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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2002

 

Commission file number: 0-20293

 


 

UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

VIRGINIA

 

54-1598552

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employee

Identification No.)

 

212 North Main Street, P.O. Box 446, Bowling Green, Virginia 22427

(Address or principal executive offices) (Zip code)

 

(804) 633-5031

(Registrant’s telephone number including area code)

 


 

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 check mark 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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b – 2 of the Act). Yes  x  No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

The aggregate market value of voting stock held by non-affiliates of the registrant as of February 21, 2003 was $174,363,576.

 

The number of shares of common stock outstanding as of February 21, 2003 was 7,589,524.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be used in conjunction with the registrant’s 2003 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.

 



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UNION BANKSHARES CORPORATION

FORM 10-K

INDEX

 

         

Page


PART I

Item 1.

  

Business

  

1

Item 2.

  

Properties

  

7

Item 3.

  

Legal Proceedings

  

8

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

8

PART II

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

  

9

Item 6.

  

Selected Financial Data

  

10

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

11

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

  

28

Item 8.

  

Financial Statements and Supplementary Data

  

29

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

55

PART III

Item 10.

  

Directors and Executive Officers of the Registrant

  

56

Item 11.

  

Executive Compensation

  

56

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

56

Item 13.

  

Certain Relationships and Related Transactions

  

57

Item 14.

  

Controls and Procedures

  

57

PART IV

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

58

 

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PART I

 

Item 1.—Business

 

GENERAL

 

Union Bankshares Corporation (the “Company”) is a multi-bank holding company organized under Virginia law and registered under the Bank Holding Company Act of 1956. The Company is headquartered in Bowling Green, Virginia. The Company is committed to the delivery of financial services through its four affiliated community banks (the “Community Banks”) and two non-bank financial services affiliates:

 

Community Banks

    

Union Bank & Trust Company

  

Bowling Green, Virginia

Northern Neck State Bank

  

Warsaw, Virginia

Rappahannock National Bank

  

Washington, Virginia

Bank of Williamsburg

  

Williamsburg, Virginia

Financial Services Affiliates

    

Mortgage Capital Investors, Inc.

  

Springfield, Virginia

Union Investment Services, Inc.

  

Bowling Green, Virginia

 

The Company was formed in connection with the July 1993 merger of Northern Neck Bankshares Corporation and Union Bancorp, Inc. into Union Bankshares Corporation. On September 1, 1996, King George State Bank and on July 1, 1998, Rappahannock National Bank became wholly-owned subsidiaries of the Company. On February 22, 1999, the Bank of Williamsburg began business as a newly organized bank. In June 1999, after the retirement of its president, King George State Bank was merged into Union Bank & Trust Company (“Union Bank”) and ceased to be a subsidiary bank.

 

Each of the Community Banks is a full service retail commercial bank offering consumers and businesses a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, and loans for commercial, industrial, residential mortgage and consumer purposes. The Community Banks also issue credit cards and can deliver automated teller machine services through the use of reciprocally shared ATMs in the major ATM networks. All of the Community Banks offer Internet banking access for banking services and online bill payment for both consumers and commercial companies.

 

The Company principally serves, through its Community Banks, the Virginia counties of Caroline, Hanover, James City, King George, King William, Spotsylvania, Stafford, Richmond, Westmoreland, Essex, Lancaster and Northumberland, and the Cities of Williamsburg, Newport News and Fredericksburg, Virginia. In January 2002, the Bank of Williamsburg opened a loan production office servicing Newport News and converted it to a full service branch in May 2002. In August 2002, Union Bank opened a loan production office in the Manassas area (Prince William County) and anticipates opening a loan production office in the Greater Richmond market (Western Henrico County) in early 2003. Through its Community Banks, the Company operated 31 branches in its primary trade area at December 31, 2002.

 

Union Investment Services has provided securities, brokerage and investment advisory services since its formation in February 1993. It is a full service investment company handling all aspects of wealth management including stocks, bonds, annuities, mutual funds and financial planning.

 

On February 11, 1999, the Company acquired CMK Corporation t/a “Mortgage Capital Investors,” a mortgage loan brokerage company headquartered in Springfield, Virginia, by merger of CMK


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Corporation into Mortgage Capital Investors, Inc., a wholly owned subsidiary of Union Bank (“MCI”). MCI has seven offices located in Virginia (3), Maryland (3) and South Carolina (1), and is also licensed to do business in Washington, D.C. MCI provides a variety of mortgage products to customers in those states. The mortgage loans originated by MCI are generally sold in the secondary market through purchase agreements with institutional investors. MCI also offers insurance services to its customers through a joint venture with an insurance agency.

 

Union Bankshares Corporation had assets of $1.116 billion, deposits of $897.6 million and stockholders’ equity of $105.5 million at December 31, 2002. The Community Banks range in asset size from $40.9 to $766.7 million at December 31, 2002.

 

SEGMENTS

 

The Company has two reportable segments: traditional full service community banks and a mortgage loan origination business, each as described above. See Note 17 in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statement and Supplementary Data, of this Form 10-K and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K, for certain financial and other information about each of the Company’s operating segments.

 

ACQUISITION PROGRAM

 

The Company looks to expand its market area and increase its market share through internal growth, de novo expansion and strategic acquisitions. In 2002, the Company, through two of its Community Banks, opened two loan production offices as a means to enter new markets in Virginia: Newport News and Manassas. The Newport News location received regulatory approval in May 2002 to become a full service branch.

 

EMPLOYEES

 

As of December 31, 2003 the Company had 471 employees, including executive officers, loan and other banking officers, branch personnel, operations personnel and others. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers their employee relations to be excellent.

 

COMPETITION

 

The Company experiences strong competition in all aspects of its business. In its market area, the Company competes with large national and regional financial institutions, savings and loans and other independent community banks, as well as credit unions, consumer finance companies, mortgage companies, loan productions offices, mutual funds and life insurance companies. Competition has increasingly come from out-of-state banks through their acquisitions of Virginia-based banks. Competition for deposits and loans is affected by factors such as interest rates offered, the number and location of branches and types of products offered, as well as the reputation of the institution. The Company’s non-bank financial services affiliates also operate in highly competitive environments.

 

Union Bankshares Corporation is the second largest independent bank holding company headquartered in Virginia, after the announced acquisition of First Virginia Bank by BB&T Corp. The Company’s Community Banks generally have a strong market share within the markets they serve, but due to the significant presence of out of state banks and the Company’s absence in many Virginia markets, the Company’s deposit market share in Virginia is only .69% of the total banking deposits in Virginia.

 

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SUPERVISION AND REGULATION

 

Bank holding companies and banks are extensively regulated under both federal and state law. The following description briefly addresses certain provisions of federal and state laws and certain regulations and proposed regulations and the potential impact of such provisions on the Company and the Community Banks. To the extent statutory or regulatory provisions or proposals are described herein, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

 

Bank Holding Companies

 

As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), the Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

 

Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks are also able to branch across state lines, provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. Virginia has adopted legislation that permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

 

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (the “FDIC”) insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund (“SAIF”) or the Bank Insurance Fund (“BIF”) as a result of the default of a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC’s claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

 

The Federal Deposit Insurance Act (the “FDIA”) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general creditor or stockholder. This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the assets of the bank.

 

The Company is registered under the bank holding company laws of Virginia. Accordingly, the Company and the Community Banks (other than Rappahannock National Bank, which is federally regulated) are subject to regulation and supervision by the State Corporation Commission of Virginia (the “SCC”).

 

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Capital Requirements

 

The Federal Reserve Board, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements of these federal bank regulatory agencies, the Company and each of the Subsidiary Banks are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be “Tier 1 capital”, which consists principally of common and certain qualifying preferred shareholders’ equity, less certain intangibles and other adjustments. The remainder (“Tier 2 capital”) consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company as of December 31, 2002 were 11.05% and 12.15%, respectively, exceeding the minimum requirements.

 

In addition, each of the federal regulatory agencies has established a minimum leverage capital ratio (Tier 1 capital to average tangible assets) (“Tier 1 leverage ratio”). These guidelines provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as of December 31, 2002, was 8.49%, which is above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

 

Limits on Dividends and Other Payments

 

The Company is a legal entity, separate and distinct from its subsidiary institutions. A significant portion of the revenues of the Company result from dividends paid to it by the Community Banks. There are various legal limitations applicable to the payment of dividends by the Community Banks to the Company, as well as the payment of dividends by the Company to its respective shareholders.

 

Under federal law, the Community Banks may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, the Company or take securities of the Company as collateral for loans to any borrower. The Community Banks are also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.

 

The Community Banks are subject to various statutory restrictions on their ability to pay dividends to the Company. Under the current supervisory practices of the Community Banks’ regulatory agencies, prior approval from those agencies is required if cash dividends declared in any given year exceed net income for that year plus retained net profits of the two preceding years. The payment of dividends by the Community Banks or the Company may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit the Community Banks or the Company from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending on the financial condition of the Community Banks, or the Company, could be deemed to constitute such an unsafe or unsound practice.

 

Under the FDIA, insured depository institutions such as the Community Banks are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution,

 

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the institution would become “undercapitalized” (as such term is used in the statute). Based on the Community Banks’ current financial condition, the Company does not expect that this provision will have any impact on its ability to obtain dividends from the Community Banks.

 

In addition to dividends it receives from the Community Banks, the Company receives management fees from its affiliated companies for various services provided to them including: data processing, item processing, customer accounting, financial accounting, human resources, funds management, credit administration, sales and marketing, collections, facilities management, call center and internal audit. These fees are charged to each subsidiary based upon various specific allocation methods measuring the usage of such services by that subsidiary. The fees are eliminated in the consolidation process.

 

The Community Banks

 

The Community Banks are supervised and regularly examined by the Federal Reserve Board and the SCC, and in the case of Rappahannock National Bank, the OCC. The various laws and regulations administered by the regulatory agencies affect corporate practices, such as the payment of dividends, incurring debt and acquisition of financial institutions and other companies, and affect business practices, such as the payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices.

