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, 2002
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 May 2, 2002, Union Bankshares Corporation had 7,544,018 shares of
Common Stock outstanding.
1
UNION BANKSHARES CORPORATION
FORM 10-Q
March 31, 2002
INDEX
PART 1 - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (Unaudited)
and December 31, 2001 (Audited)...................................... 3
Consolidated Statements of Income (Unaudited)
For the three months ended March 31, 2002 and 2001................... 4
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the three months ended March 31, 2002 and 2001................... 5
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2002 and 2001................... 6
Notes to Consolidated Financial Statements (Unaudited).................... 7-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 13-21
Item 3 - Quantitative and Qualitative Disclosures about Market Risk............. 22-23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................... 24
Item 2 - Changes in Securities and Use of Proceeds.............................. 24
Item 3 - Defaults Upon Senior Securities........................................ 24
Item 4 - Submission of Matters to a Vote of Security Holders.................... 24
Item 5 - Other Information...................................................... 24
Item 6 - Exhibits and Reports on Form 8-K....................................... 24
Signatures...................................................................... 25
Index to Exhibits............................................................... 26
2
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,
ASSETS 2002 2001
- -------- ---- ----
(Unaudited)
Cash and cash equivalents:
Cash and due from banks $ 23,423 $ 28,769
Interest-bearing deposits in other banks 678 462
Money market investments 2,206 2,023
Federal funds sold 19,559 7,661
--------------- ----------------
Total cash and cash equivalents 45,866 38,915
--------------- ----------------
Securities available for sale, at fair value 251,995 257,062
--------------- ----------------
Loans held for sale 27,016 43,485
--------------- ----------------
Loans, net of unearned income 632,636 600,164
Less allowance for loan losses 7,827 7,336
--------------- ----------------
Net loans 624,809 592,828
--------------- ----------------
Bank premises and equipment, net 19,242 19,191
Other real estate owned 909 768
Other assets 30,735 30,848
--------------- ----------------
Total assets $ 1,000,572 $ 983,097
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing demand deposits $ 117,369 $ 110,913
Interest-bearing deposits:
NOW accounts 121,205 112,940
Money market accounts 82,571 79,176
Savings accounts 75,962 72,897
Time deposits of $100,000 and over 132,800 133,629
Other time deposits 275,488 274,529
--------------- ----------------
Total interest-bearing deposits 688,026 673,171
--------------- ----------------
Total deposits 805,395 784,084
--------------- ----------------
Securities sold under agreement to repurchase 34,221 41,083
Other short-term borrowings - -
Long-term borrowings 62,466 62,731
Other liabilities 6,585 6,220
--------------- ----------------
Total liabilities 908,667 894,118
--------------- ----------------
Commitments and contingencies Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares; issued and
outstanding, 7,543,118 , and 7,525,912 shares, respectively 15,086 15,052
Surplus 746 446
Retained earnings 74,478 71,419
Accumulated other comprehensive income 1,595 2,062
--------------- ----------------
Total stockholders' equity 91,905 88,979
--------------- ----------------
Total liabilities and stockholders' equity $ 1,000,572 $ 983,097
=============== ================
See accompanying notes to consolidated financial statements.
