BOWLING GREEN, Va., Jan. 25 /PRNewswire-FirstCall/ -- Union Bankshares Corporation (the "Company") net income was $3.6 million, down 44.0%, from $6.4 million for the same quarter in 2006. Earnings per share, on a diluted basis, decreased $.21, or 43.8%, from $.48 to $.27 for the same quarter a year ago. Return on average equity for the quarter ended December 31, 2007 was 6.80%, while return on average assets for the same period was 0.64%, compared to 13.00% and 1.22%, respectively, for the prior year's same quarter.
This decline was largely the result of flat net interest income due to funding pressure and declines in yields on earning assets greater than cost of funds. Continued slowing in the mortgage banking sector also contributed to the net decline. The purchase of six bank branches, effective September 7, 2007, the opening of three bank branches and costs associated with the Company's new operations center contributed to the lower results when compared to the same period a year ago.
"When a bank faces a downturn of the economy in its marketplace, management's first concerns are asset quality and declining growth of earning assets. I am encouraged that our asset quality has remained strong through 2007 and that loan staff has successfully transitioned from residential based lending to commercial oriented lending," said G. William Beale, President and Chief Executive Officer of Union Bankshares Corporation. "We continue to undertake initiatives that will create greater long-term shareholder value, but result in a drag on current income growth rates. Our recent branch acquisition, as well as the opening of 3 de novo branches in the last 14 months, is an example of our long term focus. The current demand for deposit growth is exceeding the supply available within our marketplace, which is placing extreme pressure on our margin. In 2008, our challenges will be to continue high levels of credit quality and attract deposits at a level sufficient to meet our customer's needs."
On a liked quarter basis, net income declined from the most recent quarter by $1.7 million, or 32.6%, from $5.4 million to $3.6 million for the quarter ended December 31, 2007. This represents a decline in earnings per share, on a diluted basis, of 32.5%, or $.13, to $.27. This net decline was largely attributable to additional provisions for loan losses, costs associated with the acquisition and operation of new branches as well as lower mortgage segment income.
For the twelve months ended December 31, 2007, net income was $19.8 million, down 24.0% from $26.0 million compared to the same period a year ago. This represents a decrease in earnings per share, on a diluted basis of $.47, or 24.2%, from $1.94 to $1.47. Return on average equity for the twelve months ended December 31, 2007 was 9.61%, while return on average assets was 0.91%, compared to 13.64% and 1.30%, respectively, for 2006. This decrease was partially related to margin compression, as well as a continued slowing in the mortgage banking sector and increases in noninterest expenses.
As a supplement to U.S. generally accepted accounting principles ("GAAP"), the Company also uses certain alternate financial measures to review its operating performance. Earnings per share on a cash basis for the quarter ended December 31, 2007 were $.29 as compared to $.50 for the same quarter a year ago and $.42 for the quarter ended September 30, 2007. Additionally, cash basis return on average tangible equity for the fourth quarter ended December 31, 2007 was 10.93% as compared to 19.95% in the prior year's fourth quarter and 15.90% for the quarter ended September 30, 2007. Earnings per share, on a cash basis and cash basis return on average tangible equity, were $1.56 and 14.88%, and $2.03 and 20.31%, respectively, for the twelve months ending December 31, 2007 and 2006.
NET INTEREST INCOME
Competition for low cost deposits and other forms of funding continued to impact the Company's net interest margin in the fourth quarter. For the three months ended December 31, 2007, net interest income, on a tax-equivalent basis, increased slightly to $19.8 million from $19.7 million when compared to last year's same period. This same income on a larger earning asset base reflected a decline in net interest margin, on a tax-equivalent basis, from 4.15% to 3.89%. This 26 basis point margin decline was driven by increased costs of interest-bearing liabilities, which rose to 3.88%, or 2 basis points, compared to yields on earning assets, which declined 18 basis points to 7.22%. Declining levels of low-cost deposits have continued to put pressure on the funding side of the balance sheet, resulting in the need to grow certificates of deposit, purchased funding from the Federal Home Loan Bank of Atlanta ("FHLB") and other sources. Average interest-earning assets for the quarter ended December 31, 2007 increased approximately $151.5 million, or 9.6%, compared to only $17.7 million, or 1.3%, for interest-bearing deposits, over the same period a year ago. The remaining growth was funded by purchased funding. Loan growth was driven primarily by increases in the commercial and construction loan portfolios (primarily in owner occupied commercial real estate). Average interest-bearing liabilities for the period ended December 31, 2007 increased approximately $151.5 million, or 9.5%, over the same period a year ago. This growth was driven primarily by increases in certificates of deposit and FHLB advances, offset by lower demand deposit, savings and money market account balances. Included in these amounts are approximately $43.3 million in deposits acquired through the purchase of six bank branches, of which $34.7 million were interest-bearing liabilities.
On a linked quarter basis, the tax-equivalent net interest margin for the quarter ended December 31, 2007 declined 18 basis points from 4.07% to 3.89% from the most recent quarter. Net interest income decreased by $317 thousand to $19.8 million for the quarter ended December 31, 2007. This decrease was largely driven by declining interest rates. The Federal Open Market Committee of the Federal Reserve Board of Governors lowered the target Fed Funds rate 50 basis points during the quarter, one 25 basis point decrease on October 31st and another on December 11th to arrive at 4.25% by December 31, 2007. Loan growth of $56.4 million (13.6% increase on an annualized basis) helped to offset a decline in loan yields of 26 basis points. The growth in loans of $56.4 million was primarily within the commercial loan portfolio (principally owner occupied commercial real estate). Also contributing to the lower net interest margin was increased reliance on short-term advances from FHLB and other wholesale sources amid continued strong competition for maintaining deposit cost levels (cost of interest bearing deposits declined to 3.53% or only 1 basis point) in a declining rate environment. Despite the decline in the Fed Funds rate, competition for funds has left deposit rates uncharacteristically high.
