Union Bankshares Corporation and Subsidiaries
Selected Financial Data
1996 1995 1994 1993 1992
---------- ---------- ---------- ----------- -----------
Results of Operations (dollars in thousands, except per share amounts)
Interest income $ 40,996 $ 38,083 $ 31,927 $ 30,397 $ 31,434
Interest expense 19,330 17,855 13,089 13,009 15,086
---------- ---------- ---------- ----------- -----------
Net interest income 21,666 20,228 18,838 17,388 16,348
Provision for loan losses 895 977 1,102 1,571 2,054
---------- ---------- ---------- ----------- -----------
Net interest income after
provision for loan losses 20,771 19,251 17,736 15,817 14,294
Other income 3,459 2,618 2,949 2,061 2,105
Other expenses 14,502 13,037 12,073 10,834 9,738
---------- ---------- ---------- ----------- ------------
Income before income taxes 9,728 8,832 8,612 7,044 6,661
Income tax expense 2,272 2,079 1,899 1,529 1,565
---------- ---------- ---------- ----------- -----------
Net income $ 7,456 $ 6,753 $ 6,713 $ 5,515 $ 5,096
========== ========== ========== =========== ===========
Key Performance Ratios
Return on average assets (ROA) 1.41% 1.41% 1.55% 1.35% 1.33%
Return on average equity (ROE) 13.79% 13.56% 15.03% 13.51% 13.58%
Efficiency ratio 54.06% 53.56% 51.96% 52.14% 49.43%
Per Share Data
Net income per share $ 2.09 $ 1.91 $ 1.90 $ 1.56 $ 1.44
Cash dividends declared 0.64 0.56 0.51 0.45 0.40
Book value at year-end 16.42 15.07 13.37 12.13 11.01
Financial Condition
Total assets $ 540,893 $ 505,374 $ 462,880 $ 424,582 $ 395,678
Total deposits 439,607 415,755 390,232 367,933 344,134
Total loans, net of unearned income 352,277 327,132 295,389 258,063 247,421
Stockholders' equity 58,566 53,683 47,232 42,814 38,873
Asset Quality
Allowance for loan losses $ 4,388 $ 4,060 $ 4,110 $ 3,822 $ 3,704
Allowance as % of total loans 1.25% 1.24% 1.39% 1.48% 1.50%
Other Data
Market value per share at year-end (1) $ 25.00 $ 26.00 $ 24.00 $ 23.25 n/a
Price to earnings ratio 12.0 13.6 12.6 14.9 n/a
Price to book value ratio 152% 173% 180% 192% n/a
Dividend payout ratio 30.62% 28.80% 26.84% 28.84% 27.77%
Weighted shares outstanding 3,564,417 3,543,033 3,533,035 3,530,630 3,530,630
(1) Stock was not traded on an active market until October 1993
[photo]
[caption: The new 17,000 sq. ft. Union Bankshares Operations Center opened in
the summer of 1996]
1
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion provides information about the major components of the
results of operations and financial condition, liquidity and capital resources
of Union Bankshares Corporation and subsidiaries (the "Company" or "Union
Bankshares"). This discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the Notes to the Consolidated
Financial Statements presented elsewhere in this Annual Report. Operating
results include those of King George State Bank for all periods presented.
Overview
Union Bankshares Corporation's mission statement is to:
o enhance shareholder value,
o remain a strong independent banking organization,
o be a leading provider of financial services,
o provide exemplary customer service,
o provide a rewarding work environment for its employees, and
o provide a growing return for its shareholders.
In 1996 Union Bankshares Corporation continued to strive to achieve these
objectives. The Company's focus of providing high quality financial services to
its customers through enhanced products and improved delivery channels was
evident in 1996. King George State Bank became a member of the Union Bankshares
family in September, expanding the Company's presence to that market and
enhancing its existing markets. The Company continued cost effective expansion
opportunities through the addition of three in-store branches, including a
Wal*Mart Superstore location.
1996 was also a year of planning and preparation. Plans were announced to
convert all subsidiaries to an in-house data processing system, providing
management the opportunity to improve the quality and availability of management
information while sharing the associated costs among the consolidated group.
Northern Neck State Bank converted its data files in November and the remaining
banks will be converted by mid-year 1997. This and other consolidation efforts
represent management's commitment to establishing the infrastructure necessary
to continue to operate efficiently as the Company grows.
Despite the costs associated with the above efforts, 1996 was another year of
record earnings for Union Bankshares Corporation. The Company reported net
income of $7.5 million or $2.09 per share, up 10.4% from $6.7 million in 1995.
Core profitability from primary lines of business continued to improve as net
interest income increased by 7.1% and service fees by 19.1% from 1995 levels.
[photo]
[caption: King George State Bank]
Profitability as measured by the Company's return on average assets (ROA) was
1.41% in 1996, while its return on average equity (ROE) was 13.79%. These ratios
were in line with 1.41% and 13.56%, respectively, reported in 1995, and remain
strong relative to the Company's peer group averages. These returns have
consistently exceeded 1.30% (ROA) and 13.30% (ROE) over the last five years and
have been achieved despite the strong asset and capital growth which the Company
has experienced over this time.
Continued increases in earning assets combined with a stable interest rate
spread in 1996 to contribute significantly to the strong earnings performance in
1996. The Company's net interest margin on a taxable equivalent basis was
5
virtually unchanged from 4.80% in 1995 to 4.79% in 1996, however changes in
volume exceeded changes in rates, generating an additional $1.6 million in net
interest income.
Loans, net of unearned income, totaled $352.3 million at December 31, 1996 an
increase of 7.7% from December 31, 1995. Despite serving as a source of funds
for loans, securities growth was stable as the Company utilized certain
leveraging strategies to purchase securities funded by short-term borrowings.
Though the spread on such transactions is reduced from the more typical scenario
whereby loans are funded by deposits, the effect on net income and ROE was
favorable.
Deposits grew from $415.8 million at December 31, 1995, to $439.6 million at
December 31, 1996, an increase of 5.7%. Average deposits increased from $402.8
million in 1995 to $429.8 million in 1996, but competition for deposits among
financial service providers continues to force the Company to fund a portion of
its loan demand with other borrowings such as Federal funds purchased,
securities sold under agreements to repurchase and Federal Home Loan Bank
advances.
Capital remains a double-edged sword for the Company as financial stability is
weighed against ROE. Capital growth at 9.1% continued to outpace asset growth at
7.0%, but at a slower pace due to the use of wholesale leverage strategies and
increased shareholder dividends. The closing price of the Company's stock at
December 31, 1996 was $25.00 per share, resulting in a market to book value
ratio of 152%. Management has worked with the investment community to share the
performance record of the Company and improve the efficiency of the market. As a
result, the spread between the bid (buy) and ask (sell) price quote has been
reduced from approximately $4.00 two years ago to $.75 in February 1997.
The Company's performance in 1995 was strong with net income of $6.8 million, up
slightly from 1994 which included an after-tax gain on the sale of other real
estate owned (OREO) of $388,000. Excluding this gain, net income increased by
6.8%. The increased earnings were due primarily to increased levels of earning
assets. Return on average equity decreased in 1995 to 13.56% from 15.03% in 1994
(14.13% in 1994 excluding the OREO gain). Return on average assets in 1995 was
1.41% compared to 1.55% in 1994 (1.46% in 1994 excluding the OREO gain).
Net Interest Income
Net interest income represents the principal source of earnings for the Company.
Net interest income equals the amount by which interest income exceeds interest
expense. The net interest margin is net interest income expressed as a
percentage of interest-earning assets. Changes in the volume and mix of earning
assets and interest-bearing liabilities, as well as their respective yields and
rates, have a significant impact on the level of net interest income and the net
interest margin.
During 1996, net interest income, on a taxable-equivalent basis, totaled $23.3
million, an increase of 7.4% from $21.7 million in 1995. The Company's net
interest margin was stable at 4.79% in 1996, as compared to 4.80% in 1995 and
5.01% in 1994. The yield on earning assets was unchanged at 8.75% while the cost
of interest-bearing liabilities declined slightly from 4.69% in 1995 to 4.64%.
Average interest-bearing liabilities increased by $35.5 million, or 9.3% while
average earning assets grew by $35.9 million, or 7.9%. As a result, the Company
was able to realize an increase of $1.6 million in net interest income compared
to 1996 (see Volume and Rate Analysis table).
During 1995, net interest income, on a taxable-equivalent basis, increased 7.3%
to $21.7 million from $20.3 million in 1994. The Company's net interest margin
declined slightly to 4.80% from 5.01% in 1994. The yield on earning assets
increased to 8.75% in 1995 from 8.24% in 1994 while the cost of interest-bearing
liabilities grew more rapidly to 4.69% from 3.83% in 1994. Average
interest-bearing liabilities increased by $39.2 million, or 11.1% but were
outpaced by average earning assets which grew by $47.3 million, or 11.7%. As a
result, the Company was able to realize an increase of $1.4 million in net
interest income compared to 1994 (see Volume and Rate Analysis table).
The following table depicts interest income on earning assets and related
average yields, as well as interest expense on interest-bearing liabilities and
related average rates paid for the periods indicated.