3
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended
March 31,
-----------------------------
2002 2001
---- ----
Interest and dividend income:
Interest and fees on loans $ 12,197 $ 13,145
Interest on Federal funds sold 56 72
Interest on interest-bearing deposits in other banks 3 8
Interest on money market investments 6 -
Interest and dividends on securities:
Taxable 2,441 2,196
Nontaxable 1,164 1,182
------------- -------------
Total interest and dividend income 15,867 16,603
------------- -------------
Interest expense:
Interest on deposits 5,215 7,137
Interest on short-term borrowings 107 323
Interest on long-term borrowings 913 1,206
------------- -------------
Total interest expense 6,235 8,666
------------- -------------
Net interest income 9,632 7,937
Provision for loan losses 830 432
------------- -------------
Net interest income after provision
for loan losses 8,802 7,505
------------- -------------
Noninterest income:
Service charges on deposit accounts 845 918
Other service charges and fees 655 569
Gains on securities transactions, net 1 21
Gains on sales of loans 2,143 1,810
Gains on sales of other real estate owned
and bank premises, net 15 12
Other operating income 169 283
------------- -------------
Total noninterest income 3,828 3,613
------------- -------------
Noninterest expenses:
Salaries and benefits 5,063 4,472
Occupancy expenses 554 543
Furniture and equipment expenses 701 730
Other operating expenses 2,331 2,013
------------- -------------
Total noninterest expenses 8,649 7,758
------------- -------------
Income before income taxes 3,981 3,360
Income tax expense 923 690
------------- -------------
Net income $ 3,058 $ 2,670
============= =============
Basic net income per share $ 0.41 $ 0.36
Diluted net income per share $ 0.40 $ 0.35
See accompanying notes to consolidated financial statements.
4
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(dollars in thousands)
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
----- ------- -------- ------------- ------- -----
Balance - December 31, 2000 $ 15,033 $ 403 $ 63,201 $ (285) $ 78,352
Comprehensive income:
Net income - for three months
ended March 31, 2001 2,670 $ 2,670 2,670
Unrealized holding gains arising during
the period (net of tax, $1,734) 3,366
Reclassification adjustment for gains
included in net income (net of tax, $7) (14)
-------
Other comprehensive income (net of tax, $1,727) 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) 39 192 231
---------------------------------------- --------
Balance - March 31, 2001 (Unaudited) $ 15,072 $ 595 $ 65,871 $ 3,067 $ 84,605
======================================== ========
Balance - December 31, 2001 $ 15,052 $ 446 $ 71,419 $ 2,062 $ 88,979
Comprehensive income:
Net income - for three months ended March 31, 2002 3,058 $ 3,058 3,058
Other comprehensive income net of tax:
Unrealized holding losses arising during the
period (net of tax, $241) (466)
Reclassification adjustment for gains included
in net income (net of tax, $0) (1)
-------
Other comprehensive income (net of tax, $241) (467) (467) (467)
-------
Total comprehensive income $ 2,591
=======
Cash dividends -adjustment 1 1
Issuance of common stock under Incentive Stock
Option Plan (50 shares) - 1 1
Issuance of common stock in exchange for
net assets in acquisition (17,156 shares) 34 299 333
---------------------------------------- --------
Balance - March 31, 2002 (Unaudited) $ 15,086 $ 746 $ 74,478 $ 1,595 $ 91,905
======================================== ========
See accompanying notes to consolidated financial statements.
5
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2002 and 2001
(dollars in thousands)
2002 2001
---- ----
Operating activities:
Net income $ 3,058 $ 2,670
Adjustments to reconcile net income to net cash and
cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment 505 473
Amortization 488 318
Provision for loan losses 830 432
Gains on sales of securities available for sale (1) (21)
Gains on sales of other real estate owned and fixed assets, net (15) (12)
(Increase) decrease in loans held for sale 16,469 (19,191)
Decrease in other assets 476 408
(Increase) decrease in other liabilities 365 (241)
---------- ----------
Net cash and cash equivalents provided by (used in)
operating activities 22,175 (15,164)
---------- ----------
Investing activities:
Purchase of securities available for sale (13,297) (6,477)
Proceeds from sale of securities available for sale 8,954 -
Proceeds from paydowns of securities available for sale 8,552 5,143
Net increase in loans (33,050) (9,016)
Purchases of bank premises and equipment (687) (129)
Proceeds from sales of bank premises and equipment 8 11
Proceeds from sales of other real estate owned 110 173
---------- ----------
Net cash and cash equivalents used in
investing activities (29,410) (10,295)
---------- ----------
Financing activities:
Net increase in noninterest-bearing deposits 6,456 3,741
Net increase in interest-bearing deposits 14,855 16,252
Net increase (decrease) in short-term borrowings (6,862) 25,621
Net decrease in long-term borrowings (265) (22,327)
Issuance of common stock 1 -
Cash dividends paid 1 -
---------- ----------
Net cash and cash equivalents provided by
financing activities 14,186 23,287
---------- ----------
Increase (decrease) in cash and cash equivalents 6,951 (2,172)
Cash and cash equivalents at beginning of period 38,915 22,869
---------- ----------
Cash and cash equivalents at end of period $ 45,866 $ 20,697
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 6,394 $ 8,692
Income taxes $ - $ 262
See accompanying notes to consolidated financial statements.