For the year ended December 31, 2007, net interest income, on a tax- equivalent basis, declined $208 thousand, or 0.3%, to $78.8 million compared to a year ago. Net interest margin declined, on a tax-equivalent basis, from 4.37% in 2006 to 4.06% for 2007. The 31 basis point margin decline was driven by increases in certificates of deposit and FHLB advances offset by lower savings and money market levels. Total cost of interest-bearing liabilities increased 46 basis points, to 3.93%, compared to earning asset yield increases of only 14 basis points, to 7.42%. Strong loan growth (principally within the commercial and construction loan portfolios, with an emphasis in owner occupied commercial real estate) of $147.5 million, or 10.0%, over a year ago helped to mitigate the effect of high cost interest bearing liabilities outpacing the yields on earning assets.
The recent 100 basis point cut (50 basis points on 9/18/07, 25 basis points on 10/31/07 and 25 basis points on 12/11/07) in the target Fed Funds rate resulted in the immediate repricing of the Company's loans tied to prime -- representing approximately 33% of the loan portfolio. The liability side of the balance sheet also showed some immediate repricing, as overnight borrowing rates adjusted downward. Competition for deposits, however, has caused the Company's deposit rates to be less responsive to Fed Funds rate decreases.
For the year ended December 31, 2007, approximately $8.0 million ($6.2 million during the first quarter and $1.8 million during the second quarter) of investment securities were called by the issuers, resulting in gains of $508 thousand ($301 thousand during the first quarter and $207 thousand during the second quarter). The proceeds from these calls, plus additional funds, were used to pay off approximately $15.0 million of higher cost (6.3%) FHLB advances. Penalties of approximately $513 thousand ($316 thousand during the first quarter and $197 thousand during the second quarter) associated with the early payoff of these advances have been reflected as an interest expense adjustment in the net interest margin for the twelve months ended December 31, 2007. Absent this interest expense adjustment, net interest margin would have been 4.08%, instead of 4.06%, for the year ended December 31, 2007.
LOAN LOSS PROVISION/ASSET QUALITY
Despite increasing industry concerns over credit issues, the Company's asset quality remains strong. Net charge-offs were $393 thousand (.05% and .09% of gross loans for the year and fourth quarter 2007, respectively) for the quarter ended December 31, 2007, compared to net charge-offs of $97 thousand in the same quarter last year and $229 thousand for the quarter ended September 30, 2007, and remain at relatively low levels. At December 31, 2007, nonperforming assets totaled $10.1 million, including a single credit relationship totaling $7.3 million.
The provision for loan losses increased from $154 thousand in the fourth quarter of 2006 to $1.2 million for the same quarter in 2007. On a linked quarter basis, the provision for loan losses increased $741 thousand. This net increase was primarily due to continued loan growth, net charge-offs and increased uncertainty with regard to general economic and other credit risk factors. For the year ended December 31, 2007, the provision for loan losses decreased $390 thousand from $1.5 million a year ago. This decline was largely attributable to the reduction of estimated loss exposure ($750 thousand recapture noted during the first quarter of 2007 on a continuing non- performing loan to a single credit relationship). Without regard for the above recapture, the provision for loan losses increased $360 thousand over this same period.
The Company entered into a workout agreement with the borrower in the aforementioned single credit relationship during March 2004. Under the terms of the agreement, the Company extended further credit secured by additional property with significant equity. During the first quarter of 2007, such equity was extracted from this relationship, reducing nonperforming assets totals on this relationship from $10.6 million as of December 31, 2006 to $7.9 million, and resulting in the recapture of $750 thousand in specific reserves. In the second quarter of 2007, approximately $400 thousand of this relationship returned to accrual status, further reducing the nonperforming balance to $7.5 million as of the end of June 30, 2007. This balance has been further reduced (due to payments) to $7.3 million at December 31, 2007. Despite the lengthy nature of this workout, the Company continues to have dialogue with the borrower toward a resolution of the affiliated loans and anticipates that this workout will result in further reductions of the Company's overall exposure to the borrower. The loans to this relationship continue to be secured by real estate (two assisted living facilities).
Nationally, industry concerns over asset quality have increased due in large part to issues related to subprime mortgage lending, declining real estate activity and general economic concerns. While the Company has experienced reduced residential real estate activity, the markets in which the Company operates remain stable and there has been no significant deterioration in the quality of the Company's loan portfolio. Residential loan demand has moderated somewhat but the Company is still experiencing continued loan demand, particularly in owner occupied commercial real estate. Management will continue to monitor delinquencies, risk rating changes, charge-offs, market trends and other indicators of risk in the Company's portfolio (particularly those tied to residential real estate) and adjust the allowance for loan losses accordingly.
NONINTEREST INCOME
Noninterest income for the three months ended December 31, 2007, declined $942 thousand, or 12.8%, from $7.3 million to $6.4 million compared to last year's same quarter. This decline reflected lower mortgage segment income from the sale of loans of approximately $204 thousand from the same quarter a year ago. The prior year's same quarter contained a combination of gains from investment securities, insurance proceeds and bank-owned life insurance ("BOLI") commissions totaling approximately $1.0 million. During the fourth quarter of 2007, legacy telephone equipment was disposed at a loss of $121 thousand and replaced with voice over internet protocol ("VoIP") equipment. Absent these transactions and mortgage segment operations, noninterest income increased approximately $401 thousand, or 10.3%. This net increase comes from a combination of increases in other service charges and deposit account charges as well as the income from a full year's investment in BOLI (additional investment made during December of 2006).
On a linked quarter basis, noninterest income increased $120 thousand, or 1.9%, from the quarter ended September 30, 2007. These results included $362 thousand from deposit accounts and other service charges and $293 thousand from gains on sales of loans within the mortgage segment. The Company recorded a gain of $324 thousand from the sale of its former operations center during the third quarter of 2007. Absent the loss on disposal of legacy telephone equipment (mentioned above), mortgage operations and the prior quarter gain on sale, noninterest income increased approximately $272 thousand or 6.8%.
For the year ended December 31, 2007, noninterest income decreased $3.1 million, or 11.1%, from $28.2 million in 2006 to $25.1 million. The decrease was principally driven by lower gains on sales within the mortgage segment of $2.5 million. Deposit accounts and other service charge income increased $755 thousand, or 5.7%, compared to last year. The prior year gains from the sale of real estate of approximately $837 thousand, insurance proceeds and BOLI commissions of approximately $617 thousand did not recur in 2007 thereby contributing to lower noninterest income.
NONINTEREST EXPENSE
Noninterest expense for the three months ended December 31, 2007 increased $2.7 million, or 15.3%, to $19.9 million over last year's same period. Other operating expenses increased $1.5 million, or 27.9%, which was principally related to the purchase of six bank branches and their related operations, marketing expenses, the operation of three additional bank branches and infrastructure enhancements to support the Company's continued growth. Infrastructure enhancements included VoIP and the associated hardware and software to support this technology. Other initiatives include online check deposit (i.e., remote capture) technology, enhancements to our internet banking delivery channel (e.g., increased bandwidth) and improvements in data security and business continuity. Salaries and benefits increased $627 thousand, or 6.7%, and were mainly attributable to normal compensation increases, additional personnel and incentive compensation. This increase of $627 thousand was offset by reductions in profit sharing expense, commission expense from the mortgage segment and group insurance costs. Occupancy expenses increased $366 thousand, or 27.2%, and were principally attributable to increased facilities costs associated with the Company's continued expansion. Some of these increased costs included depreciation, property insurance, rental expenses and, to a lesser extent, utility costs. In addition, the Company moved into its new 70,000 square foot operations center, in Caroline County, during the second quarter of 2007. This facility will allow for more effective and efficient deployment of the Company's support services and provide sufficient space for anticipated growth over the next ten years. The fourth quarter of 2007 contained approximately $114 thousand of depreciation related to this new operations center. Other occupancy costs of approximately $141 thousand were attributable to the acquisition of six bank branch facilities, as stated above. Furniture and equipment expenses increased $139 thousand, or 11.9%, and were attributable to the related depreciation and software costs of the additional branches and new operations center.
On a linked quarter basis, noninterest expense increased by $1.9 million or 11.0%, to $19.9 million from $18.0 million for the period ended December 31, 2007. Increases in salaries of $748 thousand or 8.1% are primarily attributable to increases in additional retail staff as a result of acquiring branches during September 2007, incentive compensation and mortgage segment commissions, offset by lower group insurance costs and management incentive compensation. Increases in occupancy expenses of $152 thousand, or 9.7%, are principally due to costs associated with the acquisition of six bank branches. Other operating expenses increased $976 thousand, or 16.3%, principally driven by fourth quarter marketing campaign expenses, communications costs (telephone, internet and software), mortgage segment loan expense on portfolio loans, overdraft returns as well as the direct and operational costs associated with the acquisition of six bank branches. These operating costs of $976 thousand were offset by home equity line expenses. Furniture and equipment expenses increased $93 thousand, or 7.7%, primarily as a result of a full quarter of depreciation related to the acquisition of six bank branches, as well as maintenance on ATMs during the fourth quarter of 2007.
For the year ended December 31, 2007, noninterest expense increased $6.0 million, or 8.9%, from $67.6 million to $73.6 million. These figures include the acquisition of Prosperity Bank & Trust Company ("Prosperity") on April 1, 2006; therefore, results of operations include twelve months of Prosperity activity for 2007 and only nine months for 2006. Excluding this year's first quarter of noninterest expense related to Prosperity of $1.0 million, total noninterest expense increased $5.0 million, or 7.4%, when compared to the prior year.
The following increases exclude the first quarter 2007 noninterest expenses of Prosperity. Other operating expenses increased $3.1 million, or 15.0%, and principally related to telecommunications enhancements (approximately $1.2 million), the acquisition of six bank branches (approximately $428 thousand), bank franchise taxes (approximately $248 thousand) and three additional bank branches (approximately $119 thousand). The telecommunications enhancements include the Company's internet banking delivery channel (e.g., increased bandwidth), and improvements in data security and business continuity. Salary and benefits increased $741 thousand, or 2.0%, which was attributable to normal compensation adjustments, increased retail staff related to branch growth, equity based compensation and group insurance costs. This increase of $741 thousand was offset by lower commissions from the mortgage segment, as well as lower profit sharing expenses. Occupancy expense increased $967 thousand, or 19.3%, and was principally related to the Company's fixed asset expansion (bank branches and new operations center). These costs included depreciation, property insurance and, to a lesser extent, utility costs. Furniture and equipment expense increased $257 thousand, or 5.7%.
For the year ended December 31, 2007 total acquisition charges of approximately $211 thousand were charged to expense and currently are reflected in the caption "Other operating expenses" in the Company's Condensed Consolidated Statements of Income. These costs primarily related to system conversion costs.
BALANCE SHEET
At December 31, 2007, total assets were approximately $2.3 billion compared to $2.1 billion and $2.2 billion at December 31, 2006 and September 30, 2007, respectively. Net loans increased $198.2 million, or 13.0%, from December 31, 2006, and increased $63.3 million, or 3.7% from the quarter ended September 30, 2007. Loan growth was concentrated in the commercial real estate and construction loan portfolios (primarily in owner occupied commercial real estate) from a year ago, as well as from September 30, 2007. Total cash and cash equivalents declined $17.6 million (lower Fed Funds sold) to $58.3 million at December 31, 2007 from $75.9 million a year ago, but increased $7.8 million (cash and due from banks), or 15.5%, from $50.5 million as of September 30, 2007. Deposits decreased $6.3 million, or 0.4%, from December 31, 2006 primarily due to lower demand deposits, money market, and savings account balances, partially offset by higher certificates of deposit. Deposits declined $2.8 million from September 30, 2007 and related principally to demand, money market and savings accounts. Total borrowings also increased by $71.1 million and $181.5 million to $270 million, from September 30, 2007 and December 31, 2006, respectively. The Company's equity to assets ratio remains strong at 9.22% at December 31, 2007.
