UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 Commission File No. 0-20293 UNION BANKSHARES CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-1598552 (State of Incorporation) (I.R.S. Employer Identification No.) 212 North Main Street P.O. Box 446 Bowling Green, Virginia 22427 (Address of principal executive offices) (804) 633-5031 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $2 PAR VALUE Union Bankshares Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of August 10, 2000, Union Bankshares Corporation had 7,515,332 shares of Common Stock outstanding. UNION BANKSHARES CORPORATION FORM 10-Q June 30, 2000 INDEX -----
PART 1 - FINANCIAL INFORMATION Page ---- Item 1 - Financial Statements Consolidated Balance Sheets as of June 30, 2000 and 1999 (Unaudited) and December 31, 1999 (Audited).................................................. 1 Consolidated Statements of Income For the three months and six months ended June 30, 2000 and 1999 (Unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity For the six months ended June 30, 2000 and 1999 (Unaudited) 3 Consolidated Statements of Cash Flows For the six months ended June 30, 2000 and 1999 (Unaudited) 4 Notes to Consolidated Financial Statements (Unaudited).............................. 5-9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 10-18 Item 3 - Quantitative and Qualitative Disclosures about Market Risk.................... 19 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K.............................................. 20 Signatures............................................................................. 21 Index to Exhibits...................................................................... 22
PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements UNION BANKSHARES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands)
June 30, December 31, June 30, ASSETS 2000 1999 1999 - -------- ---- ---- ---- (Unaudited) (Unaudited) Cash and cash equivalents: Cash and due from banks $ 22,189 $ 18,804 $ 31,296 Interest-bearing deposits in other banks 4,759 867 2,336 Federal funds sold 49 248 5,128 --------------- -------------- -------------- Total cash and cash equivalents 26,997 19,919 38,760 --------------- -------------- -------------- Securities available for sale, at fair value 216,993 201,721 196,389 Investment securities fair value of $6,644, $9,518 and $10,799 , respectively 6,687 9,578 10,790 --------------- -------------- -------------- Total securities 223,680 211,299 207,179 --------------- -------------- -------------- Loans held for sale 16,004 6,680 16,028 Loans, net of unearned income 576,012 543,367 505,966 Less allowance for loan losses 7,594 6,617 7,303 --------------- -------------- -------------- Net loans 568,418 536,750 498,663 --------------- -------------- -------------- Bank premises and equipment, net 20,940 21,458 22,928 Other real estate owned 1,774 2,016 1,032 Other assets 25,097 23,705 22,367 --------------- -------------- -------------- Total assets $ 882,910 $ 821,827 $ 806,957 =============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing demand deposits $ 91,224 $ 79,048 $ 103,190 Interest-bearing deposits: Savings accounts 56,521 58,209 61,823 NOW accounts 107,192 95,882 81,312 Money market accounts 59,227 63,249 62,930 Time deposits of $100,000 and over 107,972 107,654 92,352 Other time deposits 264,763 242,824 235,376 --------------- -------------- -------------- Total interest-bearing deposits 595,675 567,818 533,793 --------------- -------------- -------------- Total deposits 686,899 646,866 636,983 --------------- -------------- -------------- Short-term borrowings 37,943 39,159 27,607 Long-term borrowings 80,728 54,420 52,145 Other liabilities 6,884 12,588 20,046 --------------- -------------- -------------- Total liabilities 812,454 753,033 736,781 --------------- -------------- -------------- Stockholders' equity: Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,515,332, 7,487,829 and 7,475,220 shares, respectively 15,031 14,976 14,950 Surplus 411 163 - Retained earnings 60,418 58,603 56,992 Accumulated other comprehensive income (losses) (5,404) (4,948) (1,766) --------------- -------------- -------------- Total stockholders' equity 70,456 68,794 70,176 --------------- -------------- -------------- Total liabilities and stockholders' equity $ 882,910 $ 821,827 $ 806,957 =============== ============== ==============
See accompanying notes to consolidated financial statements. 1 UNION BANKSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30 June 30 ------------------------------- ----------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Interest income: Interest and fees on loans $ 12,677 $ 10,470 $ 24,575 $ 20,788 Interest on securities: Nontaxable 1,232 1,126 2,477 2,198 Taxable 2,302 1,915 4,490 3,453 Interest on Federal funds sold 1 29 20 88 Interest on interest-bearing deposits in other banks 16 1 32 29 ------------- ------------- -------------- --------------- Total interest income 16,228 13,541 31,594 26,556 ------------- ------------- -------------- --------------- Interest expense: Interest on deposits 6,521 5,664 12,550 11,342 Interest on short term borrowings 763 177 1,356 329 Interest on long term borrowings 1,098 742 2,156 1,195 ------------- ------------- -------------- --------------- Total interest expense 8,382 6,583 16,062 12,866 ------------- ------------- -------------- --------------- Net interest income 7,846 6,958 15,532 13,690 Provision for loan losses 581 751 1,145 1,513 ------------- ------------- -------------- --------------- Net interest income after provision for loan losses 7,265 6,207 14,387 12,177 ------------- ------------- -------------- --------------- Noninterest income: Service charges on deposit accounts 911 738 1,717 1,430 Other service charges and fees 538 389 1,022 822 Gains on securities transactions, net 64 - 86 19 Gains on sales of loans 1,593 2,558 2,638 4,993 Gains (losses) on sales of other real estate owned and bank premises, net - - 5 (2) Other operating income 113 105 212 191 ------------- ------------- -------------- --------------- Total noninterest income 3,219 3,790 5,680 7,453 ------------- ------------- -------------- --------------- Noninterest expenses: Salaries and benefits 4,832 4,999 9,475 9,507 Occupancy expenses 554 522 1,161 918 Furniture and equipment expenses 740 589 1,471 1,053 Other operating expenses 2,037 2,360 4,087 4,352 ------------- ------------- -------------- --------------- Total noninterest expenses 8,163 8,470 16,194 15,830 ------------- ------------- -------------- --------------- Income before income taxes 2,321 1,527 3,873 3,800 Income tax expense 427 195 558 653 ------------- ------------- -------------- --------------- Net income $ 1,894 $ 1,332 $ 3,315 $ 3,147 ============= ============= ============== =============== Basic net income per share $ 0.25 $ 0.18 $ 0.44 $ 0.42 ============= ============= ============== =============== Diluted net income per share $ 0.25 $ 0.18 $ 0.44 $ 0.41 ============= ============= ============== =============== Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20 ============= ============= ============== ===============
See accompanying notes to consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNION BANKSHARES CORPORATION AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited) (dollars in thousands)
Shares Common Outstanding Stock Surplus ----------- ----- ------- Balance - December 31, 1998 7,507,394 15,015 311 Comprehensive income: Net income - for six months ended June 30, 1999 Other comprehensive income net of tax: Unrealized holding losses arising during the period (net of tax, $2111) Reclassification adjustment (net of tax, $6) Other comprehensive income (net of tax, $2,117) Total comprehensive income Cash dividends - 1999 ($.40 per share semi annually) Issuance of common stock under Dividend Reinvestment Plan (10,848 shares) 10,848 22 145 Stock repurchased under Stock Repurchase Plan (104,912 shares) (104,912) (210) (1,704) Discretionary transfer of retained earnings to surplus 367 Issuance of common stock under Incentive Stock Option Plan (400 shares) 400 1 4 Issuance of common stock in exchange for net assets in acquisition (61,490 shares) 61,490 122 877 ---------------------------- Balance - June 30, 1999 7,475,220 $ 14,950 $ 0 ============================ Balance - December 31, 1999 7,487,829 14,976 163 Comprehensive income: Net income - for six months ended June 30, 2000 Other comprehensive income net of tax: Unrealized holding losses arising during the period (net of tax, $206) Reclassification adjustment (net of tax, $29) Other comprehensive income (net of tax, $ 235) Total comprehensive income Cash dividends - 2000 ($.40 per share semi annually) Issuance of common stock under Dividend Reinvestment Plan (16,090 shares) 16,090 33 140 Stock repurchased under Stock Repurchase Plan (11,300 shares) (11,300) (23) (115) Issuance of common stock under Incentive Stock Option Plan (5040 shares) 5,040 10 22 Issuance of common stock in exchange for net assets in acquisition (17,673 shares) 17,673 35 201 ---------------------------- Balance - June 30, 2000 7,515,332 $ 15,031 $ 411 ============================ See accompanying notes to consolidated financial statements
Accumulated Other Comprehensive Comprehensive Income (Loss) Income (Loss) Total ------------- ------------- ----- Balance - December 31, 1998 2,343 73,359 Comprehensive income: Net income - for six months ended June 30, 1999 3,147 3,147 Other comprehensive income net of tax: Unrealized holding losses arising during the period (net of tax, $2111) (4,096) Reclassification adjustment (net of tax, $6) (13) ----------------- Other comprehensive income (net of tax, $2,117) (4,109) (4,109) (4,109) ----------------- Total comprehensive income (962) ================= Cash dividends - 1999 ($.40 per share semi annually) (1,495) Issuance of common stock under Dividend Reinvestment Plan (10,848 shares) 167 Stock repurchased under Stock Repurchase Plan (104,912 shares) (1,914) Discretionary transfer of retained earnings to surplus - Issuance of common stock under Incentive Stock Option Plan (400 shares) 5 Issuance of common stock in exchange for net assets in acquisition (61,490 shares) 1,016 ---------------- ------------- Balance - June 30, 1999 $ (1,766) $ 70,176 ================ ============= Balance - December 31, 1999 (4,948) 68,794 Comprehensive income: Net income - for six months ended June 30, 2000 3,315 3,315 Other comprehensive income net of tax: Unrealized holding losses arising during the period (net of tax, $206 ) (399) Reclassification adjustment (net of tax, $29) (57) ----------------- Other comprehensive income (net of tax, $ 235) (456) (456) (456) ----------------- Total comprehensive income 2,859 - ================= Cash dividends - 2000 ($.40 per share semi annually) (1,500) Issuance of common stock under Dividend Reinvestment Plan (16,090 shares) 173 Stock repurchased under Stock Repurchase Plan (11,300 shares) (138) Issuance of common stock under Incentive Stock Option Plan (5040 shares) 32 Issuance of common stock in exchange for net assets in acquisition (17,673 shares) 236 ---------------- ------------- Balance - June 30, 2000 $ (5,404) $ 70,456 ================ =============
3 UNION BANKSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2000 and 1999 (dollars in thousands)
2000 1999 ------------ ----------- Operating activities: Net income $ 3,315 $ 3,147 Adjustments to reconcile net income to net cash and cash equivalents used in operating activities: Depreciation of bank premises and equipment 1,232 1,244 Amortization 284 430 Provision for loan losses 1,145 1,513 (Gains) on sales of securities available for sale (86) (19) (Gains) losses on sale of other real estate owned and fixed assets, net (5) 2 (Increase) in loans held for sale (9,324) (16,028) (Increase) in other assets (1,395) (1,605) Increase (decrease) in other liabilities (5,469) 17,005 ------------ ------------ Net cash and cash equivalents (used in) provided by operating activities (10,303) 5,689 ------------ ------------ Investing activities: Net increase in securities (13,018) (36,211) Net increase in loans (32,874) (26,881) Acquisition of bank premises and equipment (880) (3,115) Proceeds from sales of bank premises and equipment 181 - Proceeds from sales of other real estate owned 280 190 ------------ ------------ Net cash and cash equivalents used in investing activities (46,311) (66,017) ------------ ------------ Financing activities: Net increase in noninterest-bearing deposits 12,176 21,861 Net increase in interest-bearing deposits 27,857 7,493 Net increase (decrease) in short-term borrowings (1,216) 8,131 Proceeds from long-term borrowings 26,500 23,880 Issuance of common stock 205 172 Repurchase of common stock (138) (1,914) Cash dividends paid (1,500) (1,495) Repayment of long-term borrowings (192) (60) ------------ ------------ Net cash and cash equivalents provided by financing activities 63,692 58,068 ------------ ------------ Increase (decrease) in cash and cash equivalents 7,078 (2,260) Cash and cash equivalents at beginning of period 19,919 41,020 ------------ ------------ Cash and cash equivalents at end of period $ 26,997 $ 38,760 ============ ============ Supplemental Disclosure of Cash Flow Information Cash payments for: Interest 15,618 11,860 Income taxes 545 564