6
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
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, 2002
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 2001 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):
2002 2001
---- ----
Balance, January 1 $ 7,336 $ 7,389
Provisions charged to operations 830 432
Recoveries credited to allowance 91 83
Loans charged off (430) (110)
-------- --------
Balance, March 31 $ 7,827 $ 7,794
======== ========
7
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 March 31, 2002
there were no stock options that were anti-dilutive. The following is a
reconcilement of the denominators of the basic and diluted EPS
computations for the quarter ended March 31, 2002 and 2001.
WEIGHTED
INCOME AVERAGE PER
(NUMERATOR) SHARES SHARE
(DENOMINATOR) AMOUNT
(dollars in (shares in
thousands) thousands)
For the quarter ended March 31, 2002
Basic EPS $ 3,058 7,536 $ .41
Effect of dilutive stock options - 46 (.01)
Diluted EPS $ 3,058 7,582 $ .40
For the quarter ended March 31, 2001
Basic EPS $ 2,670 7,517 $ .36
Effect of dilutive stock options - 17 (.01)
Diluted EPS $ 2,670 7,534 $ .35
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 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 of the Company. Intersegment
transactions are recorded at cost and eliminated as part of the
consolidation process.
8
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. These
transactions are eliminated in the consolidation process. 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
ended March 31, 2002 and 2001 follows:
9
Three Months ended March 31, 2002
(in thousands) Community Consolidated
Banks Mortgage Elimination Totals
--------- -------- ----------- ------------
Net interest income $ 9,272 $ 360 $ - $ 9,632
Provision for loan losses 830 - - 830
-----------------------------------------------------------
Net interest income after
provision for loan losses 8,442 360 - 8,802
Noninterest income 1,728 2,143 (43) 3,828
Noninterest expenses 6,679 2,013 (43) 8,649
-----------------------------------------------------------
Income before income taxes 3,491 490 - 3,981
Income tax expense 757 166 - 923
-----------------------------------------------------------
Net income $ 2,734 $ 324 $ - $ 3,058
===========================================================
Assets $ 998,748 $ 29,210 $ (27,386) $ 1,000,572
===========================================================
Three Months ended March 31, 2001
(in thousands) Community Consolidated
Banks Mortgage Elimination 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 1,820 1,812 (19) 3,613
Noninterest expenses 6,078 1,699 (19) 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
===========================================================
10
5. RECENT ACCOUNTING STATEMENTS
In July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142,
Goodwill and Other Intangible Assets, which 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.
These standards were implemented by the Company as of January 1, 2002.
Goodwill in the amount of $864,000 was deemed to be goodwill and is not
being amortized. Under the new accounting requirement, core deposit
intangibles will continue to be amortized. The adoption of these standards
did not have a material impact on the financial statements.
6. NEW LOAN PRODUCTION OFFICE
On January 2, 2002, the Company opened a loan production office in Newport
News as part of the Bank of Williamsburg. Based on the early success of
the LPO and the potential of the market, the Bank of Williamsburg has
filed for regulatory approval to open a full service branch at this
location. The branch is expected to open in early May 2002 and ,while the
initial location will serve as the branch, a larger location for a
permanent structure is expected to be found in the next two years.
