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 September 30, 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
Indicate by checkmark whether the registrant (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 October 24, 2001, Union Bankshares Corporation had 7,512,812
shares of Common Stock outstanding.
UNION BANKSHARES CORPORATION
FORM 10-Q
September 30, 2001
INDEX
-----
PART 1 - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000 (Audited)................................................................................. 1
Consolidated Statements of Income (Unaudited)
For the three months and nine months ended September 30, 2001 and 2000.......................................... 2
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the nine months ended September 30, 2001 and 2000........................................................... 3
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2001 and 2000........................................................... 4
Notes to Consolidated Financial Statements (Unaudited).............................................................. 5 - 11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................................. 12 - 20
Item 3 - Quantitative and Qualitative Disclosures about Market Risk...................................................... 21 - 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................................................................... 23
Item 2 - Changes in Securities and Use of Proceeds....................................................................... 23
Item 3 - Defaults Upon Senior Securities................................................................................. 23
Item 4 - Submission of Matters to a Vote of Security Holders............................................................. 23
Item 5 - Other Information............................................................................................... 23
Item 6 - Exhibits and Reports on Form 8-K................................................................................ 23
Signatures............................................................................................................... 24
Index to Exhibits........................................................................................................ 25
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
ASSETS 2001 2000
- ------ ---- ----
(Unaudited)
Cash and cash equivalents:
Cash and due from banks $ 19,370 $ 22,174
Interest-bearing deposits in other banks 2,280 315
Federal funds sold 15,888 380
------------- ------------
Total cash and cash equivalents 37,538 22,869
------------- ------------
Securities available for sale, at fair value 231,925 210,312
Investment securities, at amortized cost
Fair value of $0, and $5,528, respectively - 5,465
------------- ------------
Total securities 231,925 215,777
------------- ------------
Loans held for sale 27,384 16,472
------------- ------------
Loans, net of unearned income 596,043 580,790
Less allowance for loan losses 7,473 7,389
------------- ------------
Net loans 588,570 573,401
------------- ------------
Bank premises and equipment, net 18,738 20,077
Other real estate owned 887 1,701
Other assets 28,602 31,664
------------- ------------
Total assets $ 933,644 $ 881,961
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Noninterest-bearing demand deposits $ 100,554 $ 92,067
Interest-bearing deposits:
NOW accounts 100,243 96,751
Money market accounts 70,982 62,438
Savings accounts 67,361 56,540
Time deposits of $100,000 and over 128,277 121,548
Other time deposits 269,962 263,128
------------- ------------
Total interest-bearing deposits 636,825 600,405
------------- ------------
Total deposits 737,379 692,472
------------- ------------
Securities sold under agreement to repurchase 36,521 25,114
Other short-term borrowings 1,032 6,000
Long-term borrowings 63,180 74,023
Other liabilities 5,808 6,000
------------- ------------
Total liabilities 843,920 803,609
------------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares; issued and
outstanding, 7,517,820, and 7,516,534 shares, respectively 15,036 15,033
Surplus 336 403
Retained earnings 70,137 63,201
Accumulated other comprehensive income (loss) 4,215 (285)
------------- ------------
Total stockholders' equity 89,724 78,352
------------- ------------
Total liabilities and stockholders' equity $ 933,644 $ 881,961
============= ============
See accompanying notes to consolidated financial statements.
1
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 12,831 $ 12,992 $ 39,001 $ 37,567
Interest on Federal funds sold 196 37 323 57
Interest on interest-bearing deposits in other banks 10 16 28 48
Interest and dividends on securities:
Taxable 2,296 2,315 6,715 6,805
Nontaxable 1,144 1,233 3,502 3,710
-------- -------- -------- --------
Total interest and dividend income 16,477 16,593 49,569 48,187
-------- -------- -------- --------
Interest expense:
Interest on deposits 6,786 6,880 21,051 19,430
Interest on short-term borrowings 306 610 1,037 1,966
Interest on long-term borrowings 991 1,213 3,192 3,369
-------- -------- -------- --------
Total interest expense 8,083 8,703 25,280 24,765
-------- -------- -------- --------
Net interest income 8,394 7,890 24,289 23,422
Provision for loan losses 455 522 1,280 1,667
-------- -------- -------- --------
Net interest income after provision
for loan losses 7,939 7,368 23,009 21,755
-------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts 881 933 2,753 2,650
Other service charges and fees 636 545 1,867 1,567
Gains (Losses) on securities transactions, net 95 (1,050) 125 (964)
Gains on sales of loans 2,360 1,496 6,291 4,134
Gains (Losses) on sales of other real estate owned
and bank premises, net (15) 71 69 76
Gains on termination of pension plan - 1,087 - 1,087
Other operating income 110 81 664 293
-------- -------- -------- --------
Total noninterest income 4,067 3,163 11,769 8,843
-------- -------- -------- --------
Noninterest expenses:
Salaries and benefits 4,974 4,957 14,247 14,432
Occupancy expenses 553 576 1,614 1,737
Furniture and equipment expenses 700 730 2,128 2,201
Other operating expenses 1,865 2,079 5,832 6,166
-------- -------- -------- --------
Total noninterest expenses 8,092 8,342 23,821 24,536
-------- -------- -------- --------
Income before income taxes 3,914 2,189 10,957 6,062
Income tax expense 877 292 2,363 850
-------- -------- -------- --------
Net income $ 3,037 $ 1,897 $ 8,594 $ 5,212
======== ======== ======== ========
Earnings per share, basic and diluted $ 0.40 $ 0.25 $ 1.14 $ 0.69
See accompanying notes to consolidated financial statements.
