. American Cancer Society . American Heart Association . American Red Cross . Big Brother Big Sisters . Chambers of Commerce . Coggin Cancer Tournament . Community Arts Organizations . 4-H and Other Youth Clubs . Fredericksburg Area Public Schools . Friends of the Library . Garden Clubs . Germarna Community College [LOGO] Educational Foundations UNION BANKSHARES . Habitat for Humanity CORPORATION . Hanover County S.P.C.A A UNION OF COMMUNITY BANKS . Hanover Education Association . H.E.L.P Bowling Green . Heritage Shriners Club . Historical Sociaties and Foundations . James Farmer Awards . Junior League Organizations . King Williams Schools . Kiwanis Clubs . Lancaster County Schools . Lions Clubs . Little League . March of Dimes . Mary Washington College . Mary Washington Hospital Foundation . Muscular Dystrophy Association . Area Museums . National Child Safety Council . Northern Neck Soil & Water Conservation . Northumberland County Schools . County Parks and Recreation Offices . Partnership for Academic Excellence . Rappahannock County Schools THE IMPORTANCE . Rappahannock General Hospital OF COMMUNITY . County Rescue Squads . Rotary Clubs . Ruritan Clubs . Scouting Organizations . United Way . Virginia Special Olympics . Volunteer Fire Departments . YMCA 2000 ANNUAL REPORT 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) 633-4489 FALL HILL (540) 371-1000 MORTGAGE CAPITAL INVESTORS Camp Springs, MD Frederick, MD Fredericksburg, VA Greenbelt, MD Myrtle Beach, SC Virginia Beach, VA 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 ================================================================================ The listing of organizations featured on the cover of the 2000 UBSH annual report represent a sample of those groups to which our member organizations and their associates contributed time, talent, energy or financial resources over the past year. Also featured in this annual report are a few of our many employees in their roles as community volunteers. These are but a small demonstration of the commitment the UBSH family feels for the communities we serve. ================================================================================ THE IMPORTANCE OF COMMUNITY BUSINESS PROFILE Union Bankshares Corporation is a multi-bank holding company committed to the delivery of financial services through affiliated independent community banks and companies providing such services. The Company serves the Central and Northern Neck regions of Virginia through its banking subsidiaries, Union Bank & Trust Company, Northern Neck State Bank, Rappahannock National Bank, and Bank of Williamsburg and its non-bank affiliates, 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 and 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 in this region. Rappahannock National serves the community surrounding Washington, Virginia. The Bank of Williamsburg, in its 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 community bank markets and other attractive residential markets through its origination offices. In addition, it offers insurance products through a joint venture, Union Insurance Group, L.L.C. At December 31, 2000, Union Bankshares Corporation and subsidiaries had 403 employees, 2,318 shareholders of record, and assets totaling $882 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." 2000 ANNUAL REPORT . PAGE 1 UNION BANKSHARES CORPORATION SELECTED FINANCIAL DATA UNION BANKSHARES CORPORATION AND SUBSIDIARIES
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars in thousands, except per share amounts) RESULTS OF OPERATIONS Interest income $ 64,867 $ 55,636 $ 51,062 $ 44,821 $ 42,068 Interest expense 33,530 27,067 24,463 21,057 19,650 ------------------------------------------------------------------- Net interest income 31,337 28,569 26,599 23,764 22,418 Provision for loan losses 2,101 2,216 3,044 1,182 895 ------------------------------------------------------------------- Net interest income after provision for loan losses 29,236 26,353 23,555 22,582 21,523 Noninterest income 12,011 13,246 5,567 4,495 3,572 Noninterest expenses 32,424 32,689 20,622 16,628 14,982 ------------------------------------------------------------------- Income before income taxes 8,823 6,910 8,500 10,449 10,113 Income tax expense 1,223 636 1,678 2,283 2,374 ------------------------------------------------------------------- Net income $ 7,600 $ 6,274 $ 6,822 $ 8,166 $ 7,739 =================================================================== KEY PERFORMANCE RATIOS Return on average assets (ROA) 0.88% 0.79% 1.00% 1.41% 1.38% Return on average equity (ROE) 10.69% 8.74% 9.58% 12.80% 12.62% Efficiency ratio 71.18% 74.50% 61.24% 56.20% 54.06% PER SHARE DATA Net income per share - basic $ 1.01 $ 0.84 $ 0.91 $ 1.10 $ 1.04 Net income per share - diluted 1.01 0.83 0.91 1.09 1.04 Cash dividends declared 0.40 0.40 0.38 0.37 0.32 Book value at period-end 10.42 9.19 9.77 9.16 8.23 FINANCIAL CONDITION Total assets $ 881,961 $ 821,827 $ 733,947 $ 615,716 $ 559,782 Total deposits 692,472 646,866 607,629 489,256 455,718 Total loans, net of unearned income 580,790 543,367 479,822 399,351 356,038 Stockholders' equity 78,352 68,794 73,359 68,427 61,344 ASSET QUALITY Allowance for loan losses $ 7,389 $ 6,617 $ 6,407 $ 4,798 $ 4,612 Allowance as % of total loans 1.27% 1.22% 1.33% 1.20% 1.29% OTHER DATA Market value per share at period-end $ 10.25 $ 14.75 $ 17.50 $ 21.94 $ 12.50 Price to earnings ratio 10.1 17.6 19.2 19.9 12.0 Price to book value ratio 98% 161% 179% 240% 152% Dividend payout ratio 39.60% 42.62% 41.76% 32.73% 30.76% Weighted average shares outstanding, basic 7,508,238 7,473,869 7,489,873 7,455,369 7,447,637 Weighted average shares outstanding, diluted 7,513,000 7,498,000 7,516,000 7,482,000 7,472,000
PAGE 2 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY PRESIDENT'S LETTER [PICTURE APPEARS HERE] Dear Fellow Shareholders: The fellow 2000 was a good year for the Union Bankshares Corporation, with asset growth of 7.32%, and a net income increase of 21%. Management made the decision in mid 2000 to begin tightening the underwriting and pricing of loan products. We foresaw the slowing of the economy and felt that many of our competitors had adopted an irrational approach to loan pricing. This decision held loans flat over the last half of the year, but also allowed internal deposit growth to catch up and to exceed loan growth for the first time since 1993. The community-banking sector of your organization was the star of the year 2000. Earnings in the banks increased by almost 28% over the 1999 levels. Their performance is the direct result of the decisions made in 1998 to upgrade technology and our commitment to the consolidation of all back office services. While creating a short-term drag on earnings, we have now begun to fully see the benefit of that investment. Continued attention in this area should create additional cost savings and increased profits for the Corporation. On the fee income side, Union Investment Services had an excellent year despite the volatility in the stock market. Union Investments has been successful in expanding its customer base and assets under management. This company continues to provide a valuable service to the customers and potential customers of our community banks. Our mortgage company, Mortgage Capital Investors, was the one disappointment of our Corporation in 2000. Mortgage Capital Investors was acquired in 1999 to provide an additional source of fee income to offset the [PICTURE APPEARS HERE] Melvin Watkins. Among Melvin's volunteer activities, he serves as a volunteer Fire Fighter and Treasurer for the Ashland Volunteer Fire Company, where he has served since 1997. In his professional life, Melvin is a member of the Hanover Commercial Group for Union Bank & Trust, working out of their Atlee office. 2000 ANNUAL REPORT . PAGE 3 UNION BANKSHARES CORPORATION anticipated decline in the net interest margin. Additionally, we wanted a source of secondary mortgage lending for our many customers, and potential customers, under terms and rates that were not otherwise available at our banks. We also saw Mortgage Capital Investor's customers as potential users of banking services, such as credit cards, home equity loans, and insurance. We believe those reasons for owning a mortgage company remain valid and sound. The Board of Directors and management worked diligently and aggressively last year to restructure the mortgage company to meet the current needs of the mortgage business. And while the operations of MCI showed continued improvement, it did not achieve our most important goal, which is for MCI to build considerable fee income and add substantially to the bottom line of the Corporation. I am pleased to report a significant increase in the number of mortgage applications and loan closings so far this year. As a result of this trend, and the further lowering of interest rates and the rise in demand for refinancing, our outlook is for Mortgage Capital Investors to have a positive impact on the Corporation's bottom line in 2001. In the coming year we expect there to be four primary issues that will impact the banking sector of the Corporation. The issues are growth, margin management, more efficiency, and credit quality. In light of the slowing economy, we are projecting less than average asset growth for the year 2001. However, this [GRAPH] 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (in thousands) ASSETS 559,782 615,716 733,947 821,827 881,961 DEPOSITS 455,718 489,256 607,629 646,866 692,472 LOANS 356,038 399,351 479,822 543,367 580,790 [PICTURE APPEARS HERE] Wayne Penick, a Vice President at Northern Neck State Bank, has been a member of the Smith Point Sea Rescue for two years. The mission of the Smith Point Sea Rescue (which is believed to be the last volunteer, non-profit sea rescue organization on the East Coast) is to provide on-the-water assistance to boaters in distress, which could involve providing assistance in an emergency or non-emergency situation. PAGE 4 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY could be impacted by the suddenly active merger and acquisition market in the state of Virginia. Since year-end, three banks operating in Virginia, including two in our primary market areas, have been acquired by larger competitors. The last time this occurred our banks, particularly Union Bank & Trust Company, saw a significant influx of new business. Margin management, the difference between what we earn on loans and investments and what we pay on deposits and borrowed funds, will again be a key part of the banking sector's profitability. The corporation's margin has been narrowing over the last few years and rapid increases and decreases in interest rates severely impact our ability to manage our margin, as does the aggressive competition for loans and deposits. However, we are again projecting improved profitability for our banking sector companies. This is a result of efficiencies, margin control and close management of expenses. Credit quality will be another important factor in the coming year. During the year 2000, we actively managed our non-accrual loans to reduce them by over 50%. We closely watched our credit quality and began tightening our underwriting criteria and more aggressively worked any past due loans. We are very comfortable with the credit quality of the organization and believe that we are well reserved for any future losses. In reviewing this Annual Report, you will notice that we have chosen to feature a few of our many employees who are not only building relationships with our customers during business hours, but also are engaged in strengthening our communities through their volunteer service after hours. We should all take pride in the fact that last year our [GRAPH] 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- COST OF INTEREST BEARING LIABILITIES 4.61% 4.66% 4.62% 4.37% 4.80% YIELD ON EARNING ASSETS 8.68% 8.64% 8.49% 8.09% 8.50% [PICTURE APPEARS HERE] Mike Leake, Executive Vice President of Rappahannock National Bank is shown coaching the boys basketball team at Rappahannock County Middle School. The season began with a 41 point loss to a strong middle school from Fauquier County and ended with a 21 point victory over a middle school in Strasburg, a true reflection on how the team progressed. With Mike's help they were able to not only enhance their basketball skills but learned the true meaning of what it takes to become a winner and the important role teamwork plays. 