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 September 30, 1998
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer Identification No.)
211 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $2 PAR VALUE
Union Bankshares Corporation (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
As of September 30, 1998, Union Bankshares Corporation had 7,498,994 shares
of Common Stock outstanding.
<PAGE>
UNION BANKSHARES CORPORATION
FORM 10-Q
September 30, 1998
INDEX
PART 1 - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997....................................... 1
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended September 30, 1998
and 1997 (Unaudited)........................................ 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (Unaudited)... 3
Notes to Consolidated Financial Statements
(Unaudited)................................................. 4-5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 6-15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.......................... 16
Signatures......................................................... 16
Index to Exhibits.................................................. 17
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31 September 30
ASSETS 1998 1997 1997
- - -------- ---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 19,509 $ 20,959 $ 22,845
Interest-bearing deposits in other banks 499 790 1,003
Federal funds sold 8,650 6,932 5,194
-------- ---------- ---------
Total cash and cash equivalents 28,658 28,681 29,042
-------- ---------- ---------
Securities available for sale, at fair value 151,216 143,711 140,844
Investment securities
fair value of $19,801, $18,059 and $17,952, respectively 19,412 17,769 17,683
-------- ---------- ---------
Total securities 170,628 161,480 158,527
-------- ---------- ---------
Loans, net of unearned income 464,544 399,351 388,083
Less allowance for loan losses 6,105 4,798 4,668
-------- ---------- ---------
Net loans 458,439 394,553 383,415
-------- ---------- ---------
Bank premises and equpiment, net 20,735 16,978 16,516
Other real estate owned 1,039 1,746 2,535
Other assets 19,454 12,278 9,214
-------- ---------- ---------
Total assets $698,953 $ 615,716 $ 599,249
======== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing demand deposits $ 74,182 $ 65,980 $ 63,687
Interest-bearing deposits:
Savings accounts 59,371 55,039 52,472
NOW accounts 75,710 60,010 60,590
Money market accounts 61,762 50,387 49,199
Time deposits of $100,000 and over 71,005 61,171 60,382
Other time deposits 238,092 196,968 195,748
-------- ---------- ---------
Total interest-bearing deposits 505,940 423,575 418,391
-------- ---------- ---------
Total deposits 580,122 489,555 482,078
-------- ---------- ---------
Short-term borrowings 12,788 27,245 21,279
Long-term borrowings 28,355 23,715 23,745
Other liabilities 4,780 7,036 5,161
-------- ---------- ---------
Total liabilities 626,045 547,551 532,263
-------- ---------- ---------
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares;
issued and outstanding, 7,498,994, 7,151,874 and 7,142,984
shares, respectively 14,998 14,304 14,286
Surplus 337 388 248
Retained earnings 54,957 51,766 51,113
Accumulated other comprehensive income
Net unrealized gains on securities available for sale, net of taxes 2,616 1,707 1,339
-------- ---------- ---------
Total stockholders' equity 72,908 68,165 66,986
-------- ---------- ---------
Total liabilities and stockholders' equity $698,953 $ 615,716 $ 599,249
======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 10,260 $ 9,140 $ 29,982 $ 25,871
Interest on securities:
U.S. government and agency securities 361 786 1,182 2,813
Obligations of states and political subdivisions 1,049 996 3,066 2,989
Other securities 1,115 618 3,156 1,177
Interest on Federal funds sold 121 152 420 366
Interest on interest-bearing deposits in other banks 11 10 57 38
-------- -------- -------- --------
Total interest income 12,917 11,702 37,863 33,254
-------- -------- -------- --------
Interest expense:
Interest on deposits 5,645 4,807 16,143 13,876
Interest on other borrowings 593 568 1,985 1,687
-------- -------- -------- --------