6
Average Balances, Income and Expenses, Yields
and Rates (Taxable Equivalent Basis)
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ------------------------------- ------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- -------- ------ ---------- -------- --------- -------- -------- ------
(dollars in thousands)
Assets:
Securities:
Taxable .............................. $ 72,482 $ 4,493 6.20% $ 74,433 $ 4,755 6.39% $ 73,159 $ 4,565 6.24%
Tax-exempt(1) ....................... 64,963 5,397 8.31% 60,966 4,903 8.04% 58,221 4,728 8.12%
--------- -------- ------ ---------- -------- ----- --------- --------
Total securities ................ 137,445 9,890 135,399 9,658 7.13% 131,380 9,293 7.07%
Loans, net. .............................. 343,856 32,444 9.43% 310,819 29,561 9.51% 267,753 23,835 8.90%
Federal funds sold ...................... 5,941 317 5.34% 5,515 327 5.93% 5,072 209 4.12%
Interest-bearing deposits
in other banks........................ 813 44 5.41% 459 32 6.97% 689 39 5.66%
--------- --------- ------ ---------- ------- ----- --------- --------
Total earning assets ............. 488,055 42,695 8.75% 452,192 39,578 8.75% 404,894 33,376 8.24%
Allowance for loan losses ................ (4,305) (4,289) (3,893)
Total non-earning assets ................. 43,578 34,950 33,064
--------- ---------- ---------
Total assets ............................. $ 527,328 $ 482,853 $ 434,065
========= ========== =========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking.............................. $ 47,685 $ 1,202 2.52% $ 43,503 $ 1,187 2.73% $ 42,335 $ 1,109 2.62%
Regular savings ...................... 56,108 1,945 3.47% 57,312 2,146 3.74% 68,002 2,301 3.38%
Money market savings ................. 55,048 1,802 3.27% 58,265 1,978 3.39% 65,888 2,029 3.08%
Certificates of deposit:
$100,000 and over..................... 50,083 2,604 5.20% 42,289 2,317 5.48% 29,975 1,325 4.42%
Under $100,000........................ 170,032 9,938 5.84% 154,016 8,737 5.67% 120,331 5,641 4.69%
--------- -------- ------- -------- --------- --------
Total interest-bearing
deposits ..................... 378,956 17,491 4.62% 355,385 16,365 4.60% 326,531 12,405 3.80%
Other borrowings ......................... 37,528 1,839 4.90% 25,598 1,490 5.82% 15,227 684 4.49%
--------- -------- ---------- -------- --------- --------
Total interest-bearing ...........
liabilities .................. 416,484 19,330 4.64% 380,983 17,855 4.69% 341,758 13,089 3.83%
-------- -------- --------
Non-interest bearing liabilities:
Demand deposits....................... 52,305 47,472 44,168
Other liabilities..................... 4,461 4,224 3,496
--------- ---------- ---------
Total liabilities................. 473,250 432,679 389,422
Stockholders' equity ..................... 54,078 50,174 44,643
--------- ---------- ---------
Total liabilities and
stockholders' equity ................. $ 527,328 $ 482,853 $ 434,065
========= ========== =========
Net interest income....................... $ 23,365 $ 21,723 $ 20,287
======== ======== ========
Interest rate spread ..................... 4.11% 4.06% 4.41%
Interest expense as a percent
of average earning assets............. 3.96% 3.95% 3.23%
Net interest margin....................... 4.79% 4.80% 5.01%
(1) Income and yields are reported on a taxable equivalent basis.
7
The following table analyzes changes in net interest income attributable to
changes in the volume of interest-bearing assets and liabilities compared to
changes in interest rates. Nonaccrual loans are included in average loans
outstanding.
Volume and Rate Analysis*
(Taxable Equivalent Basis)
Years ended December 31,
------------------------------------------------------------
1996 vs. 1995 1995 VS. 1994
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------- ----------------------------
Volume Rate Total Volume Rate Total
-------- ------ ------- -------- ------ -------
(in thousands)
Earning Assets:
Securities:
Taxable.................................... $ (123) $(139) $ (262) $ 80 $ 110 $ 190
Tax-exempt ................................ 329 165 494 221 (46) 175
Loans, net .................................... 3,118 (235) 2,883 4,016 1,708 5,724
Federal funds sold............................. 24 (34) (10) 19 96 117
Interest-bearing deposits
in other banks............................. 20 (8) 12 (14) 7 (7)
------ ----- ------ ------ ------- ------
Total earning assets.................. 3,368 (251) 3,117 4,322 1,877 6,199
------ ----- ------ ------ ------- ------
Interest-Bearing Liabilities:
Interest checking.............................. 108 (93) 15 31 46 77
Regular savings................................ (44) (157) (201) (385) 229 (156)
Money market savings........................... (107) (69) (176) (247) 196 (51)
CDs $100,000 and over......................... 409 (122) 287 626 364 990
CDs < $100,000................................. 930 271 1,201 1,766 1,330 3,098
------ ----- ------ ------ ------- ------
Total interest-bearing
deposits.......................... 1,296 (170) 1,126 1,793 2,165 3,958
Other borrowings............................... 611 (262) 349 562 243 805
------ ----- ------ ------ ------- ------
Total interest-bearing
liabilities....................... 1,907 (432) 1,475 2,355 2,408 4,763
------ ----- ------ ------ ------- ------
Change in net interest
income .................................... $1,461 $ 181 $1,642 $1,967 $ (531) $1,436
====== ===== ====== ====== ======= ======
* The change in interest, due to both rate and volume, has been allocated to
change due to volume and change due to rate in proportion to the relationship
of the absolute dollar amounts of the change in each.
Interest Sensitivity
An important element of earnings performance and the maintenance of sufficient
liquidity is proper management of the interest sensitivity gap. The interest
sensitivity gap is the difference between interest sensitive assets and interest
sensitive liabilities in a specific time interval. This gap can be managed by
repricing assets or liabilities, which can be effected by replacing an asset or
liability at maturity or by adjusting the interest rate during the life of the
asset or liability. Matching the amounts of assets and liabilities maturing in
the same time interval helps to hedge interest rate risk and to minimize the
impact on net interest income in periods of rising or falling interest rates.
The Company determines the overall magnitude of interest sensitivity risk and
then formulates policies governing asset generation and pricing, funding sources
and pricing, and off-balance sheet commitments. These decisions are based on
management's expectations regarding future interest rate movements, the state of
the national and regional economy, and other financial and business risk
factors. The Company uses computer simulations to measure the effect of various
interest rate scenarios on net interest income. This modeling reflects interest
rate changes and the related impact on net income over specified time horizons.
8
At December 31, 1996, the Company had $ 81.5 million more liabilities than
assets subject to repricing within one year and was, therefore, in a
liability-sensitive position. A liability-sensitive Company's net interest
margin and net interest income generally will be impacted favorably by declining
interest rates, while that of an asset-sensitive Company generally will be
impacted favorably by increasing interest rates.
The following table presents the Company's interest sensitivity position at
December 31, 1996. This one-day position, which is continually changing, is not
necessarily indicative of the Company's position at any other time.
Interest Sensitivity Analysis
December 31, 1996 (1)
-----------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
-------- -------- --------- -------- --------
(in thousands)
Earning Assets:
Loans, net of unearned income (3)..................... $ 75,692 $ 64,885 $ 138,499 $ 72,781 $351,857
Investment securities ................................ 880 1,241 8,265 1,037 11,423
Securities available for sale......................... 5,399 6,040 36,165 81,664 129,268
Federal funds sold.................................... 2,104 - - - 2,104
Other short-term investments.......................... 917 - 99 - 1,016
------- -------- --------- -------- --------
Total earning assets........................... 84,992 72,166 183,028 155,482 495,668
======= ======== ========= ======== ========
Interest-Bearing Liabilities:
Interest checking (2) ................................ 5,453 454 43,927 - 49,834
Regular savings (2) .................................. 9,376 1,710 43,278 - 54,364
Money market savings.................................. 47,419 202 6,810 - 54,431
Certificates of deposit:
$100,000 and over.............................. 13,322 21,918 16,572 - 51,812
Under $100,000................................. 35,370 75,877 62,914 - 174,161
Short-term borrowings ................................ 17,994 9,409 - - 27,403
Long-term borrowings ................................. 75 75 10,600 375 11,125
------- -------- --------- -------- --------
Total interest-bearing
liabilities ................................ 129,009 109,645 184,101 375 423,130
-------- -------- --------- -------- --------
Period gap............................................ (44,017) (37,479) (1,073) 155,107
Cumulative gap........................................ $(44,017) $(81,496) $ (82,569) $ 72,538 $ 72,538
======== ======== ========= ======== ========
Ratio of cumulative gap to
total earning assets.......................... (8.88)% (16.44)% (16.66)% 14.63%
======== ======== ========= ========
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) The Company has determined that interest-bearing checking deposits and
regular savings deposits are not sensitive to changes in related market
rates and therefore, it has placed them predominantly in the "1 - 5
Years" column.
(3) Excludes non-accrual loans
Other Income
Other income increased by 32.1% from $2.6 million in 1995 to $3.5 million in
1996. This increase is largely attributable to an increase of $150,000 in
securities commissions recognized by Union Investment Services, Inc., $47,000
from the sale of a pool of loans and to $262,000 in non-taxable life insurance
proceeds related to one of the Company's directors deferred compensation plans.
The remaining 14.8% increase is reflective of management's efforts to maximize
fee-based income and steady growth in its primary source of other income,
service fees.
Other income decreased by 11.2% in 1995 from 1994 when the Company recognized a
pre-tax gain on the sale of other real estate totaling $588,000. Excluding this
1994 gain, other income increased by 10.9% over this period.
