UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer
Identification No.)
212 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
Union Bankshares Corporation (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
As of May 2, 2001, Union Bankshares Corporation had 7,536,140 shares of
Common Stock outstanding.
UNION BANKSHARES CORPORATION
FORM 10-Q
March 31, 2001
INDEX
-----
PART 1 - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2001 and 2000
(Unaudited) and December 31, 2000 (Audited) .................... 1
Consolidated Statements of Income (Unaudited)
For the three months ended March 31, 2001 and 2000 ............. 2
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) For the three months ended March 31, 2001 and 2000.. 3
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2001 and 2000 4
Notes to Consolidated Financial Statements (Unaudited)............ 5-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..............9-15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk... 16
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K............................. 18
Signatures............................................................ 19
Index to Exhibits..................................................... 20
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
March 31, December 31, March 31,
ASSETS 2001 2000 2000
- -------- ---- ---- ----
(unaudited) (unaudited)
Cash and cash equivalents:
Cash and due from banks $ 19,746 $ 22,174 $ 19,967
Interest-bearing deposits in other banks 749 315 565
Federal funds sold 202 380 76
-------- -------- --------
Total cash and cash equivalents 20,697 22,869 20,608
-------- -------- --------
Securities available for sale, at fair value 222,218 210,312 213,660
Investment securities, at amortized cost
Fair value of $0, $5,528 and $8,701, respectively - 5,465 8,761
-------- -------- --------
Total securities 222,218 215,777 222,421
-------- -------- --------
Loans held for sale 35,663 16,472 6,572
-------- -------- --------
Loans, net of unearned income 589,779 580,790 570,484
Less allowance for loan losses 7,794 7,389 7,044
-------- -------- --------
Net loans 581,985 573,401 563,440
-------- -------- --------
Bank premises and equipment, net 19,585 20,077 21,208
Other real estate owned 1,528 1,701 1,889
Other assets 29,584 31,664 24,042
-------- -------- --------
Total assets $ 911,260 $ 881,961 $ 860,180
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 95,808 $ 92,067 $ 88,318
Interest-bearing deposits:
NOW accounts 100,339 96,751 100,875
Money market accounts 62,638 62,438 62,323
Savings accounts 56,964 56,540 58,767
Time deposits of $100,000 and over 126,824 121,548 106,893
Other time deposits 269,892 263,128 248,912
-------- -------- --------
Total interest-bearing deposits 616,657 600,405 577,770
-------- -------- --------
Total deposits 712,465 692,472 666,088
-------- -------- --------
Federal funds and securities sold under agreement
to repurchase 28,703 25,114 30,540
Other short-term borrowings 28,032 6,000 12,850
Long-term borrowings 51,696 74,023 74,248
Other liabilities 5,759 6,000 5,999
-------- -------- --------
Total liabilities 826,655 803,609 789,725
-------- -------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000
shares; issued and outstanding, 7,536,140; 7,516,534
and 7,494,202 shares, respectively 15,072 15,033 14,988
Surplus 595 403 248
Retained earnings 65,871 63,201 60,025
Accumulated other comprehensive income (loss) 3,067 (285) (4,806)
-------- -------- --------
Total stockholders' equity 84,605 78,352 70,455
-------- -------- --------
Total liabilities and stockholders' equity $ 911,260 $ 881,961 $ 860,180
======== ======== ========
See accompanying notes to consolidated financ1al statements.
1
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended
March 31,
------------------
2001 2000
Interest and dividend income :
Interest and fees on loans $ 13,145 $ 11,898
Interest on Federal funds sold 72 19
Interest on interest-bearing
deposits in other banks 8 6
Interest and dividends
on securities:
Taxable 2,196 2,188
Nontaxable 1,182 1,245
-------- --------
Total interest and
dividend income 16,603 15,366
-------- --------
Interest expense:
Interest on deposits 7,137 6,029
Interest on short-term borrowings 323 593
Interest on long-term borrowings 1,206 1,058
-------- --------
Total interest expense 8,666 7,680
-------- --------
Net interest income 7,937 7,686
Provision for loan losses 432 564
-------- --------
Net interest income after
provision for loan losses 7,505 7,122
-------- --------
Noninterest income:
Service charges on deposit accounts 918 806
Other service charges and fees 569 484
Gains on securities transactions, net 21 22
Gains on sales of loans 1,810 1,045
Gains on sales of other real estate
owned and bank premises, net 12 5
Other operating income 283 99
-------- --------
Total noninterest income 3,613 2,461
-------- --------
Noninterest expenses:
Salaries and benefits 4,472 4,643
Occupancy expenses 543 607
Furniture and equipment expenses 730 731
Other operating expenses 2,013 2,050
-------- --------
Total noninterest expenses 7,758 8,031
-------- --------
Income before income taxes 3,360 1,552
Income tax expense 690 131
-------- --------
Net income $ 2,670 $ 1,421
======== ========
Basic net income per share $ 0.36 $ 0.19
Diluted net income per share $ 0.35 $ 0.19
See accompanying notes to consolidated financial statements.