2000 ANNUAL REPORT . PAGE 5 UNION BANKSHARES CORPORATION employees donated more than 10,000 hours of volunteer service to help maintain and strengthen the quality of life within the communities we serve. Union Bankshares also assists by offering financial support for many worthwhile community activities and endeavors in which our employees are involved. The volunteer service shows our commitment to our communities and helps carry our message of "community banking with a personal touch" to all members of our community. This translates to additional business for our companies and to the success of our organization. To our companies and our employees, the customer is not a number, a transaction, or a commodity. Our customers will always be individuals, or businesses, with whom we want to build a relationship that allows them to receive superior banking, investment, mortgage, and other services through one friendly and professional source. Strong customer relationships are what make us successful today and why we will be successful in the future. I would also like to welcome Frank B. Bradley and William M. Wright to the Union Bankshares Board of Directors. Each brings with them a deep and successful history in the business world. Their experience and wisdom will add much to the organization. In closing, I would like to thank the Board of Directors, but most of all, the associates of each of our subsidiaries who have worked hard, persevered, made a positive contribution to their community, and made Union Bankshares Corporation a better place to work and invest. I would also like to thank our many customer shareholders (or shareholder customers). You have continued to tell us that you like our style of banking. We appreciate your banking business and your support as shareholders. [PICTURE APPEARS HERE] Dawn Wilson, a Customer Service Representative in the Union Bank & Trust Fall Hill office is a Radiology Technician and Emergency Medical Technician with the Virginia Air National Guard working with the 192nd Medical Squadron out of Sandston, Virginia. Dawn is responsible for the Radiology Department at Sandston which includes the mammogram program as well as administering immunizations for deployments. Sincerely, /s/ William Beale G. William Beale PAGE 6 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY DIRECTORS OF UNION BANKSHARES CORPORATION [PICTURE APPEARS HERE] Ronald L. Hicks Chairman Charles H. Ryland Vice Chairman G. William Beale Frank B. Bradley, III Walton Mahon W. Tayloe Murphy, Jr. M. Raymond Piland, III A.D. Whittaker William M. Wright Seated on the left: M. Raymond Piland, III, and Walton Mahon. Standing from left to right: W. Tayloe Murphy, Jr., G. William Beale, William M. Wright, and Ronald L. Hicks. Seated at the table left to right are: A.D. Whittaker, Charles H. Ryland, and Frank B. Bradley, III QUARTERLY EARNINGS SUMMARY
2000 1999 FOURTH THIRD SECOND FIRST TOTAL FOURTH THIRD SECOND FIRST TOTAL ------ ----- ------ ----- ----- ------ ----- ------ ----- ----- (in thousands, except per share amounts) Interest income $ 16,680 $ 16,593 $ 16,228 $ 15,366 $ 64,867 $ 14,760 $ 14,327 $ 13,409 $ 13,140 $ 55,636 Interest expense 8,765 8,703 8,382 7,680 33,530 7,048 7,153 6,583 6,283 27,067 ------------------------------------------------ ------------------------------------------------ Net interest income 7,915 7,890 7,846 7,686 31,337 7,712 7,174 6,826 6,857 28,569 Provision for loan losses 434 522 581 564 2,101 190 513 751 762 2,216 ------------------------------------------------ ------------------------------------------------ Net interest income after provision for loan losses 7,481 7,368 7,265 7,122 29,236 7,522 6,661 6,075 6,095 26,353 Noninterest income 3,168 3,163 3,219 2,461 12,011 2,488 3,298 3,922 3,538 13,246 Noninterest expenses 7,888 8,342 8,163 8,031 32,424 8,399 8,458 8,470 7,362 32,689 ------------------------------------------------ ------------------------------------------------ Income before income taxes 2,761 2,189 2,321 1,552 8,823 1,611 1,501 1,527 2,271 6,910 Income tax expense 373 292 427 131 1,223 (189) 119 195 511 636 ------------------------------------------------ ------------------------------------------------ Net income $ 2,388 $ 1,897 $ 1,894 $ 1,421 $ 7,600 $ 1,800 $ 1,382 $ 1,332 $ 1,760 $ 6,274 ================================================ ================================================ Net income per share Basic $ 0.32 $ 0.25 $ 0.25 $ 0.19 $ 1.01 $ 0.24 $ 0.18 $ 0.18 $ 0.24 $ 0.84 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Diluted $ 0.32 $ 0.25 $ 0.25 $ 0.19 $ 1.01 $ 0.23 $ 0.18 $ 0.18 $ 0.24 $ 0.83 ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
2000 ANNUAL REPORT . PAGE 7 UNION BANCSHARES CORPORATION RETAIL LOCATIONS [MAP APPEARS HERE] PAGE 8 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY DIRECTORY OF UNION BANKSHARES CORPORATION UNION BANKSHARES CORPORATION - ---------------------------- Officers G. William Beale, President & Chief Executive Officer D. Anthony Peay, Senior Vice President, Chief Financial Officer & Corporate Secretary David S. Wilson, Senior Vice President Elizabeth M. Bentley, Vice President Joseph E. Brown, Jr., Vice President Jeannette B. Burke, Vice President Dawna D. Eacho, Vice President Myles W. H. Gaythwaite, Vice President John A. Lane, Vice President Richard Love, Controller Scott Q. Nininger, Vice President George Washington, Jr., Vice President Directors Ronald L. Hicks, Chairman Charles H. Ryland, Vice Chairman G. William Beale Frank B. Bradley, III Walton Mahon W. Tayloe Murphy, Jr. M. Raymond Piland, III A. D. Whittaker William M. Wright 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 Patricia Schurtz, Vice President Directors G. William Beale, Chairman John S. Cheadle Daniel I. Hansen Ronald L. Hicks Kevin P. Keegan John C. Neal D. Anthony Peay NORTHERN NECK STATE BANK - ------------------------ Officers N. Byrd Newton, President & Chief Executive Officer Russell G. Brown, Vice President William E. Harrison, Vice President & Cashier Geneva B. Lowery, Vice President & Assistant Secretary C. Wayne Penick, Vice President Marion B. Rowe, Vice President Charles M. Sanford, Jr., Vice President Gloria B. Smith, Vice President & Secretary 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 Robert E. Crowther, III William B. Graham Lloyd B. Hubbard David Jones Burton D. Reed, Jr. H. Chilton Treakle, Sr. Herbert E. Vaughan Nancy T. Young RAPPAHANNOCK NATIONAL BANK - -------------------------- Officers Michael T. Leake, Executive Vice President & 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 BANK & TRUST COMPANY - -------------------------- Officers G. William Beale, President & Chief Executive Officer John C. Neal, Executive Vice President & Chief Operating Officer William H. Hutton, Senior Vice President John M. Randolph, Senior Vice President Michael L. Torosian, Senior Vice President R. Tyler Ware, Senior Vice President David K. Bohmke, Vice President Sylvia Buffkin, Vice President Charles T. Bullock, Vice President David F. Clare, Vice President Maria S. Franklin, Vice President Charles H. Gravatt, Vice President Sherry C. Gravatt, Vice President C. Thomas Parcell, III, Vice President Douglas M. Ransone, Vice President Raymond C. Ratcliffe, Jr., Vice President Gary Salinsky, 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 UNION INVESTMENT SERVICES - ------------------------- Officers Bernard W. Mahon, Jr., President Darryl Barnes, Vice President Randall W. Vaughan, Jr., Vice President Directors G. William Beale, Chairman Russell G. Brown Myles W. H. Gaythwaite Bernard W. Mahon, Jr. Michael N. Manns J. E. Small, III 2000 ANNUAL REPORT . PAGE 9 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 2000 totaled $7.6 million or $1.01 per share on a basic and diluted basis, up 21.1% from $6.3 million or $0.84 per share on a basic and diluted basis for 1999. Profitability as measured by return on average assets (ROA) for 2000 was 0.88% as compared to .79% a year earlier, while return on average equity (ROE) for 2000 was 10.69% as compared to 8.74% in 1999. Core profitability continued to improve as net interest income increased by 9.7% and service fees on deposit accounts by 17.7%. Union Bankshares Corporation's financial performance in 2000 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 led to lower mortgage loan production and adversely affected profitability of the mortgage origination business. Initiatives implemented in the community bank sector, including the significant consolidation efforts and investments in technology in 1998 and 1999, contributed to the improvement in the Company's 2000 performance. The Company's performance was also impacted by the Company's expansion over the last three years, including five acquired branches, three de novo branches and the opening of the Bank of Williamsburg. These expansion efforts were enhanced by the backoffice consolidation, making it possible to expand without adding additional layers of overhead. As an example, the Bank of Williamsburg is staffed with the same number of employees as a branch would be since all of its non-retail tasks are performed by the holding company. The Company's performance was also impacted in 2000 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 2000 and will likely continue to have a negative impact in 2001. Our net interest margin, on a taxable equivalent basis, declined from 4.33% in 1999 to 4.29% during 2000. The financial services industry has increasingly focused on noninterest income as interest margins have compressed. The Company's focus on providing competitive products and customer service has provided additional sources of, and increases in, fee income in its community bank segment. In addition, the Company's mortgage segment provides mortgage products to customers within our community bank markets and beyond and represents an additional source of noninterest income. Assets grew to $882.0 million at December 31, 2000, up 7.3% from $821.8 million a year ago. Loans grew to $580.8 million, up 6.9% over year end 1999 totals. Deposits increased from $646.9 million at December 31, 1999 to $692.5 million at December 31, 2000, a 7.0% increase. The Company's capital position grew by 13.9%, from $68.8 million at December 31, 1999 to $78.4 million a year later and remains strong at 8.9% of total assets. 