[LOGO] UNION BANKDAHARES CORPORATION A UNION OF COMMUNITY BANKS - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- BANK OF WILLIAMSBURG . JOHNELLA P. CARTER . JOHN M. JOHNSON . TINA O. LESTER . ALISON MATTOX . MARIE STONE . MORTGAGE CAPITAL INVESTORS . TOBA ABDOLLAHZADEH . PATRICIA A. ADOLPH . KRISTA M. ALEXANDER . JOSEPH A. ANDAHAZY . FLORENCE C. ARMSTRONG . ANGELA M. ATKINSON . CRYSTAL A. AYERS . GAIL E. BAKICH . MICHAEL BARNES . LAURA R. BATCH . MEREDITH R. BATES . VALERIE BEEBE . PATRICE BENTON . BETH ANNE BITTLE . LYNN P. BLATT . JOANN W. BRAVO . BARBARA A. BREEN . CYTHIA BROCKMAN . PATRICIA L. BRODERICK . BONNIE B. BURNS . JANEEN S. CARD . GAIL J. CARR . BARBARA J. CARTER . LORRIE CHILTON . WILLIAM CHRISTOPHER . SHIELA F. CIANCIO . DARCY J. COLES . BERNARD J. CONNOLLY, JR. . DEBRA B. CURWEN . LINDA L. CUSICK . SANDRA E. DARRACOTT . TAMMY L. DAVIDSON . LAWRENCE E. DERX . THOMAS P. DI DONATO . JEANNE DI DONATO . SANDY DIXON . JOHN DORSEY, III . CHRISTINE DOWELL . MARCUS E. EINSTEIN . MARLENE EINSTEIN . THOMAS D. ELDER, JR. . THOMAS L. FONTAINE . CECILIA A. FRAZIER . ROBERT D. FULGHUM . DORSEY R. GALFORD, JR. . REENA S. GARRETT . IRIS M. GAUTIER . SHAWN C. GAVIN . CHRISTOPHER B. GINTER . BEVERLY GIRUC . BARBARA A. GOLDENBERG . RICHARD A. GOODMAN . DARNELL R. GRAY . KIMBERLY D. HARVEY . KIM M. HEYING . JACQUELINE A. HODGES . BOND L. HOLFORD . CONNIE IOANOU . DANIEL G. JAY . TONI H. JONES . KEVIN P. KEEGAN . ELIZABETH A. KEENAN . MARY JO KELLEY . STACEY L. KERRIGAN . ROLLAND D. KILLE . FRAN KOPLOW . FLOSSIE LANCASTER . JEAN P. LIBER . JONI Z. LOVING . BRENTON A. McCALLUM . CLAUDETTE C. McCLUNEY . JANE M. McQUILKIN . RICHARD C. MEEKINS . JOAN M. MILLER . GARY M. MILLS . BRENT D. MOLOVINSKY . SARA J. MONTES . DARNELLA J. MORGAN . KIMBERLEIGH MURRAY . JOHN A. O'BRIEN . BRIAN T. O'REILLY . LEONARD J. OSLAR . EDGAR PACORI . LOUIS M. PELL . EVE H. PENDLETON . REBECCA L. PETERS . PAUL J. PHELPS . JEFFERSON D. PHELPS, III . SHARON A. POWERS . BRADFORD PRATT . ELIZABETH ANN PRITCHARD . DANIEL M. PUTNEY . TERRI H. QUINN . LAURA H. RAJABI . BRENDA S. RAY-STRAIN . ADAM REPASY . LYNN REPASY . ROBERT RESH . PHAN W. ROBINSON . RAYMOND I. J. ROMANICK . EARNEST A. SAHADY . PATRICIA SCHURTZ . ROBERT F. SELDON . BRENDA SISSON . JACOB SISSON . ELIZABETH J. SMALLING . PATRICIA A. SMITH . JENNIFER L. SNYDER . EDWARD SOMA . RAY L. STEIN . JEANNE STEVENS . MICHAEL E. STOLL . ERIC D. THOMAS . DAVID M. THOMPSON . CAROL TOMASI . LESLIE A. VALENTINE . BONNIE G. VICK . JILL A. WAGNER . R. SCOTT WALLACE . DAVIN J. WILLIFORD . GRANT WING . LISA WITKOWSKI . BETTY L. WRIGHT . NORTHERN NECK STATE BANK . ROBIN S. ABERCROMBIE . LINDA H. ASHTON . LASHAY S. BALL . NANCY E. BAUGHAN . MARY ANNETTE BOWLES . MARY L. BOWLES . ANGELA C. BRANN . SHIRLEY T. BROOKS . RUSSELL G. BROWN . BARBARA H. BRYANT . JANET L. CARPENTER . HOLLY D. CARTER . MANLEY L. CHADWICK . TERRY J. CLARK . BRENDA H. CONLEY . THELMA COURTNEY . CYNTHIA E. DAIGER . SHANNON R. DAVIS . BETTY T. DELANO . ALICE V. DIX . WILLIAM A. ESTELL, JR. . BROOK H. EZZELL . ELIZABETH FORREST FRANKLIN . APRIL F. GASKINS . TERESA A. GILL . LAURA L. GORDON . KATHRYN P. GOULDTHORPE . GREGORY A. GRUNER . DORIS C. HALL . LILLIAN S. HAMBLIN . CRISTAL F. HARPER . WILLIAM E. HARRISON . SANDRA D. HAYWOOD . LINDA L. HIXON . SUE W. JETT . WENDY R. JONES . JOSEPHINE F. KING . EDITH FAYE LANGE . BARBARA W. LAWSON . ANGELIA D. LEE . DONNA G. LEWIS . GENEVA B. LOWERY . GLENN A. MORSE . E. PEYTON MOTLEY . LINDA V. MURRAY . N. BYRD NEWTON . DARLENE F. O'BIER . SANDRA K. O'BIER . C. WAYNE PENICK . SUSIE B. PRESCOTT . CHERYL REAMY . MACEL F. ROBINSON . JULIE H. ROGERS . MARION B. ROWE . APRIL R. SANDERS . NANCY A. SANDERS . CAROLYN SANDERS-SMITH . PEGGY S. SANFORD . DEBRA B. SCOTT . MELESSIA F. SELF . PATRICIA P. SETTLE . GLORIA B. SMITH . AMY TAYLOR . MARION W. THOMPSON . SANDRA M. VENEY . BRIDGETT B. WILLIAMS . RAPPAHANNOCK NATIONAL BANK . GEORGIA A. GILPIN . PATRICIA A. GRIGSBY . BETTY L. JEWELL . MICHAEL T. LEAKE . W. F. MOFFETT, III . HELEN I. SEALOCK . SHERRY JO SHAW . UNION BANK & TRUST COMPANY . HELEN M. ACORS . MARGARET ATKINS . ROBERT K. BAILEY, III . AMANDA C. BARLOW . VALERIE BENNETT - -------------------------------------------------------------------------------- . BANK OF WILLIAMSBURG . JOHNELLA P. CARTER . JOHN M. JOHNSON . TINA O. LESTER . ALISON MATTOX . MARIE STONE . MORTGAGE CAPITAL INVESTORS . TOBA ABDOLLAHZADEH . PATRICIA A. ADOLPH . KRISTA M. ALEXANDER . JOSEPH A. ANDAHAZY . FLORENCE C. ARMSTRONG . ANGELA M. ATKINSON . CRYSTAL A. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION UNION BANK & TRUST COMPANY - -------------------------- ASHLAND U.S. Route 1 & Ashcake Road Ashland, Virginia 23005 (804) 798-4488 ATLEE 10469 Atlee Station Road Ashland, Virginia 23005 (804) 550-2300 BOWLING GREEN 211 North Main Street Bowling Green, Virginia 22427 (804) 633-5031 BROCK ROAD Brock Road and Route 3 Spotsylvania, Virginia 22553 (540) 972-2958 CHANCELLOR 4210 Plank Road Fredericksburg, Virginia 22407 (540) 786-2265 COLONIAL BEACH 840 McKinney Blvd. Colonial Beach,VA 22443 (804) 224-0101 FALL HILL 2811 Fall Hill Avenue Fredericksburg, Virginia 22401 (540) 372-7760 FALMOUTH Cambridge & Layhill Road Falmouth, Virginia 22405 (540) 374-1300 FOUR MILE FORK 4540 Lafayette Boulevard Fredericksburg, Virginia 22408 (540) 898-5100 HANOVER COMMONS 9534 Chamberlayne Road Mechanicsville, Virginia 23111 (804) 730-1700 KENMORE AVENUE 700 Kenmore Avenue Fredericksburg, Virginia 22401 (540) 371-0108 KING GEORGE 10045 Kings Highway King George, VA 22485 (540) 775-9300 LADYSMITH U.S. Route 1 Ladysmith, Virginia 22501 (804) 448-3100 LEAVELLS 10415 Courthouse Road Spotsylvania, Virginia 22553 (540) 898-2700 PORT ROYAL U.S. Route 301 Port Royal, Virginia 22535 (804) 742-5546 MANQUIN U.S. Route 360 Manquin, Virginia 23106 (804) 769-3031 MASSAPONAX Massaponax Church Road & U.S. Route 1 Fredericksburg, Virginia 22407 (540) 891-0300 MECHANICSVILLE 610 Mechanicsville Turnpike Mechanicsville, Virginia 23116 (804) 730-7055 NORTHERN NECK STATE BANK - ------------------------ BURGESS 15043 Northumberland Highway Burgess, VA 22432 (804) 453-4181 KILMARNOCK 284 North Main Street Kilmarnock, VA 22842 (804) 435-2681 MONTROSS Rt. 3, Kings Hwy. Montross, VA 22520 (804) 493-9301 REEDVILLE 876 Main Street Reedville, VA 22539 (804) 453-4151 TAPPAHANNOCK U.S. Rt. 17 & Earl Street Tappahannock, VA 22560 (804) 443-4361 WAL*MART IN TAPPAHANNOCK 1660 Tappahannock Blvd. Tappahannock, VA 22560 (804) 443-9433 WARSAW - MAIN OFFICE 5839 Richmond Road Warsaw, VA 22572 (804) 333-4066 WARSAW - TIME SQUARE 4256 Richmond Road Warsaw, VA 22572 (804) 333-3019 WHITE STONE 485 Chesapeake Drive White Stone, VA 22578 (804) 435-1626 UNION INVESTMENT SERVICES - ------------------------- ATLEE (804) 550-7209 BOWLING GREEN (800) 546-5031 FALL HILL (540) 371-1000 MORTGAGE CAPITAL INVESTORS - -------------------------- ALEXANDRIA, VA BOWIE, MD CAMP SPRINGS, MD FREDERICKSBURG, VA FREDERICK, MD GREENBELT, MD JOHN'S ISLAND, SC MT. LAUREL, NJ MYRTLE BEACH, SC NORFOLK, VA ROCKVILLE, MD SOUTHPORT, CT SPRINGFIELD, VA BANK OF WILLIAMSBURG - -------------------- 5125 John Tyler Parkway Williamsburg, Virginia 23187 (804) 229-5448 RAPPAHANNOCK NATIONAL BANK - -------------------------- 257 Gay Street Washington, Virginia 22747 (540) 675-3519 On January 29, 2000, we lost a dear [PHOTO] friend and colleague, E. Peyton Motley, after a 6 month battle with cancer. Peyton was a leader within our organization and in the community... he was the community's banker. He was a devoted husband and father, committed - -------------------------------------------------------------------------------- AYERS . GAIL E. BAKICH . MICHAEL BARNES . LAURA R. BATCH . MEREDITH R. BATES o VALERIE BEEBE . PATRICE BENTON . BETH ANNE BITTLE . LYNN P. BLATT . JOANN W. BRAVO . BARBARA A. BREEN . CYTHIA BROCKMAN . PATRICIA L. BRODERICK . BONNIE B. BURNS . JANEEN S. CARD . GAIL J. CARR . BARBARA J. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT BUSINESS PROFILE Union Bankshares Corporation is a multi-bank holding company committed to the delivery of financial services through affiliated independent community banks and other financial services companies. The Company serves the Central and Northern Neck regions of Virginia through its four banking subsidiaries, Union Bank & Trust Company, Northern Neck State Bank, Rappahannock National Bank and Bank of Williamsburg and its non-bank companies, Union Investment Services and Mortgage Capital Investors. The banking subsidiaries are Federal Reserve member banks whose deposits are insured by the Federal Deposit Insurance Corporation. Each is a full-service commercial bank offering commercial and consumer deposit accounts and loans, credit cards, automated teller machines and many other services to its customers. Each is also independently operated by local management and boards of directors enabling them to be responsive to the needs of their communities. Through its 18 locations, Union Bank & Trust Company serves customers in a primary service area which extends from its headquarters in Bowling Green along the I-95 corridor from greater Fredericksburg to central Hanover County and east to King William County. Northern Neck State Bank serves the Northern Neck and Middle Peninsula regions through nine locations spanning the Northern Neck. Rappahannock National serves the community surrounding Washington, Virginia. The Bank of Williamsburg in its new location at 5125 John Tyler Parkway serves the greater Williamsburg region. Union Investment Services is a full-service brokerage firm providing a wide variety of investment choices to customers throughout the Company's service area. Mortgage Capital Investors offers a full array of mortgage products to residents of our markets through its 13 origination offices. In addition, it offers insurance products through a joint venture, Union Insurance Group, L.L.C. As of December 31, 1999, Union Bankshares Corporation and subsidiaries had 439 employees, 2,258 shareholders of record, and assets totaling $822 million. MISSION STATEMENT "The primary mission of Union Bankshares Corporation and its subsidiaries is to enhance shareholder value by remaining a strong, independent financial services organization, providing exemplary customer service, a rewarding work environment for its employees and a growing return for its shareholders." 1 - -------------------------------------------------------------------------------- CARTER . LORRIE CHILTON . WILLIAM CHRISTOPHER . SHIELA F. CIANCIO . DARCY J. COLES . BERNARD J. CONNOLLY, JR. . DEBRA B. CURWEN . LINDA L. CUSICK . SANDRA E. DARRACOTT . TAMMY L. DAVIDSON . LAWRENCE E. DERX . THOMAS P. DI DONATO . JEANNE DI DONATO . SANDY DIXON . JOHN DORSEY, III . - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION UNION BANKSHARES CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 ---------- ---------- --------- ---------- ---------- RESULTS OF OPERATIONS (dollars in thousands, except per share amounts) Interest income $ 55,636 $ 51,062 $ 44,821 $ 42,068 $ 39,154 Interest expense 27,067 24,463 21,057 19,650 18,155 ---------- ---------- --------- ---------- ---------- Net interest income 28,569 26,599 23,764 22,418 20,999 Provision for loan losses 2,216 3,044 1,182 895 977 ---------- ---------- --------- ---------- ---------- Net interest income after provision for loan losses 26,353 23,555 22,582 21,523 20,022 Noninterest income 13,246 5,567 4,495 3,572 2,763 Noninterest expenses 32,689 20,622 16,628 14,982 13,551 ---------- ---------- --------- ---------- ---------- Income before income taxes 6,910 8,500 10,449 10,113 9,234 Income tax expense 636 1,678 2,283 2,374 2,192 ---------- ---------- --------- ---------- ---------- Net income $ 6,274 $ 6,822 $ 8,166 $ 7,739 $ 7,042 ========== ========== ========= ========== ========= KEY PERFORMANCE RATIOS Return on average assets (ROA) 0.79% 1.00% 1.41% 1.38% 1.34% Return on average equity (ROE) 8.74% 9.58% 12.80% 12.62% 12.50% Efficiency ratio 74.50% 61.24% 56.20% 54.06% 52.77% PER SHARE DATA Net income per share - basic $ 0.84 $ 0.91 $ 1.10 $ 1.04 $ 0.95 Net income per share - diluted 0.84 0.91 1.09 1.04 0.95 Cash dividends declared 0.40 0.38 0.37 0.32 0.28 Book value at period-end 9.19 9.77 9.16 8.23 7.57 FINANCIAL CONDITION Total assets $ 821,827 $ 733,947 $ 615,716 $ 559,782 $ 523,613 Total deposits 646,866 607,629 489,256 455,718 431,330 Total loans, net of unearned income 543,367 479,822 399,351 356,038 331,452 Stockholders' equity 68,794 73,359 68,427 61,344 56,352 ASSET QUALITY Allowance for loan losses $ 6,617 $ 6,407 $ 4,798 $ 4,612 4,274 Allowance as % of total loans 1.22% 1.33% 1.20% 1.29% 1.28% OTHER DATA Market value per share at period-end $ 14.75 $ 17.50 $ 21.94 $ 12.50 $ 13.00 Price to earnings ratio 17.6 19.2 19.9 12.0 13.7 Price to book value ratio 161% 179% 240% 152% 172% Dividend payout ratio 42.62% 41.76% 32.73% 30.76% $ 29.47% Weighted average shares outstanding 7,473,869 7,489,873 7,455,369 7,447,637 7,402,485
2 - -------------------------------------------------------------------------------- CHRISTINE DOWELL . MARCUS E. EINSTEIN . MARLENE EINSTEIN . THOMAS D. ELDER, JR. . THOMAS L. FONTAINE . CECILIA A. FRAZIER . ROBERT D. FULGHUM . DORSEY R. GALFORD, JR. . REENA S. GARRETT . IRIS M. GAUTIER . SHAWN C. GAVIN . CHRISTOPHER B. GINTER . BEVERLY GIRUC . BARBARA A. GOLDENBERG - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT PRESIDENT'S LETTER [PHOTO] Dear Fellow Shareholders: Some seven years ago the vision for Union Bankshares was formed in a house overlooking the Rappahannock River: a union of community banks, which would take advantage of the synergies available by spreading its operating expenses and resources over a larger asset base. The Company would grow through affiliation, branch acquisition and de novo branches. Fee based services would be expanded to supplement the Company's income stream. The Company would operate with a long-term vision focused on increasing shareholder value over time. Each year since then, the Union Bankshares Board has re-affirmed these goals in its strategic plan. The year 1999 will be remembered as a critical time in the execution of our strategic plan and the development of Union Bankshares. 1999's results reflect the impact of seven key decisions or events that occurred in late 1997 and 1998. In February 1998, Union Bankshares purchased five branches from Signet/First Union. Our projections indicated that these branches would have a drag on earnings of approximately $250,000 during the first 12 months of operation. Year two would be breakeven. The Company would not begin to see a profit from these branches until year three. The deposit growth of these branches has been above our expectations. Loan growth has been below expectations. Overall the branches are on track to meet our profitability projections. Union Bank & Trust opened three de novo branches in 1998. New branches typically have an earnings drag of approximately $100,000 per year in their first year of operation. These new branches have prospered and helped to contribute to Union Bank's remarkable growth in deposits and loans over the last eighteen months. [PHOTO] FINANCIAL ACCOUNTING: Planning and Directing Corporate Finance and Reporting Left to right: Rick Love, John Lane, Lori Newsome, Tony Peay, Ed Worrell, and Mike Harris. 