2
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(dollars in thousands)
Common Retained
Stock Surplus Earnings
----- ------- --------
Balance - December 31, 1999 $ 14,976 $ 163 $ 58,603
Comprehensive income:
Net income - for three months ended March 31, 2000 1,421
Unrealized holding gains arising during the period (net of tax, $80)
Reclassification adjustment for gains included in net income (net of tax, $7)
Other comprehensive income (net of tax, $73 )
Total comprehensive income
Stock repurchased under Stock Repurchase Plan (11,300 shares) (23) (116) 1
Issuance of common stock in exchange for net assets in acquisition (17,673 shares) 35 201
--------------------------------------------
Balance - March 31, 2000 (unaudited) $ 14,988 $ 248 $ 60,025
============================================
Balance - December 31, 2000 $ 15,033 $ 403 $ 63,201
Comprehensive income:
Net income - for three months ended March 31, 2001 2,670
Unrealized holding gains arising during the period (net of tax, $1734 )
Reclassification adjustment for gains included in net income (net of tax, $7)
Other comprehensive income (net of tax, $1727)
Total comprehensive income
Issuance of common stock in exchange for net assets in acquisition (19,606 shares) 39 192
--------------------------------------------
Balance - March 31, 2001 (unaudited) $ 15,072 $ 595 $ 65,871
============================================
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income (Loss) Total
------------- ------------- -----
Balance - December 31, 1999 $ (4,948) $ 68,794
Comprehensive income:
Net income - for three months ended March 31, 2000 $ 1,421 1,421
Unrealized holding gains arising during the period (net of tax, $80) 157
Reclassification adjustment for gains included in net income (net of
tax, $7) (15)
-----------------
Other comprehensive income (net of tax, $73 ) 142 142 142
-----------------
Total comprehensive income $ 1,563
=================
Stock repurchased under Stock Repurchase Plan (11,300 shares) (138)
Issuance of common stock in exchange for net assets in acquisition (17,673
shares) 236
----------------- --------------
Balance - March 31, 2000 (unaudited) $ (4,806) $ 70,455
================= ==============
Balance - December 31, 2000 $ (285) $ 78,352
Comprehensive income:
Net income - for three months ended March 31, 2001 $ 2,670 2,670
Unrealized holding gains arising during the period (net of tax, $1734) 3,366
Reclassification adjustment for gains included in net income (net of
tax, $7) (14)
-----------------
Other comprehensive income (net of tax, $1727) 3,352 3,352 3,352
-----------------
Total comprehensive income $ 6,022
=================
Issuance of common stock in exchange for net assets in acquisition
(19,606 shares) 231
----------------- --------------
Balance - March 31, 2001 (unaudited) $ 3,067 $ 84,605
================= ==============
3
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 and 2000
(dollars in thousands)
2001 2000
---- ----
Operating activities:
Net income $ 2,670 $ 1,421
Adjustments to reconcile net income to net cash and
cash equivalents (used in) operating activities:
Depreciation of bank premises and equipment 473 462
Amortization 318 172
Provision for loan losses 432 564
(Gains) on sales of securities available for sale (21) (22)
(Gains) on sales of other real estate owned and fixed assets, net (12) (5)
(Increase) decrease in loans held for sale (19,191) 108
(Increase) decrease in other assets 408 (258)
(Decrease) in other liabilities (241) (6,660)
------------ ------------
Net cash and cash equivalents (used in)
operating activities (15,164) (4,218)
------------ ------------
Investing activities:
Net (increase) in securities (1,334) (10,910)
Net (increase) in loans (9,016) (27,315)
Purchases of bank premises and equipment (129) (379)
Proceeds from sales of bank premises and equipment 11 181
Proceeds from sales of other real estate owned 173 187
------------ ------------
Net cash and cash equivalents (used in)
investing activities (10,295) (38,236)
------------ ------------
Financing activities:
Net increase in noninterest-bearing deposits 3,741 9,270
Net increase in interest-bearing deposits 16,252 9,952
Net increase (decrease) in short-term borrowings 25,621 (2,299)
Net increase (decrease) in long-term borrowings (22,327) 26,358
Repurchase of common stock - (138)
------------ ------------
Net cash and cash equivalents provided by
financing activities 23,287 43,143
------------ ------------
Increase (decrease) in cash and cash equivalents (2,172) 689
Cash and cash equivalents at beginning of period 22,869 19,919
------------ ------------
Cash and cash equivalents at end of period $ 20,697 $ 20,608
============ ============
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 8,692 $ 7,406
Income taxes $ 262 $ -
See accompanying notes to consolidated financial statements.