See accompanying notes to consolidated financial statements. 4 UNION BANKSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 1. ACCOUNTING POLICIES ------------------- The consolidated financial statements include the accounts of Union Bankshares Corporation and its subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. The information contained in the financial statements is unaudited and does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. Operating results for the three and six month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Annual Report to Shareholders. Certain previously reported amounts have been reclassified to conform to current period presentation. 2. ALLOWANCE FOR LOAN LOSSES ------------------------- The following summarizes activity in the allowance for loan losses for the six months ended June 30, (in thousands): 2000 1999 ---- ---- Balance, January 1 $6,617 $6,407 Provisions charged to operations 1,145 1,513 Recoveries credited to allowance 200 192 Loans charged off (368) (809) ------ ------ Balance, June 30 $7,594 $7,303 ====== ====== 5 3. Earnings Per Share ------------------ Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Weighted average shares used for the computation of basic EPS were 7,503,816 and 7,494,300 for the three months ended June 30, 2000 and 1999. Weighted average shares used for the computation of basic EPS were 7,499,143 and 7,511,420 for the six months ended June 30, 2000 and 1999. Diluted EPS is computed using the weighted number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock options. Weighted average shares used for the computation of diluted EPS were 7,503,816 and 7,598,455 for the three months ended June 30, 2000 and 1999. Weighted average shares used for the computation of diluted EPS were 7,503,755 and 7,615,180 for the six months ended June 30, 2000 and 1999. 4. SEGMENT REPORTING DISCLOSURES ----------------------------- Union Bankshares Corporation has two reportable segments: its traditional full service community banks and its mortgage loan origination business. The community bank business includes four banks, which provide loan, deposit, investment, and trust services to retail and commercial customers throughout their locations in Virginia. Through its mortgage subsidiary, the Company provides a variety of mortgage loan products in a multi-state market. These loans are originated and sold principally in the secondary market through purchase commitments from investors, which subject the company to only de minimis market risk. Profit and loss is measured by net income after taxes including realized gains and losses on the Company's investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Both of the Company's reportable segments are service based. The banks offer a distribution and referral network for the mortgage services to their customers. Due largely to the lack of overlapping geographic markets, the mortgage company does not offer a similar network for the banks Another major distinction between the segments is the source of income. The mortgage business is a fee based business while the banks are driven principally by net interest income. Information about reportable segments and reconciliation of such information to the consolidated financial statements as of June 30, 2000 and June 30, 1999 follows: 6
Three Months ended June 30, 2000 (in thousands) Banks Mortgage Other Elimination Consolidated --------------- ------------- --------- ------------ -------------- Net interest income $ 7,939 $ 2 $ (95) $ - $ 7,846 Provision for loan losses 581 - - - 581 -------------------------------------------------------------------------- Net interest income after provision for loan losses 7,358 2 (95) - 7,265 Noninterest income 1,341 1,593 1,854 (1,569) 3,219 Noninterest expense 5,643 2,091 1,994 (1,565) 8,163 -------------------------------------------------------------------------- Income before taxes 3,056 (496) (235) (4) 2,321 Income tax expense (benefit) 646 (180) (39) - 427 -------------------------------------------------------------------------- - - - - - Net income (loss) $ 2,410 $ (316) $ (196) $ (4) $ 1,894 ========================================================================== - Total assets $882,733 $ 17,651 $ 76,157 $ (93,631) $ 882,910 ==========================================================================
The following summary reconciles segment profit (loss) to income after taxes (in thousands): Net Income Segment profit $ 2,094 Other subsidiary 60 Parent (256) Intersegment profit elimination (4) -------------- Net Income $ 1,894 ==============
Three Months ended June 30, 1999 (in thousands) Banks Mortgage Other Elimination Consolidated ------------ ------------- ------------ ------------- ------------- Net interest income $ 7,045 $ - $ (87) $ - $ 6,958 Provision for loan losses 751 - - - 751 -------------------------------------------------------------------------- Net interest income after provision for loan losses 6,294 - (87) - 6,207 Noninterest income 1,086 2,558 146 - 3,790 Noninterest expense 4,826 2,859 785 - 8,470 -------------------------------------------------------------------------- Income before taxes 2,554 (301) (726) - 1,527 Income tax expense (benefit) 533 (109) (229) - 195 -------------------------------------------------------------------------- - - - - - Net income (loss) $ 2,021 $ (192) $ (497) $ - $ 1,332 ========================================================================== Total assets $791,761 $ 19,524 $ 79,013 $ (83,341) $ 806,957 ==========================================================================
The following summary reconciles segment profit (loss) to income after taxes (in thousands): Net Income Segment profit $ 1,829 Other subsidiary 56 Parent (553) Intersegment profit elimination - -------------- Net Income $ 1,332 ============== 7 Six Months ended June 30, 2000 (in thousands)