2
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(dollars in thousands)
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income (Loss) Total
-------- ------- -------- -------------- ------------- ----------
Balance - December 31, 1999 $ 14,976 $ 163 $ 58,603 $ (4,948) $ 68,794
Comprehensive income:
Net income - for nine months ended September 30, 2000 $ 5,212 5,212 5,212
Unrealized holding gains arising during the period
(net of tax, $ 572) 1,112
Reclassification adjustment for gains included in net
income (net of tax, $328) 636
---------
Other comprehensive income (net of tax, $900) 1,748 1,748 1,748
---------
Total comprehensive income $ 6,960
Cash dividends - 2000 ($.40 per share semi annually) (1,499) ========= (1,499)
Issuance of common stock under Dividend Reinvestment
Plan (16,090 shares) 33 140 173
Stock repurchased under Stock Repurchase Plan
(11,300 shares) (23) (115) (138)
Issuance of common stock under Incentive Stock Option
Plan (5,040 shares) 10 22 32
Issuance of common stock in exchange for net assets in
acquisition (17,673 shares) 35 201 236
----------------------------------------------- ---------
Balance - September 30, 2000 (Unaudited) $ 15,031 $ 411 $ 62,316 $ (3,200) $ 74,558
=============================================== =========
Balance - December 31, 2000 $ 15,033 $ 403 $ 63,201 $ (285) $ 78,352
Comprehensive income:
Net income - for nine months ended
September 30, 2001 8,594 $ 8,594 8,594
Unrealized holding gains arising during the period
(net of tax, $ 2,361) 4,418
Reclassification adjustment for gains included
in net income (net of tax, $43) (82)
---------
Other comprehensive income (net of tax, $2,318) 4,500 4,500 4,500
---------
Total comprehensive income $ 13,094
=========
Cash dividends - 2001 ($.44 per share semi annually) (1,658) (1,658)
Issuance of common stock under Dividend Reinvestment Plan
(12,930 shares) 26 168 194
Stock repurchased under Stock Repurchase Plan
(31,250 shares) (62) (427) (489)
Issuance of common stock in exchange for net assets in
acquisition (19,606 shares) 39 192 231
----------------------------------------------- ---------
Balance - September 30, 2001 (Unaudited) $ 15,036 $ 336 $ 70,137 $ 4,215 $ 89,724
=============================================== =========
3
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2001 and 2000
(dollars in thousands)
2001 2000
---- ----
Operating activities:
Net income $ 8,594 $ 5,212
Adjustments to reconcile net income to net cash and
cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment 1,438 1,802
Amortization 996 426
Provision for loan losses 1,280 1,667
(Gains) losses on sales of securities available for sale (125) 964
Gains on sales of other real estate owned and fixed assets, net (69) (76)
Increase in loans held for sale (10,912) (8,919)
Decrease in other assets 480 215
Decrease in other liabilities (192) (7,278)
---------- ----------
Net cash and cash equivalents provided by (used in)
operating activities 1,490 (5,987)
---------- ----------
Investing activities:
Net (increase) decrease in securities (9,304) 8,717
Net increase in loans (16,449) (37,406)
Purchases of bank premises and equipment (519) (885)
Proceeds from sales of bank premises and equipment 22 181
Proceeds from sales of other real estate owned 879 337
---------- ----------
Net cash and cash equivalents used in
investing activities (25,371) (29,056)
---------- ----------
Financing activities:
Net increase in noninterest-bearing deposits 8,487 11,008
Net increase in interest-bearing deposits 36,420 16,450
Net increase (decrease) in short-term borrowings 6,439 (16,506)
Net increase (decrease) in long-term borrowings (10,843) 25,703
Issuance of common stock 194 205
Repurchase of common stock (489) (138)
Cash dividends paid (1,658) (1,499)
---------- ----------
Net cash and cash equivalents provided by
financing activities 38,550 35,223
---------- ----------
Increase in cash and cash equivalents 14,669 180
Cash and cash equivalents at beginning of period 22,869 19,919
---------- ----------
Cash and cash equivalents at end of period $ 37,538 $ 20,099
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 25,540 $ 19,314
Income taxes $ 1,942 $ 915
See accompanying notes to consolidated financial statements.