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 three months of 2002 and 2001 the Company did not
repurchase any shares of its common stock in the open market.
11
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.
12
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 Newport News 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 in Virginia, Maryland and
South Carolina.
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.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. In addition, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimatable and (ii) SFAS
114, Accounting by Creditors for Impairment of a Loan, which requires that
13
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses model has three basic components: the
formula allowance, the specific allowance and a calculation for unfunded loans.
Each of these components is determined based upon estimates that can and do
change when the actual events occur. These estimates are reevaluated at least
quarterly as part of our review of the adequacy of the allowance for loan loss.
The allowance formula uses a historical loss view as an indicator of future
losses for various loan classifications; as a result, the estimated losses could
differ from the loss incurred in the future. However, since this history is
updated with the most recent loss information, the errors that might otherwise
occur are mitigated. The specific allowance uses various techniques such as
historical loss information, expected cash flows and fair market value of
collateral to arrive at an estimate of losses. The use of these values is
inherently subjective and our actual losses could be greater or less than the
estimates. The allowance calculation for unfunded loans uses historical factors
to determine the losses that are attributable to these loans. Management
periodically reassesses the approach taken in these estimates in order to
enhance the process.
Core Deposit Intangibles
In July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which could potentially impact the accounting for
goodwill and other intangible assets. Statement 141 eliminated the pooling
method of accounting for business combinations and required that intangible
assets that meet certain criteria be reported separately from goodwill.
Statement 142 eliminated 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.
Subsequent to the effective date of SFAS 142 an apparent conflict with
SFAS 72 was raised as an issue, which allows certain intangibles arising from
Bank and Thrift acquisitions to be amortized over their estimated useful lives.
Upon adoption of these Statements, the Company re-evaluated its intangible
assets that arose from branch acquisitions prior to July 1, 2001. It was
determined that the intangible assets arising from branch acquisitions will
continue to be amortized over their estimated lives in accordance with SFAS 72.
In the past, the Company has classified intangibles arising from branch
purchases exclusively to core deposit intangibles. The Company will continue to
amortize these intangibles awaiting a decision by FASB as to the final
accounting treatment of these assets. As it is unknown how this accounting issue
will ultimately be resolved, the Company cannot predict what impact, if any,
there will be on future earnings.
Results of Operations
Net income for the first quarter of 2002 was $3.1 million, up from $2.7
million for the same period in 2001. This increase was largerly the result of
significant improvement in the community banking segment with increased earnings
of $198,000 or 7.8% over the prior year's first quarter due to improved net
interest margin and increases in loans. In addition, the mortgage segment's
performance improved with net income of $324,000 for the quarter ended March 31,
2002 compared to $134,000 in the comparable quarter of last year. Diluted
earnings per share amounted to $.40 in the first quarter of 2002, as compared to
$.35 in the same quarter of 2001. The Company's annualized return on average
14
assets for the three months ended March 31, 2002 was 1.27% as compared to 1.22%
a year ago. The Company's annualized return on average equity totaled 13.69% and
13.58% for the three months ended March 31, 2002 and 2001, respectively.
Net income from the Company's community banking segment increased from
$2.5 million in the first quarter of 2001 to over $2.7 million in the first
quarter of 2002. From March 31, 2001 to March 31, 2002, loans grew by 7.3% while
deposit growth showed a 12.6% increase over March 31, 2001. While this reflects
the trend experienced in 2001, the first quarter 2002 results reflect a shift in
the trend. During 2001, with loan demand lagging behind deposit availability,
excess funds were invested in lower yielding investments. In the first quarter
of 2002, the Company's loans grew by $32.5 million over December 31, 2001
levels. For the same period deposits grew by $18.3 million. As a result, the
Company was able to redeploy much of its excess funding into higher loans, thus
improving its net interest margin and net income. On a year to year basis, this
segment benefited from a sharp increase in net interest income as the cost of
funds declined more rapidly than the earnings on assets. 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 also reflected in the improved operating efficiencies and higher
profitability of the community banking segment.