Banks Mortgage Other Elimination Consolidated -------------- ---------- ----------- -------------- -------------- Net interest income $ 15,730 $ (11) $ (187) $ - $ 15,532 Provision for loan losses 1,145 1,145 -------------------------------------------------------------------------- Net interest income after provision for loan losses 14,585 (11) (187) 14,387 Noninterest income 2,493 2,638 3,642 (3,093) 5,680 Noninterest expense 11,275 4,087 3,921 (3,089) 16,194 -------------------------------------------------------------------------- Income before taxes 5,803 (1,460) (466) (4) 3,873 Income tax expense (benefit) 1,173 (508) (107) - 558 -------------------------------------------------------------------------- Net income (loss) $ 4,630 $ (952) $ (359) $ (4) $ 3,315 ========================================================================== - Total assets $882,733 $ 17,651 $ 76,157 $ (93,631) $ 882,910 ==========================================================================
The following summary reconciles segment profit (loss) to income after taxes (in thousands): Net Income Segment profit $ 3,678 Other subsidiary 97 Parent (456) Intersegment profit elimination (4) -------------- Net Income $ 3,315 ============== Six Months ended June 30, 1999 (in thousands)
Banks Mortgage Other Elimination Consolidated -------------- ---------- ----------- -------------- -------------- Net interest income $ 13,805 $ - $ (115) $ - $ 13,690 Provision for loan losses 1,513 1,513 -------------------------------------------------------------------------- Net interest income after provision for loan losses 12,292 - (115) 12,177 Noninterest income 2,093 4,993 367 - 7,453 Noninterest expense 9,734 4,630 1,466 - 15,830 -------------------------------------------------------------------------- Income before taxes 4,651 363 (1,214) - 3,800 Income tax expense (benefit) 946 68 (361) - 653 -------------------------------------------------------------------------- Net income (loss) $ 3,705 $ 295 $ (853) $ - $ 3,147 ========================================================================== Total assets $791,761 $ 19,524 $ 79,013 $ (83,341) $ 806,957 ==========================================================================
The following summary reconciles segment profit (loss) to income after taxes (in thousands): Net Income Segment profit $ 4,000 Other subsidiary 52 Parent (905) Intersegment profit elimination - -------------- Net Income $ 3,147 ============== 8 5. RECENT ACCOUNTING STATEMENTS ---------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that a company recognize all derivative instruments as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. In June of 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments Hedging Activities--Deferral of the Effective Date of FASB Statement 133". SFAS 137 delayed the effective date of SFAS133 until fiscal years beginning after June 15, 2000. As such, the effective date for the Company will be January 1, 2001. The impact of adopting SFAS 133 will be dependent on the specific derivative instruments in place at the date of adoption. At this time management believes the adoption of this new standard will not have a material impact on the financial condition or results of operations of the Company. 6. FORWARD- LOOKING STATEMENTS ---------------------------- Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results OF OPERATIONS Union Bankshares Corporation (the "Company") is a multi-bank holding company organized under Virginia law which provides financial services through its wholly-owned subsidiaries, Union Bank & Trust Company, Northern Neck State Bank, Rappahannock National Bank, the Bank of Williamsburg, Union Investment Services, Inc., and Mortgage Capital Investors, Inc. The four subsidiary banks, Union Bank & Trust Company, Northern Neck State Bank, Rappahannock National Bank and the Bank of Williamsburg are full service retail commercial banks offering a wide range of banking and related financial services, including demand and time deposits, as well as commercial, industrial, residential construction, residential mortgage and consumer loans. Union Investment Services Inc., is a full service discount brokerage company, which offers a full range of investment services and sells mutual funds, stocks and bonds. Mortgage Capital Investors, Inc. provides a wide array of mortgage products through its 13 offices in Virginia, Maryland, New Jersey, Connecticut, and South Carolina. The Company's primary trade area stretches from Rappahannock County to Fredericksburg, south to Hanover County, east to Williamsburg and throughout the Northern Neck area of Virginia. The Corporate Headquarters is located in Bowling Green, Virginia. Through its banking subsidiaries, the Company operates 29 branches in its primary trade area. In addition to the primary banking trade area, Mortgage Capital Investors, Inc. expands the Company's mortgage origination business to four additional states. In February 1999, the Company opened the Bank of Williamsburg in temporary headquarters in the Williamsburg Crossing Shopping Center. In March 2000, the Bank of Williamsburg moved into its permanent location at 5125 John Tyler Parkway, which should enhance its continued growth in this community. Deposits have increased significantly since the move, and we expect this bank to achieve monthly profitability during the fourth quarter of 2000. Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of the Company. The analysis focuses on the consolidated financial statements, the footnotes thereto, and the other financial data herein. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Amounts are rounded for presentation purposes, while the percentages presented are computed based on unrounded amounts. Results of Operations - --------------------- Net income for the second quarter of 2000 was $1.9 million, up from $1.3 million for the same period in 1999. The increase in net income for the period was caused primarily by an increase in net interest income of $888,000 over the same period in 1999. The net interest income increase reflects the growth of the community banking business and higher interest rates. Diluted earnings per share amounted to $.25 in the second quarter of 2000, as compared to $.18 in the second quarter of 1999. The Company's annualized return on 10 average assets for the second quarter of 2000 was .88% as compared to .67% a year ago. The Company's annualized return on average equity totaled 10.94% and 7.19% for the three months ended June 30, 2000 and 1999, respectively. Net income from the Company's community banking segment increased from approximately $1.6 million in the second quarter of 1999 to over $2.2 million in the second quarter of 2000. Continued growth in existing markets, as well as the performance of acquired and denovo banks and branches and previously implemented initiatives to consolidate backoffice functions are reflected in