4
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 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 and nine month period ended
September 30, 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
nine months ended September 30, (in thousands):
2001 2000
---- ----
Balance, January 1 $ 7,389 $6,617
Provisions charged to operations 1,280 1,667
Recoveries credited to allowance 296 266
Loans charged off (1,492) (693)
------- ------
Balance, September 30 $ 7,473 $7,857
======= ======
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. Diluted EPS
is computed using the weighted average number of common shares outstanding
during the period, including the effect of dilutive potential common shares
outstanding attributable to stock options. At September 30, 2001 stock
options representing 74,140 shares were anti-dilutive and were not
considered in the computation of EPS. The following is a reconcilment of the
denominators of the basic and diluted EPS computations for the quarter and
nine months ended September 30, 2001 and 2000.
- ---------------------------------------------------------------------------------------------
WEIGHTED
INCOME AVERAGE PER
(NUMERATOR) SHARES SHARE
(DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
(dollars in
thousands)
- ---------------------------------------------------------------------------------------------
For the quarter ended September
30, 2001
- ---------------------------------------------------------------------------------------------
Basic EPS $ 3,037 7,524 $ .40
- ---------------------------------------------------------------------------------------------
Effect of dilutive stock options 20
- ---------------------------------------------------------------------------------------------
Diluted EPS $ 3,037 7,544 $ .40
- ---------------------------------------------------------------------------------------------
For the quarter ended September
30, 2000
- ---------------------------------------------------------------------------------------------
Basic EPS $ 1,897 7,515 $ .25
- ---------------------------------------------------------------------------------------------
Effect of dilutive stock options -
- ---------------------------------------------------------------------------------------------
Diluted EPS $ 1,897 7,515 $ .25
- ---------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2001
- ---------------------------------------------------------------------------------------------
Basic EPS $ 8,594 7,526 $ 1.14
- ---------------------------------------------------------------------------------------------
Effect of dilutive stock options 17
- ---------------------------------------------------------------------------------------------
Diluted EPS $ 8,594 7,543 $ 1.14
- ---------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2000
- ---------------------------------------------------------------------------------------------
Basic EPS $ 5,212 7,505 $ .69
- ---------------------------------------------------------------------------------------------
Effect of dilutive stock options 6
- ---------------------------------------------------------------------------------------------
Diluted EPS $ 5,212 7,511 $ .69
- ---------------------------------------------------------------------------------------------
6
4. SEGMENT REPORTING DISCLOSURES
-----------------------------
Union Bankshares Corporation has two reportable segments: traditional full
service community banking and mortgage loan origination. The community bank
segment includes four banks which provide loan, deposit, investment, and
trust services to retail and commercial customers throughout their
locations in Virginia. The mortgage segment provides a variety of mortgage
loan products principally in Virginia and Maryland. These loans are
originated and sold primarily 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. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies of the Company. 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 loan origination business. The
mortgage segment offers a more limited network for the banks, due largely
to the minimal degree of overlapping geographic markets.
The community bank segment provides the mortgage segment with the short
term funds needed to originate mortgage loans through a warehouse line of
credit and charges the mortgage banking segment interest at the 3 month
LIBOR rate. These transactions are eliminated to reach consolidated totals.
A management fee for back room support services is charged to all
subsidiaries and eliminated in the consolidation totals.
Information about reportable segments and reconciliation of such
information to the consolidated financial statements for the three months
and nine months as of September 30, 2001 and 2000 follows:
7
Three Months ended September 30, 2001
Community Mortgage Elimination Consolidated
--------- -------- ----------- ------------
Banks Totals
----- ------
(in thousands)
Net interest income $ 8,196 $ 198 $ - $ 8,394
Provision for loan losses 445 10 - 455
-----------------------------------------------------------
Net interest income after provision for loan losses 7,751 188 - 7,939
Noninterest income 1,744 2,363 (40) 4,067
Noninterest expenses 6,099 2,033 (40) 8,092
-----------------------------------------------------------
Income before income taxes 3,396 518 - 3,914
Income tax expense 701 176 - 877
-----------------------------------------------------------
Net income $ 2,695 $ 342 $ - $ 3,037
===========================================================
Total Assets $935,361 $29,004 $(30,721) 933,644
===========================================================
Three Months ended September 30, 2000
Community Mortgage Elimination Consolidated
--------- -------- ----------- ------------
Banks Totals
----- ------
(in thousands)
Net interest income $ 7,820 $ 70 $ -- $ 7,890
Provision for loan losses 522 -- -- 522
-----------------------------------------------------------
Net interest income after provision for loan losses 7,298 70 7,368
Noninterest income 1,707 1,496 (40) 3,163
Noninterest expenses 6,351 2,031 (40) 8,342