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 interest-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 2000, net interest income, on a taxable equivalent basis, totaled $34.2 million, an increase of 10.0% from $31.1 million in 1999. The Company's net interest margin declined to 4.29% in 2000, as compared to 4.33% in 1999 and 4.59% in 1998. The yield on earning assets increased to 8.50% from 8.09% in 1999 while the cost of interest-bearing liabilities increased from 4.37% in 1999 to 4.80% in 2000. Average interest-bearing liabilities increased by $79.3 million, or 12.8% while average earning assets grew by $77.5 million, or 10.8%. The Company's ability to grow loans and deposits in new and existing markets has offset much of the impact of the declining interest margin on net income. As a result of these increased volumes, the Company was able to realize an increase of $3.0 million in net interest income on a taxable equivalent basis compared to 1999 (see Volume and Rate Analysis table). Despite the Company's ability to offset rates with volumes in recent years, the declines in the net interest margin also negatively impacted the Company's return on average assets (ROA). During the third quarter of 2000 the Company sold approximately $27.0 million of its lower-yielding securities available for sale at a loss of $1.1 million reinvesting the net proceeds of $25.9 million in higher-yielding instruments. Management anticipates this transaction will contribute to improving the net interest margin and net income in future periods. 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. PAGE 10 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31, ----------------------------------------------------------- 2000 1999 ----------------------------------------------------------- INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE ----------------------------------------------------------- (Dollars in thousands) ASSETS: Securities: Taxable........................................... $ 121,826 $ 8,979 7.37% $ 117,938 $ 7,567 6.42% Tax-exempt (1).................................... 97,080 7,424 7.65% 89,211 6,945 7.78% --------------------- ------------------- Total securities................................ 218,906 16,403 7.49% 207,149 14,512 7.01% Loans, net.......................................... 573,989 51,127 8.91% 507,658 43,424 8.55% Federal funds sold.................................. 2,607 118 4.53% 3,004 209 6.96% Interest-bearing deposits in other banks.................................... 936 59 6.30% 1,165 56 4.81% --------------------- ------------------- Total earning assets............................ 796,438 67,707 8.50% 718,976 58,201 8.09% Allowance for loan losses........................... (7,488) (7,270) Total non-earning assets............................ 72,313 79,829 --------- --------- Total assets........................................ $ 861,263 $ 791,535 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY: Interest-bearing deposits: Checking.......................................... $ 99,377 2,116 2.13% $ 88,806 1,845 2.08% Regular savings................................... 56,992 1,367 2.40% 59,897 1,576 2.63% Money market saving............................... 62,197 2,022 3.25% 63,452 2,070 3.26% Certificates of deposit: $100,000 and over................................. 108,740 6,251 5.75% 92,123 4,669 5.07% Under $100,000.................................... 258,162 14,756 5.72% 237,734 12,609 5.30% --------------------- ------------------- Total interest-bearing deposits................. 585,468 26,512 4.53% 542,012 22,769 4.20% Other borrowings.................................... 113,339 7,018 6.19% 77,497 4,298 5.55% --------------------- ------------------- Total interest-bearing liabilities.............. 698,807 33,530 4.80% 619,509 27,067 4.37% -------- -------- Noninterest bearing liabilities: Demand deposits................................... 86,416 85,017 Other liabilities................................. 4,951 15,242 --------- --------- Total liabilities............................... 790,174 719,768 Stockholders' equity................................. 71,089 71,767 --------- --------- Total liabilities and stockholders' equity........... $ 861,263 $ 791,535 ========= ========= Net interest income................................. $ 34,177 $ 31,134 ======== ======== Interest rate spread................................ 3.70% 3.72% Interest expense as a percent of average earning assets................................... 4.21% 3.76% Net interest margin................................. 4.29% 4.33% --------------------------------- 1998 --------------------------------- INTEREST AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE --------------------------------- ASSETS: Securities: Taxable........................................... $ 94,814 $ 6,107 6.44% Tax-exempt (1).................................... 74,068 5,921 7.99% ---------------------- Total securities................................ 168,882 12,028 7.12% Loans, net.......................................... 444,463 40,538 9.12% Federal funds sold.................................. 12,549 581 4.63% Interest-bearing deposits in other banks.................................... 1,058 71 6.71% ---------------------- Total earning assets............................ 626,952 53,218 8.49% Allowance for loan losses........................... (5,339) Total non-earning assets............................ 59,942 ---------- Total assets........................................ $ 681,555 ========== LIABILITIES & STOCKHOLDERS EQUITY: Interest-bearing deposits: Checking.......................................... $ 73,263 1,745 2.38% Regular savings................................... 58,490 1,749 2.99% Money market saving............................... 60,674 2,065 3.40% Certificates of deposit: $100,000 and over................................. 68,703 3,789 5.52% Under $100,000.................................... 223,362 12,559 5.62% ---------------------- Total interest-bearing deposits................. 484,492 21,907 4.52% Other borrowings.................................... 45,236 2,556 5.65% ---------------------- Total interest-bearing liabilities.............. 529,728 24,463 4.62% ------- Noninterest bearing liabilities: Demand deposits................................... 75,278 Other liabilities................................. 4,937 Total liabilities............................... 609,943 Stockholders equity................................. 71,612 Total liabilities and stockholders equity........... $ 681,555 Net interest income................................. $ 28,755 ======== Interest rate spread................................ 3.87% Interest expense as a percent of average earning assets...................................... 3.90% Net interest margin................................. 4.59%
(1) Income and yields are reported on a taxable equivalent basis. 2000 ANNUAL REPORT . PAGE 11 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, --------------------------------------------------------------- 2000 VS. 1999 1999 VS. 1998 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN: DUE TO CHANGES IN: --------------------------------------------------------------- EARNING ASSETS: VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ---- ----- ------ ---- ----- Securities: Taxable....................................................... $ 257 $ 1,155 $ 1,412 $ 1,483 $ (23) $ 1,460 Tax-exempt.................................................... 603 (124) 479 1,182 (158) 1,024 Loans, net........................................................ 5,852 1,851 7,703 5,514 (2,628) 2,886 Federal funds sold................................................ (25) (66) (91) (575) 203 (372) Interest-bearing deposits in other banks.......................... (12) 15 3 6 (21) (15) ----------------------------- ----------------------------- Total earning assets........................................ 6,675 2,831 9,506 7,610 (2,627) 4,983 ----------------------------- ----------------------------- INTEREST-BEARING LIABILITIES: Interest checking............................................... 225 46 271 340 (240) 100 Regular savings................................................. (75) (134) (209) 41 (214) (173) Money market savings............................................ (41) (7) (48) 92 (87) 5 CDs $100,000 and over........................................... 908 674 1,582 1,207 (327) 880 CDs (less than) $100,000........................................ 1,128 1,019 2,147 783 (733) 50 ----------------------------- ----------------------------- Total interest-bearing deposits............................. 2,145 1,598 3,743 2,463 (1,601) 862 Other borrowings.................................................. 2,173 547 2,720 1,790 (48) 1,742 ----------------------------- ----------------------------- Total interest-bearing liabilities.......................... 4,318 2,145 6,463 4,253 (1,649) 2,604 ----------------------------- ----------------------------- Change in net interest income..................................... $ 2,357 $ 686 $ 3,043 $ 3,357 $ (978) $ 2,379 ============================= =============================
*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. PAGE 12 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY At December 31, 2000, the Company had $246.0 million more liabilities than assets subject to repricing within one year and was, therefore, in a liability-sensitive position. A liability-sensitive companys 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. EARNINGS SIMULATION ANALYSIS - ---------------------------- Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis. Assumptions used in the model rates are derived from historical trends and management's outlook and include loan and deposit growth rates and projected yields and rates. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios. The following table represents the interest rate sensitivity on net interest income for the Company using different rate scenarios: CHANGE IN PRIME RATE % CHANGE IN NET INTEREST INCOME -------------------- ------------------------------- +200 basis points .57% Flat 0 -200 basis points -.49% MARKET VALUE SIMULATION - ----------------------- Market value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net market value is the market value of all assets minus the market value of all liabilities. The change in net market value over different rate environments is an indication of the larger term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation. The following chart reflects the change in net market value over different rate environments: CHANGE IN NET MARKET VALUE CHANGE IN PRIME RATE (DOLLARS IN THOUSANDS) -------------------- ---------------------- +200 basis points $ -25,314 +100 basis points -10,224 Flat -4,101 -100 basis points 10,264 -200 basis points 25,549 2000 ANNUAL REPORT . PAGE 13 UNION BANKSHARES CORPORATION NONINTEREST INCOME - ------------------ Noninterest income decreased by 9.3% from $13.2 million in 1999 to $12.0 in 2000. This decrease is primarily due to a $2.1 million decrease in gains on sales of loans, which declined from $7.6 million in 1999 to $5.5 million in 2000 as mortgage originations declined. A $545,000 increase in service charges on deposits and a $447,000 increase in other service charges (including a $227,000 increase in brokerage fees from Union Investment Services) offset much of this decline. In the third quarter of 2000, the Company restructured its available for sale investment portfolio, selling lower-yielding securities to invest in higher- yielding instruments and resulting in a loss of $1.1 million (see Net Interest Income). In the same quarter, the Company completed the previously announced termination of its defined benefit plan resulting in a $1.1 million gain. In connection with the termination of the defined benefit plan, the Company redirected a portion of the expense