4
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The information contained in the financial statements is unaudited and does
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
in the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of the
interim periods presented have been made. Operating results for the three
month period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 2000 Annual Report. Certain previously reported amounts have been
reclassified to conform to current period presentation.
2. ALLOWANCE FOR LOAN LOSSES
The following summarizes activity in the allowance for loan losses for the
three months ended March 31, (in thousands):
2001 2000
---- ----
Balance, January 1 $ 7,389 $6,617
Provisions charged to operations 432 564
Recoveries credited to allowance 83 74
Loans charged off (110) (211)
-------- ---------
Balance, March 31 $ 7,794 $7,044
======== =========
5
3. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of shares outstanding during the period. Weighted
average shares used for the computation of basic EPS were 7,516,752 and
7,494,470 for the three months ended March 31, 2001 and 2000. Diluted EPS is
computed using the weighted number of common shares outstanding during the
period, including the effect of dilutive potential common shares outstanding
attributable to stock options. Weighted average shares used for the
computation of diluted EPS were 7,534,057 and 7,514,395 for the three months
ended March 31, 2001 and 2000. At March 31, 2001 stock options representing
86,140 shares were anti-dilutive and were not considered in the computation
of EPS.
4. SEGMENT REPORTING DISCLOSURES
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.
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 a fee based business while the banks are driven principally by
net interest income. The banks provide a distribution and referral network
through their customers for the mortgage services. The mortgage company does
not offer a similar network for the banks, due largely to the lack of
overlapping geographic markets
Information about reportable segments and reconciliation of such information
to the consolidated financial statements as of March 31, 2001 and March 31,
2000 follows:
6
Three Months ended March 31, 2001
---------------------------------
(in thousands) Community Banks Mortgage Elimination Consolidated Totals
--------------- -------- ----------- -------------------
Net interest income $ 7,847 $ 90 $ - $ 7,937
Provision for loan losses 432 - - 432
--------------------------------------------------------------
Net interest income after provision for loan losses 7,415 90 - 7,505
Noninterest income 1,801 1,812 - 3,613
Noninterest expenses 6,059 1,699 - 7,758
--------------------------------------------------------------
Income before income taxes 3,157 203 - 3,360
Income tax expense 621 69 - 690
--------------------------------------------------------------
Net income $ 2,536 $ 134 $ - $ 2,670
==============================================================
Assets 913,679 $ 36,892 $ (39,311) $ 911,260
==============================================================
Three Months ended March 31, 2000
---------------------------------
(in thousands) Community Banks Mortgage Elimination Consolidated Totals
--------------- -------- ----------- -------------------
Net interest income (loss) $ 7,699 $ (13) $ - $ 7,686
Provision for loan losses 564 - - 564
--------------------------------------------------------------
Net interest income (loss) after provision for loan losses 7,135 (13) 7,122
Noninterest income 1,416 1,045 - 2,461
Noninterest expenses 6,035 1,996 - 8,031
--------------------------------------------------------------
Income (loss) before income taxes 2,516 (964) - 1,552
Income tax expense (benefit) 460 (329) - 131
--------------------------------------------------------------
Net income (loss) $ 2,056 $ (635) $ - $ 1,421
==============================================================
Assets $ 856,843 $ 7,373 $ (4,036) $ 860,180
==============================================================
7
5. RECENT ACCOUNTING STATEMENTS
In January 2001, the Company implemented the Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and for hedging activities. As part of
the implementation, the Company exercised an option in the standard to
reclassify held to maturity investments to available for sale. As of January
1, 2001, $5,465,000 held to maturity investments were converted to available
for sale. This has not had a material impact on the Company.
6. FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Although the Company believes that its expectations with
respect to certain forward-looking statements are based upon reasonable
assumptions within the bounds of its existing knowledge of its business and
operations, there can be no assurance that actual results, performance or
achievements of the Company will not differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Actual future results and trends may differ
materially from historical results or those anticipated depending on a
variety of factors, including, but not limited to, the effects of and
changes in: general economic conditions, the interest rate environment,
legislative and regulatory requirements, competitive pressures, new products
and delivery systems, inflation, changes in the stock and bond markets,
technology, and consumer spending and savings habits.
8
Item 2 - MANAGMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Union Bankshares Corporation (the "Company") is a multi-bank holding company
organized under Virginia law which provides financial services through its
wholly-owned bank subsidiaries, Union Bank & Trust Company, Northern Neck State
Bank, Rappahannock National Bank, Bank of Williamsburg, as well as Union
Investment Services, Inc., and Mortgage Capital Investors, Inc. The four
subsidiary banks are full service retail commercial banks offering a wide range
of banking and related financial services, including demand and time deposits,
as well as commercial, industrial, residential construction, residential
mortgage and consumer loans. Union Investment Services Inc., is a full service
discount brokerage company, which offers a full range of investment services and
sells mutual funds, stocks and bonds. Mortgage Capital Investors, Inc., a
subsidiary of Union Bank & Trust Company, provides a wide array of mortgage
products.
The Company's primary trade area stretches from Rappahannock County to
Fredericksburg, south to Hanover County, east to Williamsburg and throughout the
Northern Neck region of Virginia. The corporate headquarters is located in
Bowling Green, Virginia. Through its banking subsidiaries, the Company operates
29 branches in its primary trade area. In addition to the primary banking trade
area, Mortgage Capital Investors, Inc. expands the Company's mortgage
origination business to other strong housing markets.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of the Company. The analysis focuses on the consolidated financial statements,
the footnotes thereto, and the other financial data herein. Highlighted in the
discussion are material changes from prior reporting periods and any
identifiable trends affecting the Company. Amounts are rounded for presentation
purposes, while the percentages presented are computed based on unrounded
amounts.
Results of Operations
Net income for the first quarter of 2001 was $2.7 million, up from $1.4
million for the same period in 2000. This increase was the result of significant
improvement in the mortgage segment's performance with net income of $134,000
for the period ended March 31, 2001 compared to a loss of $635,000 in the first
quarter of last yar. In addition, the community banking segment continued to
perform well showing a $480,000 increase in earnings or 23.3% over the prior
year's first quarter. Diluted earnings per share amounted to $.35 in the first
quarter of 2001, as compared to $.19 in the first quarter of 2000. The Company's
annualized return on average assets for the first quarter of 2001 was 1.22% as
compared to .68% a year ago. The Company's annualized return on average equity
totaled 13.61% and 8.41% for the three months ended March 31, 2001 and 2000,
respectively.
Net income from the Company's community banking segment increased from
approximately $2.1 million in the first quarter of 2000 to over $2.5 million in
the first quarter of 2001. Continued growth in existing markets, as well as the
performance of acquired and denovo banks and branches and previously implemented
initiatives to consolidate backoffice functions are reflected in the improved
operating efficiencies and contributed to the improvement in the profitability
of the community banking segment.
9
Rapidly falling interest rates, coupled with tighter credit criteria for
loans and ongoing competition for deposits, have continued to compress the net
interest margin. Deposits have grown well in the quarter with customers locking
into higher rates in certificates of deposit. While this has caused an even more
dramatic narrowing of the net interest margin, repricing of both earning assets
and interest bearing deposits combined with the ability to refinance borrowings
at lower rates should bring the margin back in line. The Company continues to
seek lower cost sources of funds and anticipates continued loan growth going
forward.
The mortgage banking segment reflects a year long effort by management to
return it to profitability. Strategic changes during the last year to
consolidate operations and close unprofitable offices, combined with a favorable
interest rate environment in the first quarter contributed to this turn around.