9
Other Expenses
Other expenses totaled $14.5 million in 1996, up 11.2% over $13.0 million in
1995. Increases in personnel and operating costs are largely attributable to the
growth of the Company and to its investment in technology and people. Management
considers a portion of such costs to be an investment in the future as we
establish the infrastructure necessary to provide new products and more
convenient service to our customers, and to manage a much larger organization.
The Company's efficiency ratio has been consistently below 60% which has allowed
the Company to make the necessary investments in technology without
significantly affecting earnings.
In 1995 other expenses totaled $13.0 million, an increase of $964,000, or 8.0%
over 1994 totals. Excluding the $310,000 decline in FDIC premiums, the increase
was 10.6% which was consistent with the asset growth of 9.2% experienced in
1995. Personnel costs increased by $922,000 or 15.7% over 1994 levels.
Loan Portfolio
Loans, net of unearned income, totaled $352.3 million at December 31, 1996, an
increase of 7.7% over $327.1 million at December 31, 1995. Though loan demand
slowed in 1996 from the levels attained in 1995 and 1994, the Company continues
to experience strong loan demand. Union Bankshares has achieved a rate of growth
consistent with the economies of the markets within which it operates and has
maintained or increased its market share in each.
Loans, net of unearned income, totaled $327.1 million at December 31, 1995, an
increase of 10.6% over the 1994 total of $295.8 million. The increase was
principally due to continued loan demand during 1995, particularly in the real
estate portfolio which grew by 15.4%.
Loan Portfolio
1996 1995 1994 1993 1992
------------ ---------- ------------ ----------- -------------
(in thousands)
Commercial .................................... $ 37,263 $ 36,920 $ 40,276 $ 37,472 $ 40,773
Loans to finance agriculture production
and other loans to farmers ................. 3,080 2,878 3,083 3,344 1,183
Real estate:
Real estate construction ................... 6,435 7,849 5,453 7,432 9,332
Real estate mortgage:
Residential (1 - 4 family)........... 117,125 102,419 92,007 86,348 92,329
Home equity lines.................... 21,964 22,561 22,503 21,905 21,752
Multi-family......................... 1,353 1,274 1,406 1,179 924
Commercial(1)........................ 83,118 76,652 60,653 53,165 33,492
Agricultural......................... 2,262 2,776 2,943 3,123 3,328
------------ --------- ------------ ----------- -------------
Total real estate.................... 232,257 213,531 184,965 173,152 161,157
Loans to individuals:
Consumer.................................... 76,383 70,143 64,683 43,754 45,126
Credit card................................. 2,567 2,235 1,714 1,490 1,238
------------ --------- ------------ ----------- -------------
Total loans to individuals........... 78,950 72,378 66,397 45,244 46,364
All other loans............................. 2,125 2,619 2,024 509 651
------------ --------- ------------ ----------- -------------
Total loans.......................... 353,675 328,326 296,745 259,721 250,128
Less unearned income.............................. 1,398 1,194 976 1,246 2,174
------------ --------- ------------ ----------- -------------
Total net loans............................. $ 352,277 $ 327,132 $ 295,769 $ 258,475 $ 247,954
============ ========= ============ =========== =============
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a secondary source of collateral
10
Maturity Schedule of Loans
1 Year or Less 1 - 5 Years After 5 Years
--------------------- -------------------- ----------------------
Fixed Variable Fixed Variable Fixed Variable TOTALS
--------- --------- --------- --------- ---------- --------- ---------
(in thousands)
December 31, 1996..................... $ 62,910 $ 77,961 $ 113,912 $ 26,335 $ 66,857 $ 5,700 $ 353,675
December 31, 1995..................... 79,003 64,475 109,998 15,962 54,055 4,833 328,326
December 31, 1994..................... 55,842 97,026 95,084 9,559 39,234 - 296,745
Loans secured by real estate comprised 65.7% of the total loan portfolio at
December 31, 1996, up slightly from 65.0% in 1995. Of this total, single-family,
residential loans comprised 33.1% of the total loan portfolio at December 31,
1996, up from 31.2% in 1995. Loans secured by commercial real estate comprised
23.5% of the total loan portfolio at December 31, 1996, as compared to 23.3% in
1995, and consist principally of commercial and industrial loans where real
estate constitutes a secondary source of collateral. The Company attempts to
reduce its exposure to the risk of the local real estate markets by limiting the
aggregate size of its commercial real estate portfolio, and by making such loans
primarily on owner-occupied properties. Real estate construction loans accounted
for only 1.8% of total loans outstanding at December 31, 1995. The Company's
charge-off rate for all loans secured by real estate has historically been low.
The Company's consumer loan portfolio, its second largest category, consists
principally of installment loans. Total loans to individuals for household,
family and other personal expenditures totaled 21.6% of total loans at December
31, 1996 up slightly from 21.4% in 1995. Commercial loans, secured by non-real
estate business assets comprised 10.5% of total loans at the end of 1996, a
slight decline from 11.2% at the end of 1995. Loans to the agricultural industry
totaled less than 1.5% of the loan portfolio in each of the last five years.
The Company is focused on providing community-based financial services and
discourages the origination of loans outside of its principal trade area. The
Company maintains a policy not to originate or purchase loans to foreign
entities or loans classified by regulators as highly leveraged transactions.
To slow the growth of the real estate loans in the loan portfolio, facilitate
asset/liability management and generate additional fee income, the Company sells
a portion of conforming first mortgage residential real estate loans to the
secondary market as they are originated. Management expects this aspect of its
operations to expand in 1997, with the formation of Union Mortgage Company, LLC
("Union Mortgage"). Union Mortgage will consolidate the mortgage origination
process of the subsidiary banks, providing the banks' customers with enhanced
mortgage products and the Company with improved efficiencies.
Asset Quality - Allowance/Provision for Loan Losses
The allowance for loan losses represents management's estimate of the amount
adequate to provide for potential losses inherent in the loan portfolio. Among
other factors, management considers the Company's historical loss experience,
the size and composition of the loan portfolio, the value and adequacy of
collateral and guarantors, non-performing credits and current and anticipated
economic conditions. There are additional risks of future loan losses which
cannot be precisely quantified nor attributed to particular loans or classes of
loans. Because those risks include general economic trends as well as conditions
affecting individual borrowers, the allowance for loan losses is an estimate.
The allowance is also subject to regulatory examinations and determination as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peer
companies identified by regulatory agencies.
Management maintains a list of loans which have a potential weakness that may
need special attention. This list is used to monitor such loans and is used in
the determination of the sufficiency of the Company's allowance for loan losses.
As of December 31, 1996, the allowance for loan losses was $4.4 million, or
1.25% of total loans as compared to $4.1 million, or 1.24% in 1995. At December
31, 1996, the Company's allowance for loan losses exceeded the sum of net loan
charge-offs over the last four years.
11
Allowance for Loan Losses
December 31,
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(dollars in thousands)
Balance, beginning of year.................................. $4,060 $4,110 $3,822 $3,704 $3,004
Loans charged-off:
Commercial............................................ 114 645 442 841 635
Real estate........................................... 59 185 273 242 50
Consumer ............................................. 795 422 355 585 890
------ ------ ------ ------ ------
Total loans charged-off........................ 968 1,252 1,070 1,668 1,575
------ ------ ------ ------ ------
Recoveries:
Commercial............................................ 275 114 18 57 123
Real estate........................................... 10 16 92 29 11
Consumer.............................................. 116 95 146 129 87
------ ------ ------ ------ ------
Total recoveries............................... 401 225 256 215 221
------ ------ ------ ------ ------
Net loans charged-off....................................... 567 1,027 814 1,453 1,354
Provision for loan losses................................... 895 977 1,102 1,571 2,054
------ ------ ------ ------ ------
Balance, end of year........................................ $4,388 $4,060 $4,110 $3,822 $3,704
====== ====== ====== ====== ======
Ratio of allowance for loan losses to total
loans outstanding at end of year ..................... 1.25% 1.24% 1.39% 1.48% 1.50%
Ratio of net charge-offs to average
loans outstanding during year ........................ .16% .33% .30% .66% .64%
Provisions for loan losses are made based on management's periodic evaluation of
the adequacy of the Company's allowance for loan losses. The provision for loan
losses in 1996 totaled $895,000 as compared to $977,000 in 1995. This decrease
is reflective of management's assessment of the risk in the loan portfolio.
The allowance for loan losses as of December 31, 1995 was $4.1 million, or 1.24%
of total loans as compared to $4.1 million and 1.39%, respectively in 1994. The
provision for loan losses in 1995 was $977,000 as compared to $1.1 million in
1994.
Nonperforming Assets
Nonaccrual loans and foreclosed properties, were $4.5 million at December 31,
1996, up from $4.3 million at December 31, 1995. Non-accrual loans decreased by
$249,000 in 1996 while other real estate owned increased from $3.6 million to
$4.1 million. Foreclosed properties includes $1.9 million representing a single
property foreclosed on in 1995 and comprising over 1,800 acres in King George
County. This property was sold in February 1997 at no loss to the company.
