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, 1999
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.)
212 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.
YES X NO _________________
As of November 30, 1999, Union Bankshares Corporation had 7,475,220
shares of Common Stock outstanding.
<PAGE>
UNION BANKSHARES CORPORATION
FORM 10-Q
September 30, 1999
<TABLE>
<CAPTION>
INDEX
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PART 1 - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and 1998 (Unaudited)
and December 31, 1998 (Audited)........................................... 1
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended September 30, 1999 and 1998 (Unaudited) 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (Unaudited)................. 3
Notes to Consolidated Financial Statements (Unaudited)............................. 4-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 9-17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 18-19
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................................... 20
Signatures.................................................................................. 21
Index to Exhibits........................................................................... 22
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands) September 30, December 31, September 30,
ASSETS 1999 1998 1998
---- ---- ----
<S> <C>
(Unaudited) (Unaudited)
Cash and cash equivalents:
Cash and due from banks $ 19,187 $ 39,607 $ 19,509
Interest-bearing deposits in other banks 805 1,413 499
Federal funds sold - - 8,650
--------------- -------------- --------------
Total cash and cash equivalents 19,992 41,020 28,658
--------------- -------------- --------------
Securities available for sale, at fair value 204,537 161,228 151,216
Investment securities
fair value of $10,512, $16,452 and $19,801, respectively 10,205 16,142 19,412
--------------- -------------- --------------
Total securities 214,742 177,370 170,628
--------------- -------------- --------------
Loans, net of unearned income 526,681 479,822 464,544
Less allowance for loan losses 7,677 6,407 6,105
--------------- -------------- --------------
Net loans 519,004 473,415 458,439
--------------- -------------- --------------
Bank premises and equipment, net 23,328 21,057 20,735
Other real estate owned 2,126 1,101 1,039
Other assets 27,949 19,984 19,454
--------------- -------------- --------------
Total assets $ 807,141 $ 733,947 $ 698,953
=============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing demand deposits $ 83,143 $ 81,329 $ 74,182
Interest-bearing deposits:
Savings accounts 61,287 61,281 59,371
NOW accounts 91,858 81,514 75,710
Money market accounts 61,268 64,331 61,762
Time deposits of $100,000 and over 93,547 80,926 71,005
Other time deposits 233,875 238,248 238,092
--------------- -------------- --------------
Total interest-bearing deposits 541,835 526,300 505,940
--------------- -------------- --------------
Total deposits 624,978 607,629 580,122
--------------- -------------- --------------
Short-term borrowings 53,363 19,476 12,788
Long-term borrowings 47,105 28,325 28,355
Other liabilities 11,881 5,158 4,780
--------------- -------------- --------------
Total liabilities 737,327 660,588 626,045
--------------- -------------- --------------
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares;
issued and outstanding, 7,475,220, 7,507,394 and 7,142,984 shares,
respectively 14,950 15,015 14,998
Surplus - 311 337
Retained earnings 58,344 55,690 54,957
Accumulated other comprehensive income (losses)
Net unrealized gains (losses) on securities available for sale,
net of taxes (3,480) 2,343 2,616
--------------- -------------- --------------
Total stockholders' equity 69,814 73,359 72,908
--------------- -------------- --------------
Total liabilities and stockholders' equity $ 807,141 $ 733,947 $ 698,953
=============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- --------------------------
<S> <C>
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 11,080 $ 10,260 $ 31,820 $ 29,982
Interest on securities:
U.S. government and agency securities 410 361 1,183 1,182
Obligations of states and political subdivisions 1,272 1,049 3,617 3,066
Other securities 1,508 1,115 4,041 3,156
Interest on Federal funds sold 74 121 162 420
Interest on interest-bearing deposits in other banks 12 11 41 57
-------------- ----------- ----------- -----------
Total interest income 14,356 12,917 40,864 37,863
-------------- ----------- ----------- -----------
Interest expense:
Interest on deposits 5,644 5,645 16,986 16,143
Interest on other borrowings 1,509 593 3,033 1,985
-------------- ----------- ----------- -----------
Total interest expense 7,153 6,238 20,019 18,128
-------------- ----------- ----------- -----------
Net interest income 7,203 6,679 20,845 19,735
Provision for loan losses 513 1,479 2,026 2,394
-------------- ----------- ----------- -----------
Net interest income after provision
for loan losses 6,690 5,200 18,819 17,341
-------------- ----------- ----------- -----------
Other income:
Service charges on deposit accounts 786 754 2,216 2,093
Other service charges and fees 441 493 1,263 995
Gains (losses) on securities transactions, net (1) (6) 18 (31)
Gains (losses) on sales of other real estate owned
and bank premises, net (15) (5) (17) 11
Other operating income 2,058 114 7,290 715
-------------- ----------- ----------- -----------
Total other income 3,269 1,350 10,770 3,783
-------------- ----------- ----------- -----------
Other expenses:
Salaries and benefits 4,869 2,776 14,376 7,959
Occupancy expenses 610 315 1,528 930
Furniture and equipment expenses 604 479 1,657 1,329
Other operating expenses 2,375 1,777 6,570 4,811