improved operating efficiencies and contributed to the improvement in the profitability of the community banking segment. Rising interest rates, coupled with continued strong loan demand and competition for deposits, have continued to compress the net interest margin. Deposit competition has heightened as banks, seeking to fund this loan growth, have offered higher rates on deposits, often repricing their liabilities more rapidly than their assets. In addition to increasing certain deposit rates to attract deposits, the Company has also utilized Federal Home Loan Bank Advances and other borrowings to fund this growth. Such funding is typically more expensive than lower cost customer deposits and compresses the net interest margin, but increases net interest income by enabling the Company to grow earning assets. The mortgage banking segment continued to suffer from the effects of higher mortgage rates, the inversion in the yield curve and, in some markets, reduced inventories of homes. Due to the decline in volumes, the mortgage company has reduced its noncommission personnel, closed several marginal loan production offices, and opened two loan production offices in higher volume locations in Connecticut and New Jersey. The second quarter reflected a slowing of the losses experienced by the mortgage business to $316,000 versus $636,000 in the first quarter of 2000. Despite a reduction of $965,000 in gains on sales of loans from 1999 levels, the mortgage banking segment loss increased only $43,000 from $273,000 loss in the second quarter of 1999. The Company is continuing to make adjustments to increase the production volumes and improve operating efficiencies of this segment of our business. Net income for the first six months of 2000 was $3.3 million, up from $3.1 million for the same period in 1999. The increase in net income for the period was caused primarily by an increase in net interest income of $1.8 million and a decrease of $368,000 in the provision for loan loss over the same period in 1999. The net interest income increase reflects the growth of the core banking business, while a decline in the gain on sale of loans is reflective of the effect of higher mortgage rates on mortgage loan production volumes. Diluted earnings per share amounted to $.44 in the first six months of 2000, as compared to $.41 in the same period of 1999. The Company's annualized return on average assets for the first six months of 2000 was .79% as compared to .82% a year ago. The Company's annualized return on average equity totaled 9.70% and 8.61% for the six months ended June 30, 2000 and 1999, respectively. Net Interest Income Net interest income on a tax-equivalent basis for the second quarter of 2000 increased by 13.5% to $8.4 million from $7.4 million for the same period a year ago. By managing its interest rate spread and increasing the volume of earning assets over interest-bearing liabilities, the Company has been able to maintain a strong net interest margin. The current interest rate environment and 11 competition for deposits continue to put pressure on net interest margins. In addition, the subsidiary banks have periodically engaged in wholesale leverage transactions, borrowing funds to invest in securities at lower margins of 150 - 200 basis points. Although such transactions increase net income and return on equity, they do reduce the net interest margin. As of June 30, 2000 such transactions accounted for $25 million of the Company's total borrowings. However, with more of its funds going into loans this year, it should begin contributing to the margin. Average earning assets during the second quarter of 2000 increased by $86.6 million to $804.3 million from the second quarter of 1999, while average interest-bearing deposits grew by $50.8 million to $590.0 million over this same period. The Company's yield on average earning assets was 8.39%, up 50 basis point from 7.89% a year ago, while its cost of average interest-bearing liabilities increased 51 basis points from 4.29% in second quarter 1999 to 4.80% in first quarter 2000. 12
Union Bankshares Corporation Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) --------------------------------------------------------------------------------- Three Months June 30, --------------------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------------- Interest Average Income/ Yield/ Average Balance Expense Rate Balance --------------------------------------------------------------------------------- (Dollars in thousands) Assets: Securities: Taxable ............................... $ 123,582 $ 2,302 7.50% $131,210 Tax-exempt(1) ......................... 98,094 1,786 7.32% 86,134 -------------------------- -------------------- Total securities .................. 221,676 4,088 7.42% 217,344 Loans, net................................... 581,678 12,677 8.77% 495,598 Federal funds sold .......................... 77 1 5.22% 4,015 Interest-bearing deposits in other banks ......................... 856 16 7.52% 775 -------------------------- -------------------- Total earning assets................ 804,287 16,782 8.39% 717,732 Allowance for loan losses..................... (7,341) (7,058) Total non-earning assets...................... 64,229 83,264 ------------ -------------------- Total assets.................................. $ 861,175 $793,938 ============ ==================== Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking................................ 103,018 554 2.16% $ 87,240 Regular savings......................... 57,072 337 2.37% 59,757 Money market savings.................... 61,971 511 3.31% 64,008 Certificates of deposit: $100,000 and over....................... 107,307 1,489 5.58% 93,642 Under $100,000.......................... 260,668 3,630 5.60% 234,631 -------------------------- -------------------- Total interest-bearing deposits....................... 590,036 6,521 4.44% 539,278 Other borrowings.............................. 112,646 1,861 6.65% 76,676 -------------------------- -------------------- Total interest-bearing liabilities.................... 702,682 8,382 4.80% 615,954 Non-interest bearing liabilities: Demand deposits......................... 86,161 84,153 Other liabilities....................... 2,725 19,556 ------------ -------------------- Total liabilities................... 791,568 719,663 Stockholders' equity.......................... 69,607 74,275 ------------ -------------------- Total liabilities and stockholders' equity.................... $ 861,175 $793,938 ============ ==================== Net interest income........................... $ 8,400 ============== Interest rate spread.......................... 3.59% Interest expense as a percent of average earning assets............... 4.19% Net interest margin........................... 4.20%