Total interest expense 6,238 5,375 18,128 15,563
-------- -------- -------- --------
Net interest income 6,679 6,327 19,735 17,691
Provision for loan losses (note 2) 1,479 310 2,394 730
-------- -------- -------- --------
Net interest income after provision
for loan losses 5,200 6,017 17,341 16,961
-------- -------- -------- --------
Other income:
Service charges on deposit accounts 754 609 2,093 1,704
Other service charges and fees 493 371 1,458 980
Gains (losses) on securities transactions, net (6) (10) (31) 3
Gains (losses)on sales of other real estate owned
and bank premises, net (5) 16 11 424
Other operating income 114 178 252 450
-------- -------- -------- --------
Total other income 1,350 1,164 3,783 3,561
-------- -------- -------- --------
Other expenses:
Salaries and benefits 2,776 2,394 7,959 6,798
Occupancy expenses 315 273 930 822
Furniture and equipment expenses 479 298 1,329 1,054
Other operating expenses 1,777 1,564 4,811 4,066
-------- -------- -------- --------
Total other expenses 5,347 4,529 15,029 12,740
-------- -------- -------- --------
Income before income taxes 1,203 2,652 6,095 7,782
Income tax expense 104 641 1,041 1,703
-------- -------- -------- --------
Net income $ 1,099 $ 2,011 $ 5,054 $ 6,079
======== ======== ======== ========
Other Comprehensive income
Unrealized holding (gains) losses arising during the period net of taxes of
$301 and $309 for three and nine months of 1998
and $98 and $366 for the three and nine months of 1997 $ 585 $ 191 $ 600 $ 710
Less reclassification adjustments for (gains) losses included in net income,
net of taxes of $2 and $11 for three and nine months of 1998
and $3 and ($1) for the three and nine months of 1997 4 7 20 (2)
======== ======== ======== ========
Comprehensive income $ 1,688 $ 2,209 $ 5,674 $ 6,787
======== ======== ======== ========
Basic earnings per share $ 0.14 $ 0.28 $ 0.69 $ 0.85
======== ======== ======== ========
Diluted earnings per share $ 0.14 $ 0.28 $ 0.69 $ 0.85
======== ======== ======== ========
Dividends per share -- 0.19 0.18
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Operating activities:
Net income $ 5,054 $ 6,079
Adjustments to reconcile net income to net cash and
cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment 1,170 1,099
Amortization of intangibles 269 32
Provision for loan losses 2,394 730
Gains (losses) on sales of securities available for sale 31 (3)
Gains on sale of other real estate owned (11) (424)
Increase in other assets (7,879) (1,027)
Decrease in other liabilities (2,256) 2,656
-------- --------
Net cash and cash equivalents provided
by (used in) operating activities (1,228) 9,142
-------- --------
Investing activities:
Net increase in securities (7,834) (9,512)
Net increase in loans (66,330) (33,200)
Acquisition of bank premises and equipment (4,927) (3,342)
Proceeds from sales of other real estate owned 767 5,389
-------- --------
Net cash and cash equivalents used in
investing activities (78,324) (40,665)
-------- --------
Financing activities:
Net increase in non-interest-bearing deposits 8,202 4,352
Net increase in interest-bearing deposits 82,365 22,133
Net decrease in short-term borrowings (14,457) (6,124)
Increase in long-term borrowings 4,775 12,800
Issuance (purchase) of common stock 10 (39)
Cash dividends paid (1,231) (1,213)
Repayment of long-term borrowings (135) (180)
-------- --------
Net cash and cash equivalents provided by
financing activities 79,529 31,729
-------- --------
Increase (decrease) in cash and cash equivalents (23) 206
Cash and cash equivalents at beginning of period 28,681 28,836
-------- --------
Cash and cash equivalents at end of period $ 28,658 $ 29,042
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The information contained in the financial statements is unaudited and does
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
in the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of the
interim periods presented have been made. Operating results for the three-
and nine-month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report to Shareholders. Certain previously reported
amounts have been reclassified to conform to current period presentation.