-----------------------------------------------------------
Income (loss) before income taxes 2,654 (465) -- 2,189
Income tax expense (benefit) 445 (153) -- 292
-----------------------------------------------------------
Net income (loss) $ 2,209 $ (312) $ -- $ 1,897
===========================================================
Total Assets $860,039 $16,902 $(19,072) $ 857,869
===========================================================
8
Nine Months ended September 30, 2001
Community Mortgage Elimination Consolidated
--------- -------- ----------- ------------
Banks Totals
----- ------
(in thousands)
Net interest income $ 23,828 $ 461 $ -- $ 24,289
Provision for loan losses 1,270 10 -- 1,280
------------------------------------------------------
Net interest income after provision for loan losses 22,558 451 -- 23,009
Noninterest income 5,596 6,294 (121) 11,769
Noninterest expenses 18,347 5,595 (121) 23,821
------------------------------------------------------
Income before income taxes 9,807 1,150 -- 10,957
Income tax expense 1,972 391 -- 2,363
------------------------------------------------------
Net income $ 7,835 $ 759 $ -- $ 8,594
======================================================
Total Assets $ 935,361 $ 29,004 $(30,721) 933,644
======================================================
Nine Months ended September 30, 2000
Community Mortgage Elimination Consolidated
--------- -------- ----------- ------------
Banks Totals
----- ------
(in thousands)
Net interest income $ 23,363 $ 59 $ -- $ 23,422
Provision for loan losses 1,667 -- -- 1,667
------------------------------------------------------
Net interest income after provision for loan losses 21,696 59 21,755
Noninterest income 4,830 4,134 (121) 8,843
Noninterest expenses 18,539 6,118 (121) 24,536
------------------------------------------------------
Income (loss) before income taxes 7,987 (1,925) -- 6,062
Income tax expense (benefit) 1,511 (661) -- 850
------------------------------------------------------
Net income (loss) $ 6,476 $ (1,264) $ -- $ 5,212
======================================================
Total Assets $ 860,039 $ 16,902 $(19,072) $ 857,869
======================================================
9
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 reclassified its remaining held to maturity
investments to available for sale. As of January 1, 2001, $5,465,000 held
to maturity investments converted to available for sale. The effect of this
reclassification was not considered material.
In July, 2001, the Financial Accounting Standards Board issued two
statements- Statement 141, Business Combinations, and Statement 142,
Goodwill and Other Intangible Assets, which will potentially impact the
accounting for goodwill and other intangible assets. Statement 141
eliminates the pooling method of accounting for business combinations and
requires that intangible assets that meet certain criteria be reported
separately from goodwill. Statement 142 eliminates the amortization of
goodwill and other intangibles that are determined to have an indefinite
life. The Statement requires, at a minimum, annual impairment tests for
goodwill and other intangible assets that are determined to have an
indefinite life.
Upon adoption of these Statements, an organization is required to re-
evaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other
intangible assets do not meet the criteria for recognition, they should be
classified as goodwill. Similarly, if there are other intangible assets
that meet the criteria for recognition but were not separately recorded
from goodwill, they should be reclassified from goodwill. An organization
also must reassess the useful lives of intangible assets and adjust the
remaining amortization periods accordingly.
The standards generally are required to be implemented by the Company in
its 2002 financial statements. The adoption of these standards is not
equaled to have a material impact on the financial statements.
6. PURCHASES AND ACQUISITIONS
On August 6, 2001, the Company's subsidiary, Northern Neck State Bank,
signed an agreement with C & F Financial Corporation to purchase its
Tappahannock Branch office. The transaction includes approximately $16
million in deposits and $3.0 million in loans. The purchase, which has
received regulatory approval closed November 9, 2001, and will enhance our
accessibility and service to the local community. As part of this
transaction, the Company plans to close its existing branch and combine
these operations with the newly acquired branch on or about January 4,
2002.
10
7. STOCK REPURCHASE
The Company has an existing authorization from the board of directors of
Union Bankshares to buy up to 100,000 shares of the Company's outstanding
common stock in the open market at prices that management and the board of
directors determine are prudent. The Company will consider current market
conditions and the Company's current capital level, in addition to other
factors, when deciding whether to repurchase stock.
During the first nine months of 2001 the Company repurchased 31,250 shares
of its common stock in the open market at an average price of $15.52 per
share. During the first nine months of 2000 the Company repurchased 11,300
shares of its common stock in the open market at an average price of $12.50
per share.
8. 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.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Union Bankshares Corporation (the "Company") is a multi-bank holding
company organized under Virginia law which provides financial services through
its wholly-owned 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 third quarter of 2001 was $3.0 million, up from $1.9
million for the same period in 2000. This increase was principally the result of
significant improvement in the mortgage segment's performance with net income of
$342,000 for the quarter ended September 30, 2001 compared to a loss of $312,000
in the comparable quarter of last year. In addition, the community banking
segment increased earnings $486,000 or 22% over the prior year's third quarter.