of the prior plan to enhance the existing compensation of employees to be more competitive with the market. The net impact of these two nonrecurring transactions on the noninterest income was minimal, but each should result in improved future earnings for the Company. In 1999, noninterest income increased by 137.9% from $5.6 million in 1998 to $13.2 million in 1999. This increase was largely attributable to the addition of $7.6 million in gains on sale of loans created by the addition of Mortgage Capital Investor to the company. Excluding these gains, noninterest income was up slightly to $5.7 million. The gain was the result of service charges on deposits increasing $184,000 over 1998 and other service charges rising $412,000. Included in the latter gain was $124,000 increase in brokerage fees from Union Investment Services. NONINTEREST EXPENSES - -------------------- Noninterest expenses totaled $32.4 million in 2000, down $265,000 or .8% versus $32.7 million in 1999. Salaries and benefits were $18.7 million in 2000, down $100,000 compared to $18.8 million in 1999. The decline in mortgage loan production and gains on loan sales within the mortgage segment resulted in a reduction of $1.5 million in commission compensation. Occupancy expenses were $2.3 million, up $151,000 over $2.1 million in 1999. Equipment expense was $3.0 million, up $545,000 over $2.4 million in 1999. Other operating expense was $8.4 million down $846,000 compared to $9.3 million in 1999. Much of this decline was related to declines in 2000 mortgage production, and nonrecurring conversion and expansion costs in 1999. Most of the increase in 2000 expenses was the result of a full year of expenses from MCI and the impact of a full year of depreciation and amortization for new equipment and systems. Noninterest expenses totaled $32.7 million in 1999, up 58.5% over $20.6 million in 1998. Most of this increase was a result of the addition of Mortgage Capital Investors, which was accounted for under the purchase method; the opening of the Bank of Williamsburg; and technology enhancements in 1999. Because mortgage banking activities principally affect noninterest income and noninterest expense, these two categories have been significantly impacted in 1999 and 2000 by the Company's acquisition of Mortgage Capital Investors. LOAN PORTFOLIO - -------------- Loans, net of unearned income, totaled $580.8 million at December 31, 2000, an increase of 6.9% over $543.4 million at December 31, 1999. Union Bankshares has achieved a rate of growth consistent with the economies of the markets within which it operates. Loans secured by real estate comprised 65.0% of the total loan portfolio at December 31, 2000. Of this total, single-family residential loans, not including home equity lines, comprised 30.5% of the total loan portfolio at December 31, 2000, down slightly from 32.9% in 1999. Loans secured by commercial real estate comprised 24.0% of the total loan portfolio at December 31, 2000, as compared to 22.1% in 1999, 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 5.8% of total loans outstanding at December 31, 2000. The Company's charge-off rate for all loans secured by real estate has historically been low. PAGE 14 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY LOAN PORTFOLIO
DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in thousands) Commercial........................................................ $ 74,261 $ 67,649 $ 61,678 $ 45,541 $ 37,375 Loans to finance agriculture production and other loans to farmers................................... 2,793 3,015 2,595 1,590 3,080 Real estate: Real estate construction..................................... 33,560 33,218 38,128 28,206 13,961 Real estate mortgage: Residential (1-4 family).................................. 177,282 179,246 155,843 125,205 114,945 Home equity lines......................................... 20,049 20,987 18,737 21,061 21,964 Multi-family.............................................. 4,666 4,592 3,979 1,905 1,501 Commercial (1)............................................ 139,737 120,490 108,063 93,568 80,830 Agriculture............................................... 2,859 2,373 2,536 2,292 2,262 ---------------------------------------------------- Total real estate......................................... 378,153 360,906 327,286 272,237 235,463 Loans to individuals: Consumer..................................................... 107,876 102,713 79,492 77,505 76,826 Credit card.................................................. 4,958 4,346 3,232 2,682 2,567 ---------------------------------------------------- Total loans to individuals................................ 112,834 107,059 82,724 80,187 79,393 All other loans................................................... 13,507 5,855 6,559 879 2,125 ---------------------------------------------------- Total loans............................................... 581,548 544,484 480,842 400,434 357,436 Less unearned income.............................................. 758 1,117 1,020 1,083 1,398 ---------------------------------------------------- Total net loans.............................................. $580,790 $543,367 $479,822 $399,351 $356,038 ====================================================
(1) This category generally consists of commercial and industrial loans where real estate constitutes a secondary source of collateral. 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 18.5% of total loans at December 31, 2000, down slightly from 18.9% in 1999. Commercial loans, secured by non-real estate business assets comprised 12.8% of total loans at the end of 2000, a slight increase from 12.4% at the end of 1999. 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, 2000 $ 142,210 $ 272,101 $ 167,237 $ 581,548 December 31, 1999 148,951 241,795 153,738 544,484 December 31, 1998 155,160 179,068 146,614 480,842 Loans, net of unearned income, totaled $543.4 million at December 31, 1999, an increase of 13.2% over $479.8 million at December 31, 1998, 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 or selling loans to the affiliated banks which meet 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. 2000 ANNUAL REPORT . PAGE 15 UNION BANKSHARES CORPORATION 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, 2000, the allowance for loan losses was $7.4 million, or 1.27% of total loans as compared to $6.6 million, or 1.22% in 1999. The provision for loan losses decreased slightly from $2.2 million in 1999 to $2.1 million in 2000. The allowance for loan losses as of December 31, 1999 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 in 1999 totaled $2.2 million as compared to $3.0 million in 1998. ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, ------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars in thousands) Balance, beginning of year.................................... $6,617 $6,407 $4,798 $4,612 $4,274 Loans charged-off: Commercial.................................................. 777 1,544 597 247 114 Real estate................................................. 48 62 34 4 59 Consumer.................................................... 825 746 1,078 958 795 ---------------------------------------------- Total loans charged-off................................... 1,650 2,352 1,709 1,209 968 ---------------------------------------------- Recoveries: Commercial.................................................. 16 12 126 8 275 Real estate................................................. 10 8 18 49 10 Consumer.................................................... 295 326 130 156 126 ---------------------------------------------- Total recoveries.......................................... 321 346 274 213 411 ---------------------------------------------- Net loans charged-off......................................... 1,329 2,006 1,435 996 557 Provision for loan losses..................................... 2,101 2,216 3,044 1,182 895 ---------------------------------------------- Balance, end of year.......................................... $7,389 $6,617 $6,407 $4,798 $4,612 ============================================== Ratio of allowance for loan losses to total loans outstanding at end of year............................. 1.27% 1.22% 1.33% 1.20% 1.29% Ratio of net charge-offs to average loans outstanding during year................................ 0.23% 0.40% 0.32% 0.27% 0.16%
PAGE 16 . ANNUAL REPORT THE IMPORTANCE OF COMMUNITY NONPERFORMING ASSETS - -------------------- Nonperforming assets were $2.5 million at December 31, 2000, down from $3.5 million at December 31, 1999. Non-accrual loans decreased from $1.5 million in 1999 to $830,000 in 2000. Contributing to the decline in these figures was the charge-off of the remaining 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 charged off the remainder of this credit, $696,000 in 2000, but will continue to aggressively pursue collection on this loan. NONPERFORMING ASSETS
DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 --------------------------------------------------- (dollars in thousands) Nonaccrual loans..................................... $ 830 $1,487 $2,813 $2,244 $ 523 Foreclosed properties................................ 844 1,113 1,101 1,746 4,056 Real estate investment............................... 867 903 730 1,050 2,970 --------------------------------------------------- Total nonperforming assets......................... $ 2,541 $3,503 $4,644 $5,040 $7,549 =================================================== Loans past due 90 days and accruing interest......... $ 1,531 $ 980 $2,979 $2,675 $3,165 ================================================== Nonperforming assets to year-end loans, foreclosed properties and real estate investment........................... 0.44% 0.64% 0.97% 1.26% 2.10% Allowance for loan losses to nonaccrual loans........ 890.24% 444.99% 227.73% 213.81% 881.84%