2. ALLOWANCE FOR LOAN LOSSES
The following summarizes activity in the allowance for loan losses for the
nine months ended September 30, (in thousands):
1998 1997
---- ----
Balance, January 1 $ 4,798 $ 4,612
Provisions charged to operations 2,394 730
Recoveries credited to allowance 189 160
Loans charged off (1,276) (834)
--------- ---------
Balance, September 30 $ 6,105 $4,668
======== ========
3. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of shares outstanding during the period. Weighted
average shares used for the computation of basic EPS were 7,498,994 and
7,142,984 for the three months ended September 30, 1998 and 1997 and
7,277,881 and 7,136,644 for the nine months ended September 30, 1998 and
1997. Diluted EPS is computed using the weighted number of common shares
outstanding during the period, including the effect of dilutive potential
common shares outstanding attributable to stock options. Weighted average
shares used for the computation of diluted EPS were 7,516,968 and 7,175,070
for the three months ended September 30, 1998 and 1997 and 7,309,992 and
7,162,165 for the nine months ended September 30, 1998 and 1997.
<PAGE>
4. RECENT ACCOUNTING STATEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that a company recognize all derivative instruments
as either assets or liabilities in the consolidated balance sheet, and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
the resulting designation. For companies with a fiscal year ending on
December 31, SFAS 133 is effective as of January 1, 2000. Earlier adoption,
as of the beginning of a fiscal quarter, is encouraged but is not mandatory.
The impact of adopting SFAS 133 will be dependent on the specific derivative
instruments in place at the date of adoption. At this time, Management
believes the adoption of this new standard will not have a material impact
on the financial condition or results of operations of the Company, and does
not anticipate adopting SFAS 133 before January 1, 2000.
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Union Bankshares Corporation 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, Rappahannock National Bank, Union Investment Services, Inc., and
Union Mortgage Company, LLC (collectively, the "Company"). The four subsidiary
banks, Union Bank & Trust Company, Northern Neck State Bank, King George State
Bank and Rappahannock National Bank, are full service retail commercial banks
offering a wide range of banking and related financial services, including
demand and time deposits, as well as commercial, industrial, residential
construction, residential mortgage and consumer loans. Union Investment
Services, Inc., is a full service discount brokerage company which offers a full
range of investment services, and sells mutual funds, bonds and stocks. Union
Mortgage Company, LLC provides a wide array of mortgage products to the
Company's primary trade area.
The Company's primary trade area stretches from Fredericksburg, south to
Hanover County and east throughout Northern Neck area of Virginia. The Corporate
Headquarters are located in Bowling Green, Virginia. Through its banking
subsidiaries, the Company operates 27 branches in its primary trade area.
During the second quarter of 1998 the Company announced a two-for-one stock
split to shareholders of record as of May 21, 1998. All shares and per share
data have been adjusted to reflect the split and per value has been reduced from
$4 to $2 per share. The Company also announced that it had filed the necessary
applications to form a new community bank in Williamsburg, Virginia, The Bank of
Williamsburg. The Company anticipates to begin operations of this wholly-owned
subsidiary in January of 1999.
On July 1, 1998, the Company completed its acquisition of Rappahannock
Bankshares, Inc., a $20 million one-bank holding company in Washington,
Virginia. The Company exchanged 316.4 shares of its common stock for each
outstanding share of Rappahannock Bankshares, Inc. stock. This transaction was
accounted for as a pooling-of-interests. The impact of this transaction is not
expected to have a material effect on the financial condition or results of
operations of the Company.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of Union Bankshares Corporation and subsidiaries. The 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 third quarter of 1998 was $1.1 million, down from $2.0
million for the same period in 1997. The decline in net income for the period
was due principally to a special provision of $975,000 to the allowance for loan
losses related to a single credit relationship in the third quarter of 1998.
Diluted earnings per share amounted to $.14 in the third quarter of 1998, as
compared to $.28 in the third quarter of 1997. The Company's annualized return
on assets for the third quarter of 1998 was .63% as compared to 1.35% a year
ago. The Company's annualized return on equity totaled 6.06% and 12.12% for the
three months ended September 30, 1998 and 1997, respectively.