Diluted earnings per share amounted to $.40 in the third quarter of 2001, as
compared to $.25 in the same quarter of 2000. The Company's annualized return
on average assets for the three months ended September 30, 2001 was 1.30% as
compared to .87% a year ago. The Company's annualized return on average equity
totaled 13.88% and 10.42% for the three months ended September 30, 2001 and
2000, respectively.
Net income from the Company's community banks segment increased from $2.2
million in the third quarter of 2000 to over $2.7 million in the comparable
quarter of 2001. Loan growth slowed, but deposit growth continued steady,
funding the paydown of certain higher cost debt. The improved performance of
acquired and denovo banks and branches as well as the continued impact of
previously implemented initiatives to consolidate backoffice functions are
reflected in the improved operating efficiencies and higher profitability of the
community banking segment.
12
The mortgage banking segment continues to reflect last year's effort by
management to return it to profitability. Strategic changes to consolidate
operations and close unprofitable offices, combined with a favorable interest
rate environment in the current year contributed to this segment's turnaround.
The Company is continuing to make adjustments (including increases in commission
loan officers) to increase the production volumes and improve operating
efficiencies of this segment of our business. While mortgage rates remain
attractive, the weakening economic environment and general uncertainty felt by
investors could influence production over the next several quarters.
The atrocities of September 11th aggravated an already recessionary
environment, creating uncertainty in the economy. Despite the interest rate cuts
by the Federal Reserve, loan demand has continued to slow. Uncertainty in the
stock market has prompted many investors to seek safer returns, resulting in
increased bank deposits. Deposit growth was steady in the third quarter at 6.5%
from the December 31, 2000 balance and 2.3% from the end of June 2001, while
loans only grew 2.6% from year end 2000 and 1.4% from second quarter ending
balances. The repricing of a significant volume of high rate certificates of
deposit has reduced interest expense and improved the net interest margin.
Although some additional improvement is expected in the fourth quarter,
competition for loans and deposits is expected to compress the net interest
margin.
Net income for the nine months ended September 30, 2001 was $8.6 million, up
from $5.2 million for the same period in 2000. This increase was principally the
result of significant improvement in the mortgage segment's performance with net
income of $759,000 for the nine months ended September 30, 2001 compared to a
loss of $1.3 million for the same period last year. In addition, the community
banking segment reported a $1.4 million increase in earnings or 21.0% over the
prior year. Diluted earnings per share amounted to $1.14 in the first nine
months of 2001, as compared to $.69 for the same period of 2000. The Company's
annualized return on average assets for the nine months ended September 30, 2001
was 1.27% as compared to .81% a year ago. The Company's annualized return on
average equity totaled 13.73% and 9.93% for the nine months ended September 30,
2001 and 2000, respectively.
Net Interest Income
Net interest income on a tax-equivalent basis for the third quarter of 2001
increased by 7.1% to $9.1 million from $8.5 million for the same period a year
ago. Over that time, average interest earning assets grew by 6.2% and average
interest bearing liabilities increased by 4.0%. The interest income increase is
largely attributable to a decline of $620,000 in interest-bearing liability
costs compared to the prior year third quarter. Most of this decrease was in
the other borrowings reflecting the paying down of debt and the refinancing of
debt at lower rates. The interest rate spread was up slightly at 3.49% for the
third quarter compared to 3.47% last year. This reflects a slightly higher
decline in the cost of liabilities versus the income off earning assets. Slow
loan growth has resulted in the Company investing the in flow of deposits in
lower yielding federal funds and short term investments. It is anticipated that
scheduled maturities and repricing of certificates will continue in the next
quarter which will further lower the funding costs. Anticipated additional
interest rate cuts will place more pressure on the margin as assets will reprice
sooner than deposits.
13
In addition, the subsidiary banks have periodically engaged in wholesale
leverage transactions to better leverage their capital position by borrowing
funds to invest in securities at margins of 150 to 200 basis points. Although
such transactions increase net income and return on equity, they reduce the net
interest margin. As of September 30, 2001 such transactions accounted for $10
million of the Company's total borrowings.
Average earning assets during the third quarter of 2001 increased by $50.2
million to $866.5 million from the third quarter of 2000, while average
interest-bearing liabilities grew by $28.4 million to $734.0 million over this
same period. In the third quarter 2001, interest-bearing deposits grew $42.0
million while other borrowings declined $13.7 million compared to the same
quarter in 2000.
Included in the earning assets is $9.4 million of growth in loans held for
sale. These loans are mortgage loans originated by the mortgage segment and
held for the short period between closing with the customer and funding by the
investor. While this spread provides a positive contribution to interest income
and net income, it reduces the net interest margin as they are funded at more
narrow, short term spreads. These loans ultimately generate most of their
earnings in the noninterest category through gains on sales of loans.
