. 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