-------------- ----------- ----------- -----------
Total other expenses 8,458 5,347 24,131 15,029
-------------- ----------- ----------- -----------
Income before income taxes and cumulative effect of accounting change 1,501 1,203 5,458 6,095
Income tax expense 119 104 825 1,041
-------------- ----------- ----------- -----------
Income before effect of accounting change 1,382 1,099 4,633 5,054
Cumulative effect of change in accounting method, net - - (104) -
-------------- ----------- ----------- -----------
Net income $ 1,382 $ 1,099 $ 4,529 $ 5,054
============== =========== =========== ===========
Other Comprehensive income (losses)
Unrealized holding gains (losses) arising during the period
net of taxes of($584) and ($1183) for three and
nine months 1999 and $301 and $309 for three and
nine months 1998 $ (1,717) $ 589 $ (3,468) $ 2,636
Less reclassification adjustments for gains (losses)
included in net income net of taxes of $0 and $6 for
three and nine months 1999 and ($2) and ($11) for three
and nine months 1998 - (4) 12 (20)
-------------- ----------- ----------- -----------
Total Other Comprehensive Income (losses) (1,717) 585 (3,480) 2,616
-------------- ----------- ----------- -----------
Comprehensive income (losses) $ (335) $ 1,684 $ 1,049 $ 7,670
============== =========== =========== ===========
Basic earnings per share
Before cumulative effect of change in accounting $ 0.18 $ 0.14 $ 0.62 $ 0.69
Cumulative effect of change in accounting method - - (0.02) -
-------------- ----------- ----------- -----------
Net income $ 0.18 $ 0.14 $ 0.60 $ 0.69
============== =========== =========== ===========
Diluted earnings per share
Before cumulative effect of change in accounting $ 0.18 $ 0.14 $ 0.62 $ 0.69
Cumulative effect of change in accounting method - - (0.02) -
-------------- ----------- ----------- -----------
Net income $ 0.18 $ 0.14 $ 0.60 $ 0.69
============== =========== =========== ===========
Dividends per share $ 0.20 $ 0.19 $ 0.20 $ 0.19
============== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September\ 30, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C>
Operating activities:
Net income $ 4,529 $ 5,054
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment 1,463 1,170
Amortization of intangibles 467 269
Provision for loan losses 2,026 2,394
Gains on sales of securities available for sale (18) 31
(Gains) Losses on sale of other real estate owned 17 (11)
Increase in other assets (6,160) (7,879)
Increase (Decrease) in other liabilities 6,721 (2,256)
------------ ------------
Net cash and cash equivalents used in
operating activities 9,045 (1,228)
------------ ------------
Investing activities:
Net increase in securities (46,379) (7,834)
Net increase in loans (47,926) (66,330)
Acquisition of bank premises and equipment (3,736) (4,927)
Proceeds from sales of other real estate owned 190 767
------------ ------------
Net cash and cash equivalents used in
investing activities (97,851) (78,324)
------------ ------------
Financing activities:
Net increase (decrease) in non-interest-bearing deposits 1,814 8,202
Net increase in interest-bearing deposits 15,535 82,365
Net increase(decrease) in short-term borrowings 33,887 (14,457)
Increase in long-term borrowings 18,870 4,775
Issuance of common stock 1,005 10
Repurchase of common stock (1,915) -
Cash dividends paid (1,328) (1,231)
Repayment of long-term borrowings (90) (135)
------------ ------------
Net cash and cash equivalents provided by
financing activities 67,778 79,529
------------ ------------
Increase (Decrease) in cash and cash equivalents (21,028) (23)
Cash and cash equivalents at beginning of period 41,020 28,681
------------ ------------
Cash and cash equivalents at end of period $ 19,992 $ 28,658
============ ============
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest 17,522 17,057
Income taxes 825 1,041
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
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, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 1998 Annual Report to Shareholders. Certain previously reported
amounts have been reclassified to conform to current period presentation.
As of January 1999, the Company adopted SOP 98-5 - Reporting on the Costs
of Start-up Activities. This SOP requires that the costs of start-up
activities be expensed as incurred. This is a change from past practices,
which allowed the amortization of these costs over a specified time. As a
result, two additional lines are on the Consolidated Statements of Income
and Comprehensive Income: Income before effect of accounting change and
Cumulative effect of change in accounting method, net of taxes. This one
time charge impacted the first quarter and the nine months ended September
30, 1999 as a result of costs accumulated in 1998 related to the
organization of the Bank of Williamsburg (See Management Discussion).
2. ALLOWANCE FOR LOAN LOSSES
-------------------------
The following summarizes activity in the allowance for loan losses for the
nine months ended September 30, (in thousands):
1999 1998
---- ----
Balance, January 1 $ 6,406 $4,798
Provisions charged to operations 2,026 2,394
Recoveries credited to allowance 264 189
Loans charged off (1,019) (1,276)
------- ------
Balance, September 30 ` $ 7,677 $6,105
======= ======
4
<PAGE>
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 7,475,220 and
7,497,394 for the three months ended September 1999 and 1998 and 7,499,309
and 7,486,203 for the nine months ended September 30, 1999 and 1998.
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 7,495,991 and
7,517,930 for the three months ended September 30, 1999 and 1998 and
7,530,415 and 7,518,120 for the nine months ended September 30, 1999 and
1998.