The Company's yield on average earning assets was 7.86%, down 51 basis
points from 8.37% a year ago, while its cost of average interest-bearing
liabilities decreased 54 basis points from 4.91% in the third quarter 2000 to
4.37% in the comparable quarter of 2001.
14
Union Bankshares Corporation
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
-----------------------------------------------------------------------------------------------
For the three months ended September 30,
------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable.......................... $ 140,590 $ 2,296 6.48% $ 125,953 $ 2,315 7.31% $ 122,668 $ 2,010 6.50%
Tax-exempt(1).................... 90,119 1,733 7.63% 97,649 1,623 6.61% 88,963 1,788 7.97%
--------------------- ---------------------- --------------------
Total securities............. 230,709 4,029 6.93% 223,602 3,938 7.01% 211,631 3,798 7.12%
Loans, net.......................... 589,118 12,722 8.57% 576,811 13,116 9.05% 516,681 10,960 8.42%
Loans held for sale................. 23,102 198 3.40% 13,747 70 2.03% 13,076 9 0.27%
Federal funds sold.................. 22,079 196 3.52% 1,075 37 13.69% 616 74 47.66%
Interest-bearing deposits
in other banks................... 1,455 11 3.00% 1,042 16 6.11% 540 12 8.82%
--------------------- ---------------------- --------------------
Total earning assets......... 866,463 17,156 7.86% 816,277 17,177 8.37% 742,544 14,853 7.94%
Allowance for loan losses........... (7,884) (7,811) (7,497)
Total non-earning assets............ 66,920 65,521 71,656
---------- ---------- ----------
Total assets........................ $ 925,499 $ 873,987 $ 806,703
========== ========== ==========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking......................... 99,502 399 1.59% $ 99,000 545 2.19% $ 90,340 479 2.10%
Money market savings............. 69,103 496 2.85% 61,714 513 3.31% 62,501 490 3.11%
Regular savings.................. 69,653 400 2.28% 56,178 339 2.40% 61,410 419 2.71%
Certificates of deposit:
$100,000 and over................ 127,855 1,807 5.61% 109,390 1,615 5.87% 93,230 1,142 4.86%
Under $100,000................... 264,957 3,684 5.52% 262,762 3,868 5.86% 235,198 3,114 5.25%
--------------------- ---------------------- --------------------
Total interest-bearing
deposits................ 631,070 6,786 4.27% 589,044 6,880 4.65% 542,679 5,644 4.13%
Other borrowings.................... 102,976 1,297 5.00% 116,648 1,823 6.22% 100,064 1,509 5.98%
--------------------- ---------------------- --------------------
Total interest-bearing
liabilities............. 734,046 8,083 4.37% 705,692 8,703 4.91% 642,743 7,153 4.42%
Noninterest bearing liabilities:
Demand deposits.................. 98,897 88,437 89,149
Other liabilities................ 5,737 7,457 2,716
---------- ---------- ----------
Total liabilities............ 838,680 801,586 734,608
Stockholders' equity................ 86,819 72,401 72,095
---------- ---------- ----------
Total liabilities and
stockholders' equity............. $ 925,499 $ 873,987 $ 806,703
========== ========== ==========
Net interest income................. $ 9,073 $ 8,474 $ 7,700
========== ========== ========
Interest rate spread................ 3.49% 3.47% 3.52%
Interest expense as a percent
of average earning assets........ 3.70% 4.24% 3.82%
Net interest margin................. 4.15% 4.13% 4.11%
(1) Income and yields are reported on a taxable equivalent basis.