The Company is continuing to make adjustments to increase the production volumes
and improve operating efficiencies of this segment of our business. Entering the
second quarter, our mortgage loan pipeline remains strong and mortgage
applications continue to grow. While lower interest rates have increased the
level of refinance activity, these transactions represent less than a third of
our first quarter's loan production.
Net Interest Income
Net interest income on a tax-equivalent basis for the first quarter of 2001
increased slightly by .8% to $8.65 million from $8.58 million for the same
period a year ago. In the first quarter, the Company had slower earning asset
growth, combined with strong deposit growth and a falling interest rate
environment which caused customers and stock market investors to seek higher
returns in relatively higher certificate of deposit rates. This is reflected in
a 47 basis point increase in the cost of funds for the first quarter which was
partially offset by a 17 basis point increase in interest income. The slowing in
asset growth was planned in an effort to maintain a high asset quality level in
our loan portfolio. It is anticipated that scheduled maturities and repricing of
certificates in the later part of the year should provide some relief in
interest expense. The current interest rate environment and competition for
deposits continue to put pressure on net interest margins.
In addition, the subsidiary banks have periodically engaged in wholesale
leverage transactions to invest in securities by borrowing funds at lower
margins of 150 - 200 basis points. Although such transactions increase net
income and return on equity, they have reduced the net interest margin. As of
March 31, 2001 such transactions accounted for $25 million of the Company's
total borrowings.
Average earning assets during the first quarter of 2001 increased by $44.5
million to $825.2 million from the first quarter of 2000, while average
interest-bearing liabilities grew by $28.4 million to $713.5 million over this
same period. Included in the earning assets is $13.3 million growth in loans
held for sale. These assets lower the overall yield since they are very short
term and set up on minimal spreads. These instruments generate most of their
earnings in the noninterest category. The Company's yield on average earning
assets was 8.51%, up 17 basis points from 8.34% a year ago, while its cost of
average interest-bearing liabilities increased 47 basis points from 4.46% in the
first quarter 2000 to 4.93% in first quarter 2001.
10
Union Bankshares Corporation
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
(TAXABLE EQUIVALENT BASIS)
-----------------------------------------------------------------------------------
For the three months ended March 31,
-----------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . . . . . . . $125,103 $ 2,196 7.12% $119,970 $ 2,188 7.34%
Tax-exempt(1) . . . . . . . . . . . . . . 93,533 1,790 7.76% 98,611 1,887 7.70%
----------------------------- ----------------------------
Total securities . . . . . . . . . . 218,636 3,986 7.39% 218,581 4,075 7.50%
Loans, net. . . . . . . . . . . . . . . . . . . 582,845 13,161 9.16% 556,083 12,090 8.74%
Loans held for sale . . . . . . . . . . . . . . 17,579 90 2.08% 4,257 (13) -1.23%
Federal funds sold . . . . . . . . . . . . . . 5,450 72 5.36% 767 19 9.96%
Interest-bearing deposits
in other banks . . . . . . . . . . . . . . 734 8 4.42% 1,088 16 5.91%
----------------------------- ----------------------------
Total earning assets . . . . . . . . 825,244 17,317 8.51% 780,776 16,187 8.34%
Allowance for loan losses . . . . . . . . . . (7,592) (6,842)
Total non-earning assets . . . . . . . . . . . 69,177 66,115
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . $886,829 $840,049
=============== ==============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . . . 95,882 451 1.91% $ 97,134 502 2.08%
Money market savings . . . . . . . . . . 62,024 474 3.10% 63,162 506 3.22%
Regular savings . . . . . . . . . . . . 57,884 321 2.25% 58,689 351 2.41%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . 126,926 1,891 6.04% 103,638 1,363 5.29%
Under $100,000 . . . . . . . . . . . . 265,221 4,000 6.12% 248,018 3,307 5.36%
----------------------------- ----------------------------
Total interest-bearing
deposits . . . . . . . . . . . 607,937 7,137 4.76% 570,641 6,029 4.25%