3 - -------------------------------------------------------------------------------- . RICHARD A. GOODMAN . DARNELL R. GRAY . KIMBERLY D. HARVEY . KIM M. HEYING o JACQUELINE A. HODGES . BOND L. HOLFORD . CONNIE IOANOU . DANIEL G. JAY . TONI H. JONES . KEVIN P. KEEGAN . ELIZABETH A. KEENAN . MARY JO KELLEY . STACEY L. KERRIGAN . ROLLAND D. KILLE . FRAN KOPLOW . - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION Rappahannock National was acquired in late 1998. As with all of our acquisitions, it was priced to be accretive (increase earnings per share) to our shareholders. Under the leadership of a new chief executive, RNB is performing better than our projections. Bank of Williamsburg opened for business in February 1999. Start up costs and operating losses for this year totaled $229,000. We expect to be in our permanent facility in mid-March. Our projections show that Bank of Williamsburg will become profitable on a monthly basis during the fourth quarter of 2000. During 1999, Union Bankshares invested over $3.5 million in new technology. Upgrades were focused on teller and deposit platform software and enhancing our ability to consolidate back office functions. The back office consolidation took six months longer than anticipated which resulted in increased personnel costs. The delay was to ensure that our customers experienced minimal impact. The back office consolidation was a tremendous undertaking, but, through teamwork by associates from each bank the project is now complete. Cost savings resulting from the consolidation will begin to appear in the first quarter's numbers. In 1998 Union Bankshares entered into an agreement to acquire Mortgage Capital Investors (MCI). The transaction was closed in February 1999. Though MCI's performance in 1999 was not as projected, we continue to believe in the viability of this venture. Many factors contributed to the poor performance, including rising interest rates and declines in existing home sales. At this point, MCI has reduced non-commissioned staff by over 30%, closed two marginally producing offices, and is reviewing other offices for possible closing. Additionally, MCI has opened two new offices with high volume producers formerly with another mortgage company and has begun a construction-permanent loan program with Union Bank & Trust. We have also begun offering property and casualty insurance products to MCI's clients through a joint venture, Union Insurance Group L.L.C. Finally, during 1999 we completed the resolution of the problem loan reported during the third quarter of 1998. Management has been working with the borrower to restructure the loan to minimize any losses to the bank. Results for 1999 reflect an additional $350,000 in loan loss provisions and a partial charge-off of this loan against the loan loss reserve in the fourth quarter. It has been a difficult two years, as management and the board faced challenges on many fronts. We expect many of the long-range decisions made over this time will begin to show positive results in 2000. [PHOTO] OPERATIONS TECHNOLOGY: Managing Emerging Technology Left to right: Jim Sanford, Smokey Wilson, Tom Peregoy, and Joe Brown. [GRAPH] (in thousands) 1995 1996 1997 1998 1999 ASSETS 523,613 559,782 615,716 733,947 821,827 DEPOSITS 431,330 455,718 489,256 607,629 646,866 LOANS 331,452 356,038 399,351 479,822 543,367 4 - -------------------------------------------------------------------------------- FLOSSIE LANCASTER . JEAN P. LIBER . JONI Z. LOVING . BRENTON A. McCALLUM . CLAUDETTE C. McCLUNEY . JANE M. McQUILKIN . RICHARD C. MEEKINS . JOAN M. MILLER . GARY M. MILLS . BRENT D. MOLOVINSKY . SARA J. MONTES . DARNELLA J. MORGAN . KIMBERLEIGH MURRAY . JOHN A. O'BRIEN . BRIAN T. O'REILLY . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT [GRAPH] 1995 1996 1997 1998 1999 YIELD ON EARNING ASSETS 8.66 8.68 8.64 8.45 8.07 COST OF INTEREST BEARING LIABILITIES 4.63 4.61 4.66 4.62 4.37 There have been many positive things in 1999 as well. While none had the bottom line impact of the seven items listed previously, these successes are an indication of the strength of the team and its ability to accomplish tasks and grow the banks by meeting the customers' needs. The Company's Y2K team worked for over 18 months to assure that all systems were Y2K compliant. When we read of the large amounts spent by others, we feel fortunate that Union Bankshares Corporation's Y2K expenses were less than $250,000. The item processing conversion from paper to image processing was successful and well received by our customers. Item processing efficiency and productivity have been increased. The consolidation of our four subsidiary banks' back office operations into one location went extremely well. Data processing conversions for two of our banks were handled without incident. This task could not have been completed without the support and teamwork from all levels of the organizations. Union Bank & Trust experienced above market growth, solidifying its position as the number two bank in greater Fredericksburg and jumping from fifth to second in market share in the Hanover market. Union's indirect automobile loan department experienced strong growth. The financial performance of Rappahannock National has been excellent with continued growth and profitability on the horizon. Despite bureaucratic delays in the construction of our permanent site, the Bank of Williamsburg has been well received by the community. We expect strong performance in 2000 as we move from our temporary space to our banking house. Union Investment Services experienced a record year providing brokerage services and investment advice to its customers. On a sadder note, in July, Peyton Motley, president of Northern Neck State Bank, was diagnosed with pancreatic cancer. The staff at Northern Neck has done an excellent job of maintaining the pace while Peyton has been away. Peyton lost his fight with cancer on January 29, 2000. Our thoughts and prayers are with Peyton's family. The future holds much promise for Union Bankshares. Your corporation is positioned to increase shareholder value over the long term. Management is focused on maximizing efficiencies in the consolidated support areas. Continually increasing productivity through our investment in technology is a key to improved financial performance. We have spent the last couple of years putting the systems, people and plans in place to generate cost savings and enhance customer service. The year 2000 will be the year in which we execute those plans. [PHOTO] COMMUNITY BANKING: Focusing on Customers' Financial Needs Left to right: John Neal, Deborah Usry, and Byrd Newton. 5 - -------------------------------------------------------------------------------- LEONARD J. OSLAR . EDGAR PACORI . LOUIS M. PELL . EVE H. PENDLETON . REBECCA L. PETERS . PAUL J. PHELPS . JEFFERSON D. PHELPS, III . SHARON A. POWERS . BRADFORD PRATT . ELIZABETH ANN PRITCHARD . DANIEL M. PUTNEY. TERRI H. QUINN . LAURA H. RAJABI . BRENDA S. RAY-STRAIN . ADAM REPASY . LYNN - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION Our concerns for the year 2000 center on the policy of rising interest rates and tightening of liquidity that have been implemented by the Federal Reserve Bank. This policy could impact the corporation's already narrowing margins. Additionally, internally generated growth in deposits and earning assets, a key component for increased profitability, could be impacted. A series of rate increases will negatively impact Mortgage Capital's return to profitability. [GRAPH] [PLOT POINTS TO COME] We will continue to look at affiliations with other community banks as a way to grow, provide geographic diversity, share the high cost of technology and provide management depth. As the largest of Virginia's community bank holding companies, Union Bankshares has a unique opportunity to grow significantly as community banking in Virginia consolidates. While the corporation does own sites for future branch expansion, we do not foresee opening any new branches in 2000. Our stock price has been a concern to many of you. Like many banks our stock price had reached irrational levels in mid 1998, when compared to the historic price levels of bank stocks. A chart on this page shows our stock price performance over the last two years relative to several other market indices, including the NASDAQ Bank Index. You can see that Union Bankshares Corporation's stock price, while down 18% in 1999 and over 35% over the two year period, is in line with the market decline. When one considers the markets we serve, the investment that we have already made in infrastructure and our prospects for future growth and profitability, Union Bankshares remains a good long-term investment. Many of our shareholders are loyal customers of our banks and brokerage firm. We appreciate their continued support. Should you have any questions, I encourage you to contact me either by phone or e-mail at gwbeale@ubsh.com. /s/ William Beale G. William Beale [PHOTO] CUSTOMER ACCOUNTING: Serving Retail and Commercial Customers Left to right: Karen Dewitt, Jeannette Burke, and Carolyn Wiley. 6 - -------------------------------------------------------------------------------- REPASY . ROBERT RESH . PHAN W. ROBINSON . RAYMOND I. J. ROMANICK . EARNEST A. SAHADY . PATRICIA SCHURTZ . ROBERT F. SELDON . BRENDA SISSON . JACOB SISSON . ELIZABETH J. SMALLING . PATRICIA A. SMITH . JENNIFER L. SNYDER . EDWARD SOMA . RAY L. STEIN . JEANNE STEVENS . MICHAEL E. STOLL . ERIC - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT DIRECTORS OF UNION BANKSHARES CORPORATION Ronald L. Hicks Chairman Charles H. Ryland Vice Chairman G. William Beale Walton Mahon E. Peyton Motley (deceased) W. Tayloe Murphy, Jr. M. Raymond Piland, III A.D. Whittaker [PHOTO] (Standing, l to r): W. Tayloe Murphy, Jr., Ronald L. Hicks, G. William Beale, and E. Peyton Motley. (Seated, l to r): M. Raymond Piland III, Charles H. Ryland, A.D. Whittaker, and Walton Mahon. QUARTERLY EARNINGS SUMMARY
1999 1998 (in thousands, except per share data) FOURTH THIRD SECOND FIRST TOTAL FOURTH THIRD SECOND FIRST TOTAL ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Interest income $14,760 $14,327 $13,409 $13,140 $55,636 $13,199 $12,917 $12,741 $12,205 $51,062 Interest expense 7,048 7,153 6,583 6,283 27,067 6,335 6,238 6,069 5,821 24,463 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net interest income 7,712 7,174 6,826 6,857 28,569 6,864 6,679 6,672 6,384 26,599 Provision for loan losses 190 513 751 762 2,216 650 1,479 480 435 3,044 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Noninterest income after provision for loan losses 7,522 6,661 6,075 6,095 26,353 6,214 5,200 6,192 5,949 23,555 Noninterest income 2,488 3,298 3,922 3,538 13,246 1,784 1,350 1,329 1,104 5,567 Noninterest expense 8,399 8,458 8,470 7,362 32,689 5,593 5,347 5,173 4,509 20,622 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes 1,611 1,501 1,527 2,271 6,910 2,405 1,203 2,348 2,544 8,500 Income tax expense (189) 119 195 511 636 637 104 438 499 1,678 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 1,800 $ 1,382 $ 1,332 $ 1,760 $ 6,274 $ 1,768 $ 1,099 $ 1,910 $ 2,045 $ 6,822 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Net income per share Basic $ 0.24 $ 0.18 $ 0.18 $ 0.24 $ 0.84 $ 0.24 $ 0.15 $ 0.25 $ 0.27 $ 0.91 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Diluted $ 0.23 $ 0.18 $ 0.18 $ 0.24 $ 0.84 $ 0.24 $ 0.15 $ 0.25 $ 0.27 $ 0.91 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
7 - -------------------------------------------------------------------------------- D. THOMAS . DAVID M. THOMPSON . CAROL TOMASI . LESLIE A. VALENTINE . BONNIE G. VICK . JILL A. WAGNER . R. SCOTT WALLACE . DAVIN J. WILLIFORD . GRANT WING . LISA WITKOWSKI . BETTY L. WRIGHT . NORTHERN NECK STATE BANK . ROBIN S. ABERCROMBIE . LINDA H. ASHTON . LASHAY S. BALL . NANCY E. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION RETAIL LOCATIONS [MAP] 8 - -------------------------------------------------------------------------------- BAUGHAN . MARY ANNETTE BOWLES . MARY L. BOWLES . ANGELA C. BRANN . SHIRLEY T. BROOKS . RUSSELL G. BROWN . BARBARA H. BRYANT . JANET L. CARPENTER . HOLLY D. CARTER . MANLEY L. CHADWICK . TERRY J. CLARK . BRENDA H. CONLEY . THELMA COURTNEY . CYNTHIA E. DAIGER . SHANNON R. DAVIS . BETTY T. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT DIRECTORY OF UNION BANKSHARES CORPORATION* BANK OF WILLIAMSBURG - -------------------- OFFICERS J. Michael Johnson, President DIRECTORS Henry Aceto, Jr. G. William Beale A. G. W. Christopher Randall K. Cooper L. Mark Griggs J. Michael Johnson Christopher A. Mayer Alison Morrison D. Anthony Peay Joseph R. Potter, Jr. MORTGAGE CAPITAL INVESTORS - -------------------------- OFFICERS Kevin P. Keegan, President & Chief Executive Officer DIRECTORS G. William Beale, Chairman Kevin P. Keegan John C. Neal Brian T. O'Reilly D. Anthony Peay RAPPAHANNOCK NATIONAL BANK - -------------------------- OFFICERS Michael T. Leake, Executive Vice President and Chief Executive Officer DIRECTORS Elisabeth J. Jones, Chairman G. William Beale Alphaeus F. Cannon Thomas B. Massie Mary L. Payne Thomas G. Taylor George E. Williams UNION INVESTMENT SERVICES - ------------------------- OFFICERS Bernard W. Mahon, Jr., President Darryl Barnes, Vice President Randall W. Vaughan, Vice President DIRECTORS G. William Beale, Chairman Russell G. Brown Ronald L. Hicks Bernard W. Mahon, Jr. Michael N. Manns J.E. Small, III UNION BANK & TRUST COMPANY - -------------------------- OFFICERS G. William Beale, President & Chief Executive Officer John C. Neal, Executive Vice President & Chief Operating Officer Robert K. Bailey, III, Senior Vice President William H. Hutton, Senior Vice President John M. Randolph, Senior Vice President R. Tyler Ware, Senior Vice President David K. Bohmke, Vice President Sylvia Buffkin, Vice President Travis Bullock, Vice President David Clare, Vice President F. Kent Cox, Vice President Maria Franklin, Vice President Charles Gravatt, Vice President Sherry C. Gravatt, Vice President Tom Parcell, Vice President Doug Ransone, Vice President Raymond C. Ratcliffe, Jr., Vice President Michael Torosian, Vice President DIRECTORS Ronald L. Hicks, Chairman Walton Mahon, Vice Chairman G. William Beale John S. Cheadle William B. Gallahan Daniel I. Hansen Michael N. Manns John C. Neal M. Raymond Piland, III J.E. Small, III A.D. Whittaker HONORARY DIRECTORS Estelle H. Kay Guy C. Lewis, Jr. H. Ashton Taylor R.F. Upshaw, Jr. KING GEORGE ADVISORY BOARD Michael C. Mayo E.R. Morris, Jr. William Storke A.B. Walker, Jr. E.P. Woodworth NORTHERN NECK STATE BANK - ------------------------ OFFICERS N. Byrd Newton, President Russell G. Brown, Vice President William E. Harrison, Vice President & Cashier C. Wayne Penick, Vice President Marion B. Rowe, Vice President William M. Wright, Vice President DIRECTORS William E. Bowen S. Bryan Chandler Richard A. Farmar, Jr. W.D. Gray Edward L. Hammond William H. Hughes W. Tayloe Murphy, Jr. N. Byrd Newton Dexter C. Rumsey, III Charles H. Ryland Charles H. Williams, III William M. Wright HONORARY DIRECTORS Robert B. Delano James V. Garland, Jr. Thomas S. Herbert Louis G. Packett LANCASTER/NORTHUMBERLAND ADVISORY BOARD Nancy T. Cockrell Robert E. Crowther, III William B. Graham Lloyd B. Hubbard David Jones Burton D. Reed, Jr. H. Chilton Treakle, Sr. Herbert E. Vaughan UNION BANKSHARES CORPORATION - ---------------------------- OFFICERS G. William Beale, President & Chief Executive Officer D. Anthony Peay, Vice President, Chief Financial Officer & Corporate Secretary David "Smokey" Wilson, Senior Vice President Thomas Boyd III, Vice President Jeannette Burke, Vice President Myles W. H. Gaythwaite, Vice President John A. Lane, Vice President Scott Nininger, Vice President George Washington, Vice President DIRECTORS Ronald L. Hicks, Chairman Charles H. Ryland, Vice Chairman G. William Beale Walton Mahon W. Tayloe Murphy, Jr. M. Raymond Piland, III A.D. Whittaker * As of February 29, 2000 9 - -------------------------------------------------------------------------------- DELANO . ALICE V. DIX . WILLIAM A. ESTELL, JR. . BROOK H. EZZELL . ELIZABETH FORREST FRANKLIN . APRIL F. GASKINS . TERESA A. GILL. LAURA L. GORDON . KATHRYN P. GOULDTHORPE . GREGORY A. GRUNER - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of Union Bankshares Corporation and subsidiaries (the "Company" or "Union Bankshares"). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented elsewhere in this Annual Report. OVERVIEW Union Bankshares Corporation's net income for 1999 totaled $6.3 million or $0.84 per share on a diluted basis, down 7.4% from $6.8 million or $0.91 per share on a diluted basis for 1998. Profitability as measured by return on average assets (ROA) for 1999 was 0.79% as compared to 1.00% a year earlier, while return on average equity (ROE) for 1999 was 8.74% as compared to 9.58% in 1998. Core profitability continued to improve as net interest income increased by 7.4% and service fees on deposit accounts by 6.4%. Union Bankshares Corporation's financial performance in 1999 was impacted by the changing interest rate environment and its effect on the net interest margin and mortgage origination business. Increased volumes helped interest income rise over the previous year in the core banking business. Rising mortgage rates lowered mortgage loan production by 39% and adversely affected profitability of the mortgage origination business. The Company's performance in 1999 was also impacted by the Company's expansion over the last two years, including five acquired branches and three de novo branches. In addition, the opening of the Bank of Williamsburg created an earnings drag which will continue into the fall of 2000 when it should reach monthly profitability. The Company also completed consolidation of its accounting and operations functions and continued its commitment to invest in improved technology. With these initiatives, the Company's profit was only slightly below the previous year. The Company's performance was also impacted by continued compression of the net interest margin. Competitive pricing for loan products and alternative deposit options for consumers impacted all financial services companies in 1999 and will likely continue to have a negative impact in 2000. Our net interest margin, on a taxable equivalent basis, declined from 4.55% in 1998 to 4.30% during 1999. The financial services industry has increasingly focused on noninterest income as interest margins have compressed. Our investment brokerage operations contributed $679,000 in noninterest income in 1999, up from $555,000 in 1998. The mortgage brokerage business, with the addition of Mortgage Capital Investors, had nonin-terest income of $7,495,000 in 1999. In addition, our focus on providing competitive products and customer service has provided additional sources of fee income. Assets grew to $821.8 million at December 31, 1999, up 12.0% from $733.9 million a year ago. Loans grew to $543.4 million, up 13.3% over year end 1998 totals. Deposits increased from $607.6 million at December 31, 1998 to $646.9 million at December 31, 1999, a 6.5% increase. The Company's capital position remains strong with an equity to assets ratio of 8.4%. NET INTEREST INCOME Net interest income represents the principal source of earnings for the Company. Net interest income equals the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income and the net interest margin. During 1999, net interest income, on a taxable equivalent basis, totaled $31.0 million, an increase of 8.8% from $28.5 million in 1998. The Company's net interest margin declined to 4.30% in 1999, as compared to 4.55% in 1998 and 4.73% in 1997. This 25 basis point decline, when applied to average earning assets, represented nearly $1.7 million in potential net interest income. Despite this net interest margin decline, the impact of increases in the volume of earning assets exceeded the impact of declining rates, resulting in a net increase of $5.0 million in interest income on a taxable equivalent basis. The yield on earning assets declined to 8.07% from 8.45% in 1998 while the cost of interest-bearing liabilities also declined from 4.62% in 1998 to 4.37% in 1999. Average interest-bearing liabilities increased by $89.8 million, or 16.9% while average earning assets grew by $92.0 million, or 14.7%. As a result, the Company was able to realize an increase of $2.5 million in net interest income on a taxable equivalent basis compared to 1998 (see Volume and Rate Analysis table). 10 - -------------------------------------------------------------------------------- . DORIS C. HALL . LILLIAN S. HAMBLIN . CRISTAL F. HARPER . WILLIAM E. HARRISON . SANDRA D. HAYWOOD . LINDA L. HIXON . SUE W. JETT . WENDY R. JONES . JOSEPHINE F. KING . EDITH FAYE LANGE . BARBARA W. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT The following table depicts interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated. AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- ---------------------------- ---------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------- ------- ------ ------- ------- ------ ------- ------- ------ ASSETS: (dollars in thousands) Securities: Taxable........................... $ 117,938 $ 7,567 6.42% $ 94,814 $ 6,107 6.44% $ 87,272 $ 5,622 6.44% Tax-exempt(1)..................... 89,211 6,941 7.78% 74,068 5,847 7.89% 68,361 5,569 8.15% --------- -------- ---- --------- -------- ---- --------- -------- ---- Total securities............... 207,149 14,508 7.00% 168,882 11,954 7.08% 155,633 11,191 7.19% Loans, net........................... 507,658 43,220 8.51% 444,463 40,395 9.09% 375,328 34,939 9.31% Federal funds sold................... 3,004 209 6.96% 12,549 581 4.63% 7,148 384 5.37% Interest-bearing deposits in other banks.................... 1,165 56 4.81% 1,058 71 6.71% 702 53 7.55% --------- -------- --------- -------- --------- -------- Total earning assets........... 718,976 57,993 8.07% 626,952 53,001 8.45% 538,811 46,567 8.64% Allowance for loan losses............ (7,270) (5,339) (4,693) Total non-earning assets............. 79,829 59,942 48,049 --------- --------- --------- Total assets......................... $ 791,535 $ 681,555 $ 582,167 ========== ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY: Interest-bearing deposits: Checking.......................... $ 88,806 1,845 2.08% $ 73,263 $ 1,745 2.38% $ 56,495 $ 1,452 2.57% Regular savings................... 59,897 1,576 2.63% 58,490 1,749 2.99% 53,200 1,638 3.08% Money market savings.............. 63,452 2,070 3.26% 60,674 2,065 3.40% 51,119 1,723 3.37% Certificates of deposit: $100,000 and over................. 92,123 4,669 5.07% 68,703 3,789 5.52% 56,481 2,967 5.25% Under $100,000.................... 237,734 12,609 5.30% 223,362 12,559 5.62% 192,441 10,949 5.69% --------- -------- --------- -------- --------- -------- Total interest-bearing deposits................... 542,012 22,769 4.20% 484,492 21,907 4.52% 409,736 18,729 4.57% Other borrowings..................... 77,497 4,298 5.55% 45,236 2,556 5.65% 42,449 2,328 5.48% --------- -------- --------- -------- --------- -------- Total interest-bearing liabilities................ 619,509 27,067 4.37% 529,728 24,463 4.62% 452,185 21,057 4.66% -------- -------- -------- Non-interest bearing liabilities: Demand deposits................... 85,017 75,278 60,512 Other liabilities................. 15,242 4,937 5,005 --------- --------- --------- Total liabilities.............. 719,768 609,943 517,702 Stockholders' equity................. 71,767 71,612 64,465 --------- --------- --------- Total liabilities and stockholders' equity.............. $ 791,535 $ 681,555 $ 582,167 ========= ========= ========= Net interest income.................. $ 30,926 $ 28,538 $ 25,510 ======== ======== ======== Interest rate spread................. 3.70% 3.83% 3.98% Interest expense as a percent of average earning assets......... 3.76% 3.92% 3.91% Net interest margin.................. 4.30% 4.55% 4.73%
(1) Income and yields are reported on a taxable equivalent basis. 11 - -------------------------------------------------------------------------------- LAWSON . ANGELIA D. LEE . DONNA G. LEWIS . GENEVA B. LOWERY . GLENN A. MORSE . E. PEYTON MOTLEY . LINDA V. MURRAY . N. BYRD NEWTON . DARLENE F. O'BIER . SANDRA K. O'BIER . C. WAYNE PENICK . SUSIE - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION The following table analyzes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities compared to changes in interest rates. Nonaccrual loans are included in average loans outstanding. VOLUME AND RATE ANALYSIS* (TAXABLE EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1999 VS. 1998 1998 VS. 1997 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN: DUE TO CHANGES IN: -------------------------------- ------------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL -------- ------ ------- -------- ------ ------ (in thousands) EARNING ASSETS: Securities: Taxable ........................ $ 1,479 $ (19) $ 1,460 $ 485 $ -- $ 485 Tax-exempt ..................... 1,176 (82) 1,094 454 (176) 278 Loans, net ........................ 5,420 (2,595) 2,825 6,300 (844) 5,456 Federal funds sold ................ (575) 203 (372) 256 (59) 197 Interest-bearing deposits in other banks ................... 6 (21) (15) 24 (6) 18 -------- ------- ------ ------- ------ ------ Total earning assets ............ 7,506 (2,514) 4,992 7,519 (1,085) 6,434 -------- ------- ------ ------- ------ ------ INTEREST-BEARING LIABILITIES: Interest checking ................. 337 (237) 100 405 (112) 293 Regular savings ................... 41 (214) (173) 159 (48) 111 Money market savings .............. 91 (86) 5 327 15 342 CDs $100,000 and over ............. 1,209 (329) 880 669 153 822 CDs less than $100,000 ............ 786 (736) 50 1,742 (132) 1,610 -------- ------- ------ ------- ------ ------ Total interest-bearing deposits ................... 2,464 (1,602) 862 3,302 (124) 3,178 Other borrowings .................. 1,788 (46) 1,742 157 71 228 -------- ------- ------ ------- ------ ------ Total interest-bearing liabilities ................ 4,252 (1,648) 2,604 3,459 (53) 3,406 -------- ------- ------ ------- ------ ------ Change in net interest income ........................... $ 3,254 $ (866) $ 2,388 $ 4,060 $(1,032) $ 3,028 ======== ======= ====== ======= ====== ======
* The change in interest, due to both rate and volume, has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each. INTEREST SENSITIVITY An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which can be effected by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact on net interest income in periods of rising or falling interest rates. The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management's expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors. The Company uses computer simulations to measure the effect of various interest rate scenarios on net interest income. This modeling reflects interest rate changes and the related impact on net income over specified time horizons. 12 - -------------------------------------------------------------------------------- B. PRESCOTT . CHERYL REAMY . MACEL F. ROBINSON . JULIE H. ROGERS . MARION B. ROWE . APRIL R. SANDERS . NANCY A. SANDERS . CAROLYN SANDERS-SMITH . PEGGY S. SANFORD . DEBRA B. SCOTT . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT At December 31, 1999, the Company had $223.0 million more liabilities than assets subject to repricing within one year and was, therefore, in a liability-sensitive position. A liability-sensitive company's net interest margin and net interest income generally will be impacted favorably by declining interest rates, while that of an asset-sensitive Company generally will be impacted favorably by increasing interest rates. Although the gap report shows the Company to be liability sensitive, computer simulation shows the Company's net interest income tends to increase when interest rates rise and fall when interest rates decline. The explanation for this is interest rate changes affect bank products differently. For example: if the prime rate changes by 1.0% (100 basis points or bps), the change on certificates of deposit may only be around 0.75% (75 bps), while other interest bearing deposit accounts may only change 0.1% (10 bps). Also, despite their fixed terms, loan products are often refinanced as rates decline. Recently, increased deposit competition and the inverted yield curve have resulted in more rapid deposit rate movement than for loans. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1999(1) --------------------------------------------------------------------- WITHIN 90-365 1-5 OVER 90 DAYS DAYS YEARS 5 YEARS TOTAL --------- --------- --------- --------- --------- (in thousands) EARNING ASSETS: Loans, net of unearned income (3) $ 98,937 $ 33,904 $ 246,399 $ 162,640 $ 541,880 Investment securities ........... 615 3,844 3,452 1,667 9,578 Securities available for sale ... 911 8,340 69,885 122,585 201,721 Federal funds sold .............. 248 -- -- -- 248 Other short-term investments .... 867 -- -- -- 867 --------- --------- --------- --------- --------- Total earning assets ......... 101,578 46,088 319,736 286,892 754,294 ========= ========= ========= ========= ========= INTEREST-BEARING LIABILITIES: Interest checking (2) ........... -- -- 95,882 -- 95,882 Regular savings (2) ............. -- -- 58,209 -- 58,209 Money market savings ............ -- 63,249 -- -- 63,249 Certificates of deposit: $100,000 and over ............ 29,335 61,680 16,639 -- 107,654 Under $100,000 ............... 48,924 122,876 70,795 229 242,824 Short-term borrowings ........... 39,159 -- -- -- 39,159 Long-term borrowings ............ 5,320 75 34,025 15,000 54,420 -------- ------- -------- ------- -------- Total interest-bearing liabilities .............. 122,738 247,880 275,550 15,229 661,397 -------- --------- -------- ------- -------- Period gap ...................... (21,160) (201,792) 44,186 271,663 -- Cumulative gap .................. $ (21,160) $(222,952) $(178,766) $ 92,897 $ 92,897 ========= ========= ========= ========== ========= Ratio of cumulative gap to total earning assets ......... -2.81% -29.56% -23.70% 12.32% ========= ========= ======== ========
(1) The repricing dates may differ from maturity dates for certain assets due to prepayment assumptions. (2) The Company has determined that interest-bearing checking deposits and regular savings deposits are not sensitive to changes in related market rates and therefore, it has placed them predominantly in the "1 - 5 Years" column. (3) Excludes non-accrual loans. NONINTEREST INCOME Non interest income increased by 136.4 % from $5.6 million in 1998 to $13.2 in 1999. This increase is largely due to the addition of Mortgage Capital Investors which contributed $7.5 million in gains on sales of mortgage loans. Excluding such gains noninterest income was up slightly to $5.7 million. Deposit service charges were up $184,000 over 1998. Other service charges were up $412,000, including an increase of $124,000 in brokerage fees from Union Investment Services. In 1998, noninterest income increased by 23.9% from $4.5 million in 1997 to $5.6 million. This increase was largely attributable to the gains in deposit service charges and other service charges of $721,000 and $613,000, respectively. The latter charges were fueled by continued growth in mortgage income of $272,640 over 1997 and Union Investment's increase of $194,143 over 1997. 13 - -------------------------------------------------------------------------------- MELESSIA F. SELF . PATRICIA P. SETTLE . GLORIA B. SMITH . AMY TAYLOR . MARION W. THOMPSON . SANDRA M. VENEY . BRIDGETT B. WILLIAMS . RAPPAHANNOCK NATIONAL BANK . GEORGIA A. GILPIN . PATRICIA A. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION NONINTEREST EXPENSES Noninterest expenses totaled $32.7 million in 1999, up $12.1 million or 58.7% over $20.6 million in 1998. Mortgage Capital Investors accounted for $8.9 million of this increase, including $6.9 million in salaries and loan commissions, $900,000 in occupancy and equipment and $1.1 million in other operating expenses. The new Bank of Williamsburg also added $550,000 in noninterest expense in 1999. The remaining increase came from the core business with a $1.4 million increase in personnel and a $1.0 million increase in other operating expenses. In 1999, the Company incurred the full expense impact of the branches purchased and opened in 1998. It also implemented major technology enhancements, including teller/platform automation and check imaging, and consolidated remaining back office functions. All these activities added costs to the normal inflationary rise and, as expected, created a short term drag on earnings. Noninterest expenses totaled $20.6 million in 1998, up 24.0% over 16.6 million in 1997. Most of this increase was the result of purchasing 5 branches from Signet/ First Union bank and opening 3 de novo branches. LOAN PORTFOLIO Loans, net of unearned income, totaled $543.4 million at December 31, 1999, an increase of 13.3% over $479.8 million at December 31, 1998. Union Bankshares has achieved a rate of growth consistent with the economies of the markets within which it operates and has maintained or increased its market share in each. Loans secured by real estate comprised 66.3% of the total loan portfolio at December 31, 1999. Of this total, single-family, residential loans, not including home equity lines, comprised 33.0% of the total loan portfolio at December 31, 1999, up slightly from 32.5% in 1998. Loans secured by commercial real estate comprised 22.1% of the total loan portfolio at December 31, 1999, as compared to 22.5% in 1998, and consist principally of commercial and industrial loans where real estate constitutes a secondary source of collateral. The Company attempts to reduce its exposure to the risk of the local real estate markets by limiting the aggregate size of its commercial real estate portfolio, and by making such loans primarily on owner-occupied properties. Real estate construction loans accounted for 6.1% of total loans outstanding at December 31, 1999. The Company's charge-off rate for all loans secured by real estate has historically been low. LOAN PORTFOLIO
DECEMBER 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands) Commercial ............................ $ 67,649 $ 61,678 $ 45,541 $ 37,375 $ 37,041 Loans to finance agriculture production and other loans to farmers ......... 3,015 2,595 1,590 3,080 2,894 Real estate: Real estate construction ........... 33,218 38,128 28,206 13,961 17,479 Real estate mortgage: Residential (1 - 4 family) ...... 179,246 155,843 125,205 114,945 99,821 Home equity lines ............... 20,987 18,737 21,061 21,964 22,561 Multi-family .................... 4,592 3,979 1,905 1,501 1,440 Commercial(1) ................... 120,490 108,063 93,568 80,830 72,992 Agricultural .................... 2,373 2,536 2,292 2,262 2,776 -------- -------- -------- -------- -------- Total real estate ............... 360,906 327,286 272,237 235,463 217,069 Loans to individuals: Consumer ........................... 102,713 79,492 77,505 76,826 70,788 Credit card ........................ 4,346 3,232 2,682 2,567 2,235 -------- -------- -------- -------- -------- Total loans to individuals ...... 107,059 82,724 80,187 79,393 73,023 All other loans ....................... 5,855 6,559 879 2,125 2,619 -------- -------- -------- -------- -------- Total loans ..................... 544,484 480,842 400,434 357,436 332,646 Less unearned income .................. 1,117 1,020 1,083 1,398 1,194 -------- -------- -------- -------- -------- Total net loans .................... $543,367 $479,822 $399,351 $356,038 $331,452 ======== ======== ======== ======== ========
(1) This category generally consists of commercial and industrial loans where real estate constitutes a secondary source of collateral. 14 - -------------------------------------------------------------------------------- GRIGSBY . BETTY L. JEWELL . MICHAEL T. LEAKE . W. F. MOFFETT, III . HELEN I. SEALOCK . SHERRY JO SHAW . UNION BANK & TRUST COMPANY . HELEN M. ACORS . MARGARET ATKINS . ROBERT K. BAILEY, III . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT The Company's consumer loan portfolio, its second largest category, consists principally of installment loans. Total loans to individuals for household, family and other personal expenditures totaled 18.9% of total loans at December 31, 1999, up from 16.5% in 1998. Commercial loans, secured by non-real estate business assets comprised 12.4% of total loans at the end of 1999, a slight decrease from 12.9% at the end of 1998. Loans to the agricultural industry totaled less than 1.0% of the loan portfolio in each of the last five years. MATURITY SCHEDULE OF LOANS
1 YEAR OR LESS 1 - 5 YEARS AFTER 5 YEARS TOTAL -------------- ----------- ------------- ----- (in thousands) December 31, 1999 ...... $148,951 $241,795 $153,738 $544,484 December 31, 1998 ...... 155,160 179,068 146,614 480,842 December 31, 1997 ...... 138,935 144,220 117,279 400,434
Loans, net of unearned income, totaled $479.8 million at December 31, 1998, an increase of 20.1% over $399.3 million at December 31, 1997, fueled largely by residential mortgage growth. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade area. The Company maintains a policy not to originate or purchase loans to foreign entities or loans classified by regulators as highly leveraged transactions. To manage the growth of the real estate loans in the loan portfolio, facilitate asset/liability management and generate additional fee income, the Company sells a portion of conforming first mortgage residential real estate loans to the secondary market as they are originated. Mortgage Capital Investors serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market while retaining loans meeting the banks' current asset/liability management needs. This venture has provided the banks' customers with enhanced mortgage products and the Company with improved efficiencies through the consolidation of this function. ASSET QUALITY - ALLOWANCE/PROVISION FOR LOAN LOSSES The allowance for loan losses represents management's estimate of the amount adequate to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Company's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits and current and anticipated economic conditions. There are additional risks of future loan losses which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. Management maintains a list of loans which have a potential weakness that may need special attention. This list is used to monitor such loans and is used in the determination of the sufficiency of the Company's allowance for loan losses. As of December 31, 1999, the allowance for loan losses was $6.6 million, or 1.22% of total loans as compared to $6.4 million, or 1.33% in 1998. The provision for loan losses decreased from $3.0 million in 1998 to $2.2 million due largely to a special provision against a single credit in 1998 (see Non-Performing Assets). The allowance for loan losses as of December 31, 1998 was $6.4 million, or 1.33% of total loans as compared to $4.8 million, or 1.20% in 1997. The provision for loan losses in 1998 totaled $3,044,000 as compared to $1,182,000 in 1997. 15
- ------------------------------------------------------------------------------------------------------------ AMANDA C. BARLOW . VALERIE BENNETT . DEBBIE A. BLAZEK . MARGARET V. BLAZEK . NICOLE S. BOCLAIR . DAVID K. BOHMKE . BETTY L. BOLTON . ALEXIS C. BOYD . MELINDA B. BRADMAN . DONNA L. BREHM . - ------------------------------------------------------------------------------------------------------------ UNION BANKSHARES CORPORATION ALLOWANCE FOR LOAN LOSSES DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (dollars in thousands) Balance, beginning of year ................ $ 6,407 $ 4,798 $ 4,612 $ 4,274 $ 4,320 Loans charged-off: Commercial ............................. 1,544 597 247 114 643 Real estate ............................ 62 34 4 59 185 Consumer ............................... 746 1,078 958 795 429 ------- ------- ------- ------- ------- Total loans charged-off ............. 2,352 1,709 1,209 968 1,257 ------- ------- ------- ------- ------- Recoveries: Commercial ............................. 12 126 8 275 112 Real estate ............................ 8 18 49 10 16 Consumer ............................... 326 130 156 126 106 ------- ------- ------- ------- ------- Total recoveries .................... 346 274 213 411 234 ------- ------- ------- ------- ------- Net loans charged-off ..................... 2,006 1,435 996 557 1,023 Provision for loan losses ................. 2,216 3,044 1,182 895 977 ------- ------- ------- ------- ------- Balance, end of year ...................... $ 6,617 $ 6,407 $ 4,798 $ 4,612 $ 4,274 ======= ======= ======= ======= ======= Ratio of allowance for loan losses to total loans outstanding at end of year ....... 1.22% 1.33% 1.20% 1.29% 1.28% Ratio of net charge-offs to average loans outstanding during year ........... 0.40% 0.32% 0.27% 0.16% 0.32%
NONPERFORMING ASSETS Nonperforming assets were $3.5 million at December 31, 1999, down from $4.6 million at December 31, 1998. Non-accrual loans decreased from $2.8 million in 1998 to $1.5 million in 1999. Contributing to the decline in these figures was the charge-off of a portion of a problem loan reported during the third quarter of 1998. The Company recorded provisions for loan losses related to this loan of $975,000 in 1998 and $350,000 in 1999 and charged off 1.1 million in 1999. The Company is still working with the borrower to resolve this situation and is aggressively pursuing collection on this credit. The collateral supporting the credit has been appraised and should protect the Company from any further loss. NONPERFORMING ASSETS
DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (dollars in thousands) Nonaccrual loans ..................... $ 1,487 $ 2,813 $ 2,244 $ 523 $ 669 Foreclosed properties ................ 1,113 1,101 1,746 4,056 3,620 Real estate investment ............... 903 730 1,050 2,970 -- ------- ------- ------- ------- ------- Total nonperforming assets ..... $ 3,503 $ 4,644 $ 5,040 $ 7,549 $ 4,289 ======= ======= ======= ======= ======= Loans past due 90 days and accruing interest .............. $ 980 $ 2,979 $ 2,675 $ 3,165 $ 3,126 ======= ======= ======= ======= ======= Nonperforming assets to year-end loans, foreclosed properties and real estate investment ......... 0.64% 0.97% 1.26% 2.10% 1.28% Allowance for loan losses to nonaccrual loans ............... 444.99% 227.73% 213.81% 881.84% 638.86%
As of December 31, 1999, nonperforming assets includes approximately $903,000 representing an investment in income-producing property and included in other assets. This property consists of 11 single family homes which are either rented or listed for sale and are located near Fredericksburg, Virginia. The Company had previously acquired a limited interest in this property through settlement of a loan and, in 1996, acquired the 16 - -------------------------------------------------------------------------------- TABITHA BROWN . TINA R. BRUGGEMAN . SYLVIA C. BUFFKIN . CHARLES T. BULLOCK . LYDIA E. BYRD . DEBORAH L. BYRUM . GRACE CABANISS . BARBARA CANNON . MELINDA H. CASTLE . SHEILA CHEWNING . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT remaining ownership and control from the general partner. The carrying value of this investment in real estate is supported by residential appraisals of the homes which are being sold in an orderly manner, and management expects no loss on this investment. Because the initial downpayment on many of these houses was insufficient to qualify for full accrual sale treatment, they are being carried as nonaccrual loans until such time as the borrowers' investment in the property exceeds the required threshold. Most of the nonperforming assets are secured by real estate within the Company's trade area. Based on the estimated fair values of the related real estate, management considers these amounts to be recoverable, with any individual deficiency considered in the allowance for loan losses. At December 31, 1998, nonaccrual loans and foreclosed properties totaled $3.9 million, down from $4.0 million at December 31, 1997. Nonaccrual loans increased by $569,000 in 1998 while other real estate owned decreased from $1.7 million to $1.1 million. SECURITIES At December 31, 1999, $201.7 million, or over 95%, of the Company's securities were classified as available for sale, as compared to $161.2 million at December 31, 1998. Investment securities totaled $9.6 million at December 31, 1999 and consists of securities which management intends to hold to maturity. At December 31, 1998, $161.2 million, or over 90%, of the Company's securities were classified as available for sale, as compared to $143.7 million at December 31, 1997. Investment securities totaled $16.1 million at December 31, 1998 and consists of securities which management intends to hold to maturity. The Company seeks to diversify its portfolio to minimize risk and to maintain a large amount of securities issued by states and political subdivisions due to the tax benefits such securities provide. It also purchases mortgage backed securities because of the reinvestment opportunities from the cashflows and the higher yield offered from these securities. The investment portfolio has a high percentage of municipals and mortgage backed securities which is the main reason for the high yield the portfolio attains compared to its peers. MATURITIES OF INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1999 ----------------------------------------------------------------- OVER 10 YEARS & 1 YEAR 1 - 5 5 - 10 EQUITY OR LESS YEARS YEARS SECURITIES TOTAL -------- -------- --------- ---------- --------- (dollars in thousands) U.S. government and agency securities: Amortized cost .................... $ 1,595 $ 3,701 $ -- $ 17,998 $ 23,294 Fair value ........................ 1,585 3,650 -- 16,649 21,884 Weighted average yield(1) ......... 5.34% 5.88% -- 6.97% 6.69% Mortgage backed securities: Amortized cost .................... $ 1,699 $ 28,378 $ 35,365 $ 4,605 $ 70,047 Fair value ........................ 1,698 27,595 33,831 4,389 67,513 Weighted average yield(1) ......... 5.15% 6.59% 6.48% 6.10% 6.43% Municipal bonds: Amortized cost .................... $ 4,280 $ 18,736 $ 33,327 $ 46,528 $102,871 Fair value ........................ 4,300 18,828 33,624 43,257 100,009 Weighted average yield(1) ......... 7.95% 7.71% 7.84% 7.16% 7.51% Other securities: Amortized cost .................... $ 795 $ 3,209 $ 199 $ 18,381 $ 22,584 Fair value ........................ 794 3,123 189 17,727 21,833 Weighted average yield(1) ......... 6.46% 6,12% 6.28% 8.30% 6.01% Total securities: Amortized cost .................... $ 8,369 $ 54,024 $ 68,891 $ 87,512 $218,796 Fair value ........................ 8,377 53,196 67,644 82,022 211,239 Weighted average yield(1) ......... 6.74% 6.49% 7.14% 7.04% 6.92%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis. 17 - -------------------------------------------------------------------------------- ROOSEVELT CHILDS . DAVID F. CLARE . DONNA M. CLARK . JENNIFER COATES . LYNDA CONKLYN . DIANA L. CONLEY . F. KENT COX, JR. . RENEE M. COX . RICHARD E. CROSSLIN . TIFFANY CUMBERWORTH . MONICA - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION DEPOSITS Total deposits grew $39 million or 6.5% in 1999 with deposits in existing branches accounting for 5.8% of that growth, compared to 9.2% existing branch deposit growth in 1998. Increased competition for customer deposits continues to be a challenge for the Company, as reflected by the continual rise in other borrowings in 1999. The Company continues to focus on customer relationships and delivery of products and services that attract deposit customers. Total deposits increased from $607.6 million at December 31, 1998 to $646.9 million at December 31, 1999. Over this same period, average interest-bearing deposits were $542 million, or 11.8% over the 1998 average of $484.5 million. The majority of the increase in average deposits is represented by a $37.8 million increase in certificates of deposit and a $4.2 million increase in savings accounts. In 1999, the Company's lowest cost source of funds, non-interest-bearing demand deposits increased by a total of $9.7 million. The Company has no brokered deposits. AVERAGE DEPOSITS AND RATES PAID
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1999 1998 1997 ----------------- ------------------ ------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ----------------- ------------------ ------------------- (dollars in thousands) Non-interest-bearing accounts $ 85,017 -- $ 75,278 -- $ 60,512 -- Interest-bearing accounts: Interest checking ..... 88,806 2.08% 73,263 2.38% 56,495 2.57% Money market .......... 63,452 3.26% 60,674 3.40% 51,119 3.37% Regular savings ....... 59,897 2.63% 58,490 2.99% 53,200 3.08% Certificates of deposit: Less than $100,000 237,734 5.30% 223,362 5.62% 192,441 5.69% $100,000 and over . 92,123 5.07% 68,703 5.52% 56,481 5.25% -------- -------- -------- Total interest-bearing ...... 542,012 4.20% 484,492 4.51% 409,736 4.57% -------- -------- -------- Total average deposits. $627,029 $559,770 $470,248 ======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
PERCENT WITHIN 3 - 6 6 - 12 OVER 12 OF TOTAL 3 MONTHS MONTHS MONTHS MONTHS TOTAL DEPOSITS -------- ------ ------ ------- ----- -------- (dollars in thousands) At December 31, 1999...... $ 29,141 $ 21,405 $ 39,851 $ 17,257 $107,654 16.64% At December 31, 1998...... 26,974 16,014 19,005 18,933 80,926 13.32% At December 31, 1997...... 14,116 29,408 13,924 3,723 61,171 12.94%
Total deposits grew from $489.3 million at December 31, 1997 to $607.6 million at December 31, 1998. Over this same period, average interest-bearing deposits were $484.5 million, or 18% over the 1997 average of $409.7 million. 18 - -------------------------------------------------------------------------------- CUNDIFF . CRYSTAL DAVIS . ANNA MARIA DAY . GRACE L. DEEM . MARY E. DEYO . PHILLIP S. DICKINSON . TAMMY P. EDWARDS . RACHELLE B. ELLER . FAYE W. ELMORE . ROSA EUBANK . ELIZABETH FAIDLEY . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT CAPITAL RESOURCES Capital resources represents funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company's capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company's resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders. 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-weighed categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity, retained earnings and a limited amount of perpetual preferred stock, less certain goodwill items. The Company had a ratio of risk-weighted assets to total capital of 12.21% and 13.70% on December 31, 1999 and 1998, respectively. The Company's ratio of risk-weighted assets to Tier 1 capital was 11.11% and 12.47% at December 31, 1999 and 1998, respectively. Both of these ratios exceeded the fully phased-in capital requirements in 1999 and 1998. The Company's strategic plan includes targeted capital levels between 8% and 9%. ANALYSIS OF CAPITAL DECEMBER 31, --------- --------- 1999 1998 --------- --------- (dollars in thousands) Tier 1 capital: Common stock .................................. $ 14,976 $ 15,015 Surplus ....................................... 163 311 Retained earnings ............................. 58,603 55,690 --------- --------- Total equity .............................. 73,742 71,016 Less: core deposit intangibles/goodwill ....... (6,569) (5,846) --------- --------- Total Tier 1 capital .......................... 67,173 65,170 --------- --------- Tier 2 capital: Allowance for loan losses ..................... 6,617 6,407 Allowable long-term debt ...................... -- -- --------- --------- Total Tier 2 capital .......................... 6,617 6,407 --------- --------- Total risk-based capital ...................... $ 73,790 $ 71,577 ========= ========= Risk-weighted assets ................................ $ 604,525 $ 522,533 ========= ========= Capital ratios: Tier 1 risk-based capital ratio ............... 11.11% 12.47% Total risk-based capital ratio ................ 12.21% 13.70% Tier 1 capital to average adjusted total assets 8.35% 9.06% Equity to total assets ........................ 8.37% 10.00% LIQUIDITY Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company's ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity which is sufficient to satisfy its depositors' requirements and to meet it customers' credit needs. At December 31, 1999, cash and cash equivalents and securities classified as available for sale were 26.9% of total assets, compared to 27.6% at December 31, 1998. Asset liquidity is also provided by managing loan and 19 - -------------------------------------------------------------------------------- FRANCES M. FARMER . KELLY FASZEWSKI . TINA L. FIELDS . CHRISTOPHER FINES . HOLLY M. FLIPPEN . CAROLYN J. FORD . MARIA S. FRANKLIN . MELISSA FULLER . REBEKAH R. GART . SHARON DARLENE GILBERT - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION securities maturities and cash flows. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The subsidiary banks maintain federal funds lines with several regional banks totaling approximately $52 million at December 31, 1999. At year end 1999, the Banks had outstanding $16.8 million of borrowings pursuant to securities sold under agreements to repurchase transactions with a maturity of one day. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $100 million at December 31, 1999. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted no later than January 1, 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. 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. 20 - -------------------------------------------------------------------------------- DEBORAH S. GILES . KARINA K. GIVENS . KAY LYNN GOULDIN . TAMMY B. GOULDMAN . CHARLES H. GRAVATT . SHERRY C. GRAVATT . CAROLYN R. GRAVES . JANON R. GRAY . CORINNA L. GREEN . CASEY A. GREGORY - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT INDEPENDENT AUDITOR'S REPORT [LOGO OF YOUNT, HYDE & BARBOUR, P.C.] YOUNT, HYDE & BARBOUR, P.C. Certified Public Accountants INDEPENDENT AUDITOR'S REPORT and Consultants To the Stockholders and Directors Union Bankshares Corporation Bowling Green, Virginia We have audited the accompanying consolidated balance sheet of Union Bankshares Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of Mortgage Capital Investors, a consolidated subsidiary, which statements reflect total assets and revenue constituting 1% and 11%, respectively, in 1999, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mortgage Capital Investors, is based solely on the report of the other auditors. The financial statements of Union Bankshares Corporation for the years ended December 31, 1998 and 1997 were audited by other auditors whose report, dated February 9, 1999, except as to Note 14, which is as of February 11, 1999, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the 1999 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares Corporation and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the year ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 28, 2000 21 - -------------------------------------------------------------------------------- CAROLYN R. GULLETT . JAMMIE HAIRFIELD . VALERIE HALEY . MARIE T. HARRISON . SUSAN N. HARTSOOK . NANCY B. HAUN . JULI A. HAWKINS . JENNIFER HAYDEN . CATHY J. HOLMAN . KRISTI L. HURD . WILLIAM H. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION CONSOLIDATED BALANCE SHEETS UNION BANKSHARES CORPORATION AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 (dollars in thousands)
ASSETS 1999 1998 ----------- ----------- Cash and cash equivalents: Cash and due from banks $ 18,804 $ 39,607 Interest-bearing deposits in other banks 867 1,413 Federal funds sold 248 - ----------- ----------- Total cash and cash equivalents 19,919 41,020 ----------- ----------- Securities available for sale, at fair value 201,721 161,228 Investment securities, at amortized cost Fair value of $9,518 and $16,452, respectively 9,578 16,142 ----------- ----------- Total securities 211,299 177,370 ----------- ----------- Loans held for sale 6,680 - ----------- ----------- Loans, net of unearned income 543,367 479,822 Less allowance for loan losses 6,617 6,407 ----------- ----------- Net loans 536,750 473,415 ----------- ----------- Bank premises and equipment, net 21,458 21,057 Other real estate owned 2,016 1,101 Other assets 23,705 19,984 ----------- ----------- Total assets $ 821,827 $ 733,947 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing demand deposits $ 79,048 $ 81,329 Interest-bearing deposits: Savings accounts 58,209 61,281 NOW accounts 95,882 81,514 Money market accounts 63,249 64,331 Time deposits of $100,000 and over 107,654 80,926 Other time deposits 242,824 238,248 ----------- ----------- Total interest-bearing deposits 567,818 526,300 ----------- ----------- Total deposits 646,866 607,629 ----------- ----------- Short-term borrowings 39,159 19,476 Long-term borrowings 54,420 28,325 Other liabilities 12,588 5,158 ----------- ----------- Total liabilities 753,033 660,588 ----------- ----------- Commitments and contingencies Stockholders' equity: Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,487,829 shares in 1999 and 7,507,394 shares in 1998 14,976 15,015 Surplus 163 311 Retained earnings 58,603 55,690 Accumulated other comprehensive income (loss) (4,948) 2,343 ----------- ----------- Total stockholders' equity 68,794 73,359 ----------- ----------- Total liabilities and stockholders' equity $ 821,827 $ 733,947 =========== ===========
See accompanying notes to consolidated financial statements. 22 - -------------------------------------------------------------------------------- HUTTON . LOIS E. HYNSON . ROSEMARIE A. ISAACS-WHITE . ADAM J. JACOBS . LUCILLE S. JOHNSON . MARCIA P. JONES . JACLYN KEEL . KELLEY R. KIRBY . CHONG P. KOLIN . ELIZABETH LANEY . KIM D. LAY . LYNNE P. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (dollars in thousands, except per share amounts)
1999 1998 1997 ----------- ----------- ----------- Interest and dividend income: Interest and fees on loans $ 43,220 $ 40,395 $ 34,939 Interest and dividends on securities: U.S. government and agency securities 1,584 1,505 3,569 Obligations of states and political subdivisions 4,917 4,145 3,954 Other securities 5,650 4,365 1,922 Interest on Federal funds sold 209 581 384 Interest on interest-bearing deposits in other banks 56 71 53 ----------- ----------- ----------- Total interest income 55,636 51,062 44,821 ----------- ----------- ----------- Interest expense: Interest on deposits 22,769 21,907 18,729 Interest on other borrowings 4,298 2,556 2,328 ----------- ----------- ----------- Total interest expense 27,067 24,463 21,057 ----------- ----------- ----------- Net interest income 28,569 26,599 23,764 Provision for loan losses 2,216 3,044 1,182 ----------- ----------- ----------- Net interest income after provision for loan losses 26,353 23,555 22,582 ----------- ----------- ----------- Noninterest income: Service charges on deposit accounts 3,078 2,894 2,173 Other service charges and fees 1,716 1,304 1,001 Gains (losses) on securities transactions, net 16 71 (29) Gains on sales of loans 7,581 - - Gains (losses) on sales of other real estate owned and bank premises, net 312 297 446 Other operating income 543 1,001 904 ----------- ----------- ----------- Total noninterest income 13,246 5,567 4,495 ----------- ----------- ----------- Noninterest expenses: Salaries and benefits 18,844 10,902 8,990 Occupancy expenses 2,149 1,280 971 Furniture and equipment expenses 2,411 1,617 1,435 Other operating expenses 9,285 6,823 5,232 ----------- ----------- ----------- Total noninterest expenses 32,689 20,622 16,628 ----------- ----------- ----------- Income before income taxes 6,910 8,500 10,449 Income tax expense 636 1,678 2,283 ----------- ----------- ----------- Net income $ 6,274 $ 6,822 $ 8,166 =========== =========== =========== Basic net income per share $ 0.84 $ 0.91 $ 1.10 Diluted net income per share $ 0.84 $ 0.91 $ 1.09
See accompanying notes to consolidated financial statements. 23 - -------------------------------------------------------------------------------- LECARPENTIER . KATHRYN S. LEE . BARBARA B. LEWIS . SHEILA Y. LONG . DEBBIE C. LOVING . HELEN K. MANOS . BARBARA MARCH . S. RENEE MARKS . TERRI MASSIE . CHRISTOPHER MAYDEN . DONNA R. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 and 1997 (dollars in thousands)
ACCUMULATED OTHER RETAINED COMPREHENSIVE COMPREHENSIVE COMMON STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL ------------ ----------- ---------- ------------- ------------- --------- Balance - December 31, 1996 $ 14,900 $ (173) $ 46,203 $ 272 $ 61,202 Comprehensive income: Net income - 1997 8,166 $ 8,166 8,166 Unrealized holding gains arising during the period (net of tax, $738) 1,416 Reclassification adjustment for losses included in net income (net of tax, $10) 19 ------------- Other comprehensive income (net of tax, $728) 1,435 1,435 1,435 ------------- Total comprehensive income $ 9,601 ============= Cash dividends - 1997 ($.37 per share) (2,641) (2,641) Issuance of common stock under Dividend Reinvestment Plan (21,044 shares) 43 261 304 Stock repurchased under Stock Repurchase Plan (3,000 shares) (6) (33) (39) ---------------------------------------------------- --------- Balance - December 31, 1997 $ 14,937 $ 55 $ 51,728 $ 1,707 $ 68,427 Comprehensive income: Net income - 1998 6,822 $ 6,822 6,822 Unrealized holding gains arising during the period (net of tax, $352) 683 Reclassification adjustment for gains included in net income (net of tax, $24) (47) ------------- Other comprehensive income (net of tax, $328) 636 636 636 ------------- Total comprehensive income $ 7,458 ============= Cash dividends - 1998 ($.38 per share) (2,860) (2,860) Issuance of common stock under Dividend Reinvestment Plan (17,326 shares) 35 289 324 Issuance of common stock under Incentive Stock Option Plan (21,776 shares) 43 (33) 10 ---------------------------------------------------- --------- Balance - December 31, 1998 $ 15,015 $ 311 $ 55,690 $ 2,343 $ 73,359 Comprehensive income: Net income - 1999 6,274 $ 6,274 6,274 Unrealized holding losses arising during the period (net of tax, $3,764) (7,280) Reclassification adjustment for gains included in net income (net of tax, $5) (11) ------------- Other comprehensive income (net of tax, $3,756) (7,291) (7,291) (7,291) ------------- Total comprehensive (loss) $ (1,017) ============= Cash dividends - 1999 ($.40 per share) (2,994) (2,994) Issuance of common stock under Dividend Reinvestment Plan (22,257 shares) 45 291 336 Stock repurchased under Stock Repurchase Plan (104,912 shares) (210) (1,705) - (1,915) Discretionary transfer of retained earnings to surplus 367 (367) - Issuance of common stock under Incentive Stock Option Plan (400 shares) 1 4 - 5 Issuance of common stock for services rendered (1,200 shares) 2 18 20 Issuance of common stock in exchange for net assets in acquisition (61,490 shares) 123 877 1,000 ---------------------------------------------------- --------- Balance - December 31, 1999 $ 14,976 $ 163 $ 58,603 $ (4,948) $ 68,794 ==================================================== =========
See accompanying notes to consolidated financial statements. 24 - -------------------------------------------------------------------------------- MCCLELLAN . JENNIFER L. MCFADDEN . MELISSA MCFALL . KRISTINA MEAD-CARBEE . JENNIFER MERIDETH . CAMILLE A. MINTON . MAGGIE PERRY . PRISCILLA O. MORGAN . JOHN C. NEAL . DARHLEEN M. NELSON - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (dollars in thousands)
1999 1998 1997 ----------- ----------- ----------- Operating activities: Net income $ 6,274 $ 6,822 $ 8,166 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation of bank premises and equipment 1,683 1,472 1,359 Amortization 1,082 10 - Provision for loan losses 2,216 3,044 1,182 (Gains) losses on securities transactions, net (16) (71) 29 Origination of loans held for sale (65,076) - - Proceeds from sales of loans held for sale 58,396 - - Gains (losses) on sales of other real estate owned and fixed assets, net (312) (297) (446) Deferred income tax (benefit) (397) (567) (173) Decrease (increase) in accrued interest receivable (812) 114 (292) Other, net 9,048 (8,902) 2,188 ----------- ----------- ----------- Net cash and cash equivalents provided by operating activities 12,086 1,625 12,013 ----------- ----------- ----------- Investing activities: Purchases of investment securities (199) (1,646) (8,949) Proceeds from maturities of investment securities 3,697 3,269 6,695 Purchases of securities available for sale (77,484) (82,381) (37,565) Proceeds from sales of securities available for sale 14,259 56,472 2,857 Proceeds from maturities of securities available for sale 13,387 8,838 26,662 Net increase in loans (65,862) (82,056) (45,164) Purchases of bank premises and equipment (1,732) (5,642) (4,003) Proceeds from sales of other real estate owned 300 1,092 3,611 ----------- ----------- ----------- Net cash and cash equivalents used in investing activities (113,634) (101,974) (55,856) ----------- ----------- ----------- Financing activities: Net increase (decrease) in noninterest-bearing deposits (2,281) 15,623 6,242 Net increase in interest-bearing deposits 41,518 102,750 27,440 Net increase (decrease) in short-term borrowings 19,683 (7,769) (158) Proceeds from long-term borrowings 26,500 4,745 12,800 Repayment of long-term borrowings (405) (135) (210) Cash dividends paid (2,994) (2,860) (2,791) Issuance of common stock 341 334 304 Purchases of common stock (1,915) - (39) ----------- ----------- ----------- Net cash and cash equivalents provided by financing activities 80,447 112,688 43,588 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (21,101) 12,339 (255) Cash and cash equivalents at beginning of year 41,020 28,681 28,936 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 19,919 $ 41,020 $ 28,681 =========== =========== =========== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 27,566 $ 24,267 $ 21,053 Income taxes $ 1,840 $ 2,747 $ 2,517 Supplemental schedule of noncash investing and financing activities: Loan balances transferred to foreclosed properties $ 311 $ 50 $ 475 Unrealized gain (loss) on securities available for sale $ (11,047) $ 964 $ 2,163 Issuance of common stock in exchange for net assets in acquisition $ 1,000 $ - $ - Issuance of common stock for services rendered $ 20 $ - $ -
See accompanying notes to consolidated financial statements. 25 - -------------------------------------------------------------------------------- . SUSAN NEPRUD . GERRY P. NEWTON . RENEE NEWTON . JENNY NORRIS . DONNA A. NORTON . JEANNA M. OTT . JOYCE S. OTTO . MICHELLE C. PAGE . DARLENE M. PALMER . C. THOMAS PARCELL, III . MARY J. PARKER - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies and practices of Union Bankshares Corporation and subsidiaries (the "Company") conform to generally accepted accounting principles and to general practice within the banking industry. Major policies and practices are described below: (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Union Bankshares Corporation and its wholly-owned subsidiaries. Union Bankshares Corporation is a bank holding company that owns all of the outstanding common stock of its banking subsidiaries, Union Bank and Trust Company, Northern Neck State Bank, Rappahannock National Bank, Bank of Williamsburg and its non-banking subsidiaries, Union Investment Services and Mortgage Capital Investors ("MCI"). During 1999 King George State Bank was merged into Union Bank and Trust Company with King George State Bank ceasing to exist. All significant intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements for prior periods reflect certain reclassifications in order to conform with the 1999 presentation. On February 11, 1999 the Company completed the purchase of Mortgage Capital Investors, a mortgage origination business headquartered in Springfield, Virginia with locations in the states of Virginia, Maryland, North Carolina, South Carolina, New Jersey and Connecticut. This business was purchased to enhance the Company's existing mortgage operations (which was merged into MCI) and increase noninterest income. This acquisition was accounted for under the purchase method of accounting. The final purchase price was $3,560,000. At closing the Company paid $1,000,000 in cash and $1,000,000 in common stock totaling 61,490 shares. In addition, a total of $1,560,000 in cash and common stock is to be distributed over the next three anniversary dates. As a result of this transaction, goodwill in the amount of $1,211,000 was recorded and is being amortized using the straight line method over 10 years. (B) INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE When securities are purchased, they are classified as investment securities when management has the intent and the Company has the ability to hold them to maturity. Investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using a method that approximates the interest method. Securities available for sale are those that management intends to hold for an indefinite period of time, including securities used as part of the Company's asset/liability strategy, and that may be sold in response to changes in interest rates, liquidity needs or other similar factors. Securities available for sale are recorded at estimated fair value. The net unrealized gains or losses on securities available for sale, net of deferred taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. Gains and losses on the sale of securities are determined using the specific identification method. Purchased premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. (C) LOANS HELD FOR SALE Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. (D) LOANS Interest on loans is calculated using principally the simple interest method on daily balances of principal amounts outstanding. The accrual of interest is discontinued when the collection of principal and/or interest is legally barred or considered by management to be highly unlikely. After a loan is classified as nonaccrual, interest income is generally recognized only when collected. 26 - -------------------------------------------------------------------------------- . DEBORAH A. PAULEY . LORI PAYNE . ARTHUR E. PEARSON . MARJORIE S. PERKINS . JOYCE S. PITTS . KAREN POATES . TAMARA D. PRITCHARD . KIMBERLY PUGH . JOHN M. RANDOLPH . DOUGLAS M. RANSONE . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT Loan origination fees and direct loan origination costs for completed loans are netted and then deferred and amortized into interest income as an adjustment of yield. (E) ALLOWANCE FOR LOAN LOSSES The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectibility of the principal is unlikely. Recoveries of amounts previously charged off are credited to the allowance. Management's determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The Company includes, as a component of its allowance for loan losses, amounts it deems adequate to cover estimated losses related to impaired loans. Interest income on impaired loans is recognized on a cash basis. (F) BANK PREMISES AND EQUIPMENT Bank premises and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using either the straight-line or accelerated method based on the type of asset involved. It is the policy of the Company to capitalize additions and improvements and to depreciate the cost thereof over their estimated useful lives. Maintenance, repairs and renewals are expensed as they are incurred. (G) INTANGIBLE ASSETS Core deposit intangibles are included in other assets and are being amortized on a straight-line basis over the period of expected benefit, which approximates 15 years. Core deposits, net of amortization amounted to $5,465,000 and $5,846,000 at December 31, 1999 and 1998, respectively. Other assets also includes goodwill, which is being amortized on a straight line basis over the period of expected benefit, approximately ten years. Goodwill, net of amortization, totaled $1,111,000 at December 31, 1999. (H) INCOME TAXES Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. (I) OTHER REAL ESTATE OWNED Foreclosed assets are carried at the lower of (a) fair value minus estimated costs to sell or (b) cost at the time of foreclosure. Such determination is made on an individual asset basis. If the fair value of the asset minus the estimated costs to sell the asset is less than the cost of the asset, the deficiency is recognized as a valuation allowance. If the fair value of the asset minus the estimated costs to sell the asset subsequently increases and is more than its carrying amount, the valuation allowance is 27 - -------------------------------------------------------------------------------- RAYMOND C. RATCLIFFE . CAROLYN K. RAWLINGS . HEATHER E. RICHARD . NANCY L. ROCHE . BARBARA JEANNE ROLL . ROSALIND ROLLINS . DONNA J. SABOURIN . EMILY E. SALE . GARY A. SALINSKY . KATHRYN - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION reduced, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income. Recovery of the carrying value of such real estate is dependent to a great extent on economic, operating and other conditions that may be beyond the Company's control. (J) CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, the Company defines cash and cash equivalents as cash, due from banks, interest-bearing deposits in other banks and Federal funds sold. (K) PENSION PLAN The Company computes the net periodic pension cost of its pension plan in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." Costs of the plan are determined by independent actuaries. Termination of this plan is in process and is anticipated to be completed in 2000. (L) EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is computed using the weighted average number of common shares outstanding during the year, including the dilutive effect of stock options. (M) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) represents all changes in equity of an enterprise that result from recognized transactions and other economic events of the period. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income, such as unrealized gains and losses on certain investments in debt and equity securities. (N) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions of certain amounts in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for loan losses and the valuation of foreclosed real estate and deferred tax assets. 2 INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE The amortized cost, gross unrealized gains and losses of investment securities and estimated fair value at December 31, 1999 and 1998 are summarized as follows (in thousands):
1999 ---------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ------------ ----------- U.S. government and agency securities $ 1,300 $ 1 $ (6) $ 1,295 Obligations of states and political subdivisions 7,260 33 (85) 7,208 Corporate and other bonds 1,018 - (3) 1,015 ----------- ----------- ------------ ----------- $ 9,578 $ 34 $ (94) $ 9,518 =========== =========== ============ =========== 1998 ---------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ------------ ----------- U.S. government and agency securities $ 5,747 $ 40 $ - $ 5,787 Obligations of states and political subdivisions 8,765 241 - 9,006 Corporate and other bonds 1,630 29 - 1,659 ------------ ----------- ------------ ----------- $ 16,142 $ 310 $ - $ 16,452 ============ =========== ============ ===========
28 - -------------------------------------------------------------------------------- N. SEAY . GAIL A. SHANIKA . BONNIE C. SHOCKEY . HEATHER SHUFF . JUDITH C. SHUPE . JOYCE O. SMART . KATHLEEN L. SMILEY . TERRIA SPENCER . JUDITH E. STADDAN . GAY N. STANLEY . SHELLEY A. STENGER . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT The amortized cost, estimated fair value and gross unrealized gains and losses of securities available for sale at December 31, 1999 and 1998 are summarized as follows (in thousands):
1999 ---------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ------------ ----------- U.S. government and agency securities $ 21,994 $ - $ (1,405) $ 20,589 Obligations of states and political subdivisions 95,611 720 (3,530) 92,801 Corporate and other bonds 16,257 34 (805) 15,486 Mortgage-backed securities 70,047 34 (2,568) 67,513 Federal Reserve Bank stock 706 - - 706 Federal Home Loan Bank stock 3,923 - - 3,923 Other securities 680 43 (20) 703 ------------ ----------- ------------ ----------- $ 209,218 $ 831 $ (8,328) $ 201,721 ============ =========== ============ =========== 1998 ---------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE ------------ ----------- ------------ ----------- U.S. government and agency securities $ 7,647 $ 64 $ - $ 7,711 Obligations of states and political subdivisions 73,523 2,979 (39) 76,463 Corporate and other bonds 4,175 98 - 4,273 Mortgage-backed securities 69,015 489 (108) 69,396 Federal Reserve Bank stock 484 - - 484 Federal Home Loan Bank stock 2,517 - - 2,517 Other securities 317 67 - 384 ------------ ----------- ------------ ----------- $ 157,678 $ 3,697 $ (147) $ 161,228 ============ =========== ============ ===========
The amortized cost and estimated fair value (in thousands) of investment securities and securities available for sale at December 31, 1999, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
INVESTMENT SECURITIES SECURITIES AVAILABLE FOR SALE ----------------------------- ----------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE ------------ ----------- ------------ ----------- Due in one year or less $ 4,207 $ 4,215 $ 33,820 $ 32,958 Due after one year through five years 5,371 5,303 125,439 120,900 Due after five years through ten years - - 35,365 33,832 Due after ten years - - 9,285 8,699 ------------ ----------- ------------ ----------- 9,578 9,518 203,909 196,389 Federal Reserve Bank stock - - 706 706 Federal Home Loan Bank stock - - 3,923 3,923 Other securities - - 680 703 ------------ ----------- ------------ ----------- $ 9,578 $ 9,518 $ 209,218 $ 201,721 ============ =========== ============ ===========
Securities with an amortized cost of approximately $67,691,000 and $43,297,000 at December 31, 1999 and 1998 were pledged to secure public deposits, repurchase agreements and for other purposes. 29 - -------------------------------------------------------------------------------- JANE M. STIEGLER . LORI S. STINSON . NELSON DOUGLAS STREET . CHARLOTTE K. SULLIVAN . TRACY SULLIVAN . TANYA Y. SUMBRY . CHRISTINA TAYLOR . SHIRL A. TAYLOR . ANN M. TERRY . HALEY THOMAS . - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION Sales of securities available for sale produced the following results for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 ------------ ----------- ------------ Proceeds $ 14,259 $ 56,472 $ 2,857 ============ =========== ============ Gross realized gains $ 20 $ 195 $ 58 Gross realized (losses) (4) (124) (87) ------------ ----------- ------------ Net realized gains (losses) $ 16 $ 71 $ (29) ============ =========== ============
3 LOANS Loans are stated at their face amount, net of unearned income, and consist of the following at December 31, 1999 and 1998 (in thousands):
1999 1998 ----------- ----------- Real estate loans Residential 1 - 4 family $ 167,801 $ 144,778 Commercial 120,490 108,063 Construction 33,218 38,128 Second Mortgages 11,445 11,065 Equity lines of credit 20,987 18,737 Multifamily 4,592 5,521 Agriculture 2,373 994 ----------- ----------- Total real estate loans 360,906 327,286 ----------- ----------- Commercial loans 67,649 61,678 ----------- ----------- Consumer installment loans Personal 102,713 79,492 Credit cards 4,346 3,232 ----------- ----------- Total consumer installment loans 107,059 82,724 ----------- ----------- All other loans and agriculture loans 8,870 9,154 ----------- ----------- Gross loans 544,484 480,842 Less unearned income on loans 1,117 1,020 ----------- ----------- Loans, net of unearned income $ 543,367 $ 479,822 =========== ===========
At December 31, 1999 and 1998, the recorded investment in loans which have been identified as impaired loans, in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), totaled $1,487,000 and $2,813,000, respectively. The valuation allowance related to impaired loans on December 31, 1999 is $513,000 and $1,436,000, respectively. At December 31, 1999, 1998 and 1997, the average investment on impaired loans was $2,418,000, $3,054,000 and $1,357,000, respectively. The amount of interest income recorded by the Company during 1999, 1998 and 1997 on impaired loans was approximately $9,000, $61,000 and $102,000, respectively. 4 ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 are summarized below (in thousands):
1999 1998 1997 ----------- ----------- ------------ Balance, beginning of year $ 6,407 $ 4,798 $ 4,612 Provision charged to operations 2,216 3,044 1,182 Recoveries credited to allowance 346 274 213 ----------- ----------- ------------ Total 8,969 8,116 6,007 Loans charged off 2,352 1,709 1,209 ----------- ----------- ------------ Balance, end of year $ 6,617 $ 6,407 $ 4,798 =========== =========== ============
30 - -------------------------------------------------------------------------------- TAMMY C. THOMAS . KAREN C. THOMPSON . SHARON TOLIVER . MICHAEL L. TOROSIAN . SUZANNE-MARIE C. TULLOSS . KIMBERLY TYREE . JEAN G. UPSHAW . MORTON UPSHAW . WENDY G. VERNE . BETTY J. WALLER . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT 5 BANK PREMISES AND EQUIPMENT Bank premises and equipment as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ----------- ----------- Land $ 5,187 $ 5,386 Land improvements and buildings 13,896 13,328 Leasehold improvements 503 383 Furniture and equipment 12,607 11,031 Construction in progress 613 762 ----------- ----------- 32,806 30,890 Less accumulated depreciation and amortization 11,348 9,833 ----------- ----------- Bank premises and equipment, net $ 21,458 $ 21,057 =========== ===========
Depreciation expense for 1999, 1998 and 1997 was $1,683,000, $1,472,000 and $1,359,000 respectively. Future minimum rental payments required under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 1999 are approximately $851,000 for 2000, $692,000 for 2001, $453,000 for 2002, $425,000 for 2003, $360,000 for 2004, and $2,417,000 thereafter. Rental expense for years ended December 31, 1999, 1998 and 1997 totaled $980,000, $218,000 and $193,000 respectively. 6 DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 1999 and 1998 was $107,654,000 and $80,926,000, respectively. At December 31, 1999, the scheduled maturities of time deposits are as follows (in thousands): 2000 $ 262,815 2001 33,551 2002 16,820 2003 29,693 2004 7,359 Thereafter 240 ----------- $ 350,478 =========== 7 Other Borrowings Short-term borrowings consist of the following at December 31, 1999 and 1998 (dollars in thousands):
1999 1998 ----------- ----------- Federal funds purchased $ 750 $ 4,500 Securities sold under agreements to repurchase 16,789 14,856 Other short-term borrowings 21,620 120 ----------- ----------- Total $ 39,159 $ 19,476 =========== =========== Weighted interest rate 5.37% 3.92% Average for the year ended December 31: Outstanding $ 36,545 $ 15,150 Interest rate 5.18% 5.26% Maximum month-end outstanding $ 53,363 $ 41,621
The subsidiary banks maintain Federal funds lines with several regional banks totaling approximately $52 million at December 31, 1999. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $100 million at December 31, 1999. Short-term borrowings consist of securities sold under agreements to repurchase which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings also include federal funds purchased, which are unsecured overnight borrowings from other financial institutions, and advances from the Federal Home Loan Bank of Atlanta, which are secured by mortgage-related assets. At December 31, 1999, the Company's fixed-rate long-term debt totals $49,175,000 and matures through December 6, 2009. The interest rate on the fixed-rate note payable ranges from 5.12% to 6.61%. At December 31, 1998, the Company had long-term debt totaling $28,325,000, maturing through 2008. The 31 - -------------------------------------------------------------------------------- KIMBERLY L. WALTERS . R. TYLER WARE . JAMES M. WATKINS . BARBARA J. WILLIAMS . DAWN WILSON . DREAMA B. WINGARD . JOAN WOODSIDE . REBECCA WUNCE . MICHAEL S. YUHASZ . UNION BANKSHARES - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION interest rate on the notes payable ranged from 5.51% to 6.61% at December 31, 1998. At December 31, 1999, the Company's floating-rate long-term debt totals $5,245,000 and matures through July 1, 2004. The floating rates are based on the 90 day LIBOR plus 95 basis points and the 90 day LIBOR plus 100 basis points. The interest rate on floating-rate long-term debt ranged from 5.95% to 6.25% during 1999. The contractual maturities of long-term debt are as follows (dollars in thousands):
1999 ----------------------------------------------- FIXED RATE FLOATING RATE TOTAL Due in 2000 $ 150 $ 300 $ 450 Due in 2001 10,150 320 10,470 Due in 2002 6,150 3,605 9,755 Due in 2003 150 120 270 Due in 2004 17,575 900 18,475 Thereafter 15,000 - 15,000 ----------------------------------------------- Total long-term debt $ 49,175 $ 5,245 $ 54,420 ===============================================
8 INCOME TAXES Net deferred tax assets consist of the following components as of December 31, 1999 and 1998 (in thousands):
1999 1998 ----------- ----------- Deferred tax assets: Allowance for loan losses $ 2,071 $ 1,799 Benefit plans 730 484 Other 221 135 Securities available for sale 2,567 - ----------- ----------- Total deferred tax assets 5,589 2,418 ----------- ----------- Deferred tax liabilities: Depreciation 503 326 Other 127 96 Securities available for sale - 1,207 ----------- ----------- Total deferred tax liabilities 630 1,629 ----------- ----------- Net deferred tax asset (included in other assets) $ 4,959 $ 789 =========== ===========
In assessing the realizability of deferred tax assets, management considers the scheduled reversal of temporary differences, projected future taxable income, and tax planning strategies. Management believes it is more likely than not the Company will realize its deferred tax assets and, accordingly, no valuation allowance has been established. The provision for income taxes charged to operations for the years ended December 31, 1999, 1998 and 1997 consists of the following (in thousands):
1999 1998 1997 ----------- ----------- ----------- Current tax expense $ 1,033 $ 2,245 $ 2,456 Deferred tax (benefit) (397) (567) (173) ----------- ----------- ----------- Income tax expense $ 636 $ 1,678 $ 2,283 =========== =========== ===========
The income tax provisions differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 1999, 1998 and 1997, due to the following (in thousands):
1999 1998 1997 ----------- ----------- ----------- Computed "expected" tax expense $ 2,350 $ 2,890 $ 3,553 (Decrease) in taxes resulting from: Tax-exempt interest income (1,485) (1,203) (1,181) Other, net (229) (9) (89) ----------- ----------- ----------- Income tax expense $ 636 $ 1,678 $ 2,283 =========== =========== ===========
32 - -------------------------------------------------------------------------------- CORPORATION . CARMELA L. ALBO . RUTH M. ARNOLD . TRACY BABER . MARILYN D. BAILEY . MARY ALICE BALL . DENISE BARLOW . G. WILLIAM BEALE . ELIZABETH M. BENTLEY . THOMAS J. BOYD, III . JEREMY - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT Low income housing credits totaled $72,425, $72,425 and $60,557 for the years ended December 31, 1999, 1998 and 1997, respectively. 9 EMPLOYEE BENEFITS The Company had a noncontributory, defined benefit pension plan covering all full-time employees. Termination of this plan is in process and should be completed in 2000. Significant assumptions used in determining net periodic pension cost and projected benefit obligation for 1999, 1998 and 1997 were:
1999 1998 1997 ----------- ----------- ----------- Expected long-term rate of return on assets 9.0% 9.0% 9.0% Discount rate 5.0% 7.5% 7.5% Salary increase rate 5.0% 5.0% 5.0% Average remaining service 20 years 21 years 22 years
The following table sets forth the plan's funded status as calculated at September 30, 1999, 1998 and 1997 and amounts recognized in the Company's consolidated balance sheets at December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 ----------- ----------- ----------- Change in benefit obligation Benefit obligation at beginning of year $ 4,120 $ 3,756 $ 3,179 Service cost 544 384 323 Interest cost 325 281 237 Actuarial (gain) loss (568) (275) 43 Benefits paid (468) (26) (26) ----------- ----------- ----------- Benefit obligation at end of year 3,953 4,120 3,756 ----------- ----------- ----------- Change in plan assets Fair value of plan assets at beginning of year 3,109 3,271 2,723 Actual return on plan assets 524 (136) 394 Employer contribution 788 - 180 Benefits paid (468) (26) (26) ----------- ----------- ----------- Fair value of plan assets at end of year 3,953 3,109 3,271 ----------- ----------- ----------- Funded status - (1,011) (485) Unrecognized net obligation at transition 6 6 8 Unrecognized actuarial (gain) (1,447) (692) (872) Unrecognized prior service cost 257 279 300 ----------- ----------- ----------- Accrued pension liability (included in other liabilities) $ (1,184) $ (1,418) $ (1,049) =========== =========== ===========
Net periodic pension cost for 1999, 1998 and 1997 included the following components (in thousands):
1999 1998 1997 ----------- ----------- ----------- Service cost $ 544 $ 384 $ 323 Interest cost 326 281 238 Expected return on assets (329) (293) (281) Net amortization and deferral 13 (3) 33 ----------- ----------- ----------- Net periodic pension cost $ 554 $ 369 $ 313 =========== =========== ===========
The Company also contributes to an employees' profit-sharing plan which covers all full-time employees with vesting at various intervals over seven years. Contributions are made annually at the discretion of the subsidiary banks' Board of Directors. The payments to the plan for the years 1999, 1998 and 1997 were approximately $553,000, $567,000 and $621,000, respectively. The Company has an obligation to certain members of the subsidiary banks' Boards of Directors under deferred compensation plans in the amount of $1,005,000 and $1,033,000 at December 31, 1999 and 1998, respectively. A portion of the benefits will be funded by life insurance. 33 - -------------------------------------------------------------------------------- BREAKFIELD . JOSEPH E. BROWN, JR. . ELEANOR A. BUFFINGTON . JEANNETTE B. BURKE . CYNTHIA BYRD . REBECCA A. CARTER . CARMEN CATO . GEORGE B. CECIL, JR. . MARY Y. CHILDS . DANA F. CRUTE . STACY - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION The Company has a stock option plan (the "Plan") adopted in 1993 that authorizes the reservation of up to 400,000 shares of common stock and provides for the granting of incentive options to certain employees. Under the Plan, the option price cannot be less than the fair market value of the stock on the date granted. An option's maximum term is ten years from the date of grant. Options granted under the Plan may be subject to a graded vesting schedule. A summary of changes for the Plan for the years 1999, 1998 and 1997 follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- ---------- ----------- ---------- --------- Year ended December 31, 1999 1998 1997 ---------------------- ------------------------ ---------------------- Options outstanding, January 1 146,132 $ 17.25 73,240 $ 8.66 63,240 $ 8.06 Granted 7,500 16.00 98,940 20.13 10,000 12.50 Exercised (400) 12.50 (26,048) 8.03 - - ---------- ---------- ---------- Options outstanding, December 31 153,232 $ 17.20 146,132 $ 17.25 73,240 $ 8.66 ========== ========== ========== Weighted average fair value per option of options granted during year $ 5.71 $ 4.25 $ 3.59 ========= ========== ==========
A summary of options outstanding at December 31, 1999 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- -------------------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER REMAINING EXERCISE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE CONTRACTUAL LIFE PRICE ----------------- ----------- ---------------- ----------- ----------- ---------------- ----------- $ 7.46 - 6.53 5,040 .27 yrs. $ 6.53 5,040 .27 yrs. $ 6.53 7.46 - 11.00 20,000 5.05 11.00 16,000 4.05 11.00 22.00 - 12.50 21,752 6.49 12.50 12,491 6.46 12.50 22.00 - 16.00 7,500 9.06 16.00 - - - 22.00 - 20.13 98,940 8.06 20.13 19,788 8.06 20.13 ------------ ------------ $ 6.53 - 20.13 153,232 7.24 $ 17.24 53,319 6.05 $ 14.31 ============ ============
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the Company's stock options. Proforma adjustment of compensation cost for the stock-based compensation plans are determined based on the grant date fair values of awards (the method described in SFAS No. 123, "Accounting for Stock-Based Compensation"). For the purpose of computing the proforma amount, the fair value of each option on the date of grant is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yields of 2.24%, 2.40% and 2.40%; expected volatility of 25.45%, 23.00% and 23.00%; a risk free interest rate of 6.50%, 4.99% and 4.99%; and an expected option life of 9.06 years. For 1999, proforma net income was $6,183,000; proforma and diluted earnings per share were $0.83 and $0.82, respectively. For 1998 and 1997 the Company's net income and earnings per share as reported would not have been impacted by a material amount based on the above assumptions.. 10 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of the Company's involvement in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. 34 - -------------------------------------------------------------------------------- DABNEY . CHRISTINE DAVIS . KAREN S. DEWITT . LAURIE DILLARD . PEGGY A. DIMAIO . DAWNA D. EACHO . MARLENE ELLISON . CAROLYN D. FARMER . JAMES G. FINCH . NORMA J. FINCH . JILL L. FOSTER . MYLES W. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. At December 31, 1999 and 1998, the Company had outstanding loan commitments approximating $114,915,000 and $80,404,000, respectively. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $8,495,000 and $5,962,000 at December 31, 1999 and 1998, respectively. A geographic concentration exists within the Company's loan portfolio as most of the Bank's business activity is with customers located in areas from Rappahannock to Hanover County, Virginia and in the Northern Neck area of Virginia. 11 RELATED PARTY TRANSACTIONS The Company has entered into transactions with its directors, principal officers and affiliated companies in which they are principal stockholders. Such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties totaled $9,591,000 and $8,847,000 as of December 31, 1999 and 1998, respectively. During 1999 new advances to such related parties amounted to $11,220,000 and repayments amounted to $10,476,000. 12 EARNINGS PER SHARE The following is a reconciliation of the denominators of the basic and diluted EPS computations for December 31, 1999, 1998 and 1997:
WEIGHTED AVERAGE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ----------- (dollars and shares information in thousands) For the Year Ended December 31, 1999 Basic EPS $ 6,274 7,474 $ .84 Effect of dilutive stock options - 24 - ----------- ------------- ----------- Diluted EPS $ 6,274 7,498 $ .84 ----------- ------------- ----------- For the Year Ended December 31, 1998 Basic EPS $ 6,822 7,490 $ .91 Effect of dilutive stock options - 26 - ----------- ------------- ----------- Diluted EPS $ 6,822 7,516 $ .91 ----------- ------------- ----------- For the Year Ended December 31, 1997 Basic EPS $ 8,166 7,455 $ 1.10 Effect of dilutive stock option - 27 - ----------- ------------- ----------- Diluted EPS $ 8,166 7,482 $ 1.09 ----------- ------------- -----------
In 1999, stock options representing 98,940 shares were not included in the calculation of earnings per share as their effect would have been antidilutive. 13 LEGAL CONTINGENCIES Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Corporation's consolidated financial statements. 14 REGULATORY MATTERS The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have 35 H. GAYTHWAITE . DANTE GRAY . DIANA L. HAINES . MICHAEL S. HARRIS . SHARON HARRISON . MICHAEL HAYES . DOUGLAS J. HILL . JAMES D. HOFSTEE . JAY HUDGINS . THERESA JETT . TERI G. KETOLA . JOHN A. UNION BANKSHARES CORPORATION a direct material effect on the Company's and Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios of total and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company and Banks meet all capital adequacy requirements to which they are subject. The most recent notification from the Federal Reserve Bank as of December 31, 1999, categorized the Banks as well capitalized under the regulatory framework for prompt corrective action (PCA). To be categorized as adequately capitalized, an institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks' category. The Company's and principal banking subsidiaries' actual capital amounts and ratios are also presented in the table.
MINIMUM MINIMUM TO BE WELL CAPITALIZED CAPITAL UNDER PROMPT CORRECTIVE ACTION ACTUAL REQUIREMENT PROVISIONS ------------------------ ----------------------- ------------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------- ---------- ----------- --------- --------------- ------------- As of December 31, 1999 Total capital to risk weighted assets Consolidated $ 73,790 12.21% $ 48,362 8.00% $ NA NA Union Bank & Trust 46,417 10.38% 35,780 8.00% 44,726 10.00% Northern Neck State Bank 18,376 13.04% 11,273 8.00% 14,091 10.00% Tier 1 capital to risk weighted assets Consolidated 67,173 11.11% 24,181 4.00% NA NA Union Bank & Trust 41,513 9.28% 17,890 4.00% 26,835 6.00% Northern Neck State Bank 16,813 11.93% 5,636 4.00% 8,455 6.00% Tier 1 capital to average adjusted assets Consolidated 67,172 8.35% 32,191 4.00% NA NA Union Bank & Trust 41,513 7.16% 23,192 4.00% 28,990 5.00% Northern Neck State Bank 16,813 7.97% 8,434 4.00% 10,542 5.00% As of December 31, 1998 Total capital to risk weighted assets Consolidated $ 71,577 13.70% $ 41,797 8.00% $ NA NA Union Bank & Trust 44,576 11.64% 30,636 8.00% 38,296 10.00% Northern Neck State Bank 17,247 13.30% 10,374 8.00% 12,967 10.00% Tier 1 capital to risk weighted assets Consolidated 65,170 12.47% 20,905 4.00% NA NA Union Bank & Trust 39,819 10.40% 15,315 4.00% 22,973 6.00% Northern Neck State Bank 15,739 12.14% 5,187 4.00% 7,780 6.00% Tier 1 capital to average adjusted assets Consolidated 65,170 9.06% 28,773 4.00% NA NA Union Bank & Trust 39,819 7.64% 20,848 4.00% 26,060 5.00% Northern Neck State Bank 15,739 8.31% 7,578 4.00% 9,473 5.00%
15 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instruments. SFAS 107 excludes certain financial 36 - -------------------------------------------------------------------------------- LANE . STUART LEINENBACH . STACY LEWIS . RICHARD L. LOVE . JENNIFER MACKNIGHT . MARY F. MALLOY . SHARON L. MCENHIMER . MATTHEW MCWHIRT . KAREN H. MILLER . MICHELLE A. MINES . LORI B. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. CASH AND CASH EQUIVALENTS For those short-term instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE For investment securities and securities available for sale, fair value is determined by quoted market price. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS HELD FOR SALE Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. LOANS The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. DEPOSITS The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. BORROWINGS The carrying value of short-term borrowings are reasonable estimates of fair value. The fair value of long-term borrowings is estimated based on interest rates currently available for debt with similar terms and remaining maturities. ACCRUED INTEREST The carrying amounts of accrued interest approximate fair value. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 1999 and 1998, the carrying amount and fair value of loan commitments and standby letters of credit were immaterial. The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1999 and 1998 are as follows:
1999 1998 ----------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ------------ ----------- Financial assets: Cash and cash equivalents $ 19,919 $ 19,919 $ 41,020 $ 41,020 Investment securities 9,578 9,518 16,142 16,452 Securities available for sale 201,721 201,721 161,228 161,228 Net loans 536,750 529,377 473,415 476,606 Loans held for sale 6,680 6,680 - - Accrued interest receivable 5,527 5,527 4,715 4,715 Financial liabilities: Deposits 646,866 648,928 607,629 611,834 Borrowings 93,579 93,840 47,801 48,145 Accrued interest payable 1,891 1,891 1,451 1,451
37 - -------------------------------------------------------------------------------- NEWSOME . SCOTT Q. NININGER . MELISSA D. OESTERHELD . MICHELLE OSBORNE . JANICE D. PAVIE . D. ANTHONY PEAY . THOMAS G. PEREGOY . ALMEDA H. PITTS . SARAH PITTS . CYNTHIA A. RINALDI . JOYCE W. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION 16 PARENT COMPANY FINANCIAL INFORMATION The primary source of funds for the dividends paid by Union Bankshares Corporation (the "Parent Company") is dividends received from its subsidiary banks. The payment of such dividends by the subsidiary banks and the ability of the banks to loan or advance funds to the Parent Company are subject to certain statutory limitations which contemplate that the current year earnings and earnings retained for the two preceding years may be paid to the Parent Company without regulatory approval. As of December 31, 1999 the aggregate amount of unrestricted funds which could be transferred from the Company's subsidiaries to the Parent Company, without prior regulatory approval, totaled $7,965,000 or 13.6% of the consolidated net assets. Financial information for the Parent Company follows: UNION BANKSHARES CORPORATION ("PARENT COMPANY ONLY") BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (dollars in thousands)
1999 1998 ----------- ----------- Assets: Cash $ 221 $ 1,927 Certificates of deposit - 29 Securities available for sale 306 273 Premises and equipment, net 3,652 3,809 Other assets 3,162 2,239 Due from subsidiaries - 115 Investment in subsidiaries 66,818 66,765 ----------- ----------- Total assets $ 74,159 $ 75,157 =========== =========== Liabilities and Stockholders' equity: Long-term debt $ 5,365 $ 1,620 Other liabilities - 178 ----------- ----------- Total liabilities 5,365 1,798 ----------- ----------- Common stock 14,976 15,015 Surplus 163 311 Retained earnings 58,603 55,690 Accumulated other comprehensive income (loss) (4,948) 2,343 ----------- ----------- Total stockholders' equity 68,794 73,359 ----------- ----------- Total liabilities and stockholders' equity $ 74,159 $ 75,157 =========== ===========
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- Income: Interest income $ 9 $ 11 $ 11 Dividends received from subsidiaries 5,488 7,250 3,434 Equity in undistributed net income of subsidiaries 2,402 511 5,052 Other income 626 - 62 ----------- ----------- ----------- Total income 8,525 7,772 8,559 ----------- ----------- ----------- Expense: Interest expense 305 115 64 Operating expenses 1,946 835 329 ----------- ----------- ----------- Total expense 2,251 950 393 ----------- ----------- ----------- Net income $ 6,274 $ 6,822 $ 8,166 =========== =========== ===========
38 - -------------------------------------------------------------------------------- ROLLINS . JAMES SANFORD . RUSSELL M. SCHOOLS, JR. . LORRELL T. SHABAZZ . STACY G. SIMS . ALICE D. SKINNER . GAIL S. SMITH . VIOLA SMITH . KAREN E. SORRELL . SHARON L. SULLIVAN . PANDORA SWIFT . - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- Operating activities: Net income $ 6,274 $ 6,822 $ 8,166 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (2,402) (511) (4,902) Decrease (increase) in other assets 913 (1,312) (144) Other, net (1,038) 299 (162) ----------- ----------- ----------- Net cash provided by operating activities 3,747 5,298 2,958 ----------- ----------- ----------- Investing activities: Purchase of securities (89) - - Proceeds from maturity of securities 38 - 55 Purchase of equipment (691) (894) (2,585) Increase in investment in subsidiary (4,000) - - Decrease in investment in subsidiary 83 - - ----------- ----------- ----------- Net cash used by investing activities (4,659) (894) (2,530) ----------- ----------- ----------- Financing activities: Net increase (decrease) in borrowings 4,000 (120) 1,740 Repayment of long-term borrowings (255) - - Cash dividends paid (2,994) (2,860) (2,791) Issuance of common stock under plans 341 334 304 Repurchase of common stock under plans (1,915) - (39) ----------- ----------- ----------- Net cash used in financing activities (823) (2,646) (786) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (1,735) 1,758 (358) Cash and cash equivalents at beginning of year 1,956 198 556 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 221 $ 1,956 $ 198 =========== =========== ===========
17 SEGMENT REPORTING Union Bankshares Corporation has two reportable segments: traditional full service community banks and a 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. The mortgage company provides a variety of mortgage loan products in a multi-state market. These loans are originated and sold principally in the secondary market through purchase commitments from investors which subject the company to only de minimis market risk. Profit and loss is measured by net income after taxes including realized gains and losses on the Company's investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Both of the Company's reportable segments are service based. While the banks offer a distribution and referral network for the mortgage services, the mortgage company does not offer a similar network for the banks due largely to the lack of overlapping geographic markets. Another major distinction is the source of income. The mortgage business is a fee based business while the banks are driven principally by net interest income. 39 - -------------------------------------------------------------------------------- LISA L. TALLENT . FRANKLYN TAYLOR . THOMAS W. THOMPSON, III . DEBORAH USRY . GEORGE WASHINGTON, JR. . DARRELL A. WATSON . SONYA WEINS . AIMEE WHITTAKER . CAROLYN A. WILEY . DAVID S. WILSON . - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the year ended December 31, 1999 follows. Segment information for periods prior to 1999 are not presented, as the Company's mortgage banking operation was acquired during the current year:
INTERSEGMENT CONSOLIDATED BANKS MORTGAGE ELIMINATION OTHER TOTALS ---------- ---------- ----------- ---------- ------------ Net interest income $ 28,855 $ - $ - $ (286) $ 28,569 Provision for loan losses 2,216 - - - 2,216 Net interest income after provision for loan losses 26,639 - - (286) 26,353 Noninterest income 4,931 7,581 (51) 785 13,246 Noninterest expense 20,892 8,909 - 2,888 32,689 Income before income taxes 10,678 (1,328) (51) (2,389) 6,910 Income taxes (benefits) 1,996 (450) - (910) 636 ---------- ---------- ---------- ---------- ------------ Net income (loss) $ 8,682 $ (878) $ (51) $ (1,479) $ 6,274 ========== ========== ========== ========== ============ Assets $ 817,270 $ 8,598 $ (77,309) $ 73,268 $ 821,827 ========== ========== ========== ========== ============ Capital expenditures $ 1,015 $ 26 $ - $ 691 $ 1,732 ========== ========== ========== ========== ============
40 - -------------------------------------------------------------------------------- JOHN E. WORRELL . DARE W. WRIGHT . PATRICIA A. ZIMMERMAN . UNION INVESTMENT SERVICES . DARRYL BARNES . JULIET T. COLEMAN . BERNARD W. MAHON, JR. . ARIANE SHAGENA . RANDALL W. VAUGHAN, JR. - -------------------------------------------------------------------------------- UNION BANKSHARES CORPORATION STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS Union Bankshares Corporation P.O. Box 446 212 North Main Street Bowling Green, Virginia 22427-0446 (804) 633-5031 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 6:30 p.m. on Tuesday, April --------------------------- 18, 2000, at the Richmond County Elementary School, Warsaw, Virginia. All - --------- shareholders are cordially invited to attend. COMMON STOCK Union Bankshares' Common Stock is quoted on the NASDAQ National Market where our symbol is UBSH. (CUSIP # 905399101) Union Bankshares is also listed in some newspapers under the NASDAQ National Market heading "UnBkCp" or "UnionBS". COMMON STOCK PRICES AND DIVIDENDS Union Bankshares Corporation began trading its stock via NASDAQ in October 1993. Dividends are typically paid semi-annually on June 1st and December 1st of each year. There were 7,487,829 shares of stock outstanding on December 31, 1999, held by 2,258 shareholders of record. The most recent trades at February 25, 2000 were $13.25 per share which compares to a year earlier trading price of $19.00. The following schedule summarizes the high and low sales prices and dividends declared for the two years ended December 31, 1999. Dividends Market Values Declared ---------------------------- ------------- 1999 1998 -------------- ------------- High Low High Low 1999 1998 ------ ------- ------ ------ ------ ------ First Quarter $19.00 $ 14.37 $22.38 $19.88 $ - $ - Second Quarter 20.00 15.75 22.75 20.75 0.20 .0.19 Third Quarter 19.00 14.63 23.00 17.50 - - Fourth Quarter 16.00 13.25 20.25 14.50 0.20 0.19 ----- ----- $0.40 $0.38 ===== ===== DIVIDEND REINVESTMENT PLAN Union Bankshares' dividend reinvestment plan provides each registered shareholder with an economical and convenient method of investing cash dividends in additional shares of the Company's common stock without fees and at a 5% discount from the prevailing market price. For a prospectus on the Dividend Reinvestment Plan, contact our Transfer Agent at the address indicated below. INVESTOR RELATIONS Union Bankshares' Annual Report, Form 10-K, and other corporate publications are available to shareholders on request, without charge, by writing: D. Anthony Peay Vice President and Chief Financial Officer Union Bankshares Corporation P.O. Box 446 Bowling Green, Virginia 22427-0446 (804) 632-2112 e-mail: tpeay@ubsh.com INDEPENDENT AUDITORS Yount, Hyde & Barbour, P.C. 50 South Cameron Street Winchester, VA 22601 TRANSFER AGENT Shareholders requiring information on stock transfer requirements, lost certificates, dividends and other shareholder matters should contact our transfer agent: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 (800) 368-5948