Nonperforming assets also includes approximately $2.9 million representing an
investment in income-producing property and included in other assets. This
property consists of 30 single family homes which are either rented or listed
for sale and are located near Fredericksburg, Virginia. The Company had
previously acquired a limited interest in this property through settlement of a
loan and, in 1996, acquired the remaining ownership and control from the general
partner. During 1996 the Company paid off approximately $2.4 million in existing
third-party mortgages on the houses. The carrying value of this investment in
real estate is supported by residential appraisals of the homes which are being
sold in an orderly manner, and management expects no loss on this investment.
12
Nonperforming Assets
December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------------- ---------- ---------
(dollars in thousands)
Nonaccrual loans............................................ $ 420 $ 669 $ 1,731 $ 2,920 $ 3,233
Foreclosed properties....................................... 4,056 3,620 1,842 1,533 1,694
Real estate investment...................................... 2,970 - - - -
--------- --------- ---------- ---------- ----------
Total nonperforming assets............................ $ 7,446 $ 4,289 $ 3,573 $ 4,453 $ 4,927
========= ========= ========== ========== ==========
Loans past due 90 days and
accruing interest..................................... $ 3,163 $ 3,126 $ 1,671 $ 3,193 $ 2,950
========= ========= ========== ========== ==========
Nonperforming assets to year-end
loans, foreclosed properties and
real estate investment................................ 2.07% 1.30% 1.20% 1.72% 1.98%
Allowance for loan losses to
nonaccrual loans...................................... 1044.76% 606.88% 237.44% 130.89% 114.57%
Most of the nonperforming assets are secured by real estate within the Company's
trade area. Based on the estimated fair values of the related real estate,
management considers these amounts to be recoverable, with any individual
deficiency considered in the allowances for loan or real estate losses.
Nonperforming assets were $4.3 million at December 31, 1995, a net increase of
$716,000 from December 31, 1994. This increase was principally due to the
foreclosure on the aforementioned King George property in 1995.
Securities
During 1994, the Company adopted Statement of Financial Accounting Standards
No.115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No.115). As a result, the securities portfolio consists of two components,
investment securities and securities available for sale. Securities are
classified as investment securities based on management's intent and the
Company's ability, at the time of purchase, to hold such securities to maturity.
Securities which may be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, general
liquidity needs, and other similar factors are classified as available for sale
and are carried at estimated fair value.
In 1995, the Financial Accounting Standards Board issued a special report on the
implementation of SFAS No. 115 which permitted a one-time transfer of securities
between portfolios. As a result, in December 1995, the Company reclassified
approximately $71.9 million of its investment securities to securities available
for sale. In doing so, management believes it has positioned the Company to be
better able to respond to changes in financial markets and maximize liquidity
and profitability.
At December 31, 1996 $129.3 million, or over 91%, of the Company's securities
were classified as available for sale, as compared to $126.4 million at December
31, 1995. Investment securities totaled $11.4 million at December 31, 1996 and
consists of securities which management intends to hold to maturity.
At December 31, 1995 $126.4 million, or over 89%, of the Company's securities
were classified as available for sale, as compared to $28.1 million at December
31, 1994. This change reflects the aforementioned transfer of approximately
$71.9 million, as well as management's philosophy of designating the majority of
its post-SFAS 115 purchases as securities available for sale. Investment
securities totaled $15.1 million at December 31, 1995.
The Company seeks to diversify its portfolio to minimize risk and to maintain a
large amount of securities issued by states and political subdivisions due to
the tax benefits such securities provide.
13
Maturities of Investment Securities and Securities Available for Sale
December 31, 1996
-------------------------------------------------------------------
Over 10
Years &
1 Year 1 - 5 5 - 10 Equity
or Less Years Years Securities Total
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
U.S. agency securities:
Amortized cost........................................ $ 4,122 $ 33,345 $ 7,281 $ 10,950 $ 55,698
Fair value............................................ 4,107 32,949 7,219 10,851 55,126
Weighted average yield(1)............................. 6.55% 6.56% 7.06% 6.85% 6.68%
U.S. Treasury securities:
Amortized cost........................................ $ 1,242 $ 3,120 $ - $ - $ 4,362
Fair value............................................ 1,243 3,095 - - 4,338
Weighted average yield(1)............................. 5.61% 5.45% - - 5.49%
Municipal bonds:
Amortized cost........................................ $ 5,611 $ 17,953 $ 29,611 $ 16,981 $ 70,156
Fair value. .......................................... 5,658 18,503 30,008 17,234 71,403
Weighted average yield(1)............................. 9.08% 8.14% 7.86% 7.89% 8.04%
Other securities:
Amortized cost........................................ $ 330 $ 3,909 $ - $ 5,811 $ 10,050
Fair value. .......................................... 330 3,941 - 5,819 10,090
Weighted average yield(1)............................. 5.48% 6.63% - 7.20% 6.92%
Total securities:
Amortized cost........................................ $ 11,305 $ 58,327 $ 36,892 $ 33,742 $ 140,266
Fair value............................................ 11,338 58,488 37,227 33,904 140,957
Weighted average yield(1)............................. 7.67% 6.99% 7.71% 7.43% 7.34%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
Deposits
Increased competition for customer deposits continues to be a challenge for the
Company, as reflected by continued increases in other borrowings in 1996 to fund
growth in earning assets. In 1996 growth in the loan portfolio exceeded 7.5% and
securities growth was flat while deposit growth was 5.7%. Although average
demand deposits and interest-bearing checking accounts experienced moderate
growth in 1996, the increasing competition for deposits and the current interest
rate environment have resulted in declines in lower cost savings and money
market accounts.
Total deposits grew from $415.8 million at December 31, 1995 to $439.6 million
at December 31, 1996. Over this same period, average interest-bearing deposits
were $379.0 million, or 6.6% over the 1995 average of $355.4 million. The
majority of this increase is represented by a $23.8 million increase in
certificates of deposit. Average balances for lower cost money market and
regular savings decreased by a total of $4.4 million. The Company's lowest cost
source of funds, non-interest-bearing and interest-bearing demand deposits both
increased, by a total of $9.0 million, providing the Company with lower cost
funds. The Company has no brokered deposits.
Further development of core deposits remains a primary objective, as they
represent a stable, lower cost source of funds for asset growth. The Company's
introduction of in-store branches in 1996 has provided opportunities to attract
deposits at a much lower initial investment than traditional branches. Union
Bank opened two branches in high-scale convenience stores in 1996, and Northern
Neck State Bank opened a branch in a Wal*Mart Superstore in 1996.
In 1995, most deposit categories showed increases as total deposits grew from
$390.2 million at December 31, 1994 to $415.8 million at December 31, 1995. Over
this same period, average interest-bearing deposits were $355.4 million, or 8.8%
over the 1994 average of $326.5 million.
14
Average Deposits and Rates Paid
Years Ended December 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Amount Rate Amount Rate Amount Rate
------------------- ------------------- -------------------
(dollars in thousands)
Non-interest-bearing accounts ................................ $ 52,305 - $ 47,472 - $ 44,168 -
Interest-bearing accounts:
Interest checking....................................... 47,685 2.52% 43,503 2.73% 42,335 2.64%
Money market............................................ 55,048 3.27% 58,265 3.39% 65,888 3.08%
Regular savings......................................... 56,108 3.47% 57,312 3.74% 68,002 3.38%
Certificates of deposit:
Less than $100,000................................ 170,032 5.84% 154,016 5.67% 120,331 4.69%
$100,000 and over................................. 50,083 5.20% 42,289 5.48% 29,975 4.42%
---------- ---------- ----------
Total interest-bearing........................................ 378,956 4.62% 355,385 4.60% 326,531 3.80%
---------- ---------- ----------
Total average deposits.................................. $ 431,261 $ 402,857 $ 370,699
========== ========== ==========
Maturities of Certificates of Deposit of $100,000 and Over
Percent
Within 3 - 6 6 - 12 Over 12 of Total
3 Months Months Months Months Total Deposits
--------- --------- --------- ---------- ---------- --------
(dollars in thousands)
At December 31, 1996............................ $ 13,444 $ 11,663 $ 12,346 $ 14,359 $ 51,812 11.79%
At December 31, 1995............................ 10,513 9,514 8,172 18,307 46,506 11.19%
At December 31, 1994............................ 7,351 4,561 9,125 13,880 34,917 8.95%
Capital Resources
Capital resources represents funds, earned or obtained, over which financial
institutions can exercise greater or longer control in comparison with deposits
and borrowed funds. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
to absorb potential losses, yet allow management to effectively leverage its
capital to maximize return to shareholders.
Analysis of Capital
December 31,
----------------- ---------------
1996 1995
----------------- ---------------
(dollars in thousands)
Tier 1 capital:
Common stock...................................... $ 14,267 $ 14,248
Additional paid-in capital........................ 160 66
Retained earnings................................. 43,863 38,722
Less: core deposit intangible..................... (263) (284)
---------------- ---------------
Total Tier 1 capital ............................. 58,027 52,752
---------------- ---------------
Tier 2 capital:
Allowance for loan losses ........................ 4,388 4,060
Allowable long-term debt.......................... - -
---------------- ---------------
Total Tier 2 capital ............................. 4,388 4,060
----------------- ---------------
Total risk-based capital.......................... $ 62,415 $ 56,812
================= ===============
Risk-weighted assets ................................... $ 383,046 $ 357,130
================= ===============
Capital ratios:
Tier 1 risk-based capital ratio................... 15.15% 14.77%
Total risk-based capital ratio.................... 16.29% 15.91%
Tier 1 capital to average adjusted total assets... 10.70% 10.87%
Equity to total assets ........................... 10.83% 10.62%
15
The Federal Reserve, along with the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, has adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital,
consisting of common equity, retained earnings and a limited amount of perpetual
preferred stock, less certain goodwill items. The Company had a ratio of
risk-weighted assets to total capital of 16.29% and 15.91% on December 31, 1996
and 1995, respectively. The Company's ratio of risk-weighted assets to Tier 1
capital was 15.15% and 14.77% at December 31, 1996 and 1995, respectively. Both
of these ratios exceeded the fully phased-in capital requirements in 1996 and
1995.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity which is sufficient to satisfy its
depositors' requirements and to meet its customers' credit needs.