Union Bankshares Corporation Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) --------------------------------------------------------------------------------- Three Months June 30, --------------------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------------------- Interest Interest Income/ Yield/ Average Income/ Yield/ Expense Rate Balance Expense Rate --------------------------------------------------------------------------------- (Dollars in thousands) Assets: Securities: Taxable ............................... $ 1,915 5.85% $ 92,147 $ 1,500 6.53% Tax-exempt(1) ......................... 1,703 7.93% 73,753 1,468 7.98% ------------- --------------------------- Total securities .................. 3,618 6.68% 165,900 2,968 7.18% Loans, net................................... 10,470 8.47% 440,108 10,190 9.29% Federal funds sold .......................... 29 2.90% 6,947 110 6.35% Interest-bearing deposits in other banks ......................... 1 0.52% 1,241 21 6.79% ------------- --------------------------- Total earning assets................ 14,118 7.89% 614,196 13,289 8.68% Allowance for loan losses..................... (5,106) Total non-earning assets...................... 67,855 -------------- Total assets.................................. $676,945 ============== Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking................................ 410 1.89% $ 73,552 438 2.39% Regular savings......................... 391 2.62% 58,703 445 3.04% Money market savings.................... 561 3.52% 61,294 522 3.42% Certificates of deposit: $100,000 and over....................... 1,178 5.05% 66,952 927 5.55% Under $100,000.......................... 3,124 5.34% 222,623 3,080 5.55% ------------- --------------------------- Total interest-bearing deposits....................... 5,664 4.21% 483,124 5,412 4.49% Other borrowings.............................. 919 4.81% 41,647 657 6.33% ------------- --------------------------- Total interest-bearing liabilities.................... 6,583 4.29% 524,771 6,069 4.64% Non-interest bearing liabilities: Demand deposits......................... 76,185 Other liabilities....................... 5,488 -------------- Total liabilities................... 606,444 Stockholders' equity.......................... 70,501 -------------- Total liabilities and stockholders' equity.................... $676,945 ============== Net interest income........................... $ 7,535 $ 7,220 ============= ============= Interest rate spread.......................... 3.60% 4.04% Interest expense as a percent of average earning assets............... 3.68% 3.96% Net interest margin........................... 4.21% 4.71%
(1) Income and yields are reported on a taxable equivalent basis. 13
Union Bankshares Corporation Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) ---------------------------------------------------------------------------------- Six Months Ended June 30, ---------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------- Interest Average Income/ Yield/ Average Balance Expense Rate Balance ---------------------------------------------------------------------------------- (Dollars in thousands) Assets: Securities: Taxable................................ $ 121,776 $ 4,490 7.42% $115,527 Tax-exempt(1).......................... 98,353 3,590 7.34% 85,977 ----------------------------- ----------------- Total securities................... 220,129 8,080 7.38% 201,504 Loans, net................................... 568,881 24,575 8.69% 488,719 Federal funds sold .......................... 422 20 9.53% 4,175 Interest-bearing deposits in other banks.......................... 972 32 6.62% 1,344 ----------------------------- ----------------- Total earning assets................ 790,404 32,707 8.32% 695,742 Allowance for loan losses..................... (7,092) (6,887) Total non-earning assets...................... 65,454 81,625 --------------- ----------------- Total assets.................................. $ 848,766 $770,480 =============== ================= Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking................................ 100,076 1,056 2.12% $ 84,775 Regular savings......................... 57,881 688 2.39% 58,804 Money market savings.................... 62,567 1,016 3.27% 64,024 Certificates of deposit: $100,000 and ove........................ 105,473 2,853 5.44% 90,913 Under $100,000.......................... 254,342 6,937 5.48% 236,648 ----------------------------- ----------------- Total interest-bearing deposits....................... 580,339 12,550 4.35% 535,164 Other borrowings ............................. 113,546 3,512 6.22% 61,260 ----------------------------- ----------------- Total interest-bearing liabilitie..................... 693,885 16,062 4.66% 596,424 Non-interest bearing liabilities: Demand deposits......................... 83,301 81,328 Other liabilities....................... 2,879 18,984 --------------- ---------------- Total liabilities................... 780,065 696,736 Stockholders' equity.......................... 68,701 73,744 --------------- ---------------- Total liabilities and stockholders' equity.................... $ 848,766 $770,480 =============== ================ Net interest income........................... $ 16,645 ============== Interest rate spread.......................... 3.66% Interest expense as a percent of average earning assets............... 4.09% Net interest margin........................... 4.23%