As of December 31, 2000, nonperforming assets include approximately $867,000 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 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 and management expects no loss on this investment. 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, 1999, nonperforming assets totaled $3.5 million, down from $4.6 million at December 31, 1998. Nonaccrual loans decreased by $1.3 million in 1999 while other real estate owned remained constant. SECURITIES - ---------- At December 31, 2000, $210.3 million, or over 97%, of the Company's securities were classified as available for sale, as compared to $201.7 million at December 31, 1999. Investment securities totaled $5.4 million at December 31, 2000 and consist of securities which management intends to hold to maturity. 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 consist 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. During the year the Company restructured a portion of its portfolio (see Net Interest Income). The investment portfolio has a high percentage of municipals and mortgage backed securities which is the main reason for the high taxable equivalent yield the portfolio attains compared to its peers. 2000 ANNUAL REPORT . PAGE 17 UNION BANKSHARES CORPORATION MATURITIES OF INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 2000 ----------------------------------------------------------------------- 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............................... $ 1,150 $ 1,747 $ -- $ 17,998 $ 20,895 Fair value................................... 1,148 1,744 -- 17,527 20,419 Weighted average yield(1)........................ 5.64% 6.03% -- 6.97% 6.79% Mortgage backed securities: Amortized cost............................... $ 7 $ 4,132 $ 6,964 $ 50,841 $ 61,944 Fair value................................... 7 4,169 7,017 50,715 61,908 Weighted average yield(1).................... 6.51% 6.75% 7.03% 6.75% 6.47% Municipal bonds: Amortized cost............................... $ 2,155 $ 20,741 $ 27,182 $ 48,588 $ 98,666 Fair value................................... 2,171 21,111 28,053 48,729 100,064 Weighted average yield(1).................... 7.79% 7.36% 7.52% 6.99% 7.48% Other securities: Amortized cost............................... $ 999 $ 2,634 $ -- $ 31,071 $ 34,704 Fair value................................... 995 2,637 -- 29,817 33,449 Weighted average yield(1).................... 5.52% 6.99% -- 8.26% 8.08% Total securities: Amortized cost............................... $ 4,311 $ 29,254 $ 34,146 $148,498 $216,209 Fair value................................... 4,321 29,661 35,070 146,788 215,840 Weighted average yield(1).................... 6.69% 7.16% 7.42% 7.17% 7.20%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis. DEPOSITS - -------- Total deposits grew $46 million or 7.1% in 2000 with deposits in existing branches accounting for most of that growth. Deposits at The Bank of Williamsburg grew $ 6.2 million in 2000, with $6.0 million of the growth occurring after it relocated to its permanent location at the end of the first quarter of 2000. The Company also acquired about $3.0 million in deposits from another institution through a divestiture transaction in the fourth quarter of 2000. Increased competition for customer deposits continues to be a challenge for the Company and the Company continues to focus on customer relationships and delivery of products and services to those customers. Based on the most recent market data (June 30, 2000) the Company's growth (%) in the majority of the markets it serves exceeded the over all deposit growth of those markets, increasing our market share. Total deposits increased from $646.9 million at December 31, 1999 to $692.5 million at December 31, 2000. Over this same period, average interest-bearing deposits were $585.5 million, or 8.0% over the 1999 average of $542.0 million. A $37 million increase in certificates of deposit and a $10.6 million increase in interest checking represent the majority of the increase in average deposits. In 2000, the Company's lowest cost source of funds, noninterest-bearing demand deposits increased by a total of $13 million. The Company has no brokered deposits. AVERAGE DEPOSITS AND RATES PAID
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ----------------------------------------------------------------- (dollars in thousands) Noninterest-bearing demand deposits................... $ 86,416 - $ 85,017 - $ 75,278 - Interest-bearing deposits: Savings accounts.................................. 56,992 2.40% 59,897 2.63% 58,490 2.99% NOW accounts...................................... 99,377 2.13% 88,806 2.08% 73,263 2.38% Money market accounts............................. 62,197 3.25% 63,452 3.26% 60,674 3.40% Time deposits of $100,000 and over................ 108,740 5.75% 92,123 5.07% 68,703 5.52% Other time deposits............................... 258,162 5.72% 237,734 5.30% 223,362 5.62% ----------- ---------- ---------- Total interest-bearing................................ 585,468 4.53% 542,012 4.20% 484,492 4.51% ----------- ---------- ---------- Total average deposits............................ $671,884 $ 627,029 $ 559,770 =========== ========== ==========
PAGE 18 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY 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, 2000 ...................... $ 20,409 $ 21,673 $ 58,380 $ 21,086 $ 121,548 17.55%
Total deposits grew 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 $542.0 million, or 11.9% over the 1998 average of $484.5 million. 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. 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 reviews the adequacy of the Company's capital. 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 total capital to risk-weighted assets of 11.82% and 12.21% on December 31, 2000 and 1999, respectively. The Company's ratio of Tier 1 capital to risk-weighted assets was 10.72% and 11.11% at December 31, 2000 and 1999, respectively. Both of these ratios exceeded the fully phased-in capital requirements in 2000 and 1999. The Company's strategic plan includes targeted capital levels (equity to assets) between 8% and 9%. ANALYSIS OF CAPITAL
DECEMBER 31, ---------------------------------------- 2000 1999 1998 ---------------------------------------- Tier 1 capital: (dollars in thousands) Common stock..................................................................... $ 15,033 $ 14,976 $ 15,015 Surplus.......................................................................... 403 163 311 Retained earnings................................................................ 63,201 58,603 55,690 ---------------------------------------- Total equity................................................................ 78,637 73,742 71,016 Less: core deposit intangibles/goodwill.......................................... (6,295) (6,569) (5,846) ---------------------------------------- Total Tier 1 capital............................................................. 72,342 67,173 65,170 ---------------------------------------- Tier 2 capital: Allowance for loan losses........................................................ 7,389 6,617 6,407 ---------------------------------------- Total Tier 2 capital............................................................. 7,389 6,617 6,407 ---------------------------------------- Total risk-based capital......................................................... $ 79,731 $ 73,790 $ 71,577 ======================================== Risk-weighted assets.................................................................. $674,687 $604,525 $522,533 ======================================== Capital ratios: Tier 1 risk-based capital ratio.................................................. 10.72% 11.11% 12.47% Total risk-based capital ratio................................................... 11.82% 12.21% 13.70% Tier 1 capital to average adjusted total assets.................................. 8.46% 8.35% 9.06% Equity to total assets........................................................... 8.88% 8.37% 10.00%
2000 ANNUAL REPORT . PAGE 19 UNION BANKSHARES CORPORATION 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 customer's credit needs. At December 31, 2000, cash and cash equivalents and securities classified as available for sale were 26.4% of total assets, compared to 27.0% at December 31, 1999. Asset liquidity is also provided by managing loan and 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 $60.5 million at December 31, 2000. At year end 2000, the Banks had outstanding $25.1 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 $137 million at December 31, 2000. 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 requires 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 adoption of this Statement had no significant effect on the Company's 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. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures and new products and delivery systems. PAGE 20 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY INDEPENDENT AUDITOR'S REPORT [LOGO OF YHB] Yount, Hyde & Barbour, P.C. Certified Public Accountants and Consultants INDEPENDENT AUDITOR'S REPORT To the Stockholders and Directors Union Bankshares Corporation Bowling Green, Virginia We have audited the accompanying consolidated balance sheets of Union Bankshares Corporation and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. 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 audits. We did not audit the financial statements of Mortgage Capital Investors, a consolidated subsidiary, which statements reflect total assets and revenue constituting 2% and 8%, respectively, in 2000 and 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 year ended December 31, 1998 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 audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares Corporation and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 29, 2001 2000 ANNUAL REPORT . PAGE 21 UNION BANKSHARES CORPORATION CONSOLIDATED BALANCE SHEETS UNION BANKSHARES CORPORATION AND SUBSIDIARIES DECEMBER 31, 2000 AND 1999 (dollars in thousands)
ASSETS 2000 1999 - ------ ---- ---- Cash and cash equivalents: Cash and due from banks $ 22,174 $ 18,804 Interest-bearing deposits in other banks 315 867 Federal funds sold 380 248 ------------ ----------- Total cash and cash equivalents 22,869 19,919 ------------ ----------- Securities available for sale, at fair value 210,312 201,721 Investment securities, at amortized cost Fair value of $5,528 and $9,518, respectively 5,465 9,578 ------------ ----------- Total securities 215,777 211,299 ------------ ----------- Loans held for sale 16,472 6,680 ------------ ----------- Loans, net of unearned income 580,790 543,367 Less allowance for loan losses 7,389 6,617 ------------ ----------- Net loans 573,401 536,750 ------------ ----------- Bank premises and equipment, net 20,077 21,458 Other real estate owned 1,701 2,016 Other assets 31,664 23,705 ------------ ----------- Total assets $ 881,961 $ 821,827 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Noninterest-bearing demand deposits $ 92,067 $ 79,048 Interest-bearing deposits: Savings accounts 56,540 58,209 NOW accounts 96,751 95,882 Money market accounts 62,438 63,249 Time deposits of $100,000 and over 121,548 107,654 Other time deposits 263,128 242,824 ------------ ----------- Total interest-bearing deposits 600,405 567,818 ------------ ----------- Total deposits 692,472 646,866 ------------ ----------- Securities sold under agreements to repurchase 25,114 17,539 Other short-term borrowings 6,000 21,620 Long-term borrowings 74,023 54,420 Other liabilities 6,000 12,588 ------------ ----------- Total liabilities 803,609 753,033 ------------ ----------- Commitments and contingencies Stockholders equity: Common stock, $ 2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,516,534 shares in 2000 and 7,487,829 shares in 1999 15,033 14,976 Surplus 403 163 Retained earnings 63,201 58,603 Accumulated other comprehensive (loss) (285) (4,948) ------------ ----------- Total stockholders equity 78,352 68,794 ------------ ----------- Total liabilities and stockholders equity $ 881,961 $ 821,827 ============ ===========
See accompanying notes to consolidated financial statements. PAGE 22 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY CONSOLIDATED STATEMENTS OF INCOME UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (dollars in thousands, except per share amounts)