 

The Community Banks are also subject to the requirements of the Community Reinvestment Act (the “CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility.

 

As institutions with deposits insured by the BIF, the Community Banks also are subject to insurance assessments imposed by the FDIC. There is a base assessment for all institutions. In addition, the FDIC has implemented a risk-based assessment schedule, imposing assessments ranging from zero to 0.27% of an institution’s average assessment base. The actual assessment to be paid by each BIF member is based on the institution’s assessment risk classification, which is determined based on whether the institution is considered “well capitalized,” “adequately capitalized” or “undercapitalized,” as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. In 2002, the Company paid only the base assessment rate through the Community Banks which amounted to $134,713 in deposit insurance premiums.

 

Other Safety and Soundness Regulations

 

The federal banking agencies have broad powers under current federal law to make prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” All such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.

 

The Gramm-Leach-Bliley Act of 1999

 

The Gramm-Leach-Bliley Act of 1999 (“GLBA”) was signed into law on November 12, 1999. The main purpose of GLBA is to permit greater affiliations within the financial services industry, primarily

 

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banking, securities and insurance. The provisions of GLBA that are believed to be of most significance to the Company are discussed below.

 

GLBA repealed sections 20 and 32 of the Glass-Steagall Act, which separated commercial banking from investment banking, and substantially amends the BHCA, which limited the ability of bank holding companies to engage in the securities and insurance businesses. To achieve this purpose, GLBA created a new type of company, the “financial holding company.” A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including

 

    securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and

 

    insurance underwriting, sales and brokerage activities.

 

A bank holding company may elect to become a financial holding company only if all of its depository institution subsidiaries are well-capitalized, well-managed and have at least a satisfactory CRA rating. For various reasons, the Company has not elected to be treated as a financial holding company.

 

GLBA establishes a system of functional regulation under which the federal banking agencies regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the Securities and Exchange Commission regulate their securities activities and state insurance regulators will regulate their insurance activities.

 

GLBA and certain regulations issued by federal banking agencies also provide protection against the transfer and use by financial institutions of consumers nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.

 

Neither the provisions of GLBA nor the act’s implementing regulations have had a material impact on the Company’s or the Community Banks’ regulatory capital ratios (as discussed above) or ability to continue to operate in a safe and sound manner.

 

SEC Filings

 

The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission. These reports are posted and are available at the Company’s website, ubsh.com.

 

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Item 2.—Properties

 

The Company, through its subsidiaries, owns or leases buildings that are used in the normal course of business. The main office is located at 212 N. Main Street, Bowling Green, Virginia, in a building owned by the Company. The Company’s subsidiaries own or lease various other offices in the counties and cities in which they operate. See the Notes to Consolidated Financial Statements contained in Item 8, Financial Statement and Supplementary Data, of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.

 

Unless otherwise indicated, the properties below are owned by the Company and its subsidiaries as of December 31, 2002.

 

Locations

 

Corporate Headquarters

    

212 North Main Street

  

Bowling Green, Virginia

Banking Offices—Union Bank & Trust Company

    

211 North Main Street

  

Bowling Green, Virginia

Route 1

  

Ladysmith, Virginia

Route 301

  

Port Royal, Virginia

4540 Lafayette Boulevard

  

Fredericksburg, Virginia

Route 1 and Ashcake Road

  

Ashland, Virginia

4210 Plank Road

  

Fredericksburg, Virginia

10415 Courthouse Road

  

Spotsylvania, Virginia

9665 Sliding Hill Road

  

Ashland, Virginia

700 Kenmore Avenue

  

Fredericksburg, Virginia

Route 360

  

Manquin, Virginia

9534 Chamberlayne Road

  

Mechanicsville, Virginia

Cambridge and Layhill Road

  

Fredericksburg, Virginia (leased)

Massaponax Church Road and Route 1

  

Spotsylvania, Virginia (leased)

Brock Road and Route 3

  

Spotsylvania, Virginia (leased)

2811 Fall Hill Avenue

  

Fredericksburg, Virginia

610 Mechanicsville Turnpike

  

Mechanicsville, Virginia (leased)

10045 Kings Highway

  

King George, Virginia

840 McKinney Blvd.

  

Colonial Beach, Virginia

5510 Morris Road

  

Thornburg, Virginia

Loan Production Offices—Union Bank & Trust Company

    

9282 Corporate Circle, Building 7

    

Ashton Professional Center

  

Manassas, Virginia (leased)

Banking Offices—Northern Neck State Bank

    

5839 Richmond Road

  

Warsaw, Virginia

4256 Richmond Road

  

Warsaw, Virginia

Route 3, Kings Highway

  

Montross, Virginia

1649 Tappahannock Blvd

  

Tappahannock, Virginia

1660 Tappahannock Blvd (Wal-Mart)

  

Tappahannock, Virginia (leased)

15043 Northumberland Highway

  

Burgess, Virginia

284 North Main Street

  

Kilmarnock, Virginia

876 Main Street

  

Reedville, Virginia

485 Chesapeake Drive

  

White Stone, Virginia

 

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Banking Office—Rappahannock National Bank

    

257 Gay Street

  

Washington, Virginia

Banking Office—Bank of Williamsburg

    

5125 John Tyler Parkway

  

Williamsburg, Virginia (land lease)

610 Thimble Shoals Boulevard

  

Newport News, Virginia (leased)

Union Investment Services, Inc.

    

111 Davis Court

  

Bowling Green, Virginia

9665 Sliding Hill Road

  

Ashland, Virginia

2811 Fall Hill Avenue

  

Fredericksburg, Virginia

Mortgage Capital Investors, Inc. (All leased)

    

5835 Allentown Way

  

Camp Springs, Maryland

5440 Jeff Davis Highway, #103

  

Fredericksburg, Virginia

3 Hillcrest Drive #A100

  

Frederick, Maryland

7501 Greenway Center, #140

  

Greenbelt, Maryland

7901 N. Ocean Boulevard

  

Myrtle Beach, South Carolina

6330 Newtown Road, #211

  

Norfolk, Virginia

6571 Edsall Road

  

Springfield, Virginia

 

Item 3.—Legal Proceedings

 

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.

 

Item 4.—Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2002.

 

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PART II

 

Item 5.—Market for Registrant’s Common Equity and Related Stockholder Matters

 

Union Bankshares Corporation’s common stock is traded on the Nasdaq National Market under the symbol “UBSH”. The Company’s common stock began trading on the Nasdaq National Market in October 1993.

 

There were 7,579,707 shares of the Company’s common stock outstanding at the close of business on December 31, 2002, which were held by 2,255 shareholders of record. The closing price of the Company’s stock on December 31, 2002 was $27.25 per share as compared to $16.24 on December 31, 2001.

 

The following table summarizes the high and low sales prices and dividends declared for the two years ended December 31, 2002.

 

    

Market Values


  

Declared

Dividends


    

2002


  

2001


  
    

High


  

Low


  

High


  

Low


  

2002


  

2001


First Quarter

  

$

21.80

  

$

15.50

  

$

19.50

  

$

10.19

  

$

—  

  

$

—  

Second Quarter

  

 

27.95

  

 

20.96

  

 

16.88

  

 

11.50

  

 

0.25

  

 

0.22

Third Quarter

  

 

29.00

  

 

22.54

  

 

17.40

  

 

14.19

  

 

—  

  

 

—  

Fourth Quarter

  

 

29.33

  

 

22.25

  

 

17.20

  

 

15.05

  

 

0.27

  

 

0.24

                                

  

                                

$

0.52

  

$

0.46

                                

  

 

Restrictions on the ability of the Community Banks to transfer funds to the Company at December 31, 2002, are set forth in Note 16 of the Notes to the Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. A discussion of certain limitations on the ability of the Community Banks to pay dividends to the Company and the ability of the Company to pay dividends on its common stock, is set forth in Part I, Business, of this Form 10-K under the headings “Supervision and Regulation—Limits on Dividends and Other Payments” and “—The Community Banks”.

 

The dividend amount on the Company’s common stock is established by the Board of Directors semi-annually and dividends are typically paid on May 1st and November 1st of each year. In making its decision on the payment of dividends on the Company’s common stock, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns and other factors.

 

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Item 6.—Selected Financial Data

 

The following table sets forth selected financial data for the Company for the last five years.

 

    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(dollars in thousands, except per share amounts)

 

RESULTS OF OPERATIONS

      

Interest income

  

$

65,205

 

  

$

65,576

 

  

$

64,867

 

  

$

55,636

 

  

$

51,062

 

Interest expense

  

 

24,627

 

  

 

32,483

 

  

 

33,530

 

  

 

27,067

 

  

 

24,463

 

    


  


  


  


  


Net interest income

  

 

40,578

 

  

 

33,093

 

  

 

31,337

 

  

 

28,569

 

  

 

26,599

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

 

  

 

2,101

 

  

 

2,216

 

  

 

3,044

 

    


  


  


  


  


Net interest income after provision for loan losses

  

 

37,700

 

  

 

30,967

 

  

 

29,236

 

  

 

26,353

 

  

 

23,555

 

Noninterest income

  

 

17,538

 

  

 

16,092

 

  

 

12,011

 

  

 

13,246

 

  

 

5,567

 

Noninterest expenses

  

 

35,922

 

  

 

32,447

 

  

 

32,424

 

  

 

32,689

 

  

 

20,622

 

    


  


  


  


  


Income before income taxes

  

 

19,316

 

  

 

14,612

 

  

 

8,823

 

  

 

6,910

 

  

 

8,500

 

Income tax expense

  

 

4,811

 

  

 

2,933

 

  

 

1,223

 

  

 

636

 

  

 

1,678

 

    


  


  


  


  


Net income

  

$

14,505

 

  

$

11,679

 

  

$

7,600

 

  

$

6,274

 

  

$

6,822

 

    


  


  


  


  


KEY PERFORMANCE RATIOS

                                            

Return on average assets (ROA)

  

 

1.41

%

  

 

1.27

%

  

 

0.88

%

  

 

0.79

%

  

 

1.00

%

Return on average equity (ROE)

  

 