4. PURCHASE OF MORTGAGE CAPITAL INVESTORS, INC.
---------------------------------------------
On February 11, 1999 the Company completed the purchase of Mortgage
Capital Investors, Inc., a mortgage origination business with 17 locations
in the states of Virginia, Maryland, Delaware, North Carolina, South
Carolina and Florida. This business was purchased to enhance the Company's
existing mortgage operations and increase non-interest income. It
contributed approximately $400,418 in net loss for the period February 11
to September 30, 1999. This acquisition was accounted for under the
purchase method of accounting. The purchase price was $5,000,000. At
closing the Company paid $1,000,000 in cash and $1,000,000 in common
stock. In addition, $3,000,000 is to be distributed over the next three
years in cash and common stock. At closing 61,490 shares were issued with
cash paid for fractional shares. As a result of the transaction, goodwill
in the amount of $1,044,887 was recorded and is being amortized using the
straight line method over 10 years at $104,488 per year.
5. SEGMENT REPORTING DISCLOSURES
-----------------------------
Union Bankshares Corporation has two reportable segments: traditional full
service community banks and mortgage loan origination business. The
community bank business is made up of four banks which provide loan,
deposit, investment, and trust services to retail and commercial customers
throughout their locations in Virginia. The mortgage company provides a
variety of mortgage loan products in a multi-state market. These loans are
originated and sold principally in the secondary market through purchase
commitments from investors which subject the company to only de minimis
market risk.
Profit and loss is measured by net income after taxes including realized
gains and losses on the Company's investment portfolio. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. Intersegment transactions are
recorded at cost and eliminated as part of the consolidation process.
Both of the Company's reportable segments are service based. While the
banks offer a distribution and referral network for the mortgage services,
the mortgage company does not offer a similar network for the banks due
largely to the lack of overlapping geographic markets. Another major
distinction is the source of income. The mortgage business is a fee based
business while the banks are driven principally by net interest income.
5
<PAGE>
The following is a summary of segment profit (dollars in thousands).
Segment information for periods prior to 1999 are not presented, as the
Company's mortgage banking operation prior to the acquisition of MCI was
not significant:
6
<PAGE>
Nine Months ended September 30, 1999
<TABLE>
<CAPTION>
Banks Mortgage Total
---------------------------------------------------
<S> <C>
Net interest income after provision for loan loss $ 19,225 $ (191) $ 19,034
Total non-interest income 3,980 6,340 10,320
Total other expenses 15,366 6,756 22,122
Segment profit after taxes 6,101 (400) 5,701
Total assets 797,755 8,202 805,957
</TABLE>
The following summary reconciles segment profit (loss) to income after taxes
(dollars in thousands):
Net Income:
Segment profit $ 5,701
Other (1,172)
--------
Net income $ 4,529
========
Three Months ended September 30, 1999
<TABLE>
<CAPTION>
Banks Mortgage Total
---------------------------------------------------
<S> <C>
Net interest income after provision for loan loss $ 6,963 $ (191) $ 6,772
Total non-interest income 1,326 1,511 2,837
Total other expenses 5,332 2,126 7,458
Segment profit after taxes 2,345 (532) 1,813
Total assets 797,755 8,202 805,957
</TABLE>
The following summary reconciles segment profit (loss) to income after taxes
(dollars in thousands):
Net Income:
Segment profit $ 1,813
Other (431)
--------
Net income $ 1,382
========
<PAGE>
6. 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. In June of 1999 the FASB
issued SFAS 137, "Accounting for derivative instruments hedging
activities--deferral of the effective date of FASB Statement 133". SFAS
137 delayed the effective date of SFA3133 until fiscal years beginning
after June 15, 2000. As such, the effective date for the Company will be
January 1, 2001. 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.
7. FORWARD- LOOKING STATEMENTS
----------------------------
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Although the Company believes that its expectations with
respect to certain forward-looking statements are based upon reasonable
assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results, performance or
achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
8
<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, Rappahannock National Bank, the Bank of Williamsburg ,Union Investment
Services, Inc., and Mortgage Capital Investors. The four subsidiary banks, Union
Bank & Trust Company, Northern Neck State Bank, Rappahannock National Bank and
the Bank of Williamsburg 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. Mortgage Capital Investors
provides a wide array of mortgage products through its 17 offices in Virginia,
Maryland, Delaware, North Carolina, South Carolina and Florida.
The Company's primary trade area stretches from Rappahannock County to
Fredericksburg, south to Hanover County, east to Williamsburg and throughout the
Northern Neck area of Virginia. The Corporate Headquarters is located in Bowling
Green, Virginia. Through its banking subsidiaries, the Company operates 29
branches in its primary trade area. In addition to the primary banking trade
area, the addition of Mortgage Capital Investors expands the Company's mortgage
origination business to five additional states.