Union Bankshares Corporation Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis) ----------------------------------------------------------------------------------- Six Months Ended June 30, ----------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------------------- Interest Interest Income/ Yield/ Average Income/ Yield/ Expense Rate Balance Expense Rate ----------------------------------------------------------------------------------- (Dollars in thousands) Assets: Securities: Taxable................................ $ 3,453 6.03% $ 94,446 $ 3,017 6.44% Tax-exempt(1).......................... 3,327 7.80% 72,616 2,900 8.05% ------------- --------------------------- Total securities................... 6,780 6.79% 167,062 5,917 7.14% Loans, net................................... 20,788 8.58% 432,005 19,721 9.21% Federal funds sold .......................... 88 4.25% 8,767 299 6.88% Interest-bearing deposits in other banks.......................... 29 4.35% 1,206 46 7.69% ------------- --------------------------- Total earning assets................ 27,685 8.02% 609,040 25,983 8.60% Allowance for loan losses..................... (5,028) Total non-earning assets...................... 60,806 -------------- Total assets.................................. $664,818 ============== Liabilities & Stockholders' Equity: Interest-bearing deposits: Checking................................ 871 2.07% $ 69,318 818 2.38% Regular savings......................... 789 2.71% 57,042 861 3.04% Money market savings.................... 1,076 3.39% 59,171 1,012 3.45% Certificates of deposit: $100,000 and ove........................ 2,349 5.21% 66,245 1,784 5.43% Under $100,000.......................... 6,257 5.33% 215,790 5,984 5.59% ------------- --------------------------- Total interest-bearing deposits....................... 11,342 4.27% 467,566 10,459 4.51% Other borrowings ............................. 1,524 5.02% 49,105 1,392 5.72% ------------- --------------------------- Total interest-bearing liabilitie..................... 12,866 4.35% 516,671 11,851 4.63% Non-interest bearing liabilities: Demand deposits......................... 72,846 Other liabilities....................... 5,203 -------------- Total liabilities................... 594,720 Stockholders' equity.......................... 70,098 -------------- Total liabilities and stockholders' equity..................... $664,818 ============== Net interest income........................... $ 14,819 $ 14,132 ============= ============= Interest rate spread.......................... 3.67% 3.98% Interest expense as a percent of average earning assets............... 3.71% 3.90% Net interest margin........................... 4.30% 4.65%
(1) Income and yields are reported on a taxable equivalent basis. 14 Provision for Loan Losses The provision for loan losses totaled $581,000 for the second quarter of 2000, down from $751,000 for the second quarter of 1999. For the first six months of 2000, the provision was $1,145,000 versus $1,513,000 for the same period in 1999. The provision for loan losses for the first quarter and first six months of 1999 included $350,000 related to a single credit relationship. These provisions reflect the performance of the loan portfolio and management's assessment of the credit risk in the portfolio. (See Asset Quality) Noninterest Income Noninterest income for the three months ended June 30, 2000 totaled $3.2 million, down from $3.8 million for the same period a year ago. This decrease is due principally to the decrease in income from gains on sales of loans in the mortgage banking segment which decreased $965,000 totaling $1.6 million for the second quarter versus $2.5 million for the second three months of 1999. All other categories of noninterest income for second quarter 2000 increased over the same period in 1999 with deposit service charges up $173,000 and other service charges and fees up $157,000, reflecting deposit growth and initiatives to enhance fee income. Management continues to seek additional sources of noninterest income, including increased emphasis on cross-selling services and better leveraging the financial services available throughout the organization. Noninterest Expense Noninterest expense in the second quarter of 2000 totaled $8.1 million, a decrease of $307,000 over the same period in 1999. Personnel costs comprised $167,000 of the decrease and include a decline of $587,000 for the mortgage banking segment. Occupancy expense was up $32,000 and furniture & equipment expense was up $151,000 while Other operating expenses were down $323,000 over last year's second quarter. The increases reflect depreciation expenses for major technology investments made in the second and third quarters of 1999. The decrease in salary and other expenses reflect the volume declines and cost reductions initiatives in the mortgage segment. Financial Condition - ------------------- Total assets as of June 30, 2000 were $882.9 million, an increase of 9.41% from $807.0 million at June 30, 1999. Asset growth was fueled by loan growth, as loans totaled $576 million at June 30, 2000, an increase of 13.8% from $506 million at June 30, 1999. Stockholders' equity totaled $70.5 million at June 30, 2000, which represents a book value of $9.37 per share. 14 Deposit growth was strong as the banks continued to increase market share but was outpaced by the loan growth. Total deposits at June 30, 2000 were $686.9 million, up 7.8% from $636.9 million at June 30, 1999. Other borrowings totaled $118.7 million at June 30, 2000, a 48.8% increase over $79.8 million at June 30, 1999. As a result of the loan growth, the Company utilizes other borrowings to fund the excess growth which compresses the net interest margin but increases net interest income. The Company also periodically engages in wholesale leverage transactions to better leverage its capital position. The increases in other borrowings reflect about $25 million in net leverage transactions over the last five quarters. These wholesale leverage transactions have typically been executed at spreads of approximately 150 to 200 basis points and, although they have negatively impacted the Company's net interest margin (as a percentage), they have had a positive effect on earnings and return on equity. Continued competition for deposits, particularly as it impacts certificate of deposit rates, is reflected in the deposit mix. Management continues to focus on increasing lower cost deposit products, including noninterest bearing demand deposits and savings accounts and effective management of competitive rates on interest sensitive products. Increased competition for funds, by banks seeking to fund strong loan growth and by non-banks, continues to contribute to a narrowing of the net interest margin, which has been largely offset by increases in the volume of earning assets. Asset Quality - ------------- The allowance for loan losses is an estimate of an amount adequate to provide for potential losses in the loan portfolio. General economic trends as well as conditions affecting individual borrowers affect the level of credit losses. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and comparison to peer groups. The allowance for loan losses totaled $7.6 million at June 30, 2000 or 1.32% of total loans, as compared to 1.22% at December 31, 1999 and 1.44% at June 30, 1999.