14.91

%

  

 

13.55

%

  

 

10.69

%

  

 

8.74

%

  

 

9.58

%

Efficiency ratio

  

 

58.90

%

  

 

62.13

%

  

 

71.18

%

  

 

74.50

%

  

 

61.24

%

PER SHARE DATA

                                            

Net income per share—basic

  

$

1.92

 

  

$

1.55

 

  

$

1.01

 

  

$

0.84

 

  

$

0.91

 

Net income per share—diluted

  

 

1.90

 

  

 

1.55

 

  

 

1.01

 

  

 

0.83

 

  

 

0.91

 

Cash dividends declared

  

 

0.52

 

  

 

0.46

 

  

 

0.40

 

  

 

0.40

 

  

 

0.38

 

Book value at period-end

  

 

13.92

 

  

 

11.82

 

  

 

10.42

 

  

 

9.19

 

  

 

9.77

 

FINANCIAL CONDITION

                                            

Total assets

  

$

1,115,725

 

  

$

983,097

 

  

$

881,961

 

  

$

821,827

 

  

$

733,947

 

Total deposits

  

 

897,642

 

  

 

784,084

 

  

 

692,472

 

  

 

646,866

 

  

 

607,629

 

Total loans, net of unearned income

  

 

714,764

 

  

 

600,164

 

  

 

580,790

 

  

 

543,367

 

  

 

479,822

 

Stockholders’ equity

  

 

105,492

 

  

 

88,979

 

  

 

78,352

 

  

 

68,794

 

  

 

73,359

 

ASSET QUALITY

                                            

Allowance for loan losses

  

$

9,179

 

  

$

7,336

 

  

$

7,389

 

  

$

6,617

 

  

$

6,407

 

Allowance as % of total loans

  

 

1.28

%

  

 

1.22

%

  

 

1.27

%

  

 

1.22

%

  

 

1.33

%

OTHER DATA

                                            

Market value per share at period-end

  

$

27.25

 

  

$

16.24

 

  

$

10.25

 

  

$

14.75

 

  

$

17.50

 

Price to earnings ratio

  

 

14.3

 

  

 

10.5

 

  

 

10.1

 

  

 

17.6

 

  

 

19.2

 

Price to book value ratio

  

 

196

%

  

 

137

%

  

 

98

%

  

 

161

%

  

 

179

%

Equity to assets

  

 

9.5

%

  

 

9.1

%

  

 

8.9

%

  

 

8.4

%

  

 

10.0

%

Dividend payout ratio

  

 

27.08

%

  

 

29.68

%

  

 

39.60

%

  

 

42.62

%

  

 

41.76

%

Weighted average shares outstanding, basic

  

 

7,555,906

 

  

 

7,523,566

 

  

 

7,508,238

 

  

 

7,473,869

 

  

 

7,489,873

 

Weighted average shares outstanding, diluted

  

 

7,623,169

 

  

 

7,541,572

 

  

 

7,513,000

 

  

 

7,498,000

 

  

 

7,516,000

 

 

10


Table of Contents

 

Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of Union Bankshares Corporation and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

 

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 the 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. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

 

Allowance for Loan Losses

 

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that 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.

 

The Company’s 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 actual events occur. These estimates are reevaluated at least quarterly as part of a review of the adequacy of the allowance for loan loss. The allowance formula uses historical losses and current economic and business conditions in developing estimated loss factors as an indicator of future losses for various loan classifications; as a result, the estimated losses could differ from the losses incurred in the future. 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 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.

 

Goodwill and Intangibles

 

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business

 

11


Table of Contents

combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

 

The Company adopted SFAS No. 142 on January 1, 2002. Goodwill is included in other assets and totaled $864,000 at December 31, 2002 and 2001. The goodwill is no longer amortized, but instead tested for impairment at least annually. Based on the testing, there were no impairment charges for 2002. Application of the nonamortization provisions of the Statement resulted in additional net income of $82,500 for the year ended December 31, 2002.

 

Core deposit intangibles are included in other assets and are being amortized on a straight-line basis over the period of expected benefit, which ranges from 10 to 15 years. Core deposits, net of amortization amounted to $5,500,000 and $6,093,000 at December 31, 2002 and 2001, respectively. The Company adopted SFAS 147 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over the estimated useful life.

 

OVERVIEW

 

Union Bankshares Corporation’s net income for 2002 totaled $14.5 million or $1.92 per share on a basic and $1.90 on a diluted basis, up 24.2% from $11.7 million or $1.55 per share on a basic and diluted basis for 2001. Profitability as measured by return on average assets (ROA) for 2002 was 1.41% as compared to 1.27% a year earlier, while return on average equity (ROE) for 2002 was 14.91% as compared to 13.55% in 2001. Core profitability continued to improve as net interest income increased by 22.6% and noninterest income was up 9.0%.

 

Union Bankshares Corporation’s financial performance in 2002 was significantly influenced by the effect of lower interest rates on both the community bank segment and the mortgage banking segment. Net income for the community bank segment was $12.9 million, an increase of $2.4 million, or 22.7% over 2001. In 2002, reductions in interest rates resulted in a slight decline in interest income while the repricing of deposits and the reduction of rates on other borrowings combined to decrease interest expense and increase net interest income. Net interest income increased $7.0 million or 21.6%, resulting in the highest net interest margin in several years. Noninterest income in the community bank segment grew modestly in 2002 at 3.0%. Service charges and fees, the primary component of noninterest income, increased 8.1% in 2002. Noninterest expense in this sector increased 10.3% while assets grew by over 13.5%. This ability to grow on a stable cost platform has allowed the Company to realize efficiencies from both internal growth and expansion opportunities.

 

The decline in mortgage interest rates in 2002 stimulated mortgage loan originations and enhanced the financial performance of the Company’s mortgage banking segment. Mortgage loan originations in 2002 totaled $385 million and the gains on the sales of those loans totaled $10.1 million, a 13.9% increase over 2001. Net income for the mortgage banking segment was $1.6 million, an improvement of $400,000 over $1.2 million in 2001. This improvement was largely the result of increased volume but continued expense controls resulted in a decrease of $135,000 in noninterest expense excluding salaries and benefits. Refinanced mortgages represented 42% of the mortgage segment’s loan production for the year as compared to 30% in 2001. The Company continues to focus on developing and maintaining relationships with builders and realtors to generate loan referrals, to provide a more steady source of origination volume in a more stable rate environment.

 

12


Table of Contents

Assets grew to $1.116 billion at December 31, 2002, up 13.5% from $983.1 million a year ago. Loans grew to $714.8 million, up 19.1% over year-end 2001 totals reflecting growth in our loan production in all entities. Deposits increased to $897.6 million at December 31, 2002 from $784.1 million at December 31, 2001, a 14.5% increase. The Company’s capital position grew by 18.6%, from $89.0 million at December 31, 2001 to $105.5 million a year later and remains strong at 9.5% of total assets.

 

NET INTEREST INCOME

 

Net interest income, which represents the principal source of earnings for the Company is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income, the net interest margin and net income.

 

Various world and national events over the last two years, including the terrorist attacks and corporate scandals, have contributed to economic uncertainty that appears likely to continue into 2003. This prolonged period of economic weakness resulted in interest rate cuts by the Federal Reserve Board that reduced interest rates by 475 basis points in 2001 and an additional 50 basis points in 2002. Although the Company has not seen significant weakening in the economies of the markets it serves, the impact of the interest rate reductions has had a significant impact. During 2002 the Company benefited from the maturity of higher-rate certificates of deposit issued in prior years that were renewed at significantly lower interest rates. The impact of changes in rates on certificates of deposit resulted in a reduction in interest expense of over $6.2 million in 2002. During the same timeframe, lower interest rates resulted in loan prepayments and repricings that reduced interest income on loans by $6.2 million. However, increased loan volumes offset much of that decline, contributing $5.6 million in additional interest income. (see Volume and Rate Analysis table).

 

During 2002, net interest income, on a taxable equivalent basis, which reflects the tax benefits of nontaxable interest income, totaled $43.3 million, an increase of 20.8% from $35.9 million in 2001. The Company’s net interest margin increased to 4.49% in 2002, as compared to 4.17% in 2001. The yield on earning assets decreased to 7.04% from 7.94% in 2001 while the cost of interest-bearing liabilities decreased from 4.42% in 2001 to 3.05% in 2002. Average interest-bearing liabilities increased by $72.8 million, or 9.9% while average earning assets grew by $104.7 million, or 12.2%. In 2002, deposits increased through both internal growth and the addition of two new branches, which brought $13.9 million in deposits. Many investors left the stock market and chose to maintain their liquidity in bank deposits, which is reflected in the rapid growth in interest-bearing transaction accounts and demand deposit balances. While the margin increased on a year-to-year basis, some compression was seen in the fourth quarter as asset repricing and prepayments accelerated. The majority of the repricing of higher-rate certificates of deposit was completed in 2002. The Company anticipates that interest rates will begin to rise in the second half of 2003 and that in a rising rate environment the net interest margin will improve. However, should interest rates remain at their current levels for an extended time period, the Company would expect additional declines in the yields on investments and loans and would cause the net interest margin to gradually decline over the next several quarters.

 

During 2001, net interest income, on a taxable equivalent basis totaled $35.9 million, an increase of 4.9% from $34.2 million in 2000. The Company’s net interest margin declined to 4.17% in 2001, as compared to 4.23% in 2000. The yield on earning assets decreased to 7.94% from 8.39% in 2000 while the cost of interest-bearing liabilities decreased to 4.42% in 2001 from 4.80% in 2000. Average interest-bearing liabilities increased by $35.3 million, or 5.0% while average earning assets grew by $53.1 million, or 6.6%.

 

13


Table of Contents

The following table shows interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated.