In February 1999 the Company opened the Bank of Williamsburg in
temporary headquarters in the Williamsburg Crossing Shopping Center. This
location is one of the faster growing areas of Virginia and it is expected that
this bank will contribute to the profit of the Company within its first two
years. Also in February 1999, the Company acquired Mortgage Capital Investors, a
mortgage origination company based in Springfield, Virginia. In June 1999, after
the retirement of King George State Bank's president, the Company merged its
King George State Bank subsidiary into its Union Bank & Trust subsidiary to
better leverage its presence in the Fredericksburg, Virginia market and reduce
costs.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of 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 third quarter of 1999 was $1.4 million, up from $1.1
million for the same period in 1998. The increase in net income for the period
is due principally to improvement in the interest margin and a decrease of
$966,000 in the provision for loan loss over the third quarter of 1998. Diluted
earnings per share amounted to $.18 in the third quarter of 1999, as compared to
$.14 in the third quarter of 1998. The Company's annualized return on average
assets for the third quarter of 1999 was .68% as compared to .63% a year ago.
The Company's annualized return on average equity totaled 7.83% and 6.06% for
the three months ended September 30, 1999 and 1998, respectively.
9
<PAGE>
Net income for the first nine months of 1999 before the cumulative effect of a
change in accounting was $4.6 million, down 8.3% from $5.1 million a year ago.
During the first quarter the Company adopted a new accounting standard
(Statement of Position 98-5) which required it to expense certain previously
capitalized start-up costs totaling $158,000, or $104,000 net of applicable
taxes. Earnings per share before the cumulative adjustment for a change in
accounting method on a diluted basis decreased to $.62 from $.69 for the same
nine months in 1998. Diluted earnings per share was $.60 in the first nine
months of 1999, as compared to $.69 in the first nine months of 1998. The
Company's annualized return on average assets for the first nine months of 1999
was .78% as compared to 1.00% a year ago. The Company's annualized return on
average equity totaled 8.35% and 9.58% for the nine months ended September 30,
1999 and 1998, respectively.
Rising interest rates over the last two quarters had a positive impact on the
Company's interest rate spread and net interest margin as interest earning
assets repriced faster than most interest bearing liabilities in the third
quarter while deposit interest rates remained fairly flat. A faster growth in
earning assets versus deposits and the resultant increase in borrowed funds
leveled out most of the positive impact. Rising interest rates negatively
impacted our mortgage origination business income which slowed again in the
third quarter.
Recent expansion activities, including branch acquisitions and de novo openings,
combined with the addition of a new mainframe and imaging software/hardware have
generated a short term drag on earnings. Net interest income growth and a
slowing of the growth in other infrastructure costs, principally continued
investments in technology and people, contributed to an increase in earnings for
the quarter for the core banking business. While the benefits of technology
investments tend to lag behind the costs, the long term benefit is significant
in terms of the Company's ability to compete effectively in the changing
financial services marketplace.
Also of particular significance during the first nine months was the opening of
a new bank subsidiary, the Bank of Williamsburg. As with most de novo
operations, the Bank of Williamsburg is expected to incur operating losses for
the first year, becoming profitable during the second year of operation. The
Bank's performance since opening in a temporary location has met management's
expectations and is expected to improve upon moving into its permanent location
which is under construction and should be complete in early 2000.
Net Interest Income
Net interest income on a tax-equivalent basis for the third quarter of
1999 increased by 9.4% to $7.8 million from $7.1 million for the same period a
year ago. By managing its interest rate spread and increasing the volume of
earning assets over interest-bearing liabilities, the Company has been able to
maintain a strong net interest margin. The current interest rate environment and
competition for deposits continue to put pressure on net interest margins. In
addition, the subsidiary banks have periodically engaged in wholesale leverage
transactions, borrowing funds to invest in securities at lower margins of 150 -
200 basis points. Although such transactions increase net income and return on
equity, they do reduce the net interest margin. As of September 30, 1999 such
transactions accounted for $15 million of the Company's total borrowings. Also,
the opening of the Bank of Williamsburg with most of its capital invested in the
investment portfolio has contributed to the narrowed interest margin. Average
10
<PAGE>
earning assets during the third quarter of 1999 increased by $85.5 million to
$729.0 million from the third quarter of 1998, while average interest-bearing
deposits grew by $43.2 million to $542.7 million over this same period. The
Company's yield on average earning assets was 8.14%, down 10 basis points from
8.24% a year ago, while its cost of average interest-bearing liabilities also
decreased 15 basis points from 4.57% to 4.42%.