Other borrowings . . . . . . . . . . . . . . 105,527 1,529 5.88% 114,446 1,575 5.54%
----------------------------- ----------------------------
Total interest-bearing
liabilities . . . . . . . . . 713,464 8,666 4.93% 685,087 7,604 4.46%
Noninterest bearing liabilities:
Demand deposits . . . . . . . . . . . . 87,819 80,440
Other liabilities . . . . . . . . . . . 5,998 6,727
--------------- --------------
Total liabilities . . . . . . . . . 807,281 772,254
Stockholders' equity . . . . . . . . . . . . . 79,548 67,795
--------------- --------------
Total liabilities and
stockholders' equity . . . . . . . . . . $886,829 $840,049
=============== ==============
Net interest income . . . . . . . . . . . . . $ 8,651 $ 8,583
============== ==============
Interest rate spread . . . . . . . . . . . . . 3.58% 3.87%
Interest expense as a percent
of average earning assets . . . . . . . 4.26% 3.92%
Net interest margin . . . . . . . . . . . . . 4.25% 4.42%
Union Bankshares Corporation
AVERAGE BALANCES, INCOME AND EXPENSES,
YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
-----------------------------------------------------
For the three months ended March 31,
-----------------------------------------------------
1999
----------------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
----------------------------------------------------
Assets:
Securities:
Taxable . . . . . . . . . . . . . . . . . $ 99,670 $ 1,538 6.26%
Tax-exempt(1) . . . . . . . . . . . . . . 85,819 1,624 7.67%
----------------------------
Total securities . . . . . . . . . . 185,489 3,162 6.91%
Loans, net. . . . . . . . . . . . . . . . . . . 481,763 10,579 8.91%
Loans held for sale . . . . . . . . . . . . . . 18,852 2 0.04%
Federal funds sold . . . . . . . . . . . . . . 4,337 57 5.33%
Interest-bearing deposits
in other banks . . . . . . . . . . . . . . 1,919 26 5.49%
----------------------------
Total earning assets . . . . . . . . 692,360 13,826 8.10%
Allowance for loan losses . . . . . . . . . . (6,714)
Total non-earning assets . . . . . . . . . . . 46,277
---------------
Total assets . . . . . . . . . . . . . . . . . $731,923
===============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . . . $ 82,283 461 2.27%
Money market savings . . . . . . . . . . 64,041 515 3.26%
Regular savings . . . . . . . . . . . . 57,841 398 2.79%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . 88,154 1,171 5.39%
Under $100,000 . . . . . . . . . . . . 238,686 3,133 5.32%
----------------------------
Total interest-bearing
deposits . . . . . . . . . . . 531,005 5,678 4.34%
Other borrowings . . . . . . . . . . . . . . 45,673 606 5.38%
----------------------------
Total interest-bearing
liabilities . . . . . . . . . 576,678 6,284 4.42%
Noninterest bearing liabilities:
Demand deposits . . . . . . . . . . . . 78,472
Other liabilities . . . . . . . . . . . 3,566
---------------
Total liabilities . . . . . . . . . 658,716
Stockholders' equity . . . . . . . . . . . . . 73,207
---------------
Total liabilities and
stockholders' equity . . . . . . . . . . $731,923
===============
Net interest income . . . . . . . . . . . . . $ 7,542
=============
Interest rate spread . . . . . . . . . . . . . 3.68%
Interest expense as a percent
of average earning assets . . . . . . . 3.68%
Net interest margin . . . . . . . . . . . . . 4.42%
(1) Income and yields are reported on a taxable equivalent basis.
11
Provision for Loan Losses
The provision for loan losses totaled $432,000 for the first quarter of
2001, down from $564,000 for the first quarter of 2000. These provisions reflect
the performance of the loan portfolio and management's assessment of the credit
risk in the portfolio. (See Asset Quality)
Noninterest Income
Noninterest income for the three months ended March 31, 2001 totaled $3.6
million, up from $2.5 million for the same period a year ago. Gains on sales of
loans in the mortgage banking segment comprised much of this improvement
increasing $765,000 over the same period in 2000. Service charges on deposit
accounts increased $112,000 and other service charges and fees increased
$85,000, reflecting deposit growth and initiatives to enhance fee income. Other
operating income increased $184,000 over the prior year, reflecting an ongoing
transaction from the fourth quarter of 2000. Management continues to seek
additional sources of noninterest income, including increased emphasis on
cross-selling services and better leveraging the financial services available
throughout the organization.