 

    

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

YEARS ENDED DECEMBER 31,


 
    

2002


    

2001


    

2000


 
    

Average

Balance


    

Interest

Income/

Expense


  

Yield/

Rate


    

Average

Balance


    

Interest

Income/

Expense


  

Yield/

Rate


    

Average Balance


    

Interest

Income/

Expense


  

Yield/

Rate


 
    

(dollars in thousands)

 

ASSETS

                                                           

Securities:

                                                                    

Taxable

  

$

168,787

 

  

$

9,619

  

5.70

%

  

$

138,175

 

  

$

9,125

  

6.60

%

  

$

121,826

 

  

$

8,979

  

7.37

%

Tax-exempt(1)

  

 

91,814

 

  

 

7,015

  

7.64

%

  

 

91,538

 

  

 

7,039

  

7.69

%

  

 

97,080

 

  

 

7,424

  

7.65

%

    


  

         


  

         


  

      

Total securities

  

 

260,601

 

  

 

16,634

  

6.38

%

  

 

229,713

 

  

 

16,164

  

7.04

%

  

 

218,906

 

  

 

16,403

  

7.49

%

Loans, net

  

 

658,836

 

  

 

49,428

  

7.50

%

  

 

589,347

 

  

 

50,148

  

8.51

%

  

 

573,989

 

  

 

50,300

  

8.76

%

Loans held for sale

  

 

27,606

 

  

 

1,638

  

5.93

%

  

 

25,862

 

  

 

1,559

  

6.03

%

  

 

10,864

 

  

 

827

  

7.61

%

Federal funds sold

  

 

14,153

 

  

 

206

  

1.46

%

  

 

13,233

 

  

 

412

  

3.11

%

  

 

2,607

 

  

 

118

  

4.53

%

Money market investments

  

 

2,778

 

  

 

40

  

1.44

%

  

 

1,116

 

  

 

23

  

2.06

%

  

 

—  

 

  

 

—  

  

—  

 

Interest-bearing deposits in other banks

  

 

1,146

 

  

 

17

  

1.48

%

  

 

1,154

 

  

 

37

  

3.21

%

  

 

936

 

  

 

59

  

6.30

%

    


  

         


  

         


  

      

Total earning assets

  

 

965,120

 

  

 

67,963

  

7.04

%

  

 

860,425

 

  

 

68,343

  

7.94

%

  

 

807,302

 

  

 

67,707

  

8.39

%

Allowance for loan losses

  

 

(8,370

)

                

 

(7,725

)

                

 

(7,488

)

             

Total non-earning assets

  

 

71,684

 

                

 

69,421

 

                

 

61,449

 

             
    


                


                


             

Total assets

  

$

1,028,434

 

                

$

922,121

 

                

$

861,263

 

             
    


                


                


             

LIABILITIES AND STOCKHOLDERS EQUITY

                                                           

Interest-bearing deposits:

                                                                    

Checking

  

$

120,878

 

  

 

1,028

  

0.85

%

  

$

100,112

 

  

 

1,646

  

1.64

%

  

$

99,377

 

  

 

2,116

  

2.13

%

Money market savings

  

 

84,623

 

  

 

1,193

  

1.41

%

  

 

67,680

 

  

 

1,838

  

2.72

%

  

 

62,197

 

  

 

2,022

  

3.25

%

Regular savings

  

 

78,497

 

  

 

1,014

  

1.29

%

  

 

63,311

 

  

 

1,443

  

2.28

%

  

 

56,992

 

  

 

1,367

  

2.40

%

Certificates of deposit:

                                                                    

$100,000 and over

  

 

135,429

 

  

 

5,718

  

4.22

%

  

 

128,117

 

  

 

7,243

  

5.65

%

  

 

108,740

 

  

 

6,251

  

5.75

%

Under $100,000

  

 

286,076

 

  

 

11,506

  

4.02

%

  

 

269,578

 

  

 

14,970

  

5.55

%

  

 

258,162

 

  

 

14,756

  

5.72

%

    


  

         


  

         


  

      

Total interest-bearing deposits

  

 

705,503

 

  

 

20,459

  

2.90

%

  

 

628,798

 

  

 

27,140

  

4.32

%

  

 

585,468

 

  

 

26,512

  

4.53

%

Other borrowings

  

 

101,385

 

  

 

4,168

  

4.11

%

  

 

105,284

 

  

 

5,343

  

5.07

%

  

 

113,339

 

  

 

7,018

  

6.19

%

    


  

         


  

         


  

      

Total interest-bearing liabilities

  

 

806,888

 

  

 

24,627

  

3.05

%

  

 

734,082

 

  

 

32,483

  

4.42

%

  

 

698,807

 

  

 

33,530

  

4.80

%

    


  

                  

                  

      

Noninterest bearing liabilities:

                                                                    

Demand deposits

  

 

115,552

 

                

 

96,127

 

                

 

86,416

 

             

Other liabilities

  

 

8,734

 

                

 

5,719

 

                

 

4,951

 

             
    


                


                


             

Total liabilities

  

 

931,174

 

                

 

835,928

 

                

 

790,174

 

             

Stockholders’ equity

  

 

97,260

 

                

 

86,193

 

                

 

71,089

 

             
    


                


                


             

Total liabilities and stockholders’ equity

  

$

1,028,434

 

                

$

922,121

 

                

$

861,263

 

             
    


                


                


             

Net interest income

           

$

43,336

                  

$

35,860

                  

$

34,177

      
             

                  

                  

      

Interest rate spread

                  

3.99

%

                  

3.52

%

                  

3.59

%

Interest expense as a percent of average earning assets

                  

2.55

%

                  

3.78

%

                  

4.15

%

Net interest margin

                  

4.49

%

                  

4.17

%

                  

4.23

%

 

(1)   Income and yields are reported on a taxable equivalent basis.

 

The following table summarizes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities compared to changes in interest rates. Nonaccrual loans are included in average loans outstanding.

 

14


Table of Contents

 

VOLUME AND RATE ANALYSIS* (TAXABLE EQUIVALENT BASIS)

 

    

Years Ended December 31,


 
    

2002 vs. 2001

Increase (Decrease)

Due to Changes in:


    

2001 vs. 2000

Increase (Decrease)

Due to Changes in:


 
    

Volume


    

Rate


    

Total


    

Volume


    

Rate


    

Total


 
    

(dollars in thousands)

 

EARNING ASSETS:

                                                     

Securities:

                                                     

Taxable

  

$

1,850

 

  

$

(1,356

)

  

$

494

 

  

$

1,134

 

  

$

(988

)

  

$

146

 

Tax-exempt

  

 

21

 

  

 

(45

)

  

 

(24

)

  

 

(425

)

  

 

40

 

  

 

(385

)

Loans, net

  

 

5,563

 

  

 

(6,283

)

  

 

(720

)

  

 

1,327

 

  

 

(1,479

)

  

 

(152

)

Loans held for sale

  

 

103

 

  

 

(24

)

  

 

79

 

  

 

936

 

  

 

(204

)

  

 

732

 

Federal funds sold

  

 

26

 

  

 

(232

)

  

 

(206

)

  

 

341

 

  

 

(47

)

  

 

294

 

Money market investments

  

 

25

 

  

 

(8

)

  

 

17

 

  

 

11

 

  

 

12

 

  

 

23

 

Interest-bearing deposits in other banks

  

 

—  

 

  

 

(20

)

  

 

(20

)

  

 

11

 

  

 

(33

)

  

 

(22

)

    


  


  


  


  


  


Total earning assets

  

 

7,588

 

  

 

(7,968

)

  

 

(380

)

  

 

3,335

 

  

 

(2,699

)

  

 

636

 

    


  


  


  


  


  


INTEREST-BEARING LIABILITIES:

                                                     

Checking

  

 

291

 

  

 

(909

)

  

 

(618

)

  

 

15

 

  

 

(485

)

  

 

(470

)

Money market savings

  

 

384

 

  

 

(1,029

)

  

 

(645

)

  

 

168

 

  

 

(352

)

  

 

(184

)

Regular savings

  

 

292

 

  

 

(721

)

  

 

(429

)

  

 

146

 

  

 

(70

)

  

 

76

 

CDs $100,000 and over

  

 

394

 

  

 

(1,919

)

  

 

(1,525

)

  

 

1,097

 

  

 

(105

)

  

 

992

 

CDs < $100,000

  

 

870

 

  

 

(4,334

)

  

 

(3,464

)

  

 

641

 

  

 

(427

)

  

 

214

 

    


  


  


  


  


  


Total interest-bearing deposits

  

 

2,231

 

  

 

(8,912

)

  

 

(6,681

)

  

 

2,067

 

  

 

(1,439

)

  

 

628

 

Other borrowings

  

 

(192

)

  

 

(983

)

  

 

(1,175

)

  

 

(474

)

  

 

(1,201

)

  

 

(1,675

)

    


  


  


  


  


  


Total interest-bearing liabilities

  

 

2,039

 

  

 

(9,895

)

  

 

(7,856

)

  

 

1,593

 

  

 

(2,640

)

  

 

(1,047

)

    


  


  


  


  


  


Change in net interest income

  

$

5,549

 

  

$

1,927

 

  

$

7,476

 

  

$

1,742

 

  

$

(59

)

  

$

1,683

 

    


  


  


  


  


  


 

*   The change in interest, due to both rate and volume, has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.

 

INTEREST SENSITIVITY

 

An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which are variable rate instruments, by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact of rising or falling interest rates on net interest income.

 

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors. The Company uses computer simulations to measure the effect of various interest rate scenarios on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

 

At December 31, 2002, the Company had $168.1 million more assets than liabilities subject to repricing within one year and was, therefore, in an asset-sensitive position. An asset-sensitive Company generally will be impacted favorably by increasing interest rates while a liability-sensitive company’s net interest margin and net interest income generally will be impacted favorably by declining interest rates. At December 31, 2001, the Company had $148.3 million more liabilities than assets subject to repricing within one year.

 

15


Table of Contents

 

Although the gap report shows the Company to be asset-sensitive, computer simulation shows the Company’s net interest income tends to increase when interest rates rise and fall when interest rates decline. The explanation for this is that interest rate changes affect bank products differently. For example, if the prime rate changes by 1.00% (100 basis points or bps), the change on certificates of deposit may only be 0.75% (75 bps), while other interest bearing deposit accounts may only change 0.10% (10 bps). Also, despite their fixed terms, loan products are often refinanced as rates decline but rarely refinanced as rates rise. In 2002, with slightly declining rates, the market stayed in a more normal curve. Liabilities repriced early in the year while assets repriced throughout the year resulting in an increase in net interest income.