11
<PAGE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
----------------------------------------------------------------------------------------
Three Months September 30,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------
<S> <C>
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . . . $ 122,668 $ 2,011 6.50% $ 93,622 $ 1,578 6.69%
Tax-exempt(1) . . . . . . . . . . 88,963 1,788 7.98% 74,599 1,405 7.47%
------------------------------ ----------------------------
Total securities . . . . . . . 211,631 3,799 7.12% 168,221 2,983 7.04%
Loans, net. . . . . . . . . . . . . . . 516,681 11,080 8.51% 461,579 10,260 8.82%
Federal funds sold . . . . . . . . . . . 616 73 47.02% 11,974 121 4.01%
Interest-bearing deposits
in other banks . . . . . . . . . . 540 12 8.82% 2,227 11 1.96%
------------------------------ ----------------------------
Total earning assets . . . . . 729,468 14,964 8.14% 644,001 13,375 8.24%
Allowance for loan losses . . . . . . . . (7,497) (5,319)
Total non-earning assets . . . . . . . . 84,732 57,889
---------------- --------------
Total assets . . . . . . . . . . . . . . $ 806,703 $ 696,571
================ ==============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . $ 90,340 479 2.10% $ 74,790 455 2.41%
Regular savings . . . . . . . . . . 61,410 419 2.71% 59,388 449 3.00%
Money market savings . . . . . . . 62,501 490 3.11% 62,477 530 3.37%
Certificates of deposit:
$100,000 and over . . . . . . . . . 93,230 1,142 4.86% 71,041 968 5.41%
Under $100,000 . . . . . . . . . . 235,198 3,115 5.25% 231,804 3,243 5.55%
------------------------------ ----------------------------
Total interest-bearing
deposits . . . . . . . . 542,679 5,645 4.13% 499,500 5,645 4.48%
Other borrowings . . . . . . . . . . . . 100,064 1,509 5.98% 42,256 593 5.57%
------------------------------ ----------------------------
Total interest-bearing
liabilities . . . . . . . 642,743 7,154 4.42% 541,756 6,238 4.57%
-------------- --------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . 89,149 76,838
Other liabilities . . . . . . . . . 2,716 6,657
---------------- --------------
Total liabilities . . . . . . . 734,608 625,251
Stockholders' equity . . . . . . . . . . 72,095 71,320
---------------- --------------
Total liabilities and
stockholders' equity . . . . . . . $ 806,703 $ 696,571
================ ==============
Net interest income . . . . . . . . . . . $ 7,810 $ 7,137
============== ==============
Interest rate spread . . . . . . . . . . 3.72% 3.67%
Interest expense as a percent
of average earning assets . . . . . 3.89% 3.89%
Net interest margin . . . . . . . . . . . 4.25% 4.39%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
----------------------------------------------
<S> <C>
Assets:
Securities:
Taxable . . . . . . . . . . . . . . . . $ 89,168 $ 1,460 6.50%
Tax-exempt(1) . . . . . . . . . . . . . 68,144 1,365 7.95%
-------------------------------
Total securities . . . . . . . . . 157,312 2,825 7.12%
Loans, net. . . . . . . . . . . . . . . . . . 379,890 9,140 9.55%
Federal funds sold . . . . . . . . . . . . . 12,820 152 4.70%
Interest-bearing deposits
in other banks . . . . . . . . . . . . . 508 10 7.81%
-------------------------------
Total earning assets . . . . . . . . 550,530 12,127 8.74%
Allowance for loan losses . . . . . . . . . . (4,654)
Total non-earning assets . . . . . . . . . . . 45,627
----------------
Total assets . . . . . . . . . . . . . . . . . $ 591,503
================
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . . . $ 60,012 405 2.68%
Regular savings . . . . . . . . . . . . 52,448 409 3.09%
Money market savings . . . . . . . . . . 49,285 425 3.42%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . 60,300 804 5.29%
Under $100,000 . . . . . . . . . . . . . 195,019 2,764 5.62%
-------------------------------
Total interest-bearing
deposits . . . . . . . . . . . 417,064 4,807 4.57%
Other borrowings . . . . . . . . . . . . . . . 45,328 568 4.97%
-------------------------------
Total interest-bearing
liabilities . . . . . . . . . 462,392 5,375 4.61%
---------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . 61,070
Other liabilities . . . . . . . . . . . 5,465
----------------
Total liabilities . . . . . . . . . 528,927
Stockholders' equity . . . . . . . . . . . . . 62,576
----------------
Total liabilities and
stockholders' equity . . . . . . . . . . $ 591,503
================
Net interest income . . . . . . . . . . . . . $ 6,752
===============
Interest rate spread . . . . . . . . . . . . . 4.13%
Interest expense as a percent
of average earning assets . . . . . . . 3.93%
Net interest margin . . . . . . . . . . . . . 4.88%
</TABLE>
(1) Income and yields are reported on a taxable equivalent basis.
<PAGE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
--------------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------------------------------
<S> <C>
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . $ 117,934 $ 5,464 6.19% $ 93,858 $ 4,575 6.52%
Tax-exempt(1) . . . . . . . . 86,984 5,115 7.86% 72,959 4,306 7.89%
----------------------------- -----------------------------
Total securities . . . . . 204,918 10,579 6.90% 166,817 8,881 7.12%
Loans, net. . . . . . . . . . . . . 498,142 31,820 8.54% 441,699 30,010 9.08%
Federal funds sold . . . . . . . . . 2,976 162 7.28% 10,384 420 5.41%
Interest-bearing deposits
in other banks . . . . . . . . 1,073 41 5.11% 1,652 58 4.68%
----------------------------- -----------------------------
Total earning assets . . . 707,109 42,602 8.06% 620,552 39,369 8.48%
Allowance for loan losses . . . . . . (7,093) (5,121)
Total non-earning assets . . . . . . 82,672 60,197
---------------- ---------------
Total assets . . . . . . . . . . . . $ 782,688 $ 675,628
================ ===============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . $ 86,651 1,350 2.08% $ 71,090 1,274 2.40%
Regular savings . . . . . . . . 59,682 1,208 2.71% 57,686 1,314 3.05%
Money market savings . . . . . 63,511 1,565 3.29% 60,311 1,542 3.42%
Certificates of deposit:
$100,000 and over . . . . . . . 91,694 3,491 5.09% 68,424 2,774 5.42%
Under $100,000 . . . . . . . . 236,159 9,372 5.31% 221,061 9,233 5.58%
----------------------------- -----------------------------
Total interest-bearing
deposits . . . . . . . 537,697 16,986 4.22% 478,572 16,137 4.51%
Other borrowings . . . . . . . . . . 74,337 3,033 5.46% 46,902 1,985 5.66%
----------------------------- -----------------------------
Total interest-bearing
liabilities . . . . . 612,034 20,019 4.37% 525,474 18,122 4.61%
------------- --------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . 83,964 74,344
Other liabilities . . . . . . . 13,502 6,157
---------------- ---------------
Total liabilities . . . . . 709,500 605,975
Stockholders' equity . . . . . . . . 73,188 69,653
---------------- ---------------
Total liabilities and
stockholders' equity . . . . . $ 782,688 $ 675,628
================ ===============
Net interest income . . . . . . . . . $ 22,583 $ 21,247
============= ==============
Interest rate spread . . . . . . . . 3.69% 3.87%
Interest expense as a percent
of average earning assets . . . 3.79% 3.90%
Net interest margin . . . . . . . . . 4.27% 4.58%
</TABLE>
(1) Income and yields are reported on a taxable equivalent basis.