<PAGE>
Net income for the first nine months of 1998 was $5.1 million, down from
$6.1 million for the same period in 1997. Excluding nonrecurring pretax gains
and losses on sales of other real estate and securities in the first nine months
of 1997 and the effect of the aforementioned special provision for loan losses
in the third quarter of 1998, net income was unchanged in the first nine months
of 1998 from 1997 totals. Diluted earnings per share amounted to $.69 in the
first nine months of 1998, as compared to $.85 in the same period in 1997. The
Company's annualized return on assets for the first nine months of 1998 was
1.00% as compared to 1.42% a year ago. The Company's annualized return on equity
totaled 9.38% and 12.99% for the nine months ended September 30, 1998 and 1997,
respectively.
Net Interest Income
Net interest income on a tax-equivalent basis for the third quarter of 1998
increased by 5.7% to $7.1 million from $6.8 million for the same period a year
ago. Despite declining interest rates, the Company has been able to maintain a
strong net interest margin by managing its interest rate spread and increasing
the volume of earning assets over interest-bearing liablities. The current
interest rate environment and competition for deposits continues to put pressure
on net interest margins. Average earning assets during the third quarter of 1998
increased by $93.5 million to $644.0 million from the third quarter of 1997,
while average interest-bearing liabilities grew by $79.4 million to $541.8
million over this same period. The Company's yield on average earning assets was
8.24%, down from 8.74% a year ago, while its cost of average interest-bearing
liabilities also decreased slightly from 4.61% to 4.57%.
<PAGE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
-------------------------------------------------------------------------------------------
Quarters Ended September 30,
-------------------------------------------------------------------------------------------
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> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities:
Taxable . . . . .
. . . . . . . . . . $ $ $ $ $ $
. . . . . . 93,622 1,578 6.69% 89,168 1,460 6.50% 79,036 1,157 6.45%
Tax-exempt(1) . .
. . . . . . . . . .
. . . . 74,599 1,405 7.47% 68,144 1,365 7.95% 68,556 1,415 8.32%
--------------------- -------------------- ---------------------
Total
securities . . .
. . . . . . . .
. . 168,221 2,983 7.04% 157,312 2,825 7.12% 147,592 2,572 7.32%
Loans, net. . .
. . . . . . . . .
. . . . . . . . .
. 461,579 10,260 8.82% 379,890 9,140 9.55% 352,188 8,210 9.33%
Federal funds sold . .
. . . . . . . . . . . .
. 11,974 121 4.01% 12,820 152 4.70% 9,986 103 6.56%
Interest-bearing
deposits - - - - - -
in other banks . .
. . . . . . . . . .
. . . . 2,227 11 1.96% 508 10 7.81% 1,187 15 6.02%
--------------------- -------------------- ---------------------
Total earning assets . .
. . . . . . 644,001 13,375 8.24% 550,530 12,127 8.74% 510,953 10,900 8.68%
Allowance for loan
losses . . . . . . . .
. . (5,319) (4,654) (4,624)
Total non-earning assets . . . .
. . . . . 57,889 45,627 46,596
=========== =========== ===========
Total assets . . . . .
. . . . . . . . . . . . $ $ $
. . 696,571 591,503 552,925
=========== =========== ===========
Liabilities &
Stockholders' Equity:
Interest-bearing
deposits:
Checking . . . . .
. . . . . . . . . . $ $ $ $ $ $
. . . . . 74,790 455 2.41% 60,012 405 2.68% 48,418 302 2.47%
Regular savings . .
. . . . . . . . . .
. . . 59,388 449 3.00% 52,448 409 3.09% 62,692 511 3.56%
Money market
savings . . . . . .
. . . . 62,477 530 3.37% 49,285 425 3.42% 53,857 439 3.23%
Certificates of
deposit: - - - - - -
$100,000 and over .