 

EARNINGS SIMULATION ANALYSIS

 

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis discussed above.

 

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

 

The following table represents the interest rate sensitivity on net interest income for the Company using different rate scenarios:

 

Change in Prime Rate


    

% Change in Net Interest Income


+200 basis points

    

6.0%

Flat

    

0

-200 basis points

    

-3.1%

 

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 market value of all liabilities. The change in net economic value over different rate environments is an indication of the larger term repricing risk in the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The following chart reflects the change in net economic value over different rate environments:

 

16


Table of Contents

 

 

Change in Prime Rate


    

Change in Net Market Value

(Dollars in Thousands)


+200 basis points

    

$6,885

+100 basis points

    

5,107

Flat

    

0

-100 basis points

    

-7,404

-200 basis points

    

-17,993

 

NONINTEREST INCOME

 

Noninterest income increased by 9.0% from $16.1 million in 2001 to $17.5 million in 2002. This increase is primarily due to a $1.2 million increase in gains on sales of loans, which rose from $8.9 million in 2001 to $10.1 million in 2002. The growth in mortgage originations, stimulated by low mortgage interest rates, led to this increase. Service charges on deposits rose 11.5% from $3.7 million to $4.1 million. Other service charges, commissions and fee income were up slightly from $2.5 million in 2001 to $2.6 million as ATM fees continued to grow while brokerage commissions were slowed by the down stock market. A securities loss of $159,000 represents a $284,000 change from gains of $125,000 a year ago. This was partially offset by gains on the sale of other real estate and fixed assets as a result of sales of a former branch site and several nonperforming asset properties. In addition, other operating income was down from $906,000 in 2001 to $800,000 in 2002. This decline was principally the result of a decrease in the earnings rate on bank owned life insurance.

 

In 2001, noninterest income increased by 34.0% from $12.0 million in 2000 to $16.1 million in 2001. This increase was primarily attributable to a $3.3 million increase in gains on sales of loans, which increased from $5.5 million in 2000 to $8.9 million in 2001 as mortgage originations increased. In addition, other operating income was up from $498,000 in 2000 to $906,000 in 2001. The rise was principally the result of increases in the cash surrender value of bank owned life insurance. Other service charges, commissions and fee income were up $325,000 from $2.2 million in 2000 to $2.5 million as brokerage fees and ATM fees continued to grow. Service charges on deposits rose slightly from $3.6 million to $3.7 million.

 

In the third quarter of 2000, the Company restructured its securities portfolio, selling lower-yielding securities to invest in higher-yielding instruments and resulting in a loss of $1.1 million. In the same quarter, the Company completed the termination of its defined benefit plan resulting in a $1.1 million gain. In connection with the termination of the defined benefit plan, the Company redirected a portion of the expense of the prior plan to enhance the existing compensation of employees to be more competitive with the market. The net impact of these two nonrecurring transactions on noninterest income was minimal.

 

NONINTEREST EXPENSES

 

Noninterest expenses totaled $35.9 million in 2002, an increase of $3.5 million versus $32.4 million in 2001. Salaries and benefits were $21.3 million in 2002, up $2.2 million or 11.6% compared to $19.1 million in 2001. The increase in mortgage loan originations and gains on loan sales within the mortgage segment resulted in an increase of $1.1 million in salaries and benefits of which $572,000 was commission compensation. The community bank segment’s salaries and benefits were up $1.1 million year-to-year. This was the result of two new branches, a loan production office in Manassas, Virginia, higher group insurance, some increased support staffing and normal increases. Occupancy expenses were $2.3 million, up $139,000 over $2.2 million in 2001. Equipment expense was down slightly at $2.7 million versus $2.9 million in 2001. Other operating expense was $9.5 million up $1.2 million compared to $8.3 million in 2001. This was the result of increases in operating expense, marketing, other taxes and other expenses rose. Much of these increased costs were related to the new

 

17


Table of Contents

locations, new product advertising, Centennial celebrations at two of the Company’s Community Banks and operating costs and core deposit expenses.

 

Noninterest expenses totaled $32.4 million in 2001, flat versus $32.4 million in 2000. Salaries and benefits were $19.1 million in 2001, up $373,000 or 2.0% compared to $18.7 million in 2000. The increase in mortgage loan production and gains on loan sales within the mortgage segment resulted in an increase of $1.2 million in commission compensation but this was largely offset by a decrease in salaries of $700,000. This reflects reductions in staffing related to the closing of mortgages offices and severance payments in 2000. The community bank segment’s salaries and benefits expenses were flat year-to-year. Occupancy expenses were $2.2 million, down $121,000 over $2.3 million in 2000. Equipment expense was down slightly at $2.9 million versus $3.0 million in 2000. Other operating expense was $8.3 million down slightly compared to $8.4 million in 2000. This was the result of professional fees being down while marketing, other taxes and other expenses rose. Much of these cost efficiencies are attributable to the consolidation of virtually all back office functions and the Company’s investment in technology.

 

LOAN PORTFOLIO

 

Loans, net of unearned income, totaled $714.8 million at December 31, 2002, an increase of 19.1% over $600.2 million at December 31, 2001. Loans secured by real estate represent the Company’s largest category, comprising 72.2% of the total loan portfolio at December 31, 2002. Of this total, 1-4 family residential loans, not including home equity lines, comprised 26.6% of the total loan portfolio at December 31, 2002, down slightly from 28.2% in 2001. Loans secured by commercial real estate comprised 28.0% of the total loan portfolio at December 31, 2002, as compared to 25.8% in 2001, and consist of income producing properties, as well as commercial and industrial loans where real estate constitutes a secondary source of collateral. Real estate construction loans accounted for 11.9% of total loans outstanding at December 31, 2002. The Company’s charge-off rate for all loans secured by real estate has historically been low.

 

LOAN PORTFOLIO

 

    

DECEMBER 31,


    

2002


  

2001


  

2000


  

1999


  

1998


    

(in thousands)

Commercial

  

$

78,289

  

$

70,739

  

$

74,261

  

$

67,649

  

$

61,678

Loans to finance agriculture production and other loans to farmers

  

 

1,128

  

 

4,075

  

 

2,793

  

 

3,015

  

 

2,595

Real estate:

                                  

Real estate construction

  

 

85,335

  

 

57,940

  

 

33,560

  

 

33,218

  

 

38,128

Real estate mortgage:

                                  

Residential (1-4 family)

  

 

190,427

  

 

169,426

  

 

177,282

  

 

179,246

  

 

155,843

Home equity lines

  

 

32,320

  

 

24,474

  

 

20,049

  

 

20,987

  

 

18,737

Multi-family

  

 

3,066

  

 

3,418

  

 

4,666

  

 

4,592

  

 

3,979

Commercial (1)

  

 

200,125

  

 

155,093

  

 

139,737

  

 

120,490

  

 

108,063

Agriculture

  

 

4,466

  

 

2,497

  

 

2,859

  

 

2,373

  

 

2,536

    

  

  

  

  

Total real estate

  

 

515,739

  

 

412,848

  

 

378,153

  

 

360,906

  

 

327,286

Loans to individuals:

                                  

Consumer

  

 

102,528

  

 

94,620

  

 

107,876

  

 

102,713

  

 

79,492

Credit card

  

 

5,350

  

 

4,140

  

 

4,958

  

 

4,346

  

 

3,232

    

  

  

  

  

Total loans to individuals

  

 

107,878

  

 

98,760

  

 

112,834

  

 

107,059

  

 

82,724

All other loans

  

 

11,836

  

 

14,048

  

 

13,507

  

 

5,855

  

 

6,559

    

  

  

  

  

Total loans

  

 

714,870

  

 

600,470

  

 

581,548

  

 

544,484

  

 

480,842

Less unearned income

  

 

106

  

 

306

  

 

758

  

 

1,117

  

 

1,020

    

  

  

  

  

Total net loans

  

$

714,764

  

$

600,164

  

$

580,790

  

$

543,367

  

$

479,822

    

  

  

  

  

 

The Company’s consumer loan portfolio, its second largest category, consists principally of installment loans. Total loans to individuals for household, family and other personal expenditures

 

18


Table of Contents

 

totaled 14.3% of total loans at December 31, 2002, down from 15.8% in 2001. The increased competition for automobile loans including zero percent financing by automobile companies continued to impact this portfolio significantly in 2002. Commercial loans, secured by non-real estate business assets comprised 11.0% of total loans at the end of 2002, a slight decrease from 11.8% at the end of 2001. Loans to the agricultural industry totaled less than 1.0% of the loan portfolio in each of the last five years.

 

REMAINING MATURITIES OF SELECTED LOANS

 

                                           
    

VARIABLE RATE:


  

FIXED RATE:


    

Within 1 year


  

1 to 5 years


  

After 5 years


  

Total


  

1 to 5 years


  

After 5 years


  

Total


    

Total maturities


    

(in thousands)

At December 31, 2002

                                             

Commercial

  

$

39,699

  

6,161

  

—  

  

6,161

  

27,555

  

4,874

  

32,429

    

$

78,289

Real Estate Construction

  

$

77,827

  

1,239

  

—  

  

1,239

  

2,470

  

3,799

  

6,269

    

$

85,335

 

Loans, net of unearned income, totaled $600.2 million at December 31, 2001, an increase of 3.3% over $580.8 million at December 31, 2000, fueled largely by commercial real estate and commercial loan growth.

 

The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade area. The Company maintains a policy not to originate or purchase loans to foreign entities or loans classified by regulators as highly leveraged transactions. To manage the growth of the real estate loans in the loan portfolio, facilitate asset/liability management and generate additional fee income, the Company sells a portion of conforming first mortgage residential real estate loans to the secondary market as they are originated. Mortgage Capital Investors, Inc. serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market or selling loans to the affiliated banks that meet the banks’ current asset/liability management needs. This venture has provided the banks’ customers with enhanced mortgage products and the Company with improved efficiencies through the consolidation of this function.