2000 1999 1998 -------- -------- -------- Interest and dividend income: Interest and fees on loans $ 50,811 $ 43,220 $ 40,395 Interest and dividends on securities: Taxable 8,979 7,567 6,107 Nontaxable 4,900 4,584 3,908 Interest on Federal funds sold 118 209 581 Interest on interest-bearing deposits in other banks 59 56 71 -------- -------- -------- Total interest and dividend income 64,867 55,636 51,062 -------- -------- -------- Interest expense: Interest on deposits 26,512 22,769 21,907 Interest on short-term borrowings 2,451 1,010 744 Interest on long-term borrowings 4,567 3,288 1,812 -------- -------- -------- Total interest expense 33,530 27,067 24,463 -------- -------- -------- Net interest income 31,337 28,569 26,599 Provision for loan losses 2,101 2,216 3,044 -------- -------- -------- Net interest income after provision for loan losses 29,236 26,353 23,555 -------- -------- -------- Noninterest income: Service charges on deposit accounts 3,623 3,078 2,894 Other service charges and fees 2,163 1,716 1,304 Gains (losses) on securities transaction (957) 16 71 Gains on sales of loans 5,516 7,581 -- Gains on sales of other real estate owned and bank premises, net 81 312 297 Gain on termination of pension plan 1,087 -- -- Other operating income 498 543 1,001 -------- -------- -------- Total noninterest income 12,011 13,246 5,567 -------- -------- -------- Noninterest expenses: Salaries and benefits 18,729 18,844 10,902 Occupancy expenses 2,300 2,149 1,280 Furniture and equipment expenses 2,956 2,411 1,617 Other operating expenses 8,439 9,285 6,823 -------- -------- -------- Total noninterest expenses 32,424 32,689 20,622 -------- -------- -------- Income before income taxes 8,823 6,910 8,500 Income tax expense 1,223 636 1,678 -------- -------- -------- Net income $ 7,600 $ 6,274 $ 6,822 ======== ======== ======== Earnings per share, basic and diluted $ 1.01 $ 0.84 $ 0.91
See accompanying notes to consolidated financial statements. 2000 ANNUAL REPORT . PAGE 23 UNION BANKSHARES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (dollars in thousands)
ACCUMULATED OTHER COMMON RETAINED COMPREHENSIVE COMPREHENSIVE STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL --------- ------- -------- ------------ ------------- -------- 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 $52) 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, $3,761) (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 Comprehensive income: Net income - 2000 7,600 $ 7,600 7,600 Unrealized holding gains arising during the period (net of tax, $2,077) 4,031 Reclassification adjustment for losses included in net income (net of tax, $325) 632 -------- Other comprehensive income (net of tax, $2,402) 4,663 4,663 -------- Total comprehensive income 4,663 $ 12,263 ======== Cash dividends - 2000 ($.40 per share) (3,002) (3,002) Issuance of common stock under Dividend Reinvestment Plan (35,092 shares) 70 276 346 Stock repurchased under Stock Repurchase Plan (30,300 shares) (61) (269) (330) Issuance of common stock under Incentive Stock Option Plan (5,040 shares) 10 23 33 Issuance of common stock for services rendered (1,200 shares) 2 10 12 Issuance of common stock in exchange for net assets in acquisition (17,673 shares) 36 200 236 --------------------------------------------- -------- Balance - December 31, 2000 $ 15,033 $ 403 $ 63,201 $ (285) $ 78,352 ============================================= ========
See accompanying notes to consolidated financial statements. PAGE 24 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY CONSOLIDATED STATEMENTS OF CASH FLOWS UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDING DECEMBER 31, 2000, 1999 AND 1998 (dollars in thousands)
2000 1999 1998 ---- ---- ---- Operating activities: Net income $ 7,600 $ 6,274 $ 6,822 Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: Depreciation of bank premises and equipment 1,898 1,683 1,472 Amortization 1,117 1,082 10 Provision for loan losses 2,101 2,216 3,044 (Gains) losses on securities transactions, net 957 (16) (71) Origination of loans held for sale (155,523) (65,076) - Proceeds from sale of loans held for sale 145,731 58,396 - (Gains) on sales of other real estate owned and fixed assets, net (81) (312) (297) Deferred income tax (benefit) (226) (397) (567) Other, net (17,044) 8,236 (8,788) --------- --------- --------- Net cash and cash equivalents provided by (used in) operating activities (13,470) 12,086 1,625 --------- --------- --------- Investing activities: Purchases of investment securities - (199) (1,646) Proceeds from maturities of investment securities 4,109 3,697 3,269 Purchases of securities available for sale (39,657) (77,484) (82,381) Proceeds from sales of securities available for sale 26,147 14,259 56,472 Proceeds from maturities of securities available for sale 11,000 13,387 8,838 Net increase in loans (38,822) (65,862) (82,056) Purchases of bank premises and equipment (1,443) (1,732) (5,642) Proceeds from sales of bank premises and equipment 491 - 80 Proceeds from sales of other real estate owned 384 300 1,092 --------- --------- --------- Net cash and cash equivalents used in investing activities (37,791) (113,634) (101,974) --------- --------- --------- Financing activities: Net increase (decrease) in noninterest-bearing deposits 13,019 (2,281) 15,623 Net increase in interest-bearing deposits 32,587 41,518 102,750 Net increase (decrease) in short-term borrowings (8,045) 19,683 (7,769) Proceeds from long-term borrowings 26,000 26,500 4,745 Repayment of long-term borrowings (6,397) (405) (135) Cash dividends paid (3,002) (2,994) (2,860) Issuance of common stock 379 341 334 Purchase of common stock (330) (1,915) - --------- --------- --------- Net cash and cash equivalents provided by financing activities 54,211 80,447 112,688 --------- --------- --------- Increase (decrease) in cash and cash equivalents 2,950 (21,101) 12,339 Cash and cash equivalents at beginning of year 19,919 41,020 28,681 --------- --------- --------- Cash and cash equivalents at end of year $ 22,869 $ 19,919 $ 41,020 ========= ========= ========= Supplemental Disclosure of Cash Flow Information Cash payments for: Interest $ 33,184 $ 27,566 $ 24,267 Income taxes $ 1,376 $ 1,840 $ 2,747 Supplemental schedule of noncash investing and financing activities: Loan balances transferred to foreclosed properties $ 70 $ 311 $ 50 Unrealized gain (loss) on securities available for sale $ 7,065 $ (11,047) $ 964 Issuance of common stock in exchange for net assets in acquisition $ 236 $ 1,000 $ - Issuance of common stock for services rendered $ 12 $ 20 $ -
See accompanying notes to consolidated financial statements. 2000 ANNUAL REPORT . PAGE 25 UNION BANKSHARES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNION BANKSHARES CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2000,1999 AND 1998 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 Union Investment Services. Mortgage Capital Investors ("MCI") is a wholly owned subsidiary of Union Bank and Trust Company. 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 2000 presentation. (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. Securities classified as available for sale are those debt and equity securities 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. 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 The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout its market area. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal and interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. PAGE 26 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY (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 borrowers 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 loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the company does not separately identify individual consumer and residential loans for impairment disclosures. (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 $5,306,000 and $5,465,000 at December 31, 2000 and 1999, 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 $989,000 and $1,111,000 at December 31, 2000 and 1999,respectively. (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 Assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. (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. 2000 ANNUAL REPORT . PAGE 27 UNION BANKSHARES CORPORATION (K) PENSION PLAN The Company computed the net periodic pension costs of its pension plan in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". Costs of the plan were determined by independent actuaries. This plan was terminated in 2000 and plan assets were dispersed to participants. (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 earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. (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. (O) EMERGING ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities", which, as amended, requires adoption in years beginning after June 15, 2000. The Statement requires the Corporation to recognize all derivatives on the balance sheet at fair value. This statement was adopted as of January 1, 2001 and had no effect on the Corporation's earnings or financial position. 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, 2000 and 1999 are summarized as follows (in thousands):
2000 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE --------- ---------- ---------- --------- U.S. government and agency securities $ 900 $ -- $ -- $ 900 Obligations of states and political subdivisions 4,342 64 (1) 4,405 Corporate and other bonds 223 -- -- 223 --------- ---------- ---------- --------- $ 5,465 $ 64 $ (1) $ 5,528 ========= ========== ========== ========= 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 ========= ========== ========== =========
PAGE 28 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale at December 31, 2000 and 1999 are summarized as follows (in thousands):
2000 ------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE --------- ---------- ---------- ---------- U.S. government and agency securities $ 19,995 $ -- $ (476) $ 19,519 Obligations of states and political subdivisions 94,324 1,955 (620) 95,659 Corporate and other bonds 29,643 62 (1,318) 28,387 Mortgage-backed securities 61,944 315 (351) 61,908 Federal Reserve Bank stock 706 -- -- 706 Federal Home Loan Bank stock 3,783 -- -- 3,783 Other securities 349 14 (13) 350 --------- ---------- ---------- ---------- $ 210,744 $ 2,346 $ (2,778) $ 210,312 ========= ========== ========== ========== 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 ========= ========== ========== ==========
The amortized cost and estimated fair value (in thousands) of investment securities and securities available for sale at December 31, 2000, 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 $ 1,285 $ 1,291 $ 3,026 $ 3,030 Due after one year through five years 2,513 2,529 26,741 27,132 Due after five years through ten years 379 388 33,767 34,682 Due after ten years 1,288 1,320 142,372 140,629 --------- ---------- --------- ---------- 5,465 5,528 205,906 205,473 Federal Reserve Bank stock -- -- 706 706 Federal Home Loan Bank stock -- -- 3,783 3,783 Other securities -- -- 349 350 --------- ---------- --------- ---------- $ 5,465 $ 5,528 $ 210,744 $ 210,312 ========= ========== ========= ==========
Securities with an amortized cost of approximately $74,706,000 and $67,691,000 at December 31, 2000 and 1999 were pledged to secure public deposits, repurchase agreements and for other purposes. 2000 ANNUAL REPORT . PAGE 29 UNION BANKSHARES CORPORATION Sales of securities available for sale produced the following results for the years ended December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998 ---------- ---------- ---------- Proceeds $ 26,147 $ 14,259 $ 56,472 ========== ========== ========== Gross realized gains $ 147 $ 20 $ 195 Gross realized (losses) (1,104) (4) (124) ---------- ---------- ---------- Net realized gains (losses) $ (957) $ 16 $ 71 ========== ========== ========== Tax provision (benefit) applicable to the net realized gains and losses $ (325) $ 5 $ 24 ========== ========== ==========
3 LOANS --------------------------------------------------------------------------- Loans are stated at their face amount, net of unearned income, and consist of the following at December 31, 2000 and 1999 (in thousands):
2000 1999 ---- ---- Mortgage loans on real estate: Residential 1-4 family $ 162,184 $ 167,801 Commercial 139,737 120,490 Construction 33,560 33,218 Second mortgages 15,098 11,445 Equity lines of credit 20,049 20,987 Multifamily 4,666 4,592 Agriculture 2,859 2,373 ---------- ---------- Total real estate loans 378,153 360,906 ---------- ---------- Commercial loans 74,261 67,649 ---------- ---------- Consumer installment loans Personal 107,876 102,713 Credit cards 4,958 4,346 ---------- ---------- Total consumer installment loans 112,834 107,059 ---------- ---------- All other loans and agriculture loans 16,300 8,870 ---------- ---------- Gross loans 581,548 544,484 Less unearned income on loans 758 1,117 ---------- ---------- Loans, net of unearned income $ 580,790 $ 543,367 ========== ==========
At December 31, 2000 and 1999, 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 $482,000 and $974,000, respectively. The valuation allowance related to impaired loans on December 31, 2000 and 1999 is $252,000 and $513,000, respectively. At December 31, 2000, 1999 and 1998, the average investment on impaired loans was $755,000, $1,579,000 and $3,054,000, respectively. The amount of interest income recorded by the Company during 2000, 1999 and 1998 on impaired loans was approximately $6,000, $9,000 and $61,000, respectively. Nonaccrual loans excluded from impaired loan disclosure amounted to $348,000 and $588,000 at December 31, 2000 and 1999, respectively. If interest on these loans had been accrued, such income would have approximated $27,000 and $45,000 for 2000 and 1999, respectively. 4 ALLOWANCE FOR LOAN LOSSES --------------------------------------------------------------------------- Changes in the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 are summarized below (in thousands):
2000 1999 1998 ---------- ---------- ---------- Balance, beginning of year $ 6,617 $ 6,407 $ 4,798 Provision charged to operations 2,101 2,216 3,044 Recoveries credited to allowance 321 346 274 ---------- ---------- ---------- Total 9,039 8,969 8,116 Loans charged off 1,650 2,352 1,709 ---------- ---------- ---------- Balance, end of year $ 7,389 $ 6,617 $ 6,407 ========== ========== ==========
PAGE 30 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY 5 BANK PREMISES AND EQUIPMENT --------------------------------------------------------------------------- Bank premises and equipment as of December 31, 2000 and 1999 are as follows (in thousands): 2000 1999 -------- -------- Land $ 4,860 $ 5,187 Land improvements and buildings 14,694 13,896 Leasehold improvements 517 503 Furniture and equipment 13,071 12,607 Construction in progress 114 613 -------- -------- 33,256 32,806 Less accumulated depreciation and amortization 13,179 11,348 -------- -------- Bank premises and equipment, net $ 20,077 $ 21,458 ======== ======== Depreciation expense for 2000, 1999 and 1998 was $1,898,000, $1,683,000, and $1,472,000 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, 2000 are approximately $754,000 for 2001, $517,000 for 2002, $476,000 for 2003, $467,000 for 2004, $296,000 for 2005, and $2,326,000 thereafter. Rental expense for years ended December 31, 2000, 1999 and 1998 totaled $1,158,000, $980,000, and $218,000 respectively. 6 DEPOSITS --------------------------------------------------------------------------- The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2000 and 1999 was $121,548,000 and $107,654,000, respectively. At December 31, 2000, the scheduled maturities of time deposits are as follows (in thousands): 2001 $ 292,137 2002 41,183 2003 37,127 2004 5,928 2005 8,017 Thereafter 284 ----------- $ 384,676 =========== 7 OTHER BORROWINGS --------------------------------------------------------------------------- Short-term borrowings consist of the following at December 31, 2000 and 1999 (dollars in thousands): 2000 1999 -------- -------- Federal funds purchased $ -- $ 750 Securities sold under agreements to repurchase 25,114 16,789 Other short-term borrowings 6,000 21,620 -------- -------- Total $ 31,114 $ 39,159 ======== ======== Weighted interest rate 5.61% 5.37% Average for the year ended December 31: Outstanding $ 27,519 $ 36,545 Interest rate 5.76% 5.18% Maximum month-end outstanding $ 47,033 $ 53,363 2000 ANNUAL REPORT . PAGE 31 UNION BANKSHARES CORPORATION The subsidiary banks maintain Federal funds lines with several regional banks totaling approximately $60.5 million at December 31, 2000. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $137 million at December 31, 2000. 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, 2000, the Company's fixed-rate long-term debt totals $63,025,000 and matures through February 8, 2010. The interest rate on the fixed-rate note payable ranges from 5.13% to 6.61%. At December 31, 1999, the Company had fixed-rate long-term debt totaling $49,175,000, maturing through 2009. The interest rate on the notes payable ranged from 5.12% to 6.61% at December 31, 1999. At December 31, 2000, the Company's floating-rate long-term debt totals $10,998,000 and matures through September 30, 2005. The floating rates are based on the 90 day LIBOR plus 100 basis points and the 30 day LIBOR plus 95 basis points. The interest rate on floating-rate long-term debt ranged from 6.95% to 7.80% during 2000. At December 31, 1999, the Company had floating-rate long-term debt totaling $5,245,000. The contractual maturities of long-term debt are as follows (dollars in thousands): 2000 FIXED RATE FLOATING RATE TOTAL ---------- ------------- --------- Due in 2001 $ 10,150 $ 882 $ 11,032 Due in 2002 150 6,882 7,032 Due in 2003 150 882 1,032 Due in 2004 17,575 1,782 19,357 Due in 2005 - 570 570 Thereafter 35,000 - 35,000 ---------- ------------- --------- Total long term debt $ 63,025 $ 10,998 $ 74,023 ========== ============= ========= 8 INCOME TAXES --------------------------------------------------------------------------- Net deferred tax assets consist of the following components as of December 31, 2000 and 1999 (in thousands):
2000 1999 ------ ------ Deferred tax assets: Allowance for loan losses $2,512 $2,071 Benefit plans 354 730 Other 617 221 Securities available for sale 147 2,567 ------ ------ Total deferred tax assets 3,630 5,589 ------ ------ Deferred tax liabilities: Depreciation 659 503 Other 205 127 ------ ------ Total deferred tax liabilities 864 630 ------ ------ Net deferred tax asset (included in other assets) $2,766 $4,959 ====== ======
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, 2000, 1999 and 1998 consists of the following (in thousands):
2000 1999 1998 ------ ------ ------ Current tax expense $1,449 $1,033 $2,245 Deferred tax (benefit) (226) (397) (567) ------ ------ ------ Income tax expense $1,223 $ 636 $1,678 ====== ====== ======
PAGE 32 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY 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, 2000, 1999 and 1998, due to the following (in thousands):
2000 1999 1998 ---------- ---------- ---------- Computed "expected" tax expense $ 3,000 $ 2,350 $ 2,890 Decrease) in taxes resulting from: Tax-exempt interest income (1,395) (1,485) (1,203) Other, net (382) (229) (9) ---------- ---------- ---------- Income tax expense $ 1,223 $ 636 $ 1,678 ========== ========== ==========
Low income housing credits totaled $72,425, $72,425 and $72,425 for the years ended December 31, 2000, 1999 and 1998, respectively. 9 EMPLOYEE BENEFITS --------------------------------------------------------------------------- The Company had a noncontributory, defined benefit pension plan covering all full-time employees. Termination of this plan was completed in 2000. Significant assumptions used in determining net periodic pension cost and projected benefit obligation were:
2000 1999 1998 ---------- ---------- ---------- Expected long-term rate of return on assets 9.0% 9.0% 9.0% Discount rate 5.0% 5.0% 7.5% Salary increase rate -- 5.0% 5.0% Average remaining service -- 20 years 21 years
The following table sets forth the plan's funded status as calculated at September 30, 2000, 1999 and 1998 and amounts recognized in the Company's consolidated balance sheets at December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998 ---------- ---------- ---------- Change in benefit obligation Benefit obligation at beginning of year $ 3,953 $ 4,120 $ 3,756 Service cost -- 544 384 Interest cost 198 325 281 Actuarial (gain) loss 195 (568) (275) Benefits paid -- (468) (26) Terminate plan (4,346) -- -- ---------- ---------- ---------- Benefit obligation at end of year -- 3,953 4,120 ---------- ---------- ---------- Change in plan assets Fair value of plan assets at beginning of year 3,953 3,109 3,271 Actual return on plan assets 393 524 (136) Employer contribution -- 788 -- Benefits paid -- (468) (26) Terminate plan - distribution (4,346) -- -- ---------- ---------- ---------- Fair value of plan assets at end of year -- 3,953 3,109 ---------- ---------- ---------- Funded status -- -- (1,011) Unrecognized net obligation at transition -- 6 6 Unrecognized actuarial (gain) -- (1,447) (692) Unrecognized prior service cost 257 279 ---------- ---------- ---------- Accrued pension liability (included in other liabilities) $ -- $ (1,184) $ (1,418) ========== ========== ==========
2000 ANNUAL REPORT . PAGE 33 UNION BANKSHARES CORPORATION Net periodic pension cost for 2000, 1999 and 1998 included the following components (in thousands): 2000 1999 1998 -------- -------- -------- Service cost $ -- $ 544 $ 384 Interest cost 198 326 281 Expected return on assets (356) (329) (293) Net amortization and deferral (929) 13 (3) -------- -------- -------- Net periodic pension cost $ (1,087) $ 554 $ 369 ======== ======== ======== 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 2000, 1999 and 1998 were approximately $619,000, $553,000 and $567,000, respectively. The Company has an obligation to certain members of the subsidiary banks' Boards of Directors under deferred compensation plans in the amount of $974,000 and $1,005,000 at December 31, 2000 and 1999, respectively. A portion of the benefits will be funded by life insurance. 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 2000, 1999 and 1998 follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- --------- -------- --------- -------- --------- Year end December 31, 2000 1999 1998 ------------------------ ------------------------ ----------------------- Options outstanding, January 1 153,232 $ 17.20 146,132 $ 17.25 73,240 $ 8.66 Granted 26,040 13.07 7,500 16 98,940 20.13 Forfeited (25,852) 18.41 -- 0 -- 0 Exercised (5,040) 6.53 (400) 12.5 (26,048) 8.03 -------- -------- -------- Options outstanding, December 31 148,380 $ 16.63 153,232 $ 17.2 146,132 $ 17.25 ======== ======== ======== Weighted average fair value per option of options granted during year $ 4.98 $ 5.71 $ 4.25 ======== ========= =========
A summary of options outstanding at December 31, 2000 follows:
OPTIONS OUTSTANDING OPTIONS EXCERCISABLE ---------------------------------------------------- -------------------------------------------------- RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED AVERAGE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE -------------- ----------- ---------------- ---------------- ----------- ---------------- ---------------- $ 11.00 20,000 4.1 yrs. $ 11.00 20,000 4.1 yrs. $ 11.00 12.50 16,200 5.5 12.50 11,520 5.5 12.50 12.88-13.38 26,040 9.1 13.07 -- 9.1 -- 16.00 7,000 8.1 16.00 1,400 8.1 16.00 20.13 79,140 7.1 20.13 31,656 7.1 20.13 --------- --------- 11.00-20.13 148,380 6.9 $ 16.63 64,576 5.9 $ 16.16 ========= =========