. . . . . . . . . .
. . . 71,041 968 5.41% 60,300 804 5.29% 53,318 652 5.03%
Under $100,000 . .
. . . . . . . . . .
. . . 231,804 3,243 5.55% 195,019 2,764 5.62% 172,986 2,483 5.72%
--------------------- -------------------- ---------------------
Total
interest-bearing - - - - - -
deposits . . . . . .
. . . . . . . . . . 499,500 5,645 4.48% 417,064 4,807 4.57% 391,271 4,387 4.54%
Other borrowings . . .
. . . . . . . . . . . .
. . 42,256 593 5.57% 45,328 568 4.97% 39,986 581 5.76%
--------------------- -------------------- ---------------------
Total
interest-bearing - - - - - -
liabilities . . . . .
. . . . . . . . . . 541,756 6,238 4.57% 462,392 5,375 4.61% 431,257 4,968 4.65%
- - - - - -
Non-interest
bearing
liabilities: - - -
Demand deposits . .
. . . . . . . . . .
. . 76,838 61,070 59,661
Other liabilities .
. . . . . . . . . .
. . . . . 6,657 5,465 5,137
Total liabilities . . . .
. . . . . . . . . 625,251 528,927 496,055
Stockholders' equity .
. . . . . . . . . . . .
. 71,320 62,576 56,870
----------- ----------- -----------
Total liabilities
and
stockholders' equity . . . . $ $ $
. . . . . . . 696,571 591,503 552,925
=========== =========== ===========
Net interest income . . . . . . $ $ $
. . . . . . . . 7,137 6,752 5,932
========== ========= ==========
Interest rate spread .
. . . . . . . . . . . .
. . 3.67% 4.13% 4.03%
Interest expense
as a percent
of average earning
assets . . . . . .
. . . 3.89% 3.93% 3.98%
Net interest margin . .
. . . . . . . . . . . .
. 4.39% 4.88% 4.76%
</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
September 30, 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
September 30, 1998
----------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
----------- ---------- ---------- ----------- ----------
(In thousands)
Earning Assets:
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income (3) . . . . . . . $ 100,629 $ 42,968 $174,893 $ 143,263 $ 461,753
Investment securities . . . . . . . . . . . . . 810 3,137 12,063 3,402 19,412
Securities available for sale . . . . . . . . . 1,584 6,044 47,010 96,578 151,216
Federal funds sold . . . . . . . . . . . . . . 8,650 - - - 8,650
Other short-term investments . . . . . . . . . 400 - 99 - 499
----------- ---------- ---------- ----------- ----------
Total earning assets . . . . . . . . . . . . . 112,073 52,149 234,065 243,243 641,530
----------- ---------- ---------- ----------- ----------
Interest-Bearing Liabilities:
Interest checking (2) . . . . . . . . . . . . . $ - $ - $ 75,710 $ - $ 75,710
Regular savings (2) . . . . . . . . . . . . . . 6,090 - 53,281 - 59,371
Money market savings . . . . . . . . . . . . . 61,762 - - - 61,762
Certificates of deposit:
$100,000 and over . . . . . . . . . . . . . . 21,094 30,498 19,413 - 71,005
Under $100,000 . . . . . . . . . . . . . . . 43,171 84,842 110,079 - 238,092
Short-term borrowings . . . . . . . . . . . . . 12,788 - - - 12,788
Long-term borrowings . . . . . . . . . . . . . - 5,150 16,600 6,605 28,355
----------- ---------- ---------- ----------- ----------
Total interest-bearing
liabilities . . . . . . . . . . . . . . . . . . . 144,905 120,490 275,083 6,605 547,083
----------- ---------- ---------- ----------- ----------
Period gap . . . . . . . . . . . . . . . . . . . . (32,832) (68,341) (41,018) 236,638
Cumulative gap . . . . . . . . . . . . . . . . . $ (32,832) $(101,173) $(142,191) $ 94,447 $ 94,447
=========== ========== ========== =========== ==========
Ratio of cumulative gap to
total earning assets . . . . . . . . . . . . -5.12% -15.77% -22.16% 14.72%
=========== ========== ========== ===========
</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, including loan and deposit growth rates, are
derived from seasonal trends and management's outlook, as are the assumptions
used to project yields and rates for new loans and deposits. All maturities,
calls and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different asset and liability accounts move
differently when the prime rate changes and are accounted for in the different
rate scenarios.
The following table represents the interest rate sensitivity on net interest
income for the Company using different rate scenarios:
% Change in
Change in Prime Rate Net Interest Income
-------------------- -------------------
+200 basis points +3.1%
Flat 0
-200 basis points -3.3%
Market Value Simulation
Market value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Market values
are calculated based on discounted cash flow analysis. The net market value is
the market value of all assets minus the market value of all liabilities. The
change in net market value over different rate environments is an indication of
the longer term repricing risk in the balance sheet. The same assumptions are
used in the market value simulation as in the earnings simulation.
The following chart reflects the change in net market value over different
rate environments(dollars in thousands):
Change in Prime Rate Change in Net Market Value
-------------------- --------------------------
+200 basis points $ -9,722
+100 basis points -538
Flat 498
-100 basis points 17,862
-200 basis points 26,701
<PAGE>
Provision for Possible Loan Losses
The provision for possible loan losses totaled $1,479,000 for the third
quarter of 1998, up from $310,000 for the third quarter of 1997. The provision
for the first nine months of 1998 totaled $2,394,000, up from $730,000 a year
ago. These provisions reflect a special provision of $975,000 recorded in the
third quarter of 1998 related to a single credit relationship. Management does
not feel this loss is indicative of any decline in the overall quality of the
Company's loan portfolio. (See Asset Quality)
Non-Interest Income
Non-interest income for the nine months ended 1998 totaled $3.8 million, up
from $3.6 a year ago. This increase is due principally to the increases in
income from mortgage brokerage and was partially offset by net gains of
approximately $424,000 on sales of real estate owned in the first nine months of
1997. The remaining increase in non-interest income is due to increases in
service fees on deposit accounts, increases in other service fees and increased
brokerage commissions. Management continues to seek additional sources of
non-interest income, including increased emphasis on its credit card operations,
mortgage banking activities and brokerage services.
Non-Interest Expense
Non-interest expense increased by 18.0% for the nine months of 1998,
totaling $15.0 million as compared to $12.7 million for 1997. Personnel costs
comprised much of this change, increasing approximately 17.0% over 1997, due
principally to the Signet branch acquisition and continued growth. The remaining
cost is attributable to infrastructure associated with the consolidation of
certain functions and the development and introduction of new products and
delivery systems, which are expected to enhance future earnings through
increased revenue and/or improved efficiencies. The Company continues to stress
budgetary expense controls.
Financial Condition
Total assets as of September 30, 1998 were $699.0 million, an increase of
13.5% from $615.7 million at December 31, 1997 and 16.6% from $599.2 million at
September 30, 1997. Asset growth was fueled by the Signet branch acquisition and
steady loan demand, as loans totaled $464.5 million at September 30, 1998, an
increase of 16.3% from $399.4 million at December 31, 1997, and 19.7% from
$388.1 million at September 30, 1997. Stockholders' equity totaled $72.9 million
at September 30, 1998 which represents a book value of $9.72 per share.
Asset and deposit growth in the first nine months were principally a result
of the acquisition of the former Signet branches which added $62.5 million in
deposits to the balance sheet. Proceeds from this acquisition were invested in a
variety of investment products including government securities, mortgage backed
securities and whole loans. These branches add significantly to the Company's
presence in the Northern Neck region, and although they may cause a short-term
drag on earnings, they provide significant potential for growth in market share.
<PAGE>
Deposit growth, irrespective of the Signet acquisition, remained steady.
Total deposits at September 30, 1998 were $580.1 million, up 18.5% from $489.6
million at December 31, 1997 and 20.3% from $482.1 million a year earlier. Other
borrowings totaled $41.1 million at September 30, 1998 a 19.3% decrease over
$51.0 million at the end of 1997 and a 8.6% decrease from $45.0 million at
September 30, 1997. The Company continues to utilize other borrowings to
supplement deposit growth and, periodically, engages in wholesale leverage
transactions. These wholesale leverage transactions have typically been executed
at spreads of approximately 150 to 200 basis points and, although they have
negatively impacted the Company's net interest margin (as a percentage), they
have had a positive effect on earnings and return on equity.
Continued competition for deposits, particularly as it impacts certificate
of deposit rates, is reflected in the deposit mix. Management continues to focus
on increasing lower cost deposit products, including non-interest bearing demand
deposits and savings accounts. Increased competition for funds, particularly by
non-banks, continues to contribute to a narrowing of the net interest margin
which has been largely offset by increases in the volume of earning assets.
Asset Quality
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio. The level of credit losses
is affected by general economic trends as well as conditions affecting
individual borrowers. The allowance is also subject to regulatory examinations
and determination as to adequacy, which may take in to account such factors as
the methodology used to calculate the allowance and comparison to peer groups.
The allowance for loan losses totaled $6.1 million at September 30, 1998 or
1.20% of total loans, as compared to 1.15% at December 31, 1997 and 1.16% at
September 30, 1997. At September 30, 1998, non-performing assets of $4.8 million
included foreclosed properties of $1.0 million and a $1.0 million investment in
income-producing property.
September 30, December 31, September 30,
1998 1997 1997
----- ---- ----
Non-accrual loans $2,791 $2,140 $ 284
Foreclosed properties 1,039 1,850 1,876
Real estate investment 960 1,050 2,017
------ ----- -------
Non-performing assets $4,790 $5,040 $4,177
====== ====== ======
Allowance for loan
losses $6,105 $4,798 $4,668
Allowance as % of total
loans 1.20% 1.15% 1.16%
Non-performing assets to
loans and foreclosed
properties 1.20% 1.24% 1.10%
<PAGE>
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 September 30, 1998, the Company's ratio of total capital to risk-weighted
assets was 13.68% and its ratio of Tier 1 capital to risk-weighted assets was
12.50%. Both ratios exceed the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at
September 30, 1998:
Tier 1 capital $ 64,579
Tier 2 capital $ 6,104
Total risk-based capital $ 70,683
Total risk-weighted assets $ 516,599
Capital Ratios:
Tier 1 risk-based capital ratio 12.50%
Total risk-based capital ratio 13.68%
Leverage ratio (Tier I capital to
average adjusted total assets) 9.27%
Equity to assets ratio 9.82%
The Company's book value per share at September 30, 1998 was $9.72.
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.
<PAGE>
At September 30, 1998, cash, interest-bearing deposits in other banks,
federal funds sold, securities available for sale and loans maturing or
repricing in one year were 53.5% of total earning assets. At September 30, 1998
approximately $143.6 million or 31.1% of total loans would mature or reprice
within the next year. The Company utilizes federal funds purchased, FHLB
advances, securities sold under agreements to repurchase and customer repurchase
agreements, in addition to deposits, to fund the growth in its loan portfolio,
and to fund securities purchases, periodically in wholesale leverage
transactions.
Year 2000
The Year 2000 issue affects virtually all companies and organizations. Many
companies have existing computer applications which use only two digits to
identify a year in the date field. These applications were designed and
developed without considering the impact of the change of the century. If not
corrected these computer applications may fail or create erroneous results in
the Year 2000. Because the Company relies on information processing and
communications to conduct much of its business, the Year 2000 issue is of
concern to the company.
The Company has developed a Corporate Year 2000 team involving associates from
all areas in the organization. The team has been in-place since September of
1997. The project's scope includes all information technology (IT), both
internally developed and purchased from third parties, material vendors,
producer and customer relationships.
The Company has completed the awareness and assessment phases for its material
IT systems ("mission-critical systems") and is currently in the remediation and
testing phases. The Company anticipates that it will complete the remediation
and testing phases for its mission-critical IT systems and these systems are
targeted to be made Year 2000 compliant and validated by December 31, 1998.
The Company has been in contact with its material business partners to determine
their state of readiness and the potential impact on the Company. The Company
has identified the following general categories of business partners as material
to the Company's ability to conduct its operations: Software, hardware and
telecommunication providers, other banks and investment brokers, major deposit
and loan customers and utilities.
Where the Company has determined that the relationship with a business partner
is material to its ability to conduct normal operations, the Company has sent
letters to the business partner requesting an update on the status of its Year
2000 initiative. Where deemed necessary, the Company is following-up with the
business partner to obtain further information. The Company has not
currently identified a material business partner that will be noncompliant.
However, there can be no assurances that all material business partners will be
compliant and such noncompliance could have a material effect on the Company's
financial position and results of operations.
<PAGE>
The Company has also devoted significant time and effort in developing customer
awareness, including seminars designed to both educate and reassure its
customers and the general public.
Although it expects all of its mission-critical IT systems to be Year 2000
compliant by December 31, 1998, the Company is developing a contingency plan for
noncompliance of its mission-critical IT systems. If the Company becomes aware
of noncompliant business partners, one option will be to evaluate using other
vendors. The Company expects its review of material business partners to be
completed by December 31, 1998. At that time the Company will be able to
completely evaluate the need to replace any material business partners. In some
instances the establishment of a contingency plan is not possible or is cost
prohibitive. In these situations, noncompliance by the Company or its material
business partners could have a material adverse impact on the Company's
financial position and results of operations.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to the infrastructure and facilities enhancements
necessary to prepare its systems for the Year 2000. Testing and conversion of
system applications is expected to cost approximately $250,000. This estimate
includes some costs, such as the purchase of computer hardware, that will
qualify as depreciable assets for accounting purposes, with the related
depreciation expense recognized over the estimated lives of the related assets.
However, the majority of the costs will be expensed as incurred. A significant
portion of these costs are not likely to be incremental costs, but rather a
redeployment of existing information technology resources. Approximately $25,000
of this amount was incurred as of September 30, 1998. The remainder of the
estimated cost of the project is expected to be incurred in the fourth quarter
of 1998 and in 1999. All costs of the Year 2000 project have been expensed as
incurred.
<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)
November 16, 1998 s/ G. William Beale
- - ------------------------ --------------------------------
(Date) G. William Beale,
President, Chief Executive Officer
and Director
November 16, 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 /September 30, 1998
Exhibit
No. Description
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession- Not Applicable
4 Instruments defining the rights of security holders,
including indentures Not Applicable
10 Material contracts Not Applicable
11 Statement re: computation of per share earnings Not Applicable
15 Letter re: unaudited interim financial
information Not Applicable
18 Letter re: change in accounting principles Not Applicable
19 Previously unfiled documents Not Applicable
20 Report furnished to security holders Not Applicable
22 Published report re: matters submitted to
vote of security holders None
23 Consents of experts and counsel Not Applicable
24 Power of Attorney Not Applicable
99 Additional Exhibits None
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 19,509
<INT-BEARING-DEPOSITS> 499
<FED-FUNDS-SOLD> 8,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 151,216
<INVESTMENTS-CARRYING> 19,412
<INVESTMENTS-MARKET> 19,801
<LOANS> 464,544
<ALLOWANCE> 6,105
<TOTAL-ASSETS> 698,953
<DEPOSITS> 580,122
<SHORT-TERM> 12,788
<LIABILITIES-OTHER> 4,780
<LONG-TERM> 28,355
14,998
0
<COMMON> 0
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