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, 1998 COMMISSION FILE NO. 0-20293 UNION BANKSHARES CORPORATION (Exact name of registrant as specified in its charter) VIRGINIA 54-1598552 (State of Incorporation) (I.R.S. Employer I.D. No.) 212 NORTH MAIN STREET P.O. BOX 446 BOWLING GREEN, VIRGINIA 22427 (Address of principal executive officers) (804) 633-5031 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $2 PAR VALUE Indicate by 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. X Yes 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 the 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 the Voting Stock Held by Nonaffiliates of the Registrant was $120,043,710 as of February 26, 1999. As of February 26, 1999, Union Bankshares Corporation had 7,568,884 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998 are incorporated into Part II of this Form 10-K and portions of the Proxy Statement for the 1999 annual meeting are incorporated into Part III. UNION BANKSHARES CORPORATION FORM 10-K INDEX PART 1 PAGE Item 1. Business............................................. 1 Item 2. Properties........................................... 8 Item 3. Legal Proceedings.................................... 10 Item 4. Submission of Matters to a Vote of Security Holders....................... 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 11 Item 6. Selected Financial Data.............................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................... 11 Item 8. Financial Statements and Supplementary Data..................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 15 PART III Item 10. Directors and Executive Officers..................... 16 Item 11. Executive Compensation............................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 17 Item 13. Certain Relationships and Related Transactions........................... 17 PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K................ 18 PART I ITEM 1. - BUSINESS GENERAL Union Bankshares Corporation (the "Company") is a multi-bank holding company organized under Virginia law which is headquartered in Bowling Green, Virginia. The Company is committed to the delivery of financial services through its affiliated community banks, Union Bank & Trust Company ("Union Bank"), Northern Neck State Bank ("Northern Neck Bank"), Rappahannock National Bank ("Rappahannock Bank"), King George State Bank ("King George Bank") and the Bank of Williamsburg ("Bank of Williamsburg") (collectively, the "Subsidiary Banks") and three non-bank financial services affiliates, Union Investment Services, Inc. ("Union Investment"), Union Mortgage Company, LLC ("Union Mortgage") and Mortgage Capital Investors, Inc. ("MCI"). The Company was formed in connection with the July 12, 1993 merger of Northern Neck Bankshares Corporation with and into Union Bancorp, Inc.. 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, Bank of Williamsburg began business as a newly organized bank focused on the Williamsburg market. Each of the Subsidiary Banks is a full service retail commercial bank offering a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, commercial, industrial, residential mortgage and consumer loans. The Subsidiary Banks also issue credit cards and can deliver automated teller machine services through the use of reciprocally shared ATMs in the MOST, CIRRUS and PLUS networks. Union Bankshares Corporation had assets of $734 million, deposits of $608 million, and shareholders' equity of $73 million at December 31, 1998. The Company serves, through its subsidiaries, the counties of Caroline, Hanover, King George, King William, Spotsylvania, Stafford, Richmond, Westmoreland, Essex, Lancaster, Northumberland and the City of Fredericksburg, Virginia. Through its four subsidiary banks, the Company operated twenty eight branches in its primary trade area at year end. Union Bank opened three branches in 1998: at Brock Road and Route 3 in Fredericksburg in January 1998; at Fall Hill Avenue in Fredericksburg in June 1998; and at 610 Mechanicsville Turnpike in Mechanicsville in September 1998. In addition, five new branches were established in February 1998 in connection with the purchase of the former Signet Bank branches in Burgess, Colonial Beach, Kilmarnock, Reedville and White Stone, Virginia. See "Acquisition Program--Branch Purchase." On February 22, 1999, the Company opened the Bank of Williamsburg, a full service bank headquartered in Williamsburg, Virginia. The bank was organized and chartered under the laws of Virginia in February 1999. The main office of the Bank of Williamsburg is located at 5251 John Tyler Parkway and its primary trade area is Williamsburg and surrounding James City County. Union Investment has provided securities brokerage and investment advisory services since February 1993. It is a full service discount brokerage company which offers a full range of investment services, and sells mutual funds, bonds and stocks. Union Mortgage Company, LLC , a mortgage loan brokerage company and subsidiary of Union Bank, began operations on January 1, 1997. Union Mortgage provides a wide array of mortgage products to customers in the service areas of the Subsidiary Banks. 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 Corporation into Mortgage Capital Investors, Inc., a wholly owned subsidiary of Union Bank ("Mortgage Capital"). See "Acquisition Program - Purchase of Mortgage Capital Investors, Inc." Mortgage Capital has offices in four states in the mid-Atlantic area and in Florida which provide a variety of mortgage products to customers in those states. The Company intends to combine the operations of Union Mortgage and Mortgage Capital Investors during 1999. ACQUISITION PROGRAM The Company looks to expand its market area and increase its market share through both internal growth and strategic acquisitions. During 1998, the Company engaged in the following acquisition transactions: BRANCH PURCHASE. On February 17, 1998, Northern Neck Bank and King George Bank acquired certain assets and assumed certain deposit and other liabilities relating to five former branch offices of First Union National Bank (successor