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 2000, 1999 and 1998, respectively: dividend yields of 2.25%,2.24% and 2.40%; expected volatility of 26.44%, 25.45% and 23.00%; a risk free interest rate of 6.73%, 6.50%and 4.99%; and an expected option life of 10 years. For 2000 and 1999, proforma net income was $7,500,000 and $6,183,000, respectively; proforma basic and diluted earnings per share were $1.00 and $1.00; and $0.83 and $0.82, respectively. For 1998 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. PAGE 34 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY 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. 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, 2000 and 1999, the Company had outstanding loan commitments approximating $91,325,000 and $114,915,000, 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 $8,851,000 and $8,495,000 at December 31, 2000 and 1999, respectively. 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 $9,168,000 and $9,591,000 as of December 31, 2000 and 1999, respectively. During 2000 new advances to such related parties amounted to $18,780,000 and repayments amounted to $19,203,000. 12 EARNINGS PER SHARE --------------------------------------------------------------------------- The following is a reconciliation of the denominators of the basic and diluted EPS computations for December 31, 2000, 1999 and 1998:
WEIGHTED AVERAGE PER INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ---------- (dollars and shares information in thousands) For the Year Ended December 31, 2000 Basic EPS $ 7,600 7,508 $ 1.01 Effect of dilutive stock options -- 5 -- ----------- ------------- ---------- Diluted EPS $ 7,600 7,513 $ 1.01 ----------- ------------- ---------- For the Year Ended December 31, 1999 Basic EPS $ 6,274 7,474 $ 0.84 Effect of dilutive stock options -- 24 -- ----------- ------------- ---------- Diluted EPS $ 6,274 7,498 $ 0.84 ----------- ------------- ---------- For the Year Ended December 31, 1998 Basic EPS $ 6,822 7,490 $ 0.91 Effect of dilutive stock options -- 26 -- ----------- ------------- ---------- Diluted EPS $ 6,822 7,516 $ 0.91 ----------- ------------- ----------
In 2000 and 1999, stock options representing 204,764 and 98,940 average shares, respectively were not included in the calculation of earnings per share as their effect would have been antidilutive. 2000 ANNUAL REPORT . PAGE 35 UNION BANKSHARES CORPORATION 13 LEGAL CONTINGENCIES --------------------------------------------------------------------------- Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company'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 a direct material effect on the Company's and Bank's 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, 2000, 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, 2000, 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 CAPITAL CAPITALIZED UNDER PROMPT ACTUAL REQUIREMENT CORRECTIVE ACTION PROVISIONS --------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (dollars in thousands) As of December 31, 2000 Total capital to risk weighted assets Consolidated $79,730 11.82% $53,975 8.00% NA NA Union Bank & Trust 54,382 11.39% 38,184 8.00% $47,730 10.00% Northern Neck State Bank 19,588 11.66% 13,440 8.00% 16,800 10.00% Tier 1 capital to risk weighted assets Consolidated 72,341 10.72% 26,987 4.00% NA NA Union Bank & Trust 48,728 10.21% 19,092 4.00% 28,638 6.00% Northern Neck State Bank 18,070 10.76% 6,720 4.00% 10,080 6.00% Tier 1 capital to average adjusted assets Consolidated 72,341 8.46% 34,200 4.00% NA NA Union Bank & Trust 48,728 8.24% 23,654 4.00% 29,568 5.00% Northern Neck State Bank 18,070 7.89% 9,161 4.00% 11,451 5.00% 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%
PAGE 36 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY 15 FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK --------------------------------------------------------------------------- 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 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 is a reasonable estimate 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, 2000 and 1999, the carrying amount approximated fair value of loan commitments and standby letters of credit. The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk. 2000 ANNUAL REPORT . PAGE 37 UNION BANKSHARES CORPORATION The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2000 and 1999 are as follows (in thousands): 2000 1999 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Financial assets: Cash and cash equivalents $ 22,869 $ 22,869 $ 19,919 $ 19,919 Investment securities 5,465 5,528 9,578 9,518 Securities available for sale 210,312 210,312 201,721 201,721 Loans held for sale 16,472 16,472 6,680 6,680 Net loans 573,401 572,265 536,750 529,377 Accrued interest receivable 6,314 6,314 5,527 5,527 Financial liabilities: Deposits 692,472 695,009 646,866 648,928 Borrowings 105,137 105,515 93,579 93,840 Accrued interest payable 2,237 2,237 1,891 1,891 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, 2000, the aggregate amount of unrestricted funds which could be transferred from the Company's subsidiaries to the Parent Company, without prior regulatory approval, totaled $8,473,000 or 10.8% of the consolidated net assets. Financial information for the Parent Company follows: UNION BANKSHARES CORPORATION ("PARENT COMPANY ONLY") BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (dollars in thousands)
2000 1999 -------- -------- Assets: Cash $ 1,050 $ 221 Securities available for sale 235 306 Premises and equipment, net 3,342 3,652 Other assets 1,729 3,162 Investment in subsidiaries 77,287 66,818 -------- -------- Total assets $ 83,643 $ 74,159 ======== ======== Liabilities and Stockholders' equity: Long-term debt $ 4,998 $ 5,365 Other liabilities 293 -- -------- -------- Total liabilities 5,291 5,365 -------- -------- Common stock 15,033 14,976 Surplus 403 163 Retained earnings 63,201 58,603 Accumulated other comprehensive income (loss) (285) (4,948) -------- -------- Total stockholders' equity 78,352 68,794 -------- -------- Total liabilities and stockholders' equity $ 83,643 $ 74,159 ======== ========
PAGE 38 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 and 1998 2000 1999 1998 -------- -------- -------- Income: Interest income $ 7 $ 9 $ 11 Dividends received from subsidiaries 2,827 5,488 7,250 Management fee received from subsidiaries 6,067 -- -- Equity in undistributed net income of subsidiaries 5,560 2,402 511 Other income 31 626 -- -------- -------- -------- Total income 14,492 8,525 7,772 -------- -------- -------- Expense: Interest expense 412 305 115 Operating expenses 6,480 1,946 835 -------- -------- -------- Total expense 6,892 2,251 950 -------- -------- -------- Net income $ 7,600 $ 6,274 $ 6,822 ======== ======== ======== CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 and 1998 2000 1999 1998 -------- -------- -------- Operating activities: Net income $ 7,600 $ 6,274 $ 6,822 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (5,560) (2,402) (511) Decrease (increase) in other assets 1,433 913 (1,312) Other, net 765 (1,038) 299 -------- -------- -------- Net cash provided by operating activities 4,238 3,747 5,298 -------- -------- -------- Investing activities: Purchase of securities (61) (89) -- Proceeds from maturity of securities 138 38 -- Purchase of equipment (166) (691) (894) Increase in investment in subsidiary -- (4,000) -- Decrease in investment in subsidiary -- 83 -- -------- -------- -------- Net cash used by investing activities (89) (4,659) (894) -------- -------- -------- Financing activities: Net increase in borrowings 3,498 4,000 -- Repayment of long-term borrowings (3,865) (255) (120) Cash dividends paid (3,002) (2,994) (2,860) Issuance of common stock under plans 379 341 334 Repurchase of common stock under plans (330) (1,915) -- -------- -------- -------- Net cash used in financing activities (3,320) (823) (2,646) -------- -------- -------- Increase (decrease) in cash and cash equivalents 829 (1,735) 1,758 Cash and cash equivalents at beginning of year 221 1,956 198 -------- -------- -------- Cash and cash equivalents at end of year $ 1,050 $ 221 $ 1,956 ======== ======== ========
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 risk. 2000 ANNUAL REPORT . PAGE 39 UNION BANKSHARES CORPORATION Profit and loss is measured by net income after taxes including realized gains and losses on the Company's investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Both of the Company's reportable segments are service based. The mortgage business is largely a fee based business while the banks are driven principally by net interest income.
2000 ---- COMMUNITY CONSOLIDATED BANKS MORTGAGE ELIMINATION TOTALS ----------- ---------- ----------- ------------ Net interest income $ 31,196 $ 141 $ -- $ 31,337 Provision for loan losses 2,101 -- -- 2,101 ----------- ---------- ----------- ------------ Net interest income after provision for loan losses 29,095 141 -- 29,236 Noninterest income 6,656 5,516 (161) 12,011 Noninterest expenses 24,460 8,125 (161) 32,424 ----------- ---------- ----------- ------------ Income before income taxes 11,291 (2,468) -- 8,823 Income tax expense (benefit) 2,072 (849) -- 1,223 ----------- ---------- ----------- ------------ Net income (loss) $ 9,219 $ (1,619) $ -- $ 7,600 =========== ========== =========== ============ Assets $ 885,009 $ 17,584 $ (20,632) $ 881,961 =========== ========== =========== ============ 1999 ---- COMMUNITY CONSOLIDATED BANKS MORTGAGE ELIMINATION TOTALS ----------- ---------- ----------- ------------ Net interest income $ 28,749 $ (180) $ -- $ 28,569 Provision for loan losses 2,216 -- -- 2,216 ----------- ---------- ----------- ------------ Net interest income after provision for loan losses 26,533 (180) 26,353 Noninterest income 5,535 7,761 (50) 13,246 Noninterest expenses 23,779 8,910 -- 32,689 ----------- ---------- ----------- ------------ Income before income taxes 8,289 (1,329) (50) 6,910 Income tax expense (benefit) 1,086 (450) -- 636 ----------- ---------- ----------- ------------ Net income (loss) $ 7,203 $ (879) $ (50) $ 6,274 =========== ========== =========== ============ Assets $ 817,099 $ 8,598 $ (3,870) $ 821,827 =========== ========== =========== ============
PAGE 40 . 2000 ANNUAL REPORT THE IMPORTANCE OF COMMUNITY STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS Union Bankshares Corporation P.O. Box 446 212 North Main Street Bowling Green, Virginia 22427-0446 Phone: (804) 633-5031 Fax: (804) 633-1800 Website: www.ubsh.com ANNUAL MEETING The Annual Meeting of Stockholders will be held at 6:00 p.m. on Tuesday, April 17, 2001, at the Caroline County High School, Bowling Green, 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 7,516,534, shares of stock outstanding on December 31, 2000, held by 2,318 shareholders of record. The most recent trades at February 28, 2001 were $12.3125 per share which compares to a year earlier trading price of $13.25. The following schedule summarizes the high and low sales prices and dividends declared for the two years ended December 31, 2000. DIVIDENDS MARKET VALUES DECLARED --------------------------------- ------------- 2000 1999 --------------- -------------- HIGH LOW HIGH LOW 2000 1999 ------ ------ ------ ----- ----- ----- First Quarter $14.75 $ 8.75 $19.00 14.37 $ - $ - Second Quarter 12.37 10.25 20.00 15.75 0.20 0.20 Third Quarter 11.62 8.62 19.00 14.63 - - Fourth Quarter 10.75 9.00 16.00 13.25 0.20 0.20 ----- ----- $0.40 $0.40 ===== ===== 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 Senior 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 UNION BANKSHARES CORPORATION P.O. Box 446 212 North Main Street Bowling Green, Virginia 22427-0446 (804) 633-5031