The mortgage banking segment income increased by $190,000 or 142%,
reflecting a continued low interest rate market over the first quarter of 2001.
Increases in salaries and benefits in this segment are reflective of the
variable commission structure and the increased levels of loan production. Other
operating expenses are down, demonstrating the effect of cost cutting and branch
closings. The declining interest rate environment over the last 12 to 18 months
has resulted in significant increases in both mortgage refinancing and home
purchases. Although the mortgage segment benefited from the "refinance boom",
refinance loans comprised only 31.9% of MCI's loans in 2001 and only 39.0% in
the first quarter of 2002. MCI continues to focus its efforts toward the home
purchase market, working with home buyers, builders, realtors and other referral
sources to build a more stable loan production platform. The Company continues
to monitor the rise and fall of production volumes so adjustments can be made
quickly and to look for ways to improve operating efficiencies of this segment.
While mortgage rates remain attractive, the slowly recovering economy and
general uncertainty felt by consumers could adversely influence production over
the next several quarters.
Interest rates are at their lowest levels in years but deposits are
growing faster than loans on a year to year basis. This growth is clearly
influenced by the uncertainty in the economy and the uncertainty in the stock
market which has prompted many investors to seek safer returns, resulting in
increased bank deposits. Deposit growth was steady in the first quarter at 13.0%
from the March 31, 2001 balance and 2.7% from the end of December 2001, while
loans grew 7.3% from March 2001 and 5.4% from year end balances. The slowing of
deposit growth in the first quarter and the growth of loans could bode well for
the remainder of the year as lower yielding assets are converted to loans.
However, the largest increase in deposits are in the more liquid demand, NOW and
money market categories. As investors sense a positive change in the economy and
the stock market, some of those deposits will move and force the Company to
borrow if it can not replace deposits. This process may cause the net interest
margin to compress in the later part of the year.
15
Net Interest Income
Net interest income on a tax-equivalent basis for the first quarter of
2002 increased by 18.4% to $10.3 million from $8.7 million for the same period a
year ago. Over that time, average interest earning assets grew by 10.9% and
average interest bearing liabilities increased by 8.7%. The interest income
increase is largely attributable to a decline of $2.4 million in
interest-bearing liability costs compared to the prior year first quarter. Most
of this decrease was in the cost of interest bearing deposits reflecting the
impact of the 11 rate cuts by the Federal Reserve in 2001 and an increase in
lower cost deposits in the deposit mix. Average deposits were up $68.6 million
with 54.5% of this increase coming in NOW and money market accounts. The
interest rate spread was up significantly at 4.08% for the first quarter
compared to 3.58% last year. This reflects a faster decline in the cost of
liabilities versus the income from earning assets. Loan growth has increased
some in the first quarter but the Company still has a high portion of earning
assets in lower yielding federal funds and short-term investments. Any rise in
interest rates will tighten the margin as the competition to maintain deposit
levels will increase the cost of funds and investors will begin looking for
better returns on their funds.
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 March 31, 2002 such transactions accounted for $10
million of the Company's total borrowings.
Average earning assets during the first quarter of 2002 increased by
$89.6 million to $914.8 million from the first quarter of 2001, while average
interest-bearing liabilities grew by $62.2 million to $775.7 million over this
same period. In the first quarter 2002, interest-bearing deposits grew $68.6
million while other borrowings declined $6.4 million compared to the same
quarter in 2001.
Included in the average earning assets is $27.0 million 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 these loans are funded at
more narrow, short-term spreads. These loans ultimately generate most of their
earnings in the noninterest income category through gains on sales of loans.
The Company's yield on average earning assets was 7.34%, down 117 basis
points from 8.51% a year ago, while its cost of average interest-bearing
liabilities decreased 167 basis points from 4.93% in the first quarter 2001 to
3.26% in the comparable quarter of 2002.