15
Union Bankshares Corporation
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT
---------------------------------------------------------------------------
BASIS)
-----
For the nine months ended September 30,
----------------------------------------------------------
2001 2000
----------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable......................... $131,602 $ 6,716 6.82% $123,179 $ 6,805 7.38%
Tax-exempt(1)................... 91,902 5,306 7.72% 98,116 5,376 7.32%
-------------------- -----------------------
Total securities............. 223,504 12,022 7.19% 221,295 12,181 7.35%
Loans, net......................... 586,731 38,810 8.84% 571,543 37,579 8.78%
Loans held for sale................ 24,117 461 2.56% 9,633 304 4.22%
Federal funds sold................. 11,551 322 3.73% 642 57 11.86%
Interest-bearing deposits
in other banks.................. 1,023 28 3.66% 995 48 6.44%
-------------------- -----------------------
Total earning assets......... 846,926 51,643 8.15% 804,108 50,169 8.33%
Allowance for loan losses........... (7,793) (7,333)
Total non-earning assets............ 68,596 60,459
--------- ---------
Total assets........................ $907,729 $857,234
========= =========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking........................ 97,956 1,289 1.76% $ 99,715 1,601 2.14%
Money market savings............ 65,176 1,445 2.96% 62,280 1,528 3.28%
Regular savings................. 62,811 1,151 2.45% 57,309 1,027 2.39%
Certificates of deposit:
$100,000 and over............... 127,336 5,603 5.88% 106,788 4,468 5.59%
Under $100,000.................. 266,365 11,563 5.80% 257,170 10,806 5.61%
-------------------- -----------------------
Total interest-bearing
deposits................ 619,644 21,051 4.54% 583,262 19,430 4.45%
Other borrowings.................... 105,655 4,229 5.35% 114,588 5,335 6.22%
-------------------- -----------------------
Total interest-bearing
liabilities............. 725,299 25,280 4.66% 697,850 24,765 4.74%
Noninterest bearing liabilities:
Demand deposits................. 93,012 85,025
Other liabilities............... 5,723 4,416
--------- ---------
Total liabilities............ 824,034 787,291
Stockholders' equity................ 83,695 69,943
--------- ---------
Total liabilities and
stockholders' equity............ $907,729 $857,234
========= =========
Net interest income................. $26,363 $25,404
======== =======
Interest rate spread................ 3.49% 3.59%
Interest expense as a percent
of average earning assets....... 3.99% 4.11%
Net interest margin................. 4.16% 4.22%
1999
---------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
---------------------------
Assets:
Securities:
Taxable......................... $117,934 $ 5,466 6.20%
Tax-exempt(1)................... 86,984 5,113 7.86%
-------------------
Total securities............. 204,918 10,579 6.90%
Loans, net......................... 498,142 31,843 8.55%
Loans held for sale................ 12,414 27 0.29%
Federal funds sold................. 2,976 162 7.28%
Interest-bearing deposits
in other banks.................. 1,073 41 5.11%
-------------------
Total earning assets......... 719,523 42,652 7.93%
Allowance for loan losses........... (7,093)
Total non-earning assets............ 70,258
--------
Total assets........................ $782,688
========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking........................ $ 86,651 1,350 2.08%
Money market savings............ 63,511 1,565 3.29%
Regular savings................. 59,682 1,208 2.71%
Certificates of deposit:
$100,000 and over............... 91,694 3,491 5.09%
Under $100,000.................. 236,159 9,372 5.31%
-------------------
Total interest-bearing
deposits................ 537,697 16,986 4.22%
Other borrowings.................... 86,435 3,033 4.69%
-------------------
Total interest-bearing
liabilities............. 624,132 20,019 4.29%
Noninterest bearing liabilities:
Demand deposits................. 83,964
Other liabilities............... 1,404
--------
Total liabilities............ 709,500
Stockholders' equity................ 73,188
--------
Total liabilities and
stockholders' equity............ $782,688
========
Net interest income................. $22,633
=======
Interest rate spread................ 3.65%
Interest expense as a percent
of average earning assets....... 3.72%
Net interest margin................. 4.21%
(1) Income and yields are reported on a taxable equivalent basis.
16
Provision for Loan Losses
The provision for loan losses totaled $455,000 for the third quarter of
2001, down from $522,000 for the third quarter of 2000. For the first nine
months of 2001, the provision was $1,280,000 versus $1,667,000 for the same
period in 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 September 30, 2001 totaled
$4.1 million, up from $3.2 million for the same period a year ago. Gains on
sales of loans in the mortgage banking segment comprised much of this
improvement, increasing $864,000 over the same period in 2000. Service charges
on deposit accounts decreased $52,000 reflecting a lower volume of overdraft and
return check charges. Other service charges and fees increased $91,000,
reflecting increases in brokerage commissions, debit card income, exchange fees,
letter of credit fees and ATM surcharges. Other operating income increased
$29,000 over the prior year, reflecting income from the bank owned life
insurance (BOLI) purchased in 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 third quarter of 2001 totaled $8.1 million, a
decrease of $250,000 over the same period in 2000. Personnel costs were up
$17,000 over last year's third quarter. Commission costs were up from increased
mortgage loan production (reflecting management's push to production oriented
remuneration), but salaries and other benefit categories were down. Occupancy
expense was down $23,000 largely as a result of a $32,000 decrease in rental
expense and furniture & equipment expense was down $30,000 largely from a
decline in equipment maintenance contracts. Other operating expenses were down
$214,000 over last year's third quarter. The decreases are primarily the result
of mortgage branch consolidation and closings and expense controls in the
mortgage operation. The community banks segment is up only slightly for the
quarter, reflecting realization of cost savings and consolidation efficiencies.
Financial Condition
- -------------------
Total assets as of September 30, 2001 were $933.6 million, an increase of
5.9% from $882.0 million at December 31, 2000. Loans totaled $596.0 million at
September 30, 2001, an increase of 2.6% from $580.8 million at December 31,
2000. The securities portfolio increased to $231.9 million in the first nine
months of 2001 versus $215.8 at year end 2000. Loans held for sale increased
$10.9 million compared to the December 31, 2000 balance due to the increase in
mortgage activity. Federal funds sold increased by $15.5 million to $15.9
million on September 30, 2001. Stockholders' equity totaled $89.7 million at
September 30, 2001, which represents a book value of $11.93 per share.