13
<PAGE>
Provision for Loan Losses
The provision for loan losses totaled $513,000 for the third quarter of
1999, down from $1.5 million for the third quarter of 1998. For the first nine
months, provision totaled $2.0 million for 1999 versus $2.4 million in 1998.
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 three months ended September 30, 1999
totaled $3.3 million, up from $1.4 million for the same period a year ago. For
the nine months ended on September 30, 1999 non-interest income was up $ 7.0
million to $10.8 million versus $3.8 million in 1998. This increase is due
principally to the increases in income from mortgage brokerage fees from
Mortgage Capital Investors (MCI) totaling $1.5 million for the third quarter and
$6.3 million for the first nine months of 1999. 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 cross-selling services and better leveraging the financial services
available throughout the organization.
Non-Interest Expense
Non-interest expense in the third quarter of 1999 totaled $8.5 million,
an increase of $3.1 million over the same period in 1998. Much of this increase
was attributable to the acquisition of MCI in 1999 using the purchase accouting
method. Personnel costs comprised $2.1 million of the increase in non-interest
expense, including $1.8 million from MCI. Increases in occupancy and other
operating expenses were also impacted by the MCI acquisition.
Non-interest expense for the first nine months of 1999 totaled $24.1
million, an increase of $9.1 million over the same period in 1998. Personnel
costs comprised of $6.4 million of the increase in non-interest expense,
including $5.4 million from MCI. Expansion of existing retail and support
operations, as well as new ventures such as the Bank of Williamsburg also
contributed to increases in personnel costs. Increases in occupancy and other
operating expenses were also impacted by the MCI acquisition. Increases in other
operating expenses were also impacted by technology expenditures in the second
quarter related to check imaging and the retail platform system which resulted
in increased depreciation and amortization.
Financial Condition
- -------------------
Total assets as of September 30, 1999 were $807.1 million, an increase
of 15.5% from $699.0 million at September 30, 1998. Asset growth was fueled by
loan growth, as loans totaled $526.7 million at September 30, 1999, an increase
of 13.4% from $464.5 million at September 30, 1998. Stockholders' equity totaled
$69.8 million at September 30, 1999, which represents a book value of $9.34 per
share.
14
<PAGE>
Deposit growth dropped off some in the third quarter from prior quarters.
Total deposits at September 30, 1999 were $625.0 million, up 7.7% from $580.1
million at September 30, 1998. Other borrowings totaled $100.5 million at
September 30, 1999, a 144.2% increase over $41.1 million at September 30, 1998.
This is reflective of the Company's effort to better leverage its strong capital
position and the short term funding needs from slowed deposit growth. 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 and effectively manage
competitive rates on interest sensitive products. 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. General economic trends as
well as conditions affecting individual borrowers affect the level of credit
losses. 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 comparison to peer groups.
The allowance for loan losses totaled $7.7 million at September 30,
1999 or 1.46% of total loans, as compared to 1.34% at December 31, 1998 and
1.31% at September 30, 1998. At September 30, 1999, non-performing assets of
$4.3 million included foreclosed properties of $2,126,000 including a $902,000
investment in income-producing property.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
(dollars in thousands)
----------------------------------------------------------------------
<S> <C>
Non-accrual loans $2,178 $2,813 $2,791
Foreclosed properties 2,126 1,831 1,999
Real estate investment
------- ------ ------
Non-performing assets $ 4,304 $4,644 $5,131
======= ====== ======
Allowance for loan losses $7,677 $6,407 $6,105
Allowance as % of total loans 1.44% 1.34% 1.31%
Non-performing assets to loans
and foreclosed properties .81% .97% 1.10%
</TABLE>
The allowance for loan losses includes reserves of approximately $1.5
million related to a single credit relationship totaling approximately $1.8
million. The majority of this reserve was established in the third quarter of
1998 through a special provision for loan losses of $1.0 million. Additional
reserves have been allocated to this credit since that time. Management has
restructured this credit with the borrowers in an attempt to workout repayment
of the debt, but collection is uncertain. Currently, $1.1 million of this loan
is classified as loss and the remaining $700,000 (the appraised value of the
collateral) as doubtful.
15
<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, 1999, the Company's ratio of total capital to
risk-weighted assets was 12.60% and its ratio of Tier 1 capital to risk-weighted
assets was 11.35%. Both ratios exceed the fully phased-in capital requirements.
The following summarizes the Company's regulatory capital and related ratios at
September 30, 1999 (dollars in thousands):
Tier 1 capital $ 66,737
Tier 2 capital $ 7,355
Total risk-based capital $ 74,092
Total risk-weighted assets $ 588,076
Capital Ratios:
Tier 1 risk-based capital ratio 11.35 %
Total risk-based capital ratio 12.60 %
Leverage ratio (Tier I capital to
average adjusted total assets) 8.31 %
Equity to assets ratio 8.65 %
The Company's book value per share at September 30, 1999 was $9.34.
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 (available for sale) 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 September 30, 1999 cash, interest-bearing deposits in other banks,
federal funds sold, securities available for sale and loans maturing or
repricing in one year were 21.5% of total earning assets. At September 30, 1999
approximately $142.0 million or 27.0% 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.
16
<PAGE>
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue involves the risk that computer programs and
computer systems may not be able to perform without interruption into the year
2000. If computer systems do not correctly recognize the date change from
December 31, 1999 to January 1, 2000, computer applications that rely on the
date field could fail or create erroneous results. Such erroneous results could
affect interest payments or due dates and could cause the temporary inability to
process transactions and to engage in ordinary business activities. The failure
of the Company, its suppliers, and its borrowers to address the Y2K issue could
have a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
Accordingly, in September 1997, the Company established a team of individuals
from throughout the organization to address Y2K concerns. The Company performed
a review and assessment of all hardware and software to confirm that it will
function properly in the year 2000. Based on this assessment and subsequent
testing, we believe the Company's mainframe hardware and banking software are
currently Y2K compliant. For systems that the Company relies on third-party
vendors, these vendors have been contacted and have indicated that the hardware
and/or software will be Y2K compliant.
The Company has also initiated formal communications with all significant loan
and deposit customers to determine the extent to which the Company is vulnerable
to those third-parties' failure to remedy their own Y2K issue. The Company
believes that exposure to customers' not being Y2K compliant is minimal.
The Company continues to assess its risk from other environmental factors over
which it has little direct control, such as electrical power supply, and voice
and data transmission. Because of the nature of these external factors, the
Company is not actively engaged in any repair, replacement, or testing efforts
for these services. Based on its current assessments and remediation plans,
which are based in part on certain representations of third-party services, the
Company does not expect that it will experience a significant disruption of its
operations as a result of the change in the new millennium. Although the Company
has no reason to conclude that a failure will occur, the most likely worst-case
Y2K scenario would entail a disruption or failure of the Company's power
suppliers' or voice and data transmission suppliers' capability to provide power
to data transmission services to a computer system or a facility. If such a
failure were to occur, the Company would implement a contingency plan as
described below. While it is impossible to quantify the impact of such a
scenario, the most likely worst-case scenario would entail diminishment of
service levels, some customer inconvenience, and additional, as yet not
understood, costs associated with the implementation of the contingency plan.
For the computer systems and facilities that it has determined to be most
critical, the Company has developed a comprehensive business resumption
contingency plan and expects to complete testing of that plan during the fourth
quarter of 1999. This plan will conform to recently issued guidelines from the
FFIEC on business contingency planning for Y2K readiness. Contingency plans will
include, among other actions, manual processes and identification of resource
requirements and alternative solutions for resuming critical business processes
in the event of a Y2K-related failure. While the Company will have contingency
plans in place to address a temporary disruption in these services, there can be
no assurance that any disruption or failure will be only temporary, that the
Company's contingency plans will function as anticipated, or that the results of
operations, financial condition, or liquidity of the Company will not be
adversely affected in the event of a prolonged disruption or failure.
There can be no assurance that the FFIEC or other federal or state regulators
will not issue new regulatory requirements that require additional work by the
Company and, if issued, that new regulatory requirements will not increase the
cost or delay the completion of the Company's Y2K project. The costs of the
project and the date on which the Company plans to complete the Y2K
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third-party modification plans, and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained in this area, the ability of
third-party vendors to correct their software and hardware, the ability of
significant customers to remedy their Year 2000 issues, and similar
uncertainties.
The Company is continuing its customer awareness efforts to make its customers
aware of our readiness to address the various potential situations which may
occur. A cash contingency model has been developed to monitor cash demand
patterns of customers and a cash contingency plan has been established for use
in the event of increased customer demand. To date, the Company has expensed
approximately $110,000 related to the Year 2000 issue. Remaining expenditures,
including expenses related to the estimated cost to carry additional cash
reserves, are not expected to have a material effect on the Company's
consolidated financial statements.