by merger with Signet Bank) (the "Branch Transaction"). In the aggregate, the affiliate banks assumed total net deposits of approximately $60 million. The Branch Transaction was consummated pursuant to a Purchase and Assumption Agreement, dated as of October 21, 1997, by and between Signet Bank and the Company (the "Purchase Agreement"). According to the Purchase Agreement, the Company's subsidiary banks were to acquire certain assets and assume certain deposit and other liabilities relating to seven branch offices of Signet Bank (in 1998 Signet Bank was acquired by First Union). However, because of market concentration restrictions placed on the transaction by federal regulators, two of the branch offices (Warsaw and Montross, Virginia) that were to be acquired by Northern Neck Bank were sold to Bank of Lancaster, Kilmarnock, Virginia, immediately following the closing of the Branch Transaction pursuant to a Purchase and Assumption Agreement, dated as of November 17, 1997, between Northern Neck Bank and Bank of Lancaster. ACQUISITION OF RAPPAHANNOCK BANKSHARES. On February 25, 1998, the Company entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") with Rappahannock Bankshares, Inc. ("Rappahannock"). According to the Reorganization Agreement, Rappahannock merged with and into the Company and Rappahannock Bank operates as a subsidiary bank of the Company. The Company consummated the transaction on July 1, 1998, after obtaining the applicable shareholder and regulatory approvals. OPENING OF THE BANK OF WILLIAMSBURG. On February 22, 1999, the Company opened the Bank of Williamsburg in temporary headquarters in the Williamsburg Crossing Shopping Center at 5251 John Tyler Parkway in Williamsburg. This full service bank puts the Company in a new market area located in a rapidly growing region of Virginia. PURCHASE OF MORTGAGE CAPITAL INVESTORS. On February 11, 1999, the Company purchased CMK Corporation t/a "Mortgage Capital Investors" to augment its mortgage origination business. Mortgage Capital Investors originates and sells mortgage loans in the mortgage market and is strategically designed to increase fee income with limited or no asset quality risk. COMPETITION The Company experiences competition in all aspects of its business. In its market area, the Company competes with large regional financial institutions, savings and loans and other independent community banks, as well as credit unions, mutual funds and life insurance companies. Competition has also 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. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. The following description briefly discusses certain provisions of federal and state laws and certain regulations and proposed regulations and the potential impact of such provisions on the Company and its Subsidiary Banks. 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 nonbank 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 which 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 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 ("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 Subsidiary Banks are subject to regulation and supervision by the State Corporation Commission of Virginia (the "SCC"). CAPITAL REQUIREMENTS The Federal Reserve Board, the Office of the Comptroller of the Currency 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, 1998 were 12.47% and 13.70%, 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). These guidelines provide for a minimum ratio of 3% 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. All other institutions are expected to maintain a leverage ratio of at least 100 to 200 basis points above the minimum. The leverage ratio of the Company as of December 31, 1998, was 9.06%, 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. Substantially all of the revenues of the Company result from dividends paid to it by the Subsidiary Banks. There are various legal limitations applicable to the payment of dividends to the Company, as well as the payment of dividends by the Company to its respective shareholders. Under federal law, the Subsidiary 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 Subsidiary Banks are also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions. The Subsidiary Banks are subject to various statutory restrictions on their ability to pay dividends to the Company. Under the current supervisory practices of the Subsidiary 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 earnings of the two proceeding years. The payment of dividends by the Subsidiary 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 Subsidiary 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 Subsidiary Banks, or the Company, could be deemed to constitute such an unsafe or unsound practice. Under the FDIA, insured depository institutions such as the Subsidiary Banks are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the statute). Based on the Subsidiary Banks' current financial condition, the Company does not expect that this provision will have any impact on its ability to obtain dividends from the Subsidiary Banks. THE SUBSIDIARY BANKS The Subsidiary Banks are supervised and regularly examined by the Federal Reserve Board and the SCC. 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 Subsidiary 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 an institution with deposits insured by the BIF, the Bank also is subject to insurance assessments imposed by the FDIC. The FDIC has implemented a risk-based assessment schedule, imposing assessments ranging from zero (a minimum of $2,000) 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 1998, the Subsidiary Banks paid $63,238 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. 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. Northern Neck State Bank has its main office in Warsaw, Virginia and operated eight branches at December 31, 1998; Union Bank has its main office in Bowling Green, Virginia and operated fifteen branches at 1998 year end. At year end, King George Bank operated out of two locations, one in King George and the other in Westmoreland, Virginia. Union Investment's office is located in Bowling Green, Virