position at
March 31, 1998. This one-day position, which is continually changing, is not
necessarily indicative of the Company's position at any other time.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
March 31, 1998
-----------------------------------------------------------------
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) . . . . . . $111,005 $ 33,299 $ 156,062 $ 133,910 $ 434,276
Investment securities . . . . . . . . . . . . - 2,554 5,982 2,620 11,156
Securities available for sale . . . . . . . . 1,644 4,689 56,305 80,825 143,463
Federal funds sold. . . . . . . . . . . . . . 4,504 - - - 4,504
Other short-term investments. . . . . . . . . 1,134 - 99 - 1,233
--------- ---------- ---------- ---------- ----------
Total earning assets. . . . . . . . . . . . . 118,287 40,542 218,448 217,355 594,632
--------- ---------- ---------- ---------- ----------
Interest-Bearing Liabilities:
Interest checking (2) . . . . . . . . . . . . 24,779 - 47,358 - 72,137
Regular savings (2) . . . . . . . . . . . . . 16,771 - 35,413 - 52,184
Money market savings. . . . . . . . . . . . . 60,381 3,355 - - 63,736
Certificates of deposit: - - - -
$100,000 and over . . . . . . . . . . . 24,431 27,236 14,771 - 66,438
Under $100,000. . . . . . . . . . . . . 51,980 92,457 75,232 - 219,669
Short-term borrowings . . . . . . . . . . . . 9,943 - - - 9,943
Long-term borrowings. . . . . . . . . . . . . - 5,000 16,900 6,740 28,640
--------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities . . . . . . . . . . . . . . 188,285 128,048 189,674 6,740 512,747
--------- ---------- ---------- ---------- ----------
Period gap. . . . . . . . . . . . . . . . . . (69,998) (87,506) 28,774 210,615
Cumulative gap. . . . . . . . . . . . . . . . $(69,998) $(157,504) $(128,730) $ 81,885 $ 81,885
========= ========== ========== ========== ==========
Ratio of cumulative gap to
total earning assets. . . . . . . . . . -11.77% -26.49% -21.65% 13.77%
========= ========== ========== ==========
</TABLE>
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) The Company has found that interest-bearing checking deposits and regular
savings deposits are not sensitive to changes in related market rates and
therefore, it has placed them predominantly in the "1-5 Years" column.
(3) Excludes non-accrual loans
<PAGE>
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is
subject to the accuracy of the assumptions that underlie the process, but it
provides a better analysis of the sensitivity of earnings to changes in interest
rates than other analysis such as the static gap analysis.
Assumptions used in the model include loan and deposit growth rates are
derived from seasonal trends and management's outlook as are the assumptions
used to project yields and rates for new loans and deposits. All maturities,
calls and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different asset and liability accounts move
differently when the prime rate changes and are accounted for in the different
rate scenarios.
The following table represents the interest rate sensitivity on net
interest income for the Company using different rate scenarios:
% Change in
Change in Prime Rate Net Interest Income
-------------------- -------------------
+200 basis points +4.1%
Flat 0
-200 basis points -5.5%
Market Value Simulation
Market value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Market values
are calculated based on discounted cash flow analysis. The net market value is
the market value of all assets minus the market value of all liabilities. The
change in net market value over different rate environments is an indication of
the larger term repricing risk in the balance sheet. The same assumptions are
used in the market value simulation as in the earnings simulation.
<PAGE>
The following chart reflects the change in net market value over different
rate environments:
Change in Net Market Value
Change in Prime Rate (dollars in thousands)
- -------------------- ----------------------
+200 basis points $-17,232
+100 basis points -7,481
Flat -4,855
- -100 basis points 13,177
- -200 basis points 22,256
<PAGE>
Provision for Possible Loan Losses
The provision for possible loan losses totaled $435,000 for the first
quarter of 1998, up from $200,000 for the first quarter of 1997. These
provisions reflect the performance of the loan portfolio and management's
assessment of the credit risk in the portfolio. (See Asset Quality)
Non-Interest Income
Non-interest income for the first quarter of 1998 totaled $1.1 million, up
from $1.0 a year ago. This increase is due principally to the increases in
income from mortgage brokerage activity and was offset by net gains of
approximately $109,000 on sales of real estate owned in the first quarter of
1997 including a $120,000 gain on the sale of a single property. Management
continues to seek additional sources of non-interest income, including increased
emphasis on its credit card operations, mortgage banking activities and discount
brokerage services.
Non-Interest Expense
Non-interest expense increased by 16.4% for the first quarter of 1998,
totaling $4.4 million as compared to $3.8 million for the quarter ended March
31, 1997. Personnel costs comprised much of this change, increasing
approximately 18.6% over the first quarter of 1997 due principally to continued
growth and the Signet branch acquisition. The remaining cost is attributable to
infrastructure associated with the consolidation of certain functions and the
development and introduction of new products and delivery systems, which are
expected to enhance future earnings through increased revenue and/or improved
efficiencies. The Company continues to stress budgetary expense controls and
operates at considerably more efficient levels than its peers, as measured by
the efficiency ratio (ratio of non-interest expenses to net interest income plus
non-interest income). For the first quarter of 1998 the Company's efficiency
ratio was 56.8%.
Financial Condition
Total assets as of March 31, 1998 were $657.1 million, an increase of
10.3% from $595.5 million at December 31, 1997 and 17.8% from $557.8 million at
March 31, 1997. Asset growth continued to be fueled by steady loan demand, as
loans totaled $433.3 million at March 31, 1998, an increase of 10.9% from $390.8
million at December 31, 1997, and 22.1% from $355.0 million at March 31, 1997.
Stockholders' equity totaled $67.5 million at March 31, 1998 which represents a
book value of $ 18.85 per share.
Asset and deposit growth in the first quarter was principally a result of
the acquisition of the former Signet branches which added $60.2 million in
deposits to the balance sheet. Proceeds from this acquisition were invested in a
variety of investment products including government securities, mortgage backed
securities and whole loans. These branches add significantly to the Company's
presence in the Northern Neck region, and although the short-term impact on
earnings is not expected to be material, they provide significant potential for
growth in market share.
Deposit growth, though outpaced by loan growth, remained steady. Total
deposits at March 31, 1998 were $544.7 million, up 15.4% from $472.1 million at
December 31, 1997 and 21.9% from $446.7 million a year earlier. Other borrowings
totaled $38.6 million at March 31, 1998 a 24.2% decrease over $51.0 million at
the end of 1997 and a 16.6% decrease from $46.2 million at March 31, 1997. The
Company continues to utilize other borrowings to supplement deposit growth and,
periodically, engages in wholesale leverage transactions. These wholesale
leverage transactions have typically been executed at spreads of approximately
150 to 200 basis points and, although they have negatively impacted the
Company's net interest margin (as a percentage), they have had a positive effect
on earnings and return on equity.
Continued competition for deposits, particularly as it impacts certificate
of deposit rates, is reflected in the deposit mix. Management continues to focus
on increasing lower cost deposit products, including non-interest bearing demand
deposits and savings accounts. Increased competition for funds, particularly by
non-banks, continues to contribute to a narrowing of the net interest margin
which has been largely offset by increases in the volume of earning assets.
Asset Quality
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio. The level of credit losses
is affected by general economic trends as well as conditions affecting
individual borrowers. The allowance is also subject to regulatory examinations
and determination as to adequacy, which may take in to account such factors as
the methodology used to calculate the allowance and comparison to peer groups.
The allowance for loan losses totaled $4.6 million at March 31, 1998 or
1.05% of total loans, as compared to 1.15% at December 31, 1997 and 1.22% at
March 31, 1997. At March 31, 1998, non-performing assets of $6.0 million
included foreclosed properties of $1.3 million and a $1.0 million investment in
income-producing property.
March 31, December 31, March 31,
1998 1997 1997
----- ---- ----
Non-accrual loans $3,672 $2,140 $ 477
Foreclosed properties 1,344 1,746 1,111
Real estate investment 942 1,050 2,389
------ ------ ------
Non-performing assets $5,958 $4,936 $3,977
====== ====== ======
Allowance for loan losses $4,611 $4,565 $4,373
Allowance as % of total loans 1.05% 1.15% 1.22%
Non-performing assets to loans
and foreclosed properties 1.35% 1.24% 1.20%
Capital Resources
Capital resources represent funds, earned or obtained, over which
financial institutions can exercise greater or longer control in comparison with
deposits and borrowed funds. The adequacy of the Company's capital is reviewed
by management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1
capital, consisting of common equity and retained earnings, less certain
goodwill items.
At March 31, 1998, the Company's ratio of total capital to risk-weighted assets
was 13.45% and its ratio of Tier 1 capital to risk-weighted assets was 12.48%.
Both ratios exceed the fully phased-in capital requirements. The following
summarizes the Company's regulatory capital and related ratios at March 31,
1998:
Tier 1 capital $ 59,591
Tier 2 capital $ 4,612
Total risk-based capital $ 64,203
Total risk-weighted assets $ 477,517
Capital Ratios:
Tier 1 risk-based capital ratio 12.48 %
Total risk-based capital ratio 13.45 %
Leverage ratio (Tier I capital to
average adjusted total assets) 9.29%
Equity to assets ratio 9.82%
The Company's book value per share at March 31, 1998 was $18.85. Dividends
to stockholders are typically declared and paid semi-annually in June and
December.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. Additional sources of liquidity available to the Company include its
capacity to borrow additional funds when necessary through Federal funds lines
with several regional banks and a line of credit with the Federal Home Loan
Bank. Management considers the Company's overall liquidity to be sufficient to
satisfy its depositors' requirements and to meet its customers' credit needs.
At March 31, 1998, cash, interest-bearing deposits in other banks, federal
funds sold, securities available for sale and loans maturing or repricing in one
year were 51.2% of total earning assets. At March 31, 1998 approximately $144.3
million or 33.2% of total loans would mature or reprice within the next year.
The Company utilizes federal funds purchased, FHLB advances, securities sold
under agreements to repurchase and customer repurchase agreements, in addition
to deposits, to fund the growth in its loan portfolio, and to fund securities
purchases, periodically in wholesale leverage transactions.
Year 2000
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. The Company expects to incur
internal staff costs as well as consulting and other expenses related to the
infrastructure and facilities enhancements necessary to prepare its systems for
the year 2000. Testing and conversion of system applications is expected to cost
approximately $250,000, with all systems expected to be compliant by June 1999.
A significant portion of these costs are not likely to be incremental costs, but
rather a redeployment of existing information technology resources.
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) No Form 8-K was required to be filed during the most recently
completed quarter.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Bankshares Corporation
----------------------------
(Registrant)
May 14, 1998 s/ G. William Beale
--------------------- ----------------------
(Date) G. William Beale,
President, Chief Executive Officer
and Director
May 14, 1998 s/ D. Anthony Peay
--------------------- ----------------------
(Date) D. Anthony Peay,
Vice President and Chief Financial Officer
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q / March 31, 1998
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ------------
<S> <C>
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession - Not Applicable
4 Instruments defining the rights of security holders,
including indentures Not Applicable
10 Material contracts Not Applicable
11 Statement re: computation of per share earnings Not Applicable
15 Letter re: unaudited interim financial
information Not Applicable
18 Letter re: change in accounting principles Not Applicable
19 Previously unfiled documents Not Applicable
20 Report furnished to security holders Not Applicable
22 Published report re: matters submitted to
vote of security holders None
23 Consents of experts and counsel Not Applicable
24 Power of Attorney Not Applicable
99 Additional Exhibits None
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 23,363
<INT-BEARING-DEPOSITS> 1,233
<FED-FUNDS-SOLD> 4,504
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 143,463
<INVESTMENTS-CARRYING> 11,156
<INVESTMENTS-MARKET> 0
<LOANS> 437,948
<ALLOWANCE> 4,611
<TOTAL-ASSETS> 657,081
<DEPOSITS> 544,725
<SHORT-TERM> 9,943
<LIABILITIES-OTHER> 6,293
<LONG-TERM> 28,640
0
0
<COMMON> 14,308
<OTHER-SE> 389
<TOTAL-LIABILITIES-AND-EQUITY> 657,081
<INTEREST-LOAN> 9,451
<INTEREST-INVEST> 2,315
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 11,906
<INTEREST-DEPOSIT> 4,991
<INTEREST-EXPENSE> 735
<INTEREST-INCOME-NET> 6,180
<LOAN-LOSSES> 435
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,079
<INCOME-PRETAX> 2,433
<INCOME-PRE-EXTRAORDINARY> 474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,959
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 8.57
<LOANS-NON> 3,672
<LOANS-PAST> 2,573
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,672
<ALLOWANCE-OPEN> 4,611
<CHARGE-OFFS> 431
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 4,611
<ALLOWANCE-DOMESTIC> 4,611
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,611
</TABLE>