 

ASSET QUALITY—ALLOWANCE/PROVISION FOR LOAN LOSSES

 

The allowance for loan losses represents management’s estimate of the amount adequate to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies.

 

Management maintains a list of loans which have a potential weakness that may need special attention. This list is used to monitor such loans and is used in the determination of the sufficiency of the Company’s allowance for loan losses. As of December 31, 2002, the allowance for loan losses was $9.2 million or 1.28% of total loans as compared to $7.3 million, or 1.22% in 2001. The provision for loan losses was $2.9 million in 2002 and $2.1 million in 2001.

 

19


Table of Contents

 

The allowance for loan losses as of December 31, 2001 was $7.3 million or 1.22% of total loans as compared to $7.4 million, or 1.27% in 2000. The provision for loan losses in both 2001 and 2000 was $2.1 million.

 

ALLOWANCE FOR LOAN LOSSES

 

    

DECEMBER 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
           

(dollars in thousands)

 

Balance, beginning of year

  

$

7,336

 

  

$

7,389

 

  

$

6,617

 

  

$

6,407

 

  

$

4,798

 

Loans charged-off:

                                            

Commercial

  

 

310

 

  

 

1,716

 

  

 

777

 

  

 

1,544

 

  

 

597

 

Real estate

  

 

—  

 

  

 

3

 

  

 

48

 

  

 

62

 

  

 

34

 

Consumer

  

 

1,271

 

  

 

880

 

  

 

825

 

  

 

746

 

  

 

1,078

 

    


  


  


  


  


Total loans charged-off

  

 

1,581

 

  

 

2,599

 

  

 

1,650

 

  

 

2,352

 

  

 

1,709

 

    


  


  


  


  


Recoveries:

                                            

Commercial

  

 

245

 

  

 

154

 

  

 

16

 

  

 

12

 

  

 

126

 

Real estate

  

 

33

 

  

 

15

 

  

 

10

 

  

 

8

 

  

 

18

 

Consumer

  

 

268

 

  

 

251

 

  

 

295

 

  

 

326

 

  

 

130

 

    


  


  


  


  


Total recoveries

  

 

546

 

  

 

420

 

  

 

321

 

  

 

346

 

  

 

274

 

    


  


  


  


  


Net loans charged-off

  

 

1,035

 

  

 

2,179

 

  

 

1,329

 

  

 

2,006

 

  

 

1,435

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

 

  

 

2,101

 

  

 

2,216

 

  

 

3,044

 

    


  


  


  


  


Balance, end of year

  

$

9,179

 

  

$

7,336

 

  

$

7,389

 

  

$

6,617

 

  

$

6,407

 

    


  


  


  


  


Ratio of allowance for loan losses to total loans outstanding at end of year

  

 

1.28

%

  

 

1.22

%

  

 

1.27

%

  

 

1.22

%

  

 

1.33

%

Ratio of net charge-offs to average loans outstanding during year

  

 

0.16

%

  

 

0.37

%

  

 

0.23

%

  

 

0.40

%

  

 

0.32

%

 

The table below shows an allocation among loan categories based upon analysis of the loan portfolio’s composition, historical loan loss experience, and other factors and the ratio of the related outstanding loan balances to total loans.

(Percent is loans in category divided by total loans.)

 

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

    

2002


   

2001


   

2000


   

1999


   

1998


 
    

Allowance


  

Percent


   

Allowance


  

Percent


   

Allowance


  

Percent


   

Allowance


 

Percent


   

Allowance


 

Percent


 
    

(dollars in thousands)

 

December 31:

                                                               

Commercial, financial and agriculture

  

$

3,249

  

11.1

%

 

$

2,846

  

12.5

%

 

$

3,369

  

13.3

%

 

$

3,215

 

13.0

%

 

$

3,382

 

13.4

%

Real estate construction

  

 

3,492

  

11.9

%

 

 

2,205

  

9.7

%

 

 

1,467

  

5.8

%

 

 

1,511

 

6.1

%

 

 

2,007

 

7.9

%

Real estate mortgage

  

 

426

  

60.2

%

 

 

383

  

59.1

%

 

 

406

  

59.3

%

 

 

264

 

59.7

%

 

 

189

 

60.3

%

Consumer & other

  

 

2,012

  

16.8

%

 

 

1,902

  

18.7

%

 

 

2,147

  

21.6

%

 

 

1,627

 

21.2

%

 

 

829

 

18.4

%

    

  

 

  

 

  

 

 

 

 

    

$

9,179

  

100.0

%

 

$

7,336

  

100.0

%

 

$

7,389

  

100.0

%

 

$

6,617

 

100.0

%

 

$

6,407

 

100.0

%

    

        

        

        

       

     

 

NONPERFORMING ASSETS

 

Nonperforming assets were $910,000 at December 31, 2002, down from $1.7 million at December 31, 2001. Nonaccrual loans decreased to $136,000 in 2002 from $915,000 in 2001 and foreclosed properties were up from $639,000 in 2001 to $774,000 in 2002.

 

20


Table of Contents

 

NONPERFORMING ASSETS

 

    

DECEMBER 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(dollars in thousands)

 

Nonaccrual loans

  

$

136

 

  

$

915

 

  

$

830

 

  

$

1,487

 

  

$

2,813

 

Foreclosed properties

  

 

774

 

  

 

639

 

  

 

844

 

  

 

1,113

 

  

 

1,101

 

Real estate investment

  

 

—  

 

  

 

129

 

  

 

867

 

  

 

903

 

  

 

730

 

    


  


  


  


  


Total nonperforming assets

  

$

910

 

  

$

1,683

 

  

$

2,541

 

  

$

3,503

 

  

$

4,644

 

    


  


  


  


  


Loans past due 90 days and accruing interest

  

$

896

 

  

$

2,757

 

  

$

1,531

 

  

$

980

 

  

$

2,979

 

    


  


  


  


  


Nonperforming assets to year-end loans, foreclosed properties and real estate investment

  

 

0.13

%

  

 

0.28

%

  

 

0.44

%

  

 

0.64

%

  

 

0.97

%

Allowance for loan losses to nonaccrual loans

  

 

6749.26

%

  

 

801.75

%

  

 

890.24

%

  

 

444.99

%

  

 

227.73

%

 

Most of the nonperforming assets are secured by real estate within the Company’s trade area. Based on the estimated fair values of the related real estate, management considers these amounts to be recoverable, with any individual deficiency considered in the allowance for loan losses. As of December 31, 2002, all nonperforming assets representing an investment in income-producing property and included in other assets have been sold at no additional loss to the Company.

 

At December 31, 2001, nonperforming assets totaled $1.7 million, down from $2.5 million at December 31, 2000. Nonaccrual loans increased by $85,000 in 2001 while foreclosed properties declined by $205,000.

 

21


Table of Contents

 

SECURITIES

 

At December 31, 2002, all $272.8 million of the Company’s securities were classified as available for sale, as compared to $257.1 million at December 31, 2001. Investment securities which totaled $5.5 million at December 31, 2000 were transferred to the available for sale classification as permitted in the implementation of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in 2001.

 

The Company seeks to diversify its portfolio to minimize risk and to maintain a large amount of securities issued by states and political subdivisions due to the tax benefits such securities provide. It also purchases mortgage backed securities because of the reinvestment opportunities from the cash flows and the higher yield offered from these securities. The investment portfolio has a high percentage of municipals and mortgage backed securities, which is the main reason for the high taxable equivalent yield the portfolio attains compared to its peers. The Company does not have any derivative or hedging activities.

 

MATURITIES OF INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE

 

    

DECEMBER 31, 2002


 
    

1 YEAR OR LESS


    

1-5 YEARS


    

5-10 YEARS


    

OVER 10 YEARS & EQUITY SECURITIES


    

TOTAL


 
    

(dollars in thousands)

 

U.S. government and agency securities:

                                            

Amortized cost

  

$

999

 

  

$

16,302

 

  

$

—  

 

  

$

—  

 

  

$

17,301

 

Fair value

  

 

1,010

 

  

 

16,445

 

  

 

—  

 

  

 

—  

 

  

 

17,455

 

Weighted average yield(1)

  

 

2.65

%

  

 

3.18

%

  

 

—  

 

  

 

—  

 

  

 

3.15

%

Mortgage backed securities:

                                            

Amortized cost

  

$

18

 

  

$

1,986

 

  

$

24,863

 

  

$

51,528

 

  

$

78,395

 

Fair value

  

 

18

 

  

 

2,081

 

  

 

25,484

 

  

 

53,303

 

  

 

80,886

 

Weighted average yield(1)

  

 

6.47

%

  

 

7.19

%

  

 

5.15

%

  

 

5.78

%

  

 

5.62

%

Municipal bonds:

                                            

Amortized cost

  

$

4,757

 

  

$

22,543

 

  

$

20,558

 

  

$

49,418

 

  

$

97,276

 

Fair value

  

 

4,816

 

  

 

23,532

 

  

 

21,650

 

  

 

51,715

 

  

 

101,713

 

Weighted average yield(1)

  

 

7.07

%

  

 

7.33

%

  

 

7.08

%

  

 

7.00

%

  

 

7.09

%

Other securities:

                                            

Amortized cost

  

$

9,073

 

  

$

28,913

 

  

$

—  

 

  

$

31,352

 

  

$

69,338

 

Fair value

  

 

9,119

 

  

 

30,022

 

  

 

—  

 

  

 

33,560

 

  

 

72,701

 

Weighted average yield(1)

  

 

4.46

%

  

 

4.89

%

  

 

—  

 

  

 

8.43

%

  

 

6.31

%

Total securities:

                                            

Amortized cost

  

$

14,847

 

  

$

69,744

 

  

$

45,421

 

  

$

132,298

 

  

$

262,310

 

Fair value

  

 

14,963

 

  

 

72,080

 

  

 

47,134

 

  

 

138,578

 

  

 

272,755

 

Weighted average yield(1)

  

 

5.17

%

  

 

5.34

%

  

 

6.02

%

  

 

6.86

%

  

 

6.22

%

 

(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.