Noninterest Expense
Noninterest expense in the first quarter of 2001 totaled $7.8 million, a
decrease of $273,000 over the same period in 2000. Personnel costs were down
$171,000 over last year's first quarter. Occupancy expense was down $64,000 and
furniture & equipment expense was down $1,000. Other operating expenses were
down $37,000 over last year's first quarter. The decreases are largely the
result of branch consolidation and closings and expense controls in the mortgage
operation. The community banking segment is up slightly for the quarter.
Financial Condition
Total assets as of March 31, 2001 were $911.2 million, an increase of 5.9%
from $860.2 million at March 31, 2000. Asset growth was fueled principally by
loan growth, as loans totaled $589.8 million at March 31, 2001, an increase of
3.4% from $570.5 million at March 31, 2000. The securities portfolio declined
slightly to $222.2 million in the first quarter of 2001 versus $222.4 for the
same period in 2000. Loans held for sale increased $29.1 million compared to the
same period last year due to the increase in mortgage activity. Other assets are
up $5.5 million over the same period last year. Stockholders' equity totaled
$84.6 million at March 31, 2001, which represents a book value of $11.23 per
share.
12
Deposit growth was good as the banks continued to increase market share.
Total deposits at March 31, 2001 were $712.5 million, up 7.0% from $666.1
million at March 31, 2000. Other borrowings totaled $108.4 million at March 31,
2001, a 7.8% decrease over $117.6 million at March 31, 2000. As a result of the
deposit growth over the period, the Company was able to decrease other
borrowings, which represents a high cost of funds. The Company also periodically
engages in wholesale leverage transactions to better leverage its capital
position. The other borrowings reflect $25 million in net leverage transactions.
These wholesale leverage transactions have typically been executed at spreads of
approximately 150 to 200 basis points and, although they have negatively
impacted the Company's net interest margin (as a percentage), they have had a
positive effect on earnings and return on equity.
Continued competition for deposits, particularly as it impacts certificate
of deposit rates, is reflected in the deposit mix. Management continues to focus
on increasing lower cost deposit products, including noninterest-bearing demand
deposits and savings accounts and effective management of competitive rates on
interest sensitive products. Increased competition for funds, by banks seeking
to fund loan growth and by non-bank lending companies, continues to contribute
to a narrowing of the net interest margin.
Asset Quality
The allowance for loan losses is an estimate of an amount adequate to
provide for losses inherent in the loan portfolio. General economic trends, as
well as conditions affecting individual borrowers, affect the level of credit
losses. The allowance is also subject to regulatory examinations and
determination as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and comparison to peer groups.
Declining nonperforming asset levels and prudent maintenance of the allowance
have continued to strengthen asset quality.
The allowance for loan losses totaled $7.8 million at March 31, 2001 or
1.32% of total loans, as compared to 1.27% at December 31, 2000 and 1.23% at
March 31, 2000.
March 31, December 31, March 31,
2001 2000 2000
---- ---- ----
(dollars in thousands)
Nonaccrual loans $ 618 $ 830 $1,208
Foreclosed properties 1,536 1,711 1,889
------- ------- -------
Nonperforming assets $ 2,154 $ 2,541 $3,097
======= ======= =======
Allowance for loan losses $7,794 $ 7,389 $7,044
Allowance as % of total
loans 1.32% 1.27% 1.23%
Nonperforming assets to loans
and foreclosed properties .36% .44% .54%
13
Capital Resources
Capital resources represent funds, earned or obtained, over which financial
institutions can exercise greater or longer control in comparison with deposits
and borrowed funds. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1
capital, consisting of common equity and retained earnings, less certain
goodwill items.
At March 31, 2001, the Company's ratio of total capital to risk-weighted
assets was 12.59% and its ratio of Tier 1 capital to risk-weighted assets was
11.41%. Both ratios exceed the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at
March 31, 2001 (dollars in thousands):
Tier 1 capital $ 75,431
Tier 2 capital 7,794
Total risk-based capital 83,225
Total risk-weighted assets 661,147
Capital Ratios:
Tier 1 risk-based capital ratio 11.41%
Total risk-based capital ratio 12.59%
Leverage ratio (Tier 1 capital to
average adjusted total assets) 8.56%
Equity to assets ratio 9.28%
The Company's book value per share at March 31, 2001 was $11.23. Dividends
to stockholders are typically paid semi-annually in June and December.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
securities available for sale and loans maturing within one year. The Company's
ability to obtain deposits and purchase funds at favorable rates determines its
liability liquidity. Additional sources of liquidity available to the Company
include its capacity to borrow additional funds when necessary through federal
funds lines with several regional banks and a line of credit with the Federal
Home Loan Bank. Management considers the Company's overall liquidity to be
sufficient to satisfy its depositors' requirements and to meet its customers'
credit needs.