At December 31, 1996, cash and cash equivalents and securities classified as
available for sale were 28.1% of total assets, compared to 28.6% at December 31,
1995. Asset liquidity is also provided by managing loan and securities
maturities and cash flows.
Additional resources of liquidity available to the Company include its capacity
to borrow additional funds when necessary. The subsidiary banks maintain Federal
funds lines with several regional banks totaling in excess of $35.0 million at
December 31, 1996. At year end 1996, the Banks had outstanding $11.7 million of
borrowings pursuant to securities sold under agreements to repurchase
transactions with a maturity of one day. The Company also had a line of credit
with the Federal Home Loan Bank of Atlanta for $50.0 million at December 31,
1996.
Recent Accounting Pronouncements
In 1996, the Financial Accounting Standards Board issued Statement of Financial
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," which requires recognition of financial
assets and liabilities using a financial-components approach which focuses on
control of the assets transferred. Management believes the adoption of this new
standard in 1997 will not have a material impact on the financial conditions, or
results of operations of the Company.
Forward-Looking Statements
Certain statement in this report may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that its expectations with respect to certain
forward-looking statements are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
16
[Logo]
The Board of Directors
Union Bankshares Corporation
We have audited the accompanying consolidated balance sheets of
Union Bankshares Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of King George State Bank, Incorporated, a
wholly-owned subsidiary, as of and for the years ended December 31, 1995 and
1994, which statements reflect total assets constituting 9% as of December 31,
1995 and total interest income constituting 9% and 10% in 1995 and 1994,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for King George State Bank,
Incorporated, is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Union Bankshares
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
January 20, 1997
17
Consolidated Balance Sheets
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
December 31, 1996 and 1995
(dollars in thousands)
ASSETS 1996 1995
--------------- --------------
Cash and cash equivalents (note 11):
Cash and due from banks $ 19,333 $ 15,253
Interest-bearing deposits in other banks 1,016 124
Federal funds sold 2,104 2,650
--------------- --------------
Total cash and cash equivalents 22,453 18,027
--------------- --------------
Securities available for sale, at fair value (note 2) 129,268 126,401
Investment securities, at amortized cost (note 2) 11,423 15,132
--------------- --------------
Total securities 140,691 141,533
--------------- --------------
Loans, net of unearned income (notes 3 and 10) 352,277 327,132
Less allowance for loan losses (note 4) 4,388 4,060
--------------- --------------
Net loans 347,889 323,072
--------------- --------------
Bank premises and equipment, net (note 5) 14,221 10,203
Other real estate owned 4,056 3,620
Other assets (note 7) 11,583 8,919
--------------- --------------
Total assets $ 540,893 $ 505,374
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing demand deposits $ 55,005 $ 49,905
Interest-bearing deposits:
Savings accounts 54,364 55,889
NOW accounts 49,834 43,046
Money market accounts 54,431 56,147
Time deposits of $100,000 and over 51,812 46,506
Other time deposits 174,161 164,262
--------------- --------------
Total interest-bearing deposis 384,602 365,850
--------------- --------------
Total deposits 439,607 415,755
--------------- --------------
Short-term borrowings (note 6) 27,403 31,108
Long-term borrowings (note 6) 11,125 1,275
Other liabilities (note 8) 4,192 3,553
--------------- --------------
Total liabilities 482,327 451,691
--------------- --------------
Stockholders' equity (notes 8 and 11):
Common stock, $4 par value. Authorized 12,000,000 shares;
issued and outstanding, 3,566,915 shares in 1996 and 3,561,970 in 1995 14,267 14,248
Surplus 160 66
Retained earnings 43,863 38,722
Unrealized gains on securities available for sale, net of taxes 276 647
--------------- --------------
Total stockholders' equity 58,566 53,683
--------------- --------------
Commitments and contingencies (notes 5 and 9)
Total liabilities and stockholders' equity $ 540,893 $ 505,374
=============== ==============
See accompanying notes to consolidated financial statements.
18
Consolidated Statements of Income
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
(dollars in thousands, except per share amounts)
1996 1995 1994
---- ---- ----
Interest income:
Interest and fees on loans (note 3) $32,444 $29,561 $23,835
Interest on securities:
U.S. government and agency securities 4,079 4,306 4,159
Obligations of states and political subdivisions 3,757 3,194 2,962
Other securities 355 663 723
Interest on Federal funds sold 317 327 209
Interest on interest-bearing deposits in other banks 44 32 39
------- ------- -------
Total interest income 40,996 38,083 31,927
------- ------- -------
Interest expense:
Interest on deposits 17,491 16,365 12,405
Interest on other borrowings 1,839 1,490 684
------- ------- -------
Total interest expense 19,330 17,855 13,089
------- ------- -------
Net interest income 21,666 20,228 18,838
Provision for loan losses (note 4) 895 977 1,102
Net interest income after provision
for loan losses 20,771 19,251 17,736
------- ------- -------
Other income:
Service fees 2,553 2,143 1,897
Losses on securities transactions, net (note 2) (33) (16) (14)
Gains on sales of loans 47 - -
Gains (losses) on sales of other real estate owned
and bank premises, net (11) (11) 558
Other operating income 903 502 508
------- ------- -------
Total other income 3,459 2,618 2,949
------- ------- -------
Other expenses:
Salaries and benefits 7,587 6,794 5,872
Occupancy expenses 917 739 686
Furniture and equipment expenses 1,184 1,030 867
FDIC assessments 13 467 837
Other operating expenses 4,801 4,007 3,811
------- ------- -------
Total other expenses 14,502 13,037 12,073
------- ------- -------
Income before income taxes 9,728 8,832 8,612
Income tax expense (note 7) 2,272 2,079 1,899
------- ------- -------
Net income $7,456 $ 6,753 $ 6,713
======= ======= =======
Net income per share of common stock $2.09 1.91 $ 1.90
======= ======= =======
Cash dividends per share of common stock $0.64 0.55 $ 0.51
======= ======= =======
See accompanying notes to consolidated financial statements.
19
Consolidated Statements of Changes in Stockholders' Equity
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
(dollars in thousands)
Unrealized
Common stock gains (losses)
--------------- on securities
Retained available
Shares Amount Surplus Earnings for sale Total
-------- -------- --------- ---------- ------------- --------
Balance - December 31, 1993,
as previously reported 3,255,630 $ 13,023 $ 181 $ 25,942 - $ 39,146
Pooling of interests with King George(note 13) 275,000 1,100 (500) 3,068 - 3,668
Cumulative effect of change in accounting
for securities available for sale,
net of taxes of $25 - - - - (48) (48)
Cash dividends declared - - - (1,806) - (1,806)
Issuance of common stock under
Dividend Reinvestment Plan 8,488 34 166 - - 200
Change in net unrealized losses
on securities available for sale,
net of taxed of $330 - - - - (640) (640)
Net income - 1994 - - - 6,713 - 6,713
----------- -------- -------- --------- -------- -----------
Balance - December 31, 1994 3,539,118 14,157 (153) 33,917 (688) 47,233
Cash dividends declared - - - (1,948) - (1,948)
Issuance of common stock under
Dividend Reinvestment Plan 9,412 37 193 - - 230
Issuance of common stock under
incentive stock option plan 13,440 54 26 - - 80
Change in net unrealized losses
on securities available for sale,
net of taxes of $688 - - - - 1,335 1,335
Net income - 1995 - - - 6,753 - 6,753
----------- -------- -------- --------- ---------- -----------
Balance - December 31, 1995 3,561,970 14,248 66 38,722 647 53,683
Cash dividends declared (2,315) (2,315)
Issuance of common stock under
Dividend Reinvestment Plan 11,145 45 227 272
Stock purchased under Stock
Repurchase Plan (6,200) (26) (133) (159)
Change in net unrealized gains on securities
available for sale, net of taxes of $185 (371) (371)
Net income - 1996 7,456 7,456
----------- -------- -------- --------- -------- -----------
Balance - December 31, 1996 3,566,915 $14,267 $ 160 $43,863 $ 276 $ 58,566
=========== ======== ======== ========= ======== ===========
See accompanying notes to consolidated financial statements
20
Consolidated Statements of
Cash Flows
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
------------- -------------- ----------
Operating activities:
Net income $ 7,456 $ 6,753 $ 6,713
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of bank premises and equipment 1,120 906 826
Provision for loan losses 895 977 1,102
Provision for losses on other real estate owned - - 200
Losses on securities transactions, net 33 16 14
Gains on sale of loans (47) - -
Losses on sales of bank premises, net - - 72
(Gains) losses on sales of other real estate owned, net (11) 11 (830)
Deferred income tax expense (benefit) (176) 20 62
Decrease (increase) in accrued interest receivable 88 (463) (307)
Other, net (1,791) 480 (414)
------------- -------------- ----------
Net cash and cash equivalents provided
by operating activities 7,765 8,700 7,438
------------- -------------- ----------
Investing activities:
Purchases of investment securities (357) (4,731) (30,792)
Proceeds from maturities of investment securities 4,072 18,032 15,570
Purchases of securities available for sale (47,286) (31,466) (9,579)
Proceeds from sales of securities available for sale 18,677 4,892 12,675
Proceeds from maturities of securities available for sale 24,989 5,621 8,884
Net increase in loans (26,300) (34,539) (39,926)
Purchases of bank premises and equipment (5,143) (2,552) (1,877)
Proceeds from sales of bank premises and equipment 2 - 7
Proceeds from sales of other real estate owned 212 355 1,665
------------- -------------- ----------
Net cash and cash equivalents used in
investing activities (31,134) (44,388) (43,373)
------------- -------------- ----------
Financing activities:
Net increase in non-interest-bearing deposits 5,100 690 6,119
Net increase in interest-bearing deposits 18,752 24,833 16,173
Net increase (decrease) in short-term borrowings (3,705) 10,564 9,640
Proceeds from long-term borrowings 10,000 - 1,500
Repayment of long-term borrowings (150) (150) (75)
Cash dividends paid (2,315) (1,948) (1,806)
Issuance of common stock under plans 272 310 200
Purchases of common stock (159) - -
------------- -------------- ----------
Net cash and cash equivalents provided
by financing activities 27,795 34,299 31,751
------------- -------------- ----------
Increase (decrease) in cash and cash equivalents 4,426 (1,389) (4,184)
Cash and cash equivalents at beginning of year 18,027 19,416 23,600
------------- -------------- ----------
Cash and cash equivalents at end of year $ 22,453 $ 18,027 $ 19,416
============= ============== ==========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 19,399 $ 17,535 $ 12,960
Income taxes $ 1,971 $ 1,903 $ 2,028
See accompanying notes to consolidated financial statements.