 

DEPOSITS

 

Total deposits grew $113.6 million or 14.5% in 2002 with deposits in existing branches accounting for most of that growth. The Company also opened two new branches, which had deposits of $13.8 million at year-end. Increased competition for customer deposits continues to be a challenge for the Company and the Company continues to focus on customer relationships and delivery of financial products and services to those customers.

 

Total deposits increased from $784.1 million at December 31, 2001 to $897.6 million at December 31, 2002. Over this same period, average interest-bearing deposits were $705.5 million, or 12.2% over

 

 

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the 2001 average of $628.8 million. A $20.8 million increase in NOW accounts, a $16.9 million increase in money market accounts and a $23.8 million increase in certificates of deposits represent the majority of the increase in average deposits. In 2002, the Company’s lowest cost source of funds, noninterest-bearing demand deposits increased by a total of $23.3 million helping to reduce the overall cost of funds. On an average balance basis, demand deposits were up $19.4 million compared to 2001. The Company has no brokered deposits.

 

AVERAGE DEPOSITS AND RATES PAID

 

    

YEARS ENDED DECEMBER 31,


 
    

2002


    

2001


    

2000


 
    

AMOUNT


  

RATE


    

AMOUNT


  

RATE


    

AMOUNT


  

RATE


 
    

(dollars in thousands)

 

Noninterest-bearing demand deposits

  

$

115,552

  

—  

 

  

$

96,127

  

—  

 

  

$

86,416

  

—  

 

Interest-bearing deposits:

                                         

NOW accounts

  

 

120,878

  

0.85

%

  

 

100,112

  

1.64

%

  

 

99,377

  

2.13

%

Money market accounts

  

 

84,623

  

1.41

%

  

 

67,680

  

2.72

%

  

 

62,197

  

3.25

%

Savings accounts

  

 

78,497

  

1.29

%

  

 

63,311

  

2.28

%

  

 

56,992

  

2.40

%

Time deposits of $100,000 and over

  

 

135,429

  

4.22

%

  

 

128,117

  

5.65

%

  

 

108,740

  

5.75

%

Other time deposits

  

 

286,076

  

4.02

%

  

 

269,578

  

5.55

%

  

 

258,16

  

5.72

%

    

         

         

      

Total interest-bearing

  

 

705,503

  

2.90

%

  

 

628,798

  

4.32

%

  

 

585,468

  

4.53

%

    

         

         

      

Total average deposits

  

$

821,055

         

$

724,925

         

$

671,884

      
    

         

         

      

 

MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER

 

    

WITHIN 3 MONTHS


  

3–6 MONTHS


  

6–12 MONTHS


  

OVER 12 MONTHS


  

TOTAL


  

PERCENT

OF TOTAL

DEPOSITS


 
    

(dollars in thousands)

 

At December 31, 2002

  

$

20,112

  

$

15,232

  

$

16,994

  

$

100,630

  

$

152,968

  

17.04

%

 

Total deposits grew from $692.5 million at December 31, 2000 to $784.1 million at December 31, 2001. Over this same period, average interest-bearing deposits were $628.8 million, or 7.4% over the 2000 average of $585.5 million. The Company also acquired about $14.9 million in deposits from another institution through the purchase of a branch in the 4th quarter of 2001.

 

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 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 to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.

 

The Federal Reserve Board, along with the OCC and the FDIC, has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighed categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity, retained earnings and a limited amount of perpetual

preferred stock, less certain goodwill items. The Company had a ratio of total capital to risk-weighted assets of 12.15% and 12.16% on December 31, 2002 and 2001, respectively. The Company’s ratio of Tier 1 capital to risk-weighted assets was 11.05% and 11.14% at December 31, 2002 and 2001, respectively. Both of these ratios exceeded the fully phased-in capital requirements in 2002 and 2001. The Company’s strategic plan includes a targeted equity to asset ratio between 8% and 9%.

 

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ANALYSIS OF CAPITAL

 

    

DECEMBER 31,


 
    

2002


    

2001


    

2000


 
    

(dollars in thousands)

 

Tier 1 capital:

                          

Common stock

  

$

15,159

 

  

$

15,052

 

  

$

15,033

 

Surplus

  

 

1,442

 

  

 

446

 

  

 

403

 

Retained earnings

  

 

81,997

 

  

 

71,419

 

  

 

63,201

 

    


  


  


Total equity

  

 

98,598

 

  

 

86,917

 

  

 

78,637

 

Less: core deposit intangibles/goodwill

  

 

(6,342

)

  

 

(6,924

)

  

 

(6,295

)

    


  


  


Total Tier 1 capital

  

 

92,256

 

  

 

79,993

 

  

 

72,342

 

    


  


  


Tier 2 capital:

                          

Allowance for loan losses

  

 

9,179

 

  

 

7,336

 

  

 

7,389

 

    


  


  


Total Tier 2 capital

  

 

9,179

 

  

 

7,336

 

  

 

7,389

 

    


  


  


Total risk-based capital

  

$

101,435

 

  

$

87,329

 

  

$

79,731

 

    


  


  


Risk-weighted assets

  

$

834,560

 

  

$

718,225

 

  

$

674,687

 

    


  


  


Capital ratios:

                          

Tier 1 risk-based capital ratio

  

 

11.05

%

  

 

11.14

%

  

 

10.72

%

Total risk-based capital ratio

  

 

12.15

%

  

 

12.16

%

  

 

11.82

%

Tier 1 capital to average adjusted total assets

  

 

8.49

%

  

 

8.35

%

  

 

8.46

%

Equity to total assets

  

 

9.46

%

  

 

9.05

%

  

 

8.88

%

 

LIQUIDITY

 

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, Federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity, which is sufficient to satisfy its depositors’ requirements and to meet it customers’ credit needs.

 

At December 31, 2002, cash and cash equivalents and securities classified as available for sale were 28.6% of total assets, compared to 30.1% at December 31, 2001. Asset liquidity is also provided by managing loan and securities maturities and cash flows.

 

Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The subsidiary banks maintain Federal funds lines with several regional banks totaling approximately $63.8 million at December 31, 2002. At year-end 2002, the banks had outstanding $43.2 million of borrowings pursuant to securities sold under agreements to repurchase transactions with a maturity of one day. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $415 million at December 31, 2002.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2001, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others, to reconcile and conform the

 

 

24


Table of Contents

 

accounting and financial reporting provisions established by various AICPA industry audit guides. SOP No. 01-6 is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001, and did not have a material impact on the Company’s consolidated financial statements.

 

On March 13, 2002, the Financial Accounting Standards Board (“FASB”) determined that commitments for the origination of mortgage loans that will be held for sale must be accounted for as derivatives instruments, effective for fiscal quarters beginning after April 10, 2002. The Community Banks enter into commitments to originate loans whereby the interest rate on the loan is determined prior to funding. Such rate lock commitments on mortgage loans to be sold in the secondary market are considered derivatives. Accordingly, these commitments including any fees received from the potential borrower are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. The cumulative effect of adopting SFAS No. 133 for rate lock commitments as of December 31, 2002, was not material. The Company originally adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001.

 

In April 2002, FASB issued SFAS No. 145, Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The amendment to SFAS No. 13, eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are in effect for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, with early application encouraged.

 

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires recognition of a liability, when incurred, for costs associated with an exit or disposal activity. The liability should be measured at fair value. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002.

 

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, SFAS No. 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their estimated useful life. Branch acquisition transactions were outside the scope of SFAS No. 142 and therefore any intangible asset arising from such transactions remained subject to amortization over their estimated useful life.

 

In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 amends previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of SFAS No. 141, Business Combinations, and SFAS No. 142 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of SFAS No. 147 do not apply to transactions between two or more mutual enterprises. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment of Long-Lived Assets, to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used.

 

 

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Table of Contents

 

The adoption of SFAS Nos. 142, 145, 146 and 147 did not have a material impact on the Company’s consolidated financial statements.

 

FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of Statement No. 123, in December 2002. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about the effects of stock options in interim financial information. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendments to APB No. 28 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Early application is encouraged for both amendments. The Company continues to record stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees, and has not adopted the alternative methods allowable under SFAS No. 148.

 

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. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. 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. We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

 

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Table of Contents

 

QUARTERLY RESULTS

 

The table below lists the Company’s quarterly performance for the years ended December 31, 2002 and 2001.

 

    

2002


    

FOURTH


  

THIRD


  

SECOND


  

FIRST


  

TOTAL


    

(in thousands, except per share amounts)

Interest income

  

$

16,778

  

$

16,441

  

$

16,119

  

$

15,867

  

$

65,205

Interest expense

  

 

6,206

  

 

6,114

  

 

6,072

  

 

6,235

  

 

24,627

    

  

  

  

  

Net interest income

  

 

10,572

  

 

10,327

  

 

10,047

  

 

9,632

  

 

40,578

Provision for loan losses

  

 

659

  

 

650

  

 

739

  

 

830

  

 

2,878

    

  

  

  

  

Net interest income after provision for loan losses

  

 

9,913

  

 

9,677

  

 

9,308

  

 

8,802

  

 

37,700

Noninterest income

  

 

5,154

  

 

4,724

  

 

3,832

  

 

3,828

  

 

17,538

Noninterest expenses

  

 

9,557

  

 

9,067

  

 

8,649

  

 

8,649

  

 

35,922

    

  

  

  

  

Income before income taxes

  

 

5,510

  

 

5,334

  

 

4,491

  

 

3,981

  

 

19,316

Income tax expense

  

 

1,527

  

 

1,323

  

 

1,038

  

 

923

  

 

4,811

    

  

  

  

  

Net income

  

$

3,983

  

$

4,011

  

$

3,453

  

$

3,058

  

$

14,505

    

  

  

  

  

Net income per share

                                  

Basic

  

$

0.52

  

$

0.53

  

$

0.46

  

$

0.41

  

$

1.92

    

  

  

  

  

Diluted

  

$

0.52

  

$

0.52

  

$

0.46

  

$

0.40

  

$

1.90

    

  

  

  

  

 

    

2001


    

FOURTH


  

THIRD


  

SECOND


  

FIRST


  

TOTAL


    

(in thousands, except per share amounts)

Interest income

  

$

16,007

  

$

16,477

  

$

16,489

  

$

16,603

  

$

65,576

Interest expense

  

 

7,203

  

 

8,083

  

 

8,531

  

 

8,666

  

 

32,483

    

  

  

  

  

Net interest income

  

 

8,804

  

 

8,394

  

 

7,958

  

 

7,937

  

 

33,093

Provision for loan losses

  

 

846

  

 

455

  

 

393

  

 

432

  

 

2,126

    

  

  

  

  

Net interest income after provision for loan losses

  

 

7,958

  

 

7,939

  

 

7,565

  

 

7,505

  

 

30,967

Noninterest income

  

 

4,323

  

 

4,067

  

 

4,089

  

 

3,613

  

 

16,092

Noninterest expenses

  

 

8,626

  

 

8,092

  

 

7,971

  

 

7,758

  

 

32,447

    

  

  

  

  

Income before income taxes

  

 

3,655

  

 

3,914

  

 

3,683

  

 

3,360

  

 

14,612

Income tax expense

  

 

569

  

 

877

  

 

797

  

 

690

  

 

2,933

    

  

  

  

  

Net income

  

$

3,086

  

$

3,037

  

$

2,886

  

$

2,670

  

$

11,679

    

  

  

  

  

Net income per share

                                  

Basic

  

$

0.41

  

$

0.40

  

$

0.38

  

$

0.36

  

$

1.55

    

  

  

  

  

Diluted

  

$

0.41

  

$

0.40

  

$

0.38

  

$

0.35

  

$

1.55

    

  

  

  

  

 

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Table of Contents

 

Item 7A.—Quantitative and Qualitative Disclosures About Market Risk

 

This information is incorporated herein by reference from Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, on pages 15 through 17 of this Form 10-K.

 

28


Table of Contents

 

Item 8.—Financial Statements and Supplementary Data

 

INDEPENDENT AUDITOR’S REPORT

 

To the Stockholders and Directors

Union Bankshares Corporation

Bowling Green, Virginia

 

We have audited the accompanying consolidated balance sheets of Union Bankshares Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Mortgage Capital Investors, a consolidated subsidiary, which statements reflect total assets and revenue constituting 4% and 14%, respectively, in 2002, 5% and 13%, respectively, in 2001, 2% and 8%, respectively, in 2000, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mortgage Capital Investors, is based solely on the report of the other auditors.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares Corporation and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America.

 

/s/    Yount, Hyde & Barbour, P.C.

 

Winchester, Virginia

January 15, 2003

 

29


Table of Contents

 

UNION BANK SHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

 

    

2002


  

2001


    

(dollars in thousands)

ASSETS

             

Cash and cash equivalents:

             

Cash and due from banks

  

$

29,104

  

$

28,769

Interest-bearing deposits in other banks

  

 

909

  

 

462

Money market investments

  

 

15,142

  

 

2,023

Federal funds sold

  

 

1,247

  

 

7,661

    

  

Total cash and cash equivalents

  

 

46,402

  

 

38,915

    

  

Securities available for sale, at fair value

  

 

272,755

  

 

257,062

    

  

Loans held for sale

  

 

39,771

  

 

43,485

    

  

Loans, net of unearned income

  

 

714,764

  

 

600,164

Less allowance for loan losses

  

 

9,179

  

 

7,336

    

  

Net loans

  

 

705,585

  

 

592,828

    

  

Bank premises and equipment, net

  

 

21,577

  

 

19,191

Other real estate owned

  

 

774

  

 

768

Other assets

  

 

28,861

  

 

30,848

    

  

Total assets

  

$

1,115,725

  

$

983,097

    

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Noninterest-bearing demand deposits

  

$

134,172

  

$

110,913

Interest-bearing deposits:

             

NOW accounts

  

 

128,764

  

 

112,940

Money market accounts

  

 

88,440

  

 

79,176

Savings accounts

  

 

84,983

  

 

72,897

Time deposits of $100,000 and over

  

 

152,968

  

 

133,629

Other time deposits

  

 

308,315

  

 

274,529

    

  

Total interest-bearing deposits

  

 

763,470

  

 

673,171

    

  

Total deposits

  

 

897,642

  

 

784,084

    

  

Securities sold under agreements to repurchase

  

 

43,227

  

 

41,083

Other short-term borrowings

  

 

1,550

  

 

—  

Long-term borrowings

  

 

62,219

  

 

62,731

Other liabilities

  

 

5,595

  

 

6,220

    

  

Total liabilities

  

 

1,010,233

  

 

894,118

    

  

Commitments and contingencies

             

Stockholders’ equity:

             

Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,579,707 shares in 2002 and 7,525,912 shares in 2001

  

 

15,159

  

 

15,052

Surplus

  

 

1,442

  

 

446

Retained earnings

  

 

81,997

  

 

71,419

Accumulated other comprehensive income

  

 

6,894

  

 

2,062

    

  

Total stockholders’ equity

  

 

105,492

  

 

88,979

    

  

Total liabilities and stockholders’ equity

  

$

1,115,725

  

$

983,097

    

  

 

See accompanying notes to consolidated financial statements.

 

30


Table of Contents

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

    

2002


    

2001


  

2000


 
    

(dollars in thousands, except per share amounts)

 

Interest and dividend income:

                        

Interest and fees on loans

  

$

50,693

 

  

$

51,333

  

$

50,811

 

Interest on Federal funds sold

  

 

206

 

  

 

412

  

 

118

 

Interest on interest-bearing deposits in other banks

  

 

17

 

  

 

37

  

 

59

 

Interest on money market investments

  

 

40

 

  

 

23

  

 

—  

 

Interest and dividends on securities:

                        

Taxable

  

 

9,619

 

  

 

9,125

  

 

8,979

 

Nontaxable

  

 

4,630

 

  

 

4,646

  

 

4,900

 

    


  

  


Total interest and dividend income

  

 

65,205

 

  

 

65,576

  

 

64,867

 

    


  

  


Interest expense:

                        

Interest on deposits

  

 

20,459

 

  

 

27,140

  

 

26,512

 

Interest on short-term borrowings

  

 

475

 

  

 

1,200

  

 

2,451

 

Interest on long-term borrowings

  

 

3,693

 

  

 

4,143

  

 

4,567

 

    


  

  


Total interest expense

  

 

24,627

 

  

 

32,483

  

 

33,530

 

    


  

  


Net interest income

  

 

40,578

 

  

 

33,093

  

 

31,337

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

  

 

2,101

 

    


  

  


Net interest income after provision for loan losses

  

 

37,700

 

  

 

30,967

  

 

29,236

 

    


  

  


Noninterest in come:

                        

Service charges on deposit accounts

  

 

4,088

 

  

 

3,665

  

 

3,623

 

Other service charges, commissions and fees

  

 

2,563

 

  

 

2,488

  

 

2,163

 

Gains (losses) on securities transactions, net

  

 

(159

)

  

 

125

  

 

(957

)

Gains on sales of loans

  

 

10,089

 

  

 

8,857

  

 

5,516

 

Gains on sales of other real estate owned and bank premises, net

  

 

157

 

  

 

51

  

 

81

 

Gain on termination of pension plan

  

 

—  

 

  

 

—  

  

 

1,087

 

Other operating income

  

 

800

 

  

 

906

  

 

498

 

    


  

  


Total noninterest income

  

 

17,538

 

  

 

16,092

  

 

12,011

 

    


  

  


Noninterest expenses:

                        

Salaries and benefits

  

 

21,326

 

  

 

19,102

  

 

18,729

 

Occupancy expenses

  

 

2,318

 

  

 

2,179

  

 

2,300

 

Furniture and equipment expenses

  

 

2,742

 

  

 

2,859

  

 

2,956

 

Other operating expenses

  

 

9,536

 

  

 

8,307

  

 

8,439

 

    


  

  


Total noninterest expenses

  

 

35,922

 

  

 

32,447

  

 

32,424

 

    


  

  


Income before income taxes

  

 

19,316

 

  

 

14,612

  

 

8,823

 

Income tax expense

  

 

4,811

 

  

 

2,933

  

 

1,223

 

    


  

  


Net income

  

$

14,505

 

  

$

11,679

  

$

7,600

 

    


  

  


Earnings per share, basic

  

$

1.92

 

  

$

1.55

  

$

1.01

 

    


  

  


Earnings per share, diluted

  

$

1.90

 

  

$

1.55

  

$

1.01

 

    


  

  


 

See accompanying notes to consolidated financial statements.

 

31


Table of Contents

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

    

Common Stock


    

Surplus Earnings


    

Retained Income


      

Accumulated Other Comprehensive Income (Loss)


      

Comprehensive Income (Loss)


    

Total


 
    

(dollars in thousands, except per share amounts)

 

Balance—December 31, 1999

  

$

14,976

 

  

$

163

 

  

$

58,603

 

    

$

(4,948

)

             

$

68,794

 

Comprehensive income:

                                                         

Net income—2000

                    

 

7,600

 

               

$

7,600

 

  

 

7,600

 

Unrealized holding gains arising during the period (net of tax, $2,077)

                                          

 

4,031

 

        

Reclassification adjustment for losses included in net income (net of tax, $325)

                                          

 

632

 

        
                                            


        

Other comprehensive income (net of tax, $2,402)

                               

 

4,663

 

    

 

4,663

 

  

 

4,663

 

                                            


        

Total comprehensive income

                                          

$

12,263

 

        
                                            


        

Cash dividends—2000 ($.40 per share)

                    

 

(3,002

)

                        

 

(3,002

)

Issuance of common stock under Dividend Reinvestment Plan (35,092 shares)

  

 

70

 

  

 

276

 

                                 

 

346

 

Stock repurchased under Stock Repurchase Plan (30,300 shares)

  

 

(61

)

  

 

(269

)