17
Total deposits at September 30, 2001 were $737.4 million, up 6.5% from
$692.5 million at December 31, 2000. Other borrowings totaled $100.7 million at
September 30, 2001, a 4.2% decrease over $105.1 million at year end 2000. The
other borrowings change is the result of a $11.4 million increase in securities
sold under agreement to repurchase (principally with customers). This was offset
by a $5.0 million decrease in other short-term borrowings and a $10.8 million
decrease in long-term borrowings. These changes reflect our effort to
restructure debt to lower cost alternatives.
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 both loans and deposits
is expected to continue 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
absorb potential losses inherent in the loan portfolio. General economic trends,
as well as conditions affecting individual borrowers, affect the level of credit
losses. 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 the collateral, current economic conditions, historical loan loss experience,
and other risk factors. 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.
Management believes the allowance is adequate at this time and will continue to
make adjustments as the changing economy and portfolio performance warrant.
The allowance for loan losses totaled $7.5 million at September 30, 2001 or
1.25% of total loans, as compared to 1.27% at December 31, 2000 and 1.35% at
September 30, 2000.
September 30, December 31, September 30,
2001 2000 2000
---- ---- ----
(dollars in thousands)
Nonaccrual loans $1,307 $ 830 $1,603
Foreclosed properties 888 1,711 1,704
------ ------ ------
Nonperforming assets $2,195 $2,541 $3,307
====== ====== ======
Allowance for loan losses $7,473 $7,389 $7,857
Allowance as % of total loans 1.25% 1.27% 1.35%
Nonperforming assets to loans
and foreclosed properties .37% .44% .57%
18
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 September 30, 2001, the Company's ratio of total capital to risk-
weighted assets was 12.74% and its ratio of Tier 1 capital to risk-weighted
assets was 11.65%. Both ratios exceed the flly phased-in capital requirements.
The following summarizes the Company's regulatory capital and related ratios at
September 30, 2001 (dollars in thousands):
Tier 1 capital $ 79,692
Tier 2 capital 7,473
Total risk-based capital 87,165
Total risk-weighted assets 683,947
Capital Ratios:
Tier 1 risk-based capital ratio 11.65%
Total risk-based capital ratio 12.74%
Leverage ratio (Tier 1 capital to
average adjusted total assets) 8.67%
Equity to assets ratio 9.60%
The Company's book value per share at September 30, 2001 was $11.93.
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
19
Company's overall liquidity to be sufficient to satisfy its depositors'
requirements and to meet its customers' credit needs.
At September 30, 2001 cash, interest-bearing deposits in other banks,
federal funds sold, securities available for sale and loans maturing or
repricing in one year were 42.1% of total earning assets. At September 30, 2001
approximately $300.7 million or 48.3% of total loans are scheduled to mature or
reprice within the next year. In addition to deposits, the Company utilizes
Federal funds purchased, FHLB advances, securities sold under agreements to
repurchase and customer repurchase agreements, to fund the growth in its loan
portfolio, securities purchases, and periodically, wholesale leverage
transactions.
20
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 economic
value simulation (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 which measures aggregate repricing values is less utilized since it
does not effectively measure the earnings impact on the Company and is not
addressed here. But earnings simulation and economic value models which more
effectively measure the earnings impact are utilized by management on a regular
basis and are explained below.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
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 income
for the Company using different rate scenarios as of:
September 30, 2001 September 30, 2000
% Change in % Change in
Change in Prime Rate Net Income Net Income
-------------------- -------------------------------
+200 basis points +14.68% -1.74%
Flat 0 0
-200 basis points -14.16% +2.00%
21
Based on this model, in September 2001, the company is positioned to benefit
from a rising rate environment and be hurt by a falling rate environment.
Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Economic
values are calculated based on discounted cash flow analysis. The net economic
value is the economic value of all assets minus the economic value of all
liabilities. The change in net economic 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 economic value simulation as in the earnings
simulation.
The following chart reflects the change in net market value over different
rate environments as of September 30:
Change in Net Economic Value
Change in Prime Rate (dollars in thousands)
-------------------- ----------------------
2001 2000
---- ----
+200 basis points $ -2,138 $-46,850
+100 basis points +1,096 -29,696
Flat 0 -14,523
-100 basis points -2,839 5,863
-200 basis points -5,063 21,905
22
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) See attached list of exhibits
(b) Form 8-K was filed during the most recent quarter relative to our
purchase of a C & F Financial Corporation branch in Tappahannock,
Va.
23
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)
November 14, 2001 /s/ G. William Beale
(Date) --------------------------------------
G. William Beale,
President, Chief Executive Officer
and Director
November 14, 2001 /s/ D. Anthony Peay
(Date) --------------------------------------
D. Anthony Peay,
Senior Vice President and Chief Financial
Officer
24
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q /September 30, 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
25