21
Notes to Consolidated Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Years ended December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
The accounting policies and practices of Union Bankshares Corporation
and subsidiaries (the "Company") conform to generally accepted
accounting principles and to general practice within the banking
industry. Certain major policies and practices are described below:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Union Bankshares Corporation and its wholly-owned
subsidiaries. Union Bankshares Corporation is a bank holding
company that owns all of the outstanding common stock of its
banking subsidiaries, Union Bank and Trust Company ("Union
Bank"), Northern Neck State Bank ("Northern Neck") and King
George State Bank ("King George") and its non-banking
subsidiary, Union Investment Services, Inc. All significant
intercompany balances and transactions have been eliminated.
King George was merged with and into the Company on September
1, 1996. The merger was accounted for as a
pooling-of-interests and, accordingly, the amounts in the
consolidated financial statements include the accounts and
results of King George for all periods presented.
The accompanying consolidated financial statements for prior
periods reflect certain reclassifications in order to conform
with the 1996 presentation.
(b) Investment Securities and Securities Available for Sale
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115).
In accordance with SFAS 115, when securities are purchased,
they are classified as investment securities when management
has the intent and the Company has the ability to hold them to
maturity. Investment securities are carried at cost, adjusted
for amortization of premiums and accretion of discounts, which
are recognized as adjustments to interest income using a
method that approximates the interest method.
Securities available for sale are those that management
intends to hold for an indefinite period of time, including
securities used as part of the Company's asset/liability
strategy, and that may be sold in response to changes in
interest rates, liquidity needs or other similar factors.
Securities available for sale are recorded at estimated fair
value with net unrealized gains or losses reported as a
separate component of stockholders' equity, net of taxes.
Gains and losses on the sale of securities are determined
using the specific identification method.
(c) Loans
Interest on loans is calculated using the simple interest
method on daily balances of principal amounts outstanding. The
accrual of interest is discontinued when the collection of
principal and/or interest is legally barred or considered by
management to be highly unlikely. After a loan is classified
as nonaccrual, interest income is generally recognized only
when collected.
Loan origination fees and direct loan origination costs for
completed loans are netted and then deferred and amortized
into interest income as an adjustment of yield.
(d) Allowance for Loan Losses
The provision for loan losses charged to operations is an
amount sufficient to bring the allowance for loan losses to an
estimated balance that management considers adequate to absorb
potential losses in the portfolio. Loans are charged against
the allowance when management believes the collectibility of
the principal is unlikely. Recoveries of amounts previously
charged off are credited to the allowance. Management's
determination of the adequacy of the allowance is based on an
evaluation of the composition of the loan portfolio, the value
and adequacy of collateral, current economic conditions,
historical loan loss experience, and other risk factors.
22
Management believes that the allowance for loan losses is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions,
particularly those affecting real estate values. In addition,
regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about
information available to them at the time of their
examination.
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), as amended by
SFAS 118. SFAS No. 114 requires the measurement of impaired
loans based on the present value of the expected future cash
flows discounted at the loan's effective rate, or the fair
value of the loan's collateral. A loan is considered impaired,
based on current information and events, if it is probable
that the Company will be unable to collect the scheduled
payments of principal or interest when due under the
contractual terms of the loan agreement. The effect of the
adoption of SFAS No. 114 as amended was not material to the
Company's financial statements.
(e) Bank Premises and Equipment
Bank premises and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using either the
straight-line or accelerated depreciation method based on the
type of asset involved. It is the policy of the Company to
capitalize additions and improvements and to depreciate the
cost thereof over their estimated useful lives. Maintenance,
repairs and renewals are expensed as they are incurred.
(f) Income Taxes
Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and
income tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax
expense is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets
and liabilities.
(g) Other Real Estate Owned
Foreclosed assets are carried at the lower of (a) fair value
minus estimated costs to sell or (b) cost at the time of
foreclosure. Such determination is made on an individual asset
basis. If the fair value of the asset minus the estimated
costs to sell the asset is less than the cost of the asset,
the deficiency is recognized as a valuation allowance. If the
fair value of the asset minus the estimated costs to sell the
asset subsequently increases and is more than its carrying
amount, the valuation allowance is reduced, but not below
zero. Increases or decreases in the valuation allowance are
charged or credited to income. Recovery of the carrying value
of such real estate is dependent to a great extent on
economic, operating, and other conditions that may be beyond
the Company's control.
(h) Consolidated Statements of Cash Flows
For purposes of reporting cash flows, the Company defines cash
and cash equivalents as cash, due from banks, interest-bearing
deposits in other banks and Federal funds sold. Other real
estate owned increased in the amount of $635,000, $2,375,000
and $1,139,000 during the years ended December 31, 1996, 1995
and 1994, respectively, as a result of loan foreclosures. The
Company also transferred $71,872,000 in investment securities
to securities available for sale during 1995. Other assets
increased by $471,304 during the year ended December 31, 1994,
also as a result of loan foreclosures. These represent
non-cash investing activities for purposes of the consolidated
statements of cash flows.
23
(i) Pension Plan
The Company computes the net periodic pension cost of its
pension plan in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for
Pensions." Costs of the plan are determined by independent
actuaries.
(j) Per Share Data
Per share data has been computed on the basis of the weighted
average number of shares outstanding. Weighted average shares
used for the computation were 3,564,417 in 1996, 3,543,033 in
1995, 3,533,035 in 1994.
(k) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions of
certain amounts in the financial statements. Actual results
could differ from these estimates.
2. Investment Securities and Securities Available for Sale
The amortized cost, estimated fair values, and gross unrealized gains
and losses of investment securities at December 31, 1996 and 1995 are
summarized as follows (in thousands):
1996
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and agency securities $ 849 $ - $ 10 $ 839
Obligations of states and
political subdivisions 8,606 276 17 8,865
Corporate and other bonds 1,968 23 6 1,985
--------------- --------------- --------------- ---------------
$ 11,423 $ 299 $ 33 $ 11,689
=============== =============== =============== ===============
1995
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and agency securities $ 2,000 $ 14 $ 30 $ 1,984
Obligations of states and
political subdivisions 10,471 407 12 10,866
Corporate and other bonds 2,653 59 4 2,708
Mortgage-backed securities 8 - - 8
--------------- --------------- --------------- ---------------
$ 15,132 $ 480 $ 46 $ 15,566
=============== =============== =============== ===============
24
The amortized cost, estimated fair values, and gross unrealized gains
and losses of securities available for sale at December 31, 1996 and
1995 are summarized as follows (in thousands):
1996
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and agency securities $ 18,405 $ 45 $ 109 $ 18,340
Obligations of states and
political subdivisions 61,553 1,233 247 62,539
Corporate and other bonds 1,498 21 7 1,512
Mortgage-backed securities 44,347 171 741 43,777
Federal Reserve Bank stock 361 - - 361
Federal Home Loan Bank stock 2,402 - - 2,402
Other securities 277 68 9 336
--------------- --------------- --------------- ---------------
$ 128,843 $ 1,538 $ 1,113 $ 129,268
=============== =============== =============== ===============
1995
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and agency securities $ 21,988 $ 182 $ 83 $ 22,088
Obligations of states and
political subdivisions 54,017 1,640 161 55,495
Corporate and other bonds 2,454 8 9 2,453
Mortgage-backed securities 44,552 237 844 43,945
Federal Reserve Bank stock 361 - - 361
Federal Home Loan Bank stock 1,845 - - 1,845
Other securities 204 10 - 214
--------------- --------------- --------------- ---------------
$ 125,421 $ 2,077 $ 1,097 $ 126,401
=============== =============== =============== ===============
The amortized cost and estimated fair value of investment securities
and securities available for sale at December 31, 1996, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Investment Securities Securities Available for Sale
----------------------------------- -----------------------------------
Amortized Estimated Amortized Estimated
Cost Fair value Cost Fair value
--------------- --------------- --------------- ---------------
Due in one year or less $ 2,120 $ 2,135 $ 9,185 $ 9,203
Due after one year through five years 8,240 8,484 50,087 50,004
Due after five years through ten years 734 743 36,158 36,484
Due after ten years 329 327 30,373 30,478
--------------- --------------- -------------- ---------------
11,423 11,689 125,803 126,169
Federal Reserve Bank stock - - 361 361
Federal Home Loan Bank stock - - 2,402 2,402
Other securities - - 277 336
--------------- --------------- --------------- ---------------
$ 11,423 $ 11,689 $ 128,843 $ 129,268
=============== =============== =============== ===============
Investment securities with an amortized cost of approximately
$48,123,000 at December 31, 1996 and $42,612,000 at December 31, 1995
were pledged to secure public deposits, repurchase agreements and for
other purposes.