16
Union Bankshares Corporation
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
-----------------------------------------------------------------------------------
For the three months ended March 31,
-----------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Securities:
Taxable. . . . . . . . . . . . . . . . . $ 166,289 $ 2,441 5.95% $125,103 $ 2,196 7.12%
Tax-exempt(1). . . . . . . . . . . . . . 91,038 1,763 7.85% 93,533 1,790 7.76%
------------------------ -------------------------
Total securities . . . . . . . . . . 257,327 4,204 6.63% 218,636 3,986 7.39%
Loans, net . . . . . . . . . . . . . . . . . . 612,215 11,813 7.83% 582,845 13,161 9.16%
Loans held for sale. . . . . . . . . . . . . . 27,026 484 7.26% 17,579 90 2.08%
Federal funds sold . . . . . . . . . . . . . . 15,626 56 1.45% 5,450 72 5.36%
Money market investment. . . . . . . . . . . . 1,869 6 1.30% - -
Interest-bearing deposits
in other banks. . . . . . . . . . . . . . 745 3 1.63% 734 8 4.42%
------------------------ -------------------------
Total earning assets. . . . . . . . . 914,808 16,566 7.34% 825,244 17,317 8.51%
Allowance for loan losses . . . . . . . . . . . (7,558) (7,592)
Total non-earning assets. . . . . . . . . . . . 69,648 69,177
------------ -----------
Total assets. . . . . . . . . . . . . . . . . . $ 976,898 $886,829
============ ===========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking. . . . . . . . . . . . . . . . . 113,796 276 0.98% $ 95,882 451 1.91%
Money market savings. . . . . . . . . . . 81,525 302 1.50% 62,024 474 3.10%
Regular savings . . . . . . . . . . . . . 73,761 246 1.35% 57,884 321 2.25%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . . 132,028 1,421 4.36% 126,926 1,891 6.04%
Under $100,000. . . . . . . . . . . . . . 275,467 2,970 4.37% 265,221 4,000 6.12%
------------------------ -------------------------
Total interest-bearing
deposits . . . . . . . . . . . . 676,577 5,215 3.13% 607,937 7,137 4.76%
Other borrowings. . . . . . . . . . . . . . . . 99,135 1,020 4.17% 105,527 1,529 5.88%
------------------------ -------------------------
Total interest-bearing
liabilities. . . . . . . . . . . 775,712 6,235 3.26% 713,464 8,666 4.93%
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . . 104,841 87,819
Other liabilities . . . . . . . . . . . . 5,732 5,998
------------ -----------
Total liabilities . . . . . . . . . . 886,285 807,281
Stockholders' equity. . . . . . . . . . . . . . 90,613 79,548
------------ -----------
Total liabilities and
stockholders' equity. . . . . . . . . . . $ 976,898 $886,829
============ ===========
Net interest income . . . . . . . . . . . . . . $ 10,331 $ 8,651
============ ==============
Interest rate spread. . . . . . . . . . . . . . 4.08% 3.58%
Interest expense as a percent
of average earning assets . . . . . . . . 2.76% 4.26%
Net interest margin . . . . . . . . . . . . . . 4.58% 4.25%
Union Bankshares Corporation
AVERAGE BALANCES, INCOME AND EXPENSES,
YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
----------------------------------------------
For the three months ended March 31,
----------------------------------------------
2000
----------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
----------------------------------------------
Assets:
Securities:
Taxable. . . . . . . . . . . . . . . . . $119,970 $ 2,188 7.34%
Tax-exempt(1). . . . . . . . . . . . . . 98,611 1,887 7.70%
--------------------------
Total securities . . . . . . . . . . 218,581 4,075 7.50%
Loans, net . . . . . . . . . . . . . . . . . . 556,083 12,090 8.74%
Loans held for sale. . . . . . . . . . . . . . 4,257 (13) -1.23%
Federal funds sold . . . . . . . . . . . . . . 767 19 9.96%
Money market investment. . . . . . . . . . . . - -
Interest-bearing deposits
in other banks. . . . . . . . . . . . . . 1,088 16 5.91%
--------------------------
Total earning assets. . . . . . . . . 780,776 16,187 8.34%
Allowance for loan losses . . . . . . . . . . . (6,842)
Total non-earning assets. . . . . . . . . . . . 66,115
--------------
Total assets. . . . . . . . . . . . . . . . . . $840,049