SEGMENT INFORMATION Community Banking Segment
For the three months ended December 31, 2007, net income for the community banking segment decreased 39.6% or $2.6 million from $6.5 million to $3.9 million from the same quarter last year. This decline was partially attributable to flat net interest income as a result of increased funding costs and a heavier reliance on purchased funding. The provision for loan loss increased $1.0 million, from $154 thousand to $1.2 million during this period. This net increase was primarily due to continued loan growth, net charge-offs and increased uncertainty with regard to general economic and other credit risk factors.
Noninterest income declined $738 thousand, or 15.1%, in the fourth quarter of 2007 from the same period a year earlier. The prior year's same quarter contained a combination of gains from investment securities, insurance proceeds and BOLI commissions totaling approximately $1 million. Additionally, during the fourth quarter of 2007, legacy telephone equipment was disposed at a loss of $121 thousand and replaced with VoIP equipment. Absent these transactions, noninterest income increased approximately $401 thousand, or 10.3%. This net increase comes from a combination of increases in other service charges and deposit account charges as well as the income from a full year's investment in BOLI (additional investment made during December 2006). Noninterest expense increased $2.4 million, or 16.2%, mainly due to increases in other operating expenses. Other operating expenses increased $1.3 million, or 25.3%, which was principally related to marketing expenses, the operation of three additional bank branches, the purchase of six bank branches and their related operations, and infrastructure enhancements to support the Company's continued growth. Other increases in operating expenses are reflective of the Company's continued investment in people and technology necessary to support growth and service goals. Increases in salaries and benefits of $620 thousand, occupancy expenses of $316 thousand and furniture and equipment expense of $141 thousand increased primarily as a result of the above noted branch expansion.
On a linked quarter basis, community bank segment net income declined $1.6 million, or 28.7%, for the period ended December 31, 2007. The provision for loan loss increased $741 thousand, from $432 thousand to $1.2 million during this period. Net interest income after the provision for loan losses decreased $1.1 million, or 5.7%. Noninterest income decreased $173 thousand, or 4.0%, and was primarily attributable to the current quarter disposal of legacy telephone equipment, partially offset by higher service charges and fees on deposit accounts. Noninterest expense increased $1.4 million, or 8.9%, and was primarily related to the acquisition of six bank branches and their related operations, a newly opened bank branch (Harrison's Crossing) and increased marketing expenses related to Company marketing campaigns.
For the twelve months ended December 31, 2007, compared to the same period in 2006, net income for the community banking segment decreased 20.5%, or approximately $5.3 million, from $25.9 million to $20.6 million. Net interest income declined $993 thousand, or 1.3%, as funding costs increased at a greater pace than yields on earning assets. During the first half of 2007 funds from called securities were used to payoff FHLB advances. Approximately $513 thousand in penalties associated with the early payoff of FHLB advances have been reflected as an interest expense adjustment. Net interest income after the provision for loan losses decreased $603 thousand, or 0.8%, from a year ago. Reflected in this net decrease are specific loan loss reserves of $750 thousand that were recaptured during the first quarter of 2007. See Loan Loss Provision/Asset Quality section for additional information.
Noninterest income for the twelve months ended December 31, 2007 decreased $654 thousand or 3.8%. Excluding the gains from called investment securities of $508 thousand, the gain recorded from the sale of the former operations center of $324 thousand in 2007 and prior year gains from the sale of real estate of $856 thousand, investment securities of $276 thousand and Small Business Investment Company income of $150 thousand, the increase in noninterest income was $646 thousand, or 4.2%, over the prior year.
Noninterest expense increased $6.8 million, or 12.1%, to $63.4 million for the twelve months ending December 31, 2007 compared to the same period a year ago. Other operating expenses and salary and benefits increased $3.1 million and $2.4 million, respectively. To a lesser extent, occupancy expenses and furniture and equipment increased $931 thousand and $393 thousand, respectively. These increased costs were a function of three new branches, six purchased bank branches and the completion of the Company's operations center during 2007. Additionally, twelve months of Prosperity's noninterest expenses were included in 2007 compared to only nine months for the same period in 2006 (acquired April 1, 2006). This represents approximately $1.0 million of the total increase in noninterest expenses.
Mortgage Segment
For the three months ended December 31, 2007, the mortgage segment reported a net loss of $330 thousand, a $247 thousand decline from an $83 thousand net loss for the same quarter in 2006. The housing market for both new construction and existing sales continued to slump during the quarter, providing fewer origination opportunities than during the same quarter last year. Reduced mortgage loan demand combined with less liquidity in the secondary market and more stringent underwriting requirements have slowed both purchase and refinance production. Loan origination volume decreased 15.3% from the same period last year, resulting in a decline in loan revenue of $204 thousand. Total noninterest expenses increased $170 thousand, including occupancy expense increases of $50 thousand primarily related to the expansion of the branch network in the last quarter, including the addition of new origination offices. Other operating expenses increased $219 thousand principally as the result of losses on repurchased loans and other receivables.
On a linked quarter basis, mortgage segment net income declined $159 thousand from a net loss of $171 thousand to a net loss of $330 thousand. Revenue from the sale of loans increased $293 thousand, or 14.5% while originations rose 3.8% as loan profit margins improved due to consumer demand for more profitable loan products and better secondary market execution. Commission expense increased $308 thousand correlating to a portion of the increase in gain on sale revenue. Occupancy expense increased $58 thousand from the last quarter primarily as a result of expansion of the branch network and maintenance of existing locations. Other operating expenses increased $197 thousand principally as a result of the costs, fixed and variable, associated with the expansion of the branch network and $103 thousand on repurchased loans.
For the year ended December 30, 2007, the mortgage segment reported a net loss of $803 thousand, a decline of $941 thousand from net income of $138 thousand for the year ended December 31, 2006. This was principally due to a 23.3% decline in loan originations, from $484.7 million to $371.9 million, for the years ended December 31, 2006 and 2007, respectively. In addition, the mortgage segment reported loan related losses of $267 thousand during the twelve months ended December 31, 2007, and $103 thousand on repurchased loans.