25
Sales of securities available for sale produced the following results
for the years ended December 31, 1996, 1995 and 1994 (in thousands):
<Captin>
1996 1995 1994
--------------- --------------- ---------------
Proceeds $ 18,677 $ 4,892 $ 12,675
=============== =============== ===============
Gross gains $ 126 $ 37 $ 54
Gross losses (159) (53) (68)
--------------- --------------- ---------------
Net losses $ (33) $ (16) $ (14)
=============== =============== ===============
3. Loans
Loans are stated at their face amount, net of unearned income, and
consist of the following at December 31, 1996 and 1995 (in thousands):
1996 1995
--------------- ---------------
Real estate loans $ 232,257 $ 213,531
Commercial loans 37,263 36,920
Loans to individuals for household,
family and other personal expenditures 78,950 72,378
All other loans 5,205 5,497
--------------- ---------------
353,675 328,326
Less unearned income on loans 1,398 1,194
--------------- ---------------
$ 352,277 $ 327,132
=============== ===============
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114), as amended by SFAS 118. This pronouncement
requires that impaired loans within the scope of the statements be
presented in the financial statements at the present value of expected
future cash flows or at the fair value of the loan's collateral. A
valuation allowance is required to the extent that the measure of the
impaired loans is less than the recorded investment. SFAS 114 does not
apply to larger groups of homogenous loans such as real estate
mortgage, installment, home equity and bank card loans, which are
collectively evaluated for impairment. The initial adoption of SFAS 114
did not require an increase to the Company's allowance for loan losses.
At December 31, 1996 and 1995, the recorded investment in loans which
have been identified as impaired loans, in accordance with SFAS 114,
totaled $420,000 and $669,000, respectively.
Nonaccrual loans totaled approximately $420,000 at December 31, 1996
and approximately $669,000 at December 31, 1995. The gross interest
income that would have been recorded during 1996, 1995 and 1994 had the
Company's nonaccrual loans been current with their original terms, was
approximately $58,000, $60,000 and $160,000, respectively. The amount
of interest income recorded by the Company during 1996, 1995 and 1994
on nonaccrual loans was $44,000, $8,014 and $0, respectively.
4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 are summarized below (in thousands):
1996 1995 1994
--------------- --------------- ---------------
Balance, beginning of year $ 4,060 $ 4,110 $ 3,822
Provision charged to operations 895 977 1,102
Recoveries credited to allowance 401 225 256
--------------- --------------- ---------------
Total 5,356 5,312 5,180
Loans charged off 968 1,252 1,070
--------------- --------------- ---------------
Balance, end of year $ 4,388 $ 4,060 $ 4,110
=============== =============== ===============
26
5. Bank Premises and Equipment
Bank premises and equipment as of December 31, 1996 and 1995 are as
follows (in thousands):
1996 1995
--------------- ---------------
Land $ 3,371 $ 3,107
Land improvements and buildings 9,827 7,183
Furniture and equipment 7,968 6,036
Leasehold improvements 273 -
Construction in progress 54 190
--------------- ---------------
21,493 16,516
Less accumulated depreciation 7,272 6,313
--------------- ---------------
Bank premises and equipment, net $ 14,221 $ 10,203
=============== ===============
Depreciation and amortization expense for 1996, 1995 and 1994 was
$1,120,000, $906,000 and $826,000, respectively. Future minimum rental
payments required under non-cancelable operating leases that have
initial or remaining terms in excess of one year as of December 31,
1996 are approximately $151,000 for 1997, $113,000 for 1998, and
$71,000 for 1999.
6. Other Borrowings
Short-term borrowings consist of the following at December 31, 1996,
1995 and 1994 (dollars in thousands):
1996 1995 1994
--------------- --------------- ----------------
Federal funds purchased $ 6,295 $ 6,590 $ 1,175
Securities sold under agreements to repurchase 11,698 10,368 12,342
Other short-term borrowings 9,410 14,150 7,027
---------------- --------------- ---------------
Total $ 27,403 $ 31,108 $ 20,544
=============== =============== ===============
Weighted interest rate 5.27% 5.43% 5.86%
Average for the year ended December 31:
Outstanding $ 26,344 $ 23,832 $ 13,863
Interest rate 4.58% 5.85% 4.37%
Maximum month-end outstanding $ 31,023 $ 31,108 $ 22,095
Federal funds purchased and securities sold under agreements to
repurchase are due within one year. The subsidiary banks maintain
Federal funds lines with several regional banks totaling in excess of
$35 million at December 31, 1996.
Long-term borrowings at December 31, 1996 represent Federal Home Loan
Bank Advances totalling $11,125,000. Interest on advances totaling
$1,125,000 is payable monthly at 6.17%, with semiannual principal
payments of $75,000 and the final payment due in 2004. Interest on the
remaining advances of $10,000,000 is payable quarterly at 5.60% and
matures on June 1, 2001, with a one year call provision at June 1,
1997. Outstanding long-term borrowings at December 31, 1995 totaled
$1,275,000.
7. Income Taxes
The components of the 1996, 1995 and 1994 income tax expense (benefit)
are as follows in thousands:
1996 1995 1994
--------------- --------------- ---------------
Current taxes - Federal $ 2,448 $ 2,059 $ 1,837
Deferred taxes - Federal (176) 20 62
--------------- --------------- ---------------
Income tax expense $ 2,272 $ 2,079 $ 1,899
=============== =============== ===============
27
The reasons for the difference between actual income tax expense and
the amount computed by applying the statutory Federal income tax rate
to income before income taxes are shown below.
1996 1995 1994
--------------- --------------- ---------------
Computed "expected" tax expense $ 3,308 $ 3,003 $ 2,928
Increase (reduction) in taxes resulting from:
Tax-exempt interest (1,128) (976) (999)
Other, net 92 52 (30)
--------------- --------------- ---------------
Income tax expense $ 2,272 $ 2,079 $ 1,899
=============== =============== ===============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities at
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
--------------- ---------------
Deferred tax assets:
Loans, principally due to the allowance for loan losses $ 999 $ 864
Benefit plans 633 596
Deferred loan fees and costs 43 70
Other 88 77
--------------- ---------------
Total deferred tax assets 1,763 1,607
--------------- ---------------
Deferred tax liabilities:
Unrealized gains on securities available for sale 148 333
Bank premises and equipment, principally due to depreciation 309 336
Condemnation gains 52 52
Other real estate owned, principally due to sales treatment 158 157
Other 43 37
--------------- ---------------
Total deferred tax liabilities 710 915
--------------- ---------------
Net deferred tax asset (included in other assets) $ 1,053 $ 692
=============== ===============
In assessing the realizability of deferred tax assets, management
considers the scheduled reversal of temporary differences, projected
future taxable income, and tax planning strategies. Management believes
it is more likely than not the Company will realize its deferred tax
assets and, accordingly, no valuation has been established.
8. Employee Benefits
The Company has a noncontributory, defined benefit pension plan
covering all full-time employees. Contributions to the plan totaled
$196,166 and $107,201 for 1996 and 1995, respectively.
Significant assumptions used in determining net periodic pension cost
and projected benefit obligation for 1996 and 1995 were:
Expected long-term rate of return on assets 9%
Discount rate 7.5%
Salary increase rate 6%
Average remaining service 21 years
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31,
1996 and 1995 (in thousands):
28
1996 1995
--------------- ---------------
Vested benefit obligation $ (1,385) $ (1,409)
Nonvested accumulated plan benefits (72) (16)
--------------- ---------------
Accumulated benefit obligation $ (1,457) $ (1,425)
=============== ===============
Projected benefit obligation $ (2,960) $ (2,751)
Plan assets at fair value 2,483 2,277
--------------- ---------------
Excess of projected benefit obligation over plan assets (477) (474)
Unrecognized net obligation 6 7
Unrecognized prior service cost 285 303
Unrecognized net gain (655) (659)
--------------- ---------------
Accrued pension (included in other liabilities) $ (841) $ (823)
=============== ===============
Net periodic pension cost for 1996, 1995 and 1994 included the
following components (in thousands):
1996 1995 1994
--------------- --------------- ---------------
Service cost $ 265 $ 212 $ 203
Interest cost 205 178 163
Actual return on assets (275) (339) (57)
Net amortization and deferral 71 165 (132)
--------------- --------------- ---------------
Net periodic pension cost $ 266 $ 216 $ 177
=============== =============== ===============
The Company also contributes to an employees' profit-sharing plan which
covers all full-time employees. Contributions are made annually at the
discretion of the subsidiaries banks' Board of Directors. The payments
to the plan for the years 1996, 1995 and 1994 were approximately
$521,000, $580,000 and $422,000, respectively, which represents
approximately 15% of the compensation of participants in each year.