==============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking. . . . . . . . . . . . . . . . . $ 97,134 502 2.08%
Money market savings. . . . . . . . . . . 63,162 506 3.22%
Regular savings . . . . . . . . . . . . . 58,689 351 2.41%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . . 103,638 1,363 5.29%
Under $100,000. . . . . . . . . . . . . . 248,018 3,307 5.36%
--------------------------
Total interest-bearing
deposits . . . . . . . . . . . . 570,641 6,029 4.25%
Other borrowings. . . . . . . . . . . . . . . . 114,446 1,575 5.54%
--------------------------
Total interest-bearing
liabilities. . . . . . . . . . . 685,087 7,604 4.46%
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . . 80,440
Other liabilities . . . . . . . . . . . . 6,727
--------------
Total liabilities . . . . . . . . . . 772,254
Stockholders' equity. . . . . . . . . . . . . . 67,795
--------------
Total liabilities and
stockholders' equity. . . . . . . . . . . $840,049
==============
Net interest income . . . . . . . . . . . . . . $ 8,583
============
Interest rate spread. . . . . . . . . . . . . . 3.87%
Interest expense as a percent
of average earning assets . . . . . . . . 3.92%
Net interest margin . . . . . . . . . . . . . . 4.42%
(1) Income and yields are reported on a taxable equivalent basis.
17
Provision for Loan Losses
The provision for loan losses totaled $830,000 for the first quarter of
2002, up from $432,000 for the first quarter of 2001. 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, 2002 totaled $3.8
million, up from $3.6 million for the same period a year ago. Gains on sales of
loans in the mortgage banking segment comprised much of this improvement,
increasing $333,000 over the same period in 2001. Service charges on deposit
accounts decreased $73,000 reflecting a lower volume of overdraft and return
check charges and higher average balances. Other service charges and fees
increased $86,000, reflecting increases in brokerage commissions, debit card
income and ATM surcharges. Other operating income decreased $114,000 over the
prior year, reflecting lower income from the bank owned life insurance (BOLI)
and nonrecurring miscellaneous income items from the prior year. 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 2002 totaled $8.6 million, an
increase of $891,000 over the same period in 2001. Personnel costs were up
$591,000 over last year's first quarter. Commission costs were up from increased
mortgage loan production and salaries and other benefit categories were also up
reflecting normal increases. Occupancy expense was up $11,000 largely as a
result of increases in depreciation expense with the new branch in Tappahannock
and the loan production office in Newport News. Furniture & equipment expense
was down $29,000 largely from a decline in equipment maintenance contracts.
Other operating expenses were up $318,000 over last year's first quarter. The
increases are primarily the result of: operating expenses up $70,000 from
software, postage, internet and courier and armor car costs; professional
services up $44,000; marketing up $114,000 which includes internet banking and
preparation for centennial celebrations at Union Bank and Trust and Rappahannock
National Bank; and other expense up $52,000 due to losses associated with four
branch robberies experienced in the first quarter. Management continues to
monitor expenses closely.
Financial Condition
Total assets as of March 31, 2002 were $1.001 billion, an increase of 1.8%
from $983.1 million at December 31, 2001. Loans totaled $632.6 million at March
31, 2002, an increase of 5.4% from $600.2 million at December 31, 2001. The
securities portfolio decreased to $252.0 million in the first three months of
2002 versus $257.1 at year end 2001. Loans held for sale decreased $16.5 million
compared to the December 31, 2001 balance. Federal funds sold increased by $11.9
million to $19.6 million on March 31, 2002. Stockholders' equity totaled $91.9
million at March 31, 2002, which represents a book value of $12.18 per share.