17
<PAGE>
COMBINED
--------
The following table presents the Company's interest sensitivity position at
September 30, 1999. 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, 1999
--------------------------------------------------------------
Within 90-365 1-5
90 Days Days Years
------------- ------------ ----------------
<S> <C>
(In thousands)
Earning Assets:
Loans, net of unearned income (3) . . . $107,420 $ 34,633 $ - $236,037 $ -
Investment securities . . . . . . . . . . . . 625 - 3,611 - 4,103 -
Securities available for sale. . . . . . . . 1,131 6,530 - 93,738 -
Federal funds sold . . . . . . . . . . . . . . - - - - -
Other short-term investments . . . . . . . . 805 - - - -
Total earning assets . . . . . . . . . . . . 109,981 44,774 333,878
------------- ------------ ----------------
Interest-Bearing Liabilities:
Interest checking (2) . . . . . . . . . . . . $ - $ - $ - $ 91,858 $ -
Regular savings (2) . . . . . . . . . . . . . - - - 61,286 -
Money market savings . . . . . . . . . . . - 61,268 - - -
Certificates of deposit:
$100,000 and over . . . . 25,237 49,956 - 18,353 -
Under $100,000 . . . . . . 43,906 112,492 77,285 -
Short-term borrowings. . . . . . . . . . . . 53,243 120 - - -
Long-term borrowings . . . . . . . . . . . . 5,000 150 - 31,525
Total interest-bearing
liabilities . . . . . . . 127,386 223,986 280,307
------------- ------------ ----------------
Period gap . . . . . . . . . . . . . . . . . . (17,405) (179,212) 53,571
Cumulative gap . . . . . . . . . . . . . . . . (17,405) (196,617) $(143,046)
============= ============ ================
Ratio of cumulative gap to
total earning assets . . . -2.35% -26.57% -19.33%
============= ============ ================
</TABLE>
<TABLE>
<CAPTION>
Over
5 Years Total
---------------- -----------------
<S> <C>
Earning Assets:
Loans, net of unearned income (3) . . . $146,409 $ - $524,499
Investment securities . . . . . . . . . . . . 1,866 - 10,205
Securities available for sale. . . . . . . . 103,139 - 204,538
Federal funds sold . . . . . . . . . . . . . . - - -
Other short-term investments . . . . . . . . - - 805
Total earning assets . . . . . . . . . . . . 251,414 740,047
---------------- -----------------
Interest-Bearing Liabilities:
Interest checking (2) . . . . . . . . . . . . $ - $ - $ 91,858
Regular savings (2) . . . . . . . . . . . . . - - 61,286
Money market savings . . . . . . . . . . . - - 61,268
Certificates of deposit: -
$100,000 and over . . . . - - 93,546
Under $100,000 . . . . . . 192 - 233,875
Short-term borrowings. . . . . . . . . . . . - - 53,363
Long-term borrowings . . . . . . . . . . . . 10,430 - 47,105
Total interest-bearing
liabilities . . . . . . . 10,622 642,301
---------------- -----------------
Period gap . . . . . . . . . . . . . . . . . . 240,792
Cumulative gap . . . . . . . . . . . . . . . . $ 97,746 $ 97,746
================ =================
Ratio of cumulative gap to
total earning assets . . . 13.21%
================
</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
18
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 as of September
30, 1999:
% Change in
Change in Prime Rate Net Interest Income
-------------------- -------------------
+200 basis points -1.63%
Flat 0
-200 basis points +2.00%
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 as of September 30, 1999:
Change in Net Market Value
Change in Prime Rate (dollars in thousands)
-------------------- ----------------------
+200 basis points $ -34,456
+100 basis points -18,711
Flat -9,869
-100 basis points 6,304
-200 basis points 27,385
19
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
(a) See attached list of exhibits
(b) Form 8-K and 8-KA were filed during the most recently completed
quarter relative to our change in external Accountant's.
20
<PAGE>
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 12, 1999
----------------------------
(Date) G. William Beale,
President, Chief Executive Officer
and Director
November 12, 1999
-----------------------------
(Date) D. Anthony Peay,
Vice President and Chief Financial Officer
21
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q /September 30, 1999
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,187
<INT-BEARING-DEPOSITS> 805
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 204,537
<INVESTMENTS-CARRYING> 10,205
<INVESTMENTS-MARKET> 10,512
<LOANS> 526,681
<ALLOWANCE> 7,677
<TOTAL-ASSETS> 807,141
<DEPOSITS> 624,978
<SHORT-TERM> 53,363
<LIABILITIES-OTHER> 11,881
<LONG-TERM> 47,105
0
0
<COMMON> 14,950
<OTHER-SE> 54,864
<TOTAL-LIABILITIES-AND-EQUITY> 807,141
<INTEREST-LOAN> 31,820
<INTEREST-INVEST> 9,044
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 40,864
<INTEREST-DEPOSIT> 16,986
<INTEREST-EXPENSE> 20,019
<INTEREST-INCOME-NET> 20,845
<LOAN-LOSSES> 2,026
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 24,131
<INCOME-PRETAX> 5,458
<INCOME-PRE-EXTRAORDINARY> 4,633
<EXTRAORDINARY> 0
<CHANGES> (104)
<NET-INCOME> 4,529
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 4.27
<LOANS-NON> 4,304
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,800
<LOANS-PROBLEM> 2,504
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<RECOVERIES> 264
<ALLOWANCE-CLOSE> 7,677
<ALLOWANCE-DOMESTIC> 7,677
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