June 30, December 31, June 30, 2000 1999 1999 ------ ------ ------ (dollars in thousands) Non-accrual loans $1,694 $1,487 $2,484 Foreclosed properties 1,774 2,016 1,742 ------ ------ ------ Non-performing assets $3,468 $3,503 $4,226 ====== ====== ====== Allowance for loan losses $7,594 $6,617 $7,303 Allowance as % of total loans 1.32% 1.22% 1.44% Non-performing assets to loans and foreclosed properties .60% .64% .83%
At June 30, 1999, the allowance for loan losses included reserves of approximately $1.4 million related to a single credit relationship totaling approximately $1.8 million. Management has previously restructured this credit with the borrowers in an attempt to work out repayment of this debt, but collection is uncertain and accordingly, in late 1999, $1.1 million of this credit was charged off against previously established reserves. 16 Capital Resources - ----------------- Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company's capital is reviewed by management on an ongoing basis with reference to the size, composition, and quality of the Company's resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses. The Federal Reserve, along with the Comptroller of the Currency and the Federal Deposit Insurance Corporation, has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity and retained earnings, less certain goodwill items. At June 30, 2000, the Company's ratio of total capital to risk-weighted assets was 11.55% and its ratio of Tier 1 capital to risk-weighted assets was 10.41%. Both ratios exceed the fully phased-in capital requirements. The following summarizes the Company's regulatory capital and related ratios at June 30, 2000 (dollars in thousands):
Tier 1 capital $ 69,568 Tier 2 capital 7,594 Total risk-based capital 77,162 Total risk-weighted assets 668,336 Capital Ratios: Tier 1 risk-based capital ratio 10.4% Total risk-based capital ratio 11.6% Leverage ratio (Tier I capital to average adjusted total assets) 8.0% Equity to assets ratio 8.0%
The Company's book value per share at June 30, 2000 was $9.37. Dividends to stockholders are typically declared and paid semi-annually in June and December. Liquidity - ----------- Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, investments (available for sale) and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several regional banks and a line of credit 17 with the Federal Home Loan Bank. Management considers the Company's overall liquidity to be sufficient to satisfy its depositors' requirements and to meet its customers' credit needs. At June 30, 2000 cash, interest-bearing deposits in other banks, Federal funds sold, securities available for sale and loans maturing or repricing in one year were 21.0% of total earning assets. At June 30, 2000 approximately $154.8 million or 26.2% of total loans would mature or reprice within the next year. The Company utilizes Federal funds purchased, FHLB advances, securities sold under agreements to repurchase and customer repurchase agreements, in addition to deposits, to fund the growth in its loan portfolio, and to fund securities purchases, periodically in wholesale leverage transactions. 18 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Earnings Simulation Analysis Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis. Assumptions used in the model, including loan and deposit growth rates, are derived from seasonal trends and management's outlook, as are the assumptions used to project yields and rates for new loans and deposits. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios. The following table represents the interest rate sensitivity on net interest income for the Company using different rate scenarios as of June 30, 2000: % Change in Change in Prime Rate Net Interest Income -------------------- ------------------- +200 basis points -2.17% Flat 0 -200 basis points +8.35% Market Value Simulation Market value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net market value is the market value of all assets minus the market value of all liabilities. The change in net market value over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation. The following chart reflects the change in net market value over different rate environments as of June 30, 2000:
Change in Net Market Value Change in Prime Rate (dollars in thousands) - -------------------- -------------------------- +200 basis points $-42,271 +100 basis points -25,343 Flat 6,696 -100 basis points 11,110 -200 basis points 27,633
19 PART II - OTHER INFORMATION --------------------------- Item 6 - Exhibits and Reports on Form 8-K (a) See attached list of exhibits 20 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Union Bankshares Corporation ---------------------------- (Registrant) August 14, 2000 ______________________________________ (Date) G. William Beale, President, Chief Executive Officer and Director August 14, 2000 (Date) ______________________________________ D. Anthony Peay, Vice President and Chief Financial Officer UNION BANKSHARES CORPORATION AND SUBSIDIARIES Index to Exhibits Form 10-Q /June 30, 2000
Exhibit No. Description - --- ----------- 2 Plan of acquisition, reorganization, arrangement, liquidation or succession - Not Applicable 4 Instruments defining the rights of security holders, including indentures Not Applicable 10 Material contracts Not Applicable 11 Statement re: computation of per share earnings Not Applicable 15 Letter re: unaudited interim financial information Not Applicable 18 Letter re: change in accounting principles Not Applicable 19 Previously unfiled documents Not Applicable 20 Report furnished to security holders Not Applicable 22 Published report re: matters submitted to vote of security holders None 23 Consents of experts and counsel Not Applicable 24 Power of Attorney Not Applicable 99 Additional Exhibits None