18
Total deposits at March 31, 2002 were $805.4 million, up 2.7% from
$784.1 million at December 31, 2001. Other borrowings totaled $96.7 million at
March 31, 2002, a 6.7% decrease from $103.8 million at year end 2001. The other
borrowings change is the result of a $6.9 million decrease in securities sold
under agreement to repurchase (principally with customers). These changes
reflect the lower interest rates and a limited need to borrow with our current
high deposit base.
Competition for deposits, particularly as it impacts certificate of
deposit rates, will pick up later in the year when the economy picks up and
rates rise. This will cause the lower cost NOW and money market accounts to
search for better returns. Management will focus on increasing and retaining
these lower cost deposit products, including noninterest-bearing demand deposits
and savings accounts in an effort to maintain a lower cost of funds. Increased
competition for both loans and deposits is expected 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 $7.8 million at March 31, 2002 or
1.24% of total loans, as compared to 1.22% at December 31, 2001 and 1.32% at
March 31, 2001.
March 31, December 31, March 31,
2002 2001 2001
---- ---- ----
(dollars in thousands)
Nonaccrual loans $ 818 $ 915 $ 618
Foreclosed properties 909 768 1,536
------- ------- -------
Nonperforming assets $ 1,727 $ 1,683 $ 2,154
======= ======= =======
Allowance for loan losses $ 7,827 $ 7,336 $ 7,794
Allowance as % of total loans 1.24% 1.22% 1.32%
Allowance as % of
nonperforming assets 453% 435% 362%
Nonperforming assets to loans
and foreclosed properties .27% .37% .36%
19
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, 2002, the Company's ratio of total capital to risk-weighted
assets was 11.92% and its ratio of Tier 1 capital to risk-weighted assets was
10.90%. Both ratios exceed the minimum capital requirements. The following
summarizes the Company's regulatory capital and related ratios at March 31, 2002
(dollars in thousands):
Tier 1 capital $ 83,529
Tier 2 capital 7,827
Total risk-based capital 91,356
Total risk-weighted assets 766,508
Capital Ratios:
Tier 1 risk-based capital ratio 10.90%
Total risk-based capital ratio 11.92%
Leverage ratio (Tier 1 capital to
average adjusted total assets) 8.61 %
Equity to assets ratio 9.18 %
The Company's book value per share at March 31, 2002 was $12.18. Dividends
to stockholders are typically paid semi-annually in May and November.
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, money market investments,
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.
20
At March 31, 2002 cash, interest-bearing deposits in other banks, money
market investments, Federal funds sold, securities available for sale, loans
available for sale and loans maturing or repricing in one year were 64.0% of
total earning assets. At March 31, 2002 approximately $288.0 million or 43.9% 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.
21
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.
22
The following table represents the interest rate sensitivity on net income
for the Company using different rate scenarios as of:
March 31, 2002
% Change in
Change in Prime Rate Net Income
-------------------- -------------
+200 basis points +12.44%
+100 basis points +6.47%
Most likely 0
-100 basis points -5.89
-200 basis points -14.16%
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 economic value
of equity is the economic value of all assets minus the economic value of all
liabilities. The change in economic value of equity 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 March 31:
Change in Economic Value of Equity
(dollars in thousands)
Change in Prime Rate --------------------------------
-------------------- 2002
--------------------------------
+200 basis points $ -11,750
+100 basis points + 5,612
Most likely 0
-100 basis points - 2,284
-200 basis points - 2,054
23
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 - None
24
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 15, 2002 /s/ G. William Beale
(Date) ----------------------------------
G. William Beale,
President, Chief Executive Officer
and Director
May 15, 2002 /s/ D. Anthony Peay
(Date) -------------------------------------------------
D. Anthony Peay,
Senior Vice President and Chief Financial Officer
25
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q /March 31, 2002
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
26