The Company has an obligation to certain members of the subsidiary
banks' Boards of Directors under deferred compensation plans in the
amount of $1,034,000 and $979,000 at December 31, 1996 and 1995,
respectively. A portion of the benefits will be funded by life
insurance.
In 1993, the Company adopted an incentive stock plan which reserves up
to 200,000 shares of common stock for issuance to certain employees.
Approximately 45,000 shares had been granted under this plan as of
December 31, 1996 at prevailing market prices including 6,500 and
10,000 shares granted in 1996 and 1995, respectively. Exercise prices
range from $7.46 to $25.00 per share. No stock options were exercised
during 1996. Stock options representing 13,440 shares were exercised in
1995.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the Company's
stock options. Had compensation cost been determined based on the fair
value at the grant dates consistent with the alternative method of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per
share as reported in the accompanying Consolidated Statements of Income
would not have been impacted by a material amount.
9. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contractual amounts
of these instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
29
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit and standby letters of credit written is represented by the
contractual amount of these instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. Unless noted otherwise, the
Company does not require collateral or other security to support
financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments may expire without being completely drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. At December 31, 1996 and 1995, the Company had
outstanding loan commitments approximating $36,592,000 and $20,361,000,
respectively.
Standby letters of credit written are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
The amount of standby letters of credit whose contract amounts
represent credit risk totaled approximately $6,772,000 and $3,206,000
at December 31, 1996 and 1995, respectively.
A geographic concentration exists within the Company's loan portfolio
as most of the Bank's business activity is with customers located in
areas from Fredericksburg to Hanover County, Virginia and in the
Northern Neck area of Virginia.
10. Related Party Transactions
The Company has entered into transactions with its directors, principal
officers and affiliated companies in which they are principal
stockholders. Such transactions were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related
parties totaled $6,677,000 and $6,611,000 as of December 31, 1996 and
1995, respectively. During 1996 new advances to such related parties
amounted to $5,295,000 and repayments amounted to $5,229,000.
11. Regulatory Matters
The bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative measures of
the Company's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative
judgments by regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
1996, that the Company meets all capital adequacy requirements to which
it is subject.
The most recent notification from the Federal Reserve Bank as of
September 30, 1996, categorized the Company as well capitalized under
the regulatory framework for prompt corrective action (PCA). To be
categorized as adequately capitalized the Company must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's
category.
30
The Company's actual capital amounts and ratios are also presented in
the table.
Required for capital Required in order to be
Actual adequacy purposes well capitalized under PCA
-------------------- -------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- --------- --------- ------------ ------------
As of December 31, 1996
Total capital to
risk weighted assets $ 62,415 16.29% $ 30,644 8.00% $ 38,305 10.00%
Tier 1capital to
risk weighted assets 58,027 15.15% 15,322 4.00% 22,983 6.00%
Tier 1capital to
average assets 58,027 10.70% 21,692 4.00% 27,115 5.00%
As of December 31, 1995
Total capital to
risk weighted assets $ 56,812 15.91% $ 28,570 8.00% $ 35,713 10.00%
Tier 1capital to
risk weighted assets 52,752 14.77% 14,285 4.00% 21,428 6.00%
Tier 1capital to
average assets 52,752 10.87% 19,412 4.00% 24,265 5.00%
12. Disclosure about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Cash Equivalents
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment Securities and Securities Available for Sale
For investment securities and securities available for sale,
fair value is determined by quoted market price. If a quoted
market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans
The fair value of performing loans is estimated by discounting
the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Fair value for
significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows.
Deposits
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of
similar remaining maturities.
Borrowings
The carrying value of short-term borrowings are reasonable
estimates of fair value. The fair value of long-term
borrowings is estimated based on interest rates currently
available for debt with similar terms and remaining
maturities.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate
31
loan commitments, fair value also considers the difference
between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date. At December 31,
1996 and 1995, the carrying amount and fair value of loan
commitments and standby letters of credit were immaterial.
The carrying amounts and estimated fair values of the
Company's financial instruments as of December 31, 1996 and
1995 are as follows:
1996 1995
--------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- --------------
Financial assets:
Cash and cash equivalents $ 22,453 $ 22,453 $ 18,027 $ 18,027
Investment securities 11,423 11,689 15,132 15,566
Securities available for sale 129,268 129,268 126,401 126,401
Net loans 352,277 350,717 327,132 319,150
Financial liabilities:
Deposits 439,607 436,605 415,755 411,020
Borrowings 38,528 38,528 32,383 32,383
13. Merger
On September 1, 1996 King George State Bank, Inc. merged with and into
Union Bankshares in a transaction accounted for as a
pooling-of-interests. Pursuant to the merger, each share of common
stock of King George was exchanged for 5.5 shares of common stock of
the Company. A total of 275,000 shares of the Company's common stock
was issued in connection with the merger. Previously reported
information for the periods presented below for Union Bankshares and
King George was as follows (in thousands):
Six Months Ended Year Ended Year Ended
June 30, 1996 December 31, 1995 December 31, 1994
------------------------------ ------------------------------ -----------------------------
Union King Union King Union King
Bankshares George Bankshares George Bankshares George
-------------- -------------- -------------- ------------- -------------- ------------
Net interest income $ 9,435 $ 1,036 $ 18,188 $ 2,040 $ 16,903 $ 1,935
Provision for loan losses 231 90 574 403 597 505
Other income 1,425 348 2,442 176 2,774 176
Other expenses 6,170 584 11,899 1,138 11,031 1,042
Income tax expense 984 132 1,910 169 1,774 126
-------------- -------------- -------------- ------------- -------------- ------------
Net income $ 3,475 $ 578 $ 6,247 $ 506 $ 6,275 $ 438
============== ============== ============== ============= ============== ============
Net income per share $ 1.06 $ 11.56 $ 1.91 $ 10.11 $ 1.93 $ 8.76
============== ============== ============== ============= ============== ============
Cash dividends per share $ .30 $ 2.35 $ .56 $ 2.30 $ .52 $ 2.25
============== ============== ============== ============= ============== ============
14. Parent Company Financial Information
The primary source of funds for the dividends paid by Union Bankshares
Corporation (the "Parent Company") is dividends received from its
subsidiary banks. The payment of such dividends by the subsidiary banks
and the ability of the banks to loan or advance funds to the Parent
Company are subject to certain statutory limitations which contemplate
that the current year earnings and earnings retained for the two
preceding years may be paid to the Parent Company without regulatory
approval. Financial information for the Parent Company follows:
32
UNION BANKSHARES CORPORATION ("PARENT COMPANY ONLY")
Balance Sheets
December 31, 1996 and 1995
(dollars in thousands)
1996 1995
--------------- ---------------
Assets
Cash $ $ 84 $ 207
Certificates of deposit 472 450
Securities available for sale 211 1,108
Premises and equipment 1,058 -
Other assets 313 323
Due from subsidiaries 51 73
Investment in subsidiaries 56,581 51,525
--------------- ---------------
Total assets $ 58,770 $ 53,686
=============== ===============
Liabilities and Stockholders' equity:
Other liabilities $ 204 $ 3
Common stock 14,267 14,248
Surplus 160 66
Retained earnings 43,863 38,722
Unrealized losses on securities available for sale 276 647
--------------- ---------------
Total liabilities and stockholders' equity $ 58,770 $ 53,686
=============== ===============
Condensed Statements of Income
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------------- --------------- --------------
Income:
Interest income $ 67 $ 93 $ 27
Dividends received from subsidiaries 2,315 1,948 3,524
Equity in undistributed net income of subsidiaries 5,453 4,886 3,209
--------------- --------------- --------------
Total income 7,835 6,927 6,760
Operating expenses 379 174 47
--------------- --------------- --------------
Net income $ 7,456 $ 6,753 $ 6,713
=============== =============== ==============
Condensed Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------------- --------------- --------------
Operating activities:
Net income $ 7,456 $ 6,753 $ 6,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (5,453) (4,886) (3,209)
Decrease (increase) in other assets 34 (260) (136)
Other (net) 197 (1) 45
--------------- --------------- --------------
Net cash provided by operating activities 2,234 1,606 3,413
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Investing activities:
Purchase of securities (63) (100) (1,496)
Proceeds from maturity of securities 1,006 498 -
Purchase of equipment (1,076) - -
Capital contributions to subsidiaries - (50) -
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Net cash provided (used) by investing activities (133) 348 (1,496)
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Financing activities:
Cash dividends paid (2,315) (1,948) (1,806)
Issuance of common stock under plans 272 310 200
Repurchase of common stock (159) - -
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Net cash used in financing activities (2,202) (1,638) (1,606)
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Increase (decrease) in cash and cash equivalents (101) 316 311
Cash and cash equivalents at beginning of year 657 341 30
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Cash and cash equivalents at end of year $ 556 $ 657 $ 341
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