ABOUT UNION BANKSHARES CORPORATION
Union Bankshares Corporation is one of the largest community banking organizations based in Virginia, providing full service banking to the Northern, Central, Rappahannock, Tidewater and Northern Neck regions of Virginia through its bank subsidiaries, Union Bank and Trust Company (35 locations in the counties of Albemarle, Caroline, Chesterfield, Fluvanna, Hanover, Henrico, King George, King William, Nelson, Spotsylvania, Stafford, Westmoreland and the Cities of Fredericksburg and Charlottesville); Northern Neck State Bank (9 locations in the counties of Richmond, Westmoreland, Essex, Northumberland and Lancaster); Rappahannock National Bank (7 locations in Washington, Front Royal, Middleburg, Warrenton, and Winchester); Bay Community Bank (4 locations in Williamsburg, Newport News and Grafton), and Prosperity Bank & Trust Company (3 locations in Springfield and Burke). Union Bank and Trust Company also operates a loan production office in Manassas. Union Investment Services, Inc. provides full brokerage services; Union Mortgage Group, Inc. provides a full line of mortgage products; and Union Insurance Group, LLC offers various lines of insurance products. Bay Community Bank also owns a non-controlling interest in Johnson Mortgage Company, LLC.
Additional information is available on the Company's website at http://www.ubsh.com/. The shares of the Company are traded on the NASDAQ Global Select Market under the symbol "UBSH".
FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate" or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing 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. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. The Company does not update any forward-looking statements that may be made from time to time by or on behalf of the Company.
UNION BANKSHARES CORPORATION AND SUBSIDIARIES KEY FINANCIAL RESULTS (in thousands, except share data) Three Months Ended Twelve Months Ended 12/31/07 12/31/06 09/30/07 12/31/07 12/31/06 Results of Operations Interest and dividend income $35,989 $34,350 $36,251 $140,996 $129,156 Net interest income 19,016 18,933 19,348 75,745 76,715 Provision for loan losses 1,173 154 432 1,060 1,450 Net interest income after provision for loan losses 17,843 18,779 18,916 74,685 75,265 Noninterest income 6,402 7,344 6,282 25,105 28,245 Noninterest expenses 19,947 17,297 17,978 73,550 67,567 Income before income taxes 4,298 8,826 7,220 26,240 35,943 Income tax expense 688 2,383 1,863 6,484 9,951 Net income $3,610 $6,443 $5,357 $19,756 $25,992 Interest earned on loans (FTE) $32,610 $30,122 $32,644 $126,974 $113,343 Interest earned on securities (FTE) 4,112 4,303 4,099 16,217 16,429 Interest earned on earning assets (FTE) 36,772 35,073 37,020 144,001 131,399 Net interest income (FTE) 19,799 19,656 20,116 78,750 78,958 Interest expense on certificates of deposit 10,757 10,138 10,613 42,389 33,813 Interest expense on interest- bearing deposits 12,256 11,693 12,079 48,233 39,730 Core deposit intangible amortization 483 457 471 1,868 1,677 Net income - community bank segment $3,940 $6,526 $5,528 $20,559 $25,854 Net income - mortgage segment (330) (83) (171) (803) 138 Key Performance Ratios Return on average assets (ROA) 0.64% 1.22% 0.97% 0.91% 1.30% Return on average equity (ROE) 6.80% 13.00% 10.32% 9.61% 13.64% Efficiency ratio 78.48% 65.83% 70.14% 72.93% 64.37% Efficiency ratio - community bank segment 73.92% 61.73% 66.40% 68.89% 60.36% Net interest margin (FTE) 3.89% 4.15% 4.07% 4.06% 4.37% Yields on earning assets (FTE) 7.22% 7.40% 7.49% 7.42% 7.28% Cost of interest- bearing liabilities (FTE) 3.88% 3.86% 3.99% 3.93% 3.47% Noninterest expense less noninterest income / average assets 2.38% 1.89% 2.12% 2.24% 1.97% Per Share Data Earnings per share, basic $0.27 $0.49 $0.40 $1.48 $1.97 Earnings per share, diluted 0.27 0.48 0.40 1.47 1.94 Cash basis earnings per share, diluted 0.29 0.50 0.42 1.56 2.03 Cash dividends paid 0.19 0.17 0.19 0.73 0.63 Market value per share 21.14 30.59 22.71 21.14 30.59 Book value per share 15.82 14.99 15.59 15.82 14.99 Tangible book value per share 10.74 10.30 10.46 10.74 10.30 Price to earnings ratio, diluted 19.73 16.06 14.31 14.38 15.77 Price to book value ratio 1.34 2.04 1.46 1.34 2.04 Weighted average shares outstanding, basic 13,377,186 13,266,699 13,350,143 13,341,741 13,233,101 Weighted average shares outstanding, diluted 13,445,789 13,397,264 13,420,199 13,422,139 13,361,773 Shares outstanding at end of period 13,438,334 13,303,520 13,359,649 13,438,334 13,303,520 Financial Condition Assets $2,301,397 $2,092,891 $2,219,032 $2,301,397 $2,092,891 Loans, net of unearned income 1,747,820 1,549,445 1,683,742 1,747,820 1,549,445 Earning Assets 2,059,330 1,872,732 1,985,891 2,059,330 1,872,732 Goodwill 56,474 50,049 56,075 56,474 50,049 Core deposit intangibles, net 11,550 12,341 12,407 11,550 12,341 Deposits 1,659,578 1,665,908 1,662,341 1,659,578 1,665,908 Stockholders' equity 212,082 199,416 208,251 212,082 199,416 Tangible equity 144,058 137,026 139,769 144,058 137,026 Three Months Ended Twelve Months Ended 12/31/07 12/31/06 09/30/07 12/31/07 12/31/06 Averages Assets $2,255,299 $2,088,244 $2,190,166 $2,167,123 $1,998,068 Loans, net of unearned income 1,713,402 1,554,662 1,657,002 1,637,573 1,489,794 Loans held for sale 22,635 21,738 21,350 21,991 25,129 Securities 279,200 289,341 276,537 274,886 277,868 Earning assets 2,019,705 1,880,341 1,960,836 1,941,231 1,805,481 Deposits 1,668,656 