14
At March 31, 2001 cash, interest-bearing deposits in other banks, federal
funds sold, securities available for sale and loans maturing or repricing in one
year were 32.4% of total earning assets. At March 31, 2001 approximately $186.7
million or 31.6% of total loans are scheduled to mature or reprice within the
next year. The Company utilizes federal funds purchased, FHLB advances,
securities sold under agreements to repurchase and customer repurchase
agreements, in addition to deposits, to fund the growth in its loan portfolio,
and to fund securities purchases, periodically, in wholesale leverage
transactions.
15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. The Company's market risk is composed primarily of interest
rate risk. The Company's Asset and Liability Management Committee (ALCO) is
responsible for reviewing the interest rate sensitivity position and
establishing policies to monitor and limit exposure to this risk. The Board of
Directors reviews the guidelines established by ALCO.
Interest rate risk is monitored through the use of three complimentary
modeling tools: static gap analysis, earnings simulation modeling, and net
present value estimation. Each of these models measure changes in a variety of
interest rate scenarios. While each of the interest rate risk measures has
limitations, taken together they represent a reasonably comprehensive view of
the magnitude of interest rate risk in the Company, the distribution of risk
along the yield curve, the level of risk through time, and the amount of
exposure to changes in certain interest rate relationships. Static gap is less
utilized in the current environment but earnings simulation and market value
models are utilized on a regular basis.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is
subject to the accuracy of the assumptions that underlie the process, but it
provides a better analysis of the sensitivity of earnings to changes in interest
rates than other analysis such as the static gap analysis.
Assumptions used in the model, including loan and deposit growth rates, are
derived from seasonal trends and management's outlook, as are the assumptions
used to project yields and rates for new loans and deposits. All maturities,
calls and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different asset and liability accounts move
differently when the prime rate changes and are accounted for in the different
rate scenarios.
The following table represents the interest rate sensitivity on net interest
income for the Company using different rate scenarios as of:
March 31, 2001 March 31, 2000
% Change in % Change in
Change in Prime Rate Net Interest Income Net Interest Income
-------------------- ------------------- -------------------
+200 basis points -.52% -.62%
Flat 0 0
-200 basis points +.83% +.31%
Based on this model, the company is positioned to benefit from a falling rate
environment.
16
Market Value Simulation
Market value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Market values
are calculated based on discounted cash flow analysis. The net market value is
the market value of all assets minus the market value of all liabilities. The
change in net market value over different rate environments is an indication of
the longer term repricing risk in the balance sheet. The same assumptions are
used in the market value simulation as in the earnings simulation.
The following chart reflects the change in net market value over different
rate environments as of March 31:
Change in Net Market Value
Change in Prime Rate (dollars in thousands)
2001 2000
---- ----
+200 basis points $ -21,519 $-41,580
+100 basis points -6,993 -25,092
Flat 4,761 -15,477
-100 basis points 22,762 8,109
-200 basis points 28,208 23,040
17
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a)See attached list of exhibits
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Bankshares Corporation
----------------------------
(Registrant)
May 14, 2001 /s/ G. William Beale
-------------------------------------------
(Date) G. William Beale,
President, Chief Executive Officer
and Director
May 14, 2001 /s/ D. Anthony Peay
--------------------------------------------
(Date) D. Anthony Peay,
Senior Vice President and Chief
Financial Officer
19
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q /March 31, 2001
Exhibit
No. Description
--- -----------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession - Not Applicable
4 Instruments defining the rights of security holders,
including indentures Not Applicable
10 Material contracts Not Applicable
11 Statement re: computation of per share earnings Not Applicable
15 Letter re: unaudited interim financial
information Not Applicable
18 Letter re: change in accounting principles Not Applicable
19 Previously unfiled documents Not Applicable
20 Report furnished to security holders Not Applicable
22 Published report re: matters submitted to
vote of security holders None
23 Consents of experts and counsel Not Applicable
24 Power of Attorney Not Applicable
99 Additional Exhibits None
20