1,652,901 1,637,453 1,651,479 1,572,802 Certificates of deposit 904,167 869,444 888,862 897,886 792,953 Interest- bearing deposits 1,378,282 1,360,544 1,353,293 1,367,602 1,288,708 Borrowings 356,236 222,441 327,515 291,742 220,632 Interest- bearing liabilities 1,734,518 1,582,985 1,680,808 1,659,344 1,509,340 Stockholders' equity 210,656 196,623 205,848 205,525 190,560 Tangible equity 142,417 134,006 141,307 140,883 133,337 Asset Quality Allowance for Loan Losses Beginning balance of allowance for loan losses $18,556 $19,091 $18,353 $19,148 $17,116 Add: Allowance from acquired banks - - - - 785 Add: Recoveries 102 72 23 340 419 Less: Charge-offs 495 169 252 1,212 622 Add: Provision for loan losses 1,173 154 432 1,060 1,450 Ending balance of allowance for loan losses $19,336 $19,148 $18,556 $19,336 $19,148 Allowance for loan losses / total outstanding loans 1.11% 1.24% 1.10% 1.11% 1.24% Nonperforming Assets Nonaccrual loans $9,436 $10,873 $8,307 $9,436 $10,873 Other real estate and foreclosed properties 693 - 217 693 - Total nonperforming assets 10,129 10,873 8,524 10,129 10,873 Loans > 90 days and still accruing 905 208 1,439 905 208 Total nonperforming assets and loans > 90 days and still accruing $11,034 $11,081 $9,963 $11,034 $11,081 Nonperforming assets / total outstanding loans 0.58% 0.70% 0.51% 0.58% 0.70% Nonperforming assets / allowance for loan losses 52.38% 56.78% 45.94% 52.38% 56.78% Other Data Mortgage loan originations $91,198 $107,672 $87,861 $371,873 $484,696 % of originations that are refinances 46.17% 42.83% 33.51% 42.33% 36.20% End of period full-time employees 690 646 675 690 646 Number of full-service branches 58 51 57 58 51 Number of community banks (subsidiaries) 5 5 5 5 5 Number of full automatic transaction machines (ATM's) 144 134 144 144 134 Alternative Performance Measures (1) Net income $3,610 $6,443 $5,357 $19,756 $25,992 Plus: Core deposit intangible amortization, net of tax 314 297 306 1,214 1,090 Cash basis operating earnings $3,924 $6,740 $5,663 $20,970 $27,082 Average assets $2,255,299 $2,088,244 $2,190,166 $2,167,123 $1,998,068 Less: Average goodwill 56,214 50,049 52,975 52,807 45,360 Less: Average core deposit intangibles 12,025 12,568 11,566 11,835 11,863 Average tangible assets $2,187,060 $2,025,627 $2,125,625 $2,102,481 $1,940,845 Average equity $210,656 $196,623 $205,848 $205,525 $190,560 Less: Average goodwill 56,214 50,049 52,975 52,807 45,360 Less: Average core deposit intangibles 12,025 12,568 11,566 11,835 11,863 Average tangible equity $142,417 $134,006 $141,307 $140,883 $133,337 Cash basis earnings per share, diluted $0.29 $0.50 $0.42 $1.56 $2.03 Cash basis return on average tangible assets 0.71% 1.32% 1.06% 1.00% 1.40% Cash basis return on average tangible equity 10.93% 19.95% 15.90% 14.88% 20.31% (1) As a supplement to accounting principles generally accepted in the United States ("GAAP"), management also reviews operating performance based on its "cash basis earnings" to fully analyze its core business. Cash basis earnings exclude amortization expense attributable to intangibles (goodwill and core deposit intangibles) that do not qualify as regulatory capital. Financial ratios based on cash basis earnings exclude the amortization of nonqualifying intangible assets from earnings and the unamortized balance of nonqualifying intangibles from assets and equity. In management's opinion, cash basis earnings are useful to investors because by excluding non-operating adjustments stemming from the consolidation of our organization, they allow investors to see clearly the combined economic results of our multi-bank company. These non-GAAP disclosures should not, however, be viewed in direct comparison with non-GAAP measures of other companies. UNION BANKSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006 (Dollars in thousands, except share amounts) 2007 2006 ASSETS Cash and cash equivalents: Cash and due from banks $54,716 $55,511 Interest-bearing deposits in other banks 662 950 Money market investments 303 322 Other interest-bearing deposits 2,598 2,598 Federal funds sold - 16,509 Total cash and cash equivalents 58,279 75,890 Securities available for sale, at fair value 282,699 282,824 Loans held for sale 25,248 20,084 Loans, net of unearned income 1,747,820 1,549,445 Less allowance for loan losses 19,336 19,148 Net loans 1,728,484 1,530,297 Bank premises and equipment, net 75,741 63,461 Other real estate owned 694 - Core deposit intangibles, net 11,550 12,341 Goodwill 56,474 50,049 Other assets 62,228 57,945 Total assets $2,301,397 $2,092,891 LIABILITIES Noninterest-bearing demand deposits $281,405 $292,262 Interest-bearing deposits: NOW accounts 217,809 212,328 Money market accounts 156,576 165,202 Savings accounts 100,885 107,163 Time deposits of $100,000 and over 453,243 442,953 Other time deposits 449,660 446,000 Total interest-bearing deposits 1,378,173 1,373,646 Total deposits 1,659,578 1,665,908 Securities sold under agreements to repurchase 82,049 62,696 Other short-term borrowings 200,837 - Trust preferred capital notes 60,310 60,310 Long-term borrowings 69,500 88,850 Other liabilities 17,041 15,711 Total liabilities 2,089,315 1,893,475 Commitments and contingencies STOCKHOLDERS' EQUITY Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 13,438,334 shares at December 31, 2007 and 13,303,520 shares at December 31, 2006 17,879 17,716 Surplus 40,758 38,047 Retained earnings 152,238 142,168 Accumulated other comprehensive income 1,207 1,485 Total stockholders' equity 212,082 199,416 Total liabilities and stockholders' equity $2,301,397 $2,092,891 UNION BANKSHARES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Twelve Months Ended December 31 December 31 2007 2006 2007 2006 Interest and dividend income: Interest and fees on loans $32,492 $30,015 $126,514 $113,392 Interest on Federal funds sold 8 600 614 1,438 Interest on deposits in other banks 10 13 57 57 Interest on money market investments 1 - 4 3 Interest on other interest-bearing deposits 32 35 135 129 Interest and dividends on securities: Taxable 2,210 2,546 8,945 9,883 Nontaxable 1,236 1,141 4,727 4,254 Total interest and dividend income 35,989 34,350 140,996 129,156 Interest expense: Interest on deposits 12,257 11,693 48,234 39,729 Interest on Federal funds purchased 224 509 1,224 1,256 Interest on short-term borrowings 2,395 835 6,618 4,168 Interest on long-term borrowings 2,097 2,380 9,175 7,288 Total interest expense 16,973 15,417 65,251 52,441 Net interest income 19,016 18,933 75,745 76,715 Provision for loan losses 1,173 154 1,060 1,450 Net interest income after provision for loan losses 17,843 18,779 74,685 75,265 Noninterest income: Service charges on deposit accounts 2,203 1,885 7,793 7,186 Other service charges, commissions and fees 1,631 1,838 6,157 6,009 Gains (losses) on securities transactions, net (15) 402 586 688 Gains on sales of loans 2,317 2,521 8,817 11,277 Gains (losses) on sales of other real estate and bank premises, net (121) (2) 187 870 Other operating income 387 700 1,565 2,215 Total noninterest income 6,402 7,344 25,105 28,245 Noninterest expenses: Salaries and benefits 9,978 9,351 38,765 37,635 Occupancy expenses 1,712 1,346 6,085 5,006 Furniture and equipment expenses 1,306 1,167 4,816 4,503 Other operating expenses 6,951 5,433 23,884 20,423 Total noninterest expenses 19,947 17,297 73,550 67,567 Income before income taxes 4,298 8,826 26,240 35,943 Income tax expense 688 2,383 6,484 9,951 Net income $3,610 $6,443 $19,756 $25,992 Earnings per share, basic $0.27 $0.49 $1.48 $1.97 Earnings per share, diluted $0.27 $0.48 $1.47 $1.94 AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS) For the Three Months Ended December 31, 2007 Interest Average Income / Yield / Balance Expense Rate (1) (Dollars in thousands) Assets: Securities: Taxable $173,564 $2,210 5.05% Tax-exempt 105,636 1,902 7.14% Total securities 279,200 4,112 5.84% Loans, net (2) 1,713,402 32,276 7.47% Loans held for sale 22,635 334 5.86% Federal funds sold 662 8 5.00% Money market investments 241 1 1.71% Interest-bearing deposits in other banks 967 10 4.07% Other interest-bearing deposits 2,598 31 4.76% Total earning assets 2,019,705 36,772 7.22% Allowance for loan losses (18,896) Total non-earning assets 254,490 Total assets $2,255,299 Liabilities and Stockholders' Equity: Interest-bearing deposits: Checking $210,929 334 0.63% Money market savings 160,084 971 2.41% Regular savings 103,102 194 0.75% Certificates of deposit: $100,000 and over 449,333 5,545 4.90% Under $100,000 454,834 5,212 4.55% Total interest-bearing deposits 1,378,282 12,256 3.53% Other borrowings 356,236 4,717 5.25% Total interest-bearing liabilities 1,734,518 16,973 3.88% Noninterest-bearing liabilities: Demand deposits 290,374 Other liabilities 19,751 Total liabilities 2,044,643 Stockholders' equity 210,656 Total liabilities and stockholders' equity $2,255,299 Net interest income $19,799 Interest rate spread (3) 3.34% Interest expense as a percent of average earning assets 3.33% Net interest margin 3.89% For the Three Months Ended December 31, 2006 Interest Average Income / Yield / Balance Expense Rate (1) (Dollars in thousands) Assets: Securities: Taxable $193,371 $2,546 5.23% Tax-exempt 95,970 1,757 7.26% Total securities 289,341 4,303 5.90% Loans, net (2) 1,554,662 29,837 7.61% Loans held for sale 21,738 285 5.21% Federal funds sold 10,826 600 5.33% Money market investments 196 - 0.53% Interest-bearing deposits in other banks 980 13 5.26% Other interest-bearing deposits 2,598 35 5.27% Total earning assets 1,880,341 35,073 7.40% Allowance for loan losses (19,168) Total non-earning assets 227,071 Total assets $2,088,244 Liabilities and Stockholders' Equity: Interest-bearing deposits: Checking $209,178 318 0.60% Money market savings 173,356 997 2.28% Regular savings 108,566 240 0.88% Certificates of deposit: $100,000 and over 431,727 5,297 4.87% Under $100,000 437,717 4,841 4.39% Total interest-bearing deposits 1,360,544 11,693 3.41% Other borrowings 222,441 3,724 6.26% Total interest-bearing liabilities 1,582,985 15,417 3.86% Noninterest-bearing liabilities: Demand deposits 292,357 Other liabilities 16,279 Total liabilities 1,891,621 Stockholders' equity 196,623 Total liabilities and stockholders' equity $2,088,244 Net interest income $19,656 Interest rate spread (3) 3.54% Interest expense as a percent of average earning assets 3.25% Net interest margin 4.15% For the Three Months Ended December 31, 2005 Interest Average Income / Yield / Balance Expense Rate (1) (Dollars in thousands) Assets: Securities: Taxable $161,831 $2,080 5.10% Tax-exempt 75,153 1,413 7.46% Total securities 236,984 3,493 5.85% Loans, net (2) 1,354,787 23,821 6.98% Loans held for sale 33,760 483 5.68% Federal funds sold 27,529 270 3.89% Money market investments 52 1 3.77% Interest-bearing deposits in other banks 701 6 3.43% Other interest-bearing deposits 2,598 25 3.84% Total earning assets 1,656,411 28,099 6.73% Allowance for loan losses (17,028) Total non-earning assets 163,017 Total assets $1,802,400 Liabilities and Stockholders' Equity: Interest-bearing deposits: Checking $199,621 189 0.38% Money market savings 187,683 968 2.05% Regular savings 118,370 271 0.91% Certificates of deposit: $100,000 and over 304,616 2,998 3.90% Under $100,000 371,522 3,195 3.41% Total interest-bearing deposits 1,181,812 7,621 2.56% Other borrowings 164,987 1,822 4.38% Total interest-bearing liabilities 1,346,799 9,443 2.78% Noninterest-bearing liabilities: Demand deposits 259,582 Other liabilities 19,230 Total liabilities 1,625,611 Stockholders' equity 176,789 Total liabilities and stockholders' equity $1,802,400 Net interest income $18,656 Interest rate spread (3) 3.95% Interest expense as a percent of average earning assets 2.26% Net interest margin 4.47% (1) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above. (2) Nonaccrual loans are included in average loans outstanding. (3) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%. AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS) For the Twelve Months Ended December 31, 2007 Interest Average Income / Balance Expense Yield / Rate (Dollars in thousands) Assets: Securities: Taxable $173,942 $8,945 5.14% Tax-exempt 100,944 7,272 7.20% Total securities 274,886 16,217 5.90% Loans, net (2) (3) 1,637,573 125,628 7.67% Loans held for sale 21,991 1,346 6.12% Federal funds sold 2,852 614 5.53% Money market investments 217 4 1.94% Interest-bearing deposits in other banks 1,116 57 5.12% Other interest-bearing deposits 2,596 135 5.18% Total earning assets 1,941,231 144,001 7.42% Allowance for loan losses (18,666) Total non-earning assets 244,558 Total assets $2,167,123 Liabilities and Stockholders' Equity: Interest-bearing deposits: Checking $206,748 1,316 0.64% Money market savings 158,461 3,708 2.34% Regular savings 104,507 820 0.78% Certificates of deposit: $100,000 and over 446,662 22,023 4.93% Under $100,000 451,224 20,366 4.51% Total interest-bearing deposits 1,367,602 48,233 3.53% Other borrowings 291,742 17,018 5.83% Total interest-bearing liabilities 1,659,344 65,251 3.93% Noninterest-bearing liabilities: Demand deposits 283,877 Other liabilities 18,377 Total liabilities 1,961,598 Stockholders' equity 205,525 Total liabilities and stockholders' equity $2,167,123 Net interest income $78,750 Interest rate spread (1) 3.49% Interest expense as a percent of average earning assets 3.36% Net interest margin 4.06% For the Twelve Months Ended December 31, 2006 Interest Average Income / Balance Expense Yield / Rate (Dollars in thousands) Assets: Securities: Taxable $188,461 $9,883 5.24% Tax-exempt 89,407 6,546 7.32% Total securities 277,868 16,429 5.91% Loans, net (2) (3) 1,489,794 111,771 7.50% Loans held for sale 25,129 1,572 6.26% Federal funds sold 8,837 1,438 5.35% Money market investments 151 3 2.24% Interest-bearing deposits in other banks 1,104 57 5.13% Other interest-bearing deposits 2,598 129 4.96% Total earning assets 1,805,481 131,399 7.28% Allowance for loan losses (18,468) Total non-earning assets 211,055 Total assets $1,998,068 Liabilities and Stockholders' Equity: Interest-bearing deposits: Checking $204,023 $911 0.45% Money market savings 175,163 3,945 2.25% Regular savings 116,569 1,061 0.91% Certificates of deposit: $100,000 and over 387,023 17,603 4.55% Under $100,000 405,930 16,210 3.99% Total interest-bearing deposits 1,288,708 39,730 3.08% Other borrowings 220,632 12,711 5.85% Total interest-bearing liabilities 1,509,340 52,441 3.47% Noninterest-bearing liabilities: Demand deposits 284,094 Other liabilities 14,074 Total liabilities 1,807,508 Stockholders' equity 190,560 Total liabilities and stockholders' equity $1,998,068 Net interest income $78,958 Interest rate spread (1) 3.81% Interest expense as a percent of average earning assets 2.90% Net interest margin 4.37% For the Twelve Months Ended December 31, 2005 Interest Average Income / Balance Expense Yield / Rate (Dollars in thousands) Assets: Securities: Taxable $154,954 $7,791 5.03% Tax-exempt 74,936 5,677 7.58% Total securities 229,890 13,468 5.86% Loans, net (2) (3) 1,315,695 88,089 6.70% Loans held for sale 38,975 2,367 6.07% Federal funds sold 11,143 349 3.13% Money market investments 73 2 2.79% Interest-bearing deposits in other banks 1,665 49 2.92% Other interest-bearing deposits 2,598 81 3.13% Total earning assets 1,600,039 104,405 6.53% Allowance for loan losses (16,687) Total non-earning assets 154,653 Total assets $1,738,005 Liabilities and Stockholders' Equity: Interest-bearing deposits: Checking $198,969 704 0.35% Money market savings 187,673 3,174 1.69% Regular savings 119,309 998 0.84% Certificates of deposit: $100,000 and over 259,185 9,427 3.64% Under $100,000 365,758 11,605 3.17% Total interest-bearing deposits 1,130,894 25,908 2.29% Other borrowings 175,309 7,059 4.03% Total interest-bearing liabilities 1,306,203 32,967 2.52% Noninterest-bearing liabilities: Demand deposits 245,587 Other liabilities 14,994 Total liabilities 1,566,784 Stockholders' equity 171,221 Total liabilities and stockholders' equity $1,738,005 Net interest income $71,438 Interest rate spread (1) 4.01% Interest expense as a percent of average earning assets 2.06% Net interest margin 4.46% (1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%. (2) Foregone interest on previously charged off credits of $0 thousand and $464 thousand has been excluded for 2007 and 2006, respectively. (3) Nonaccrual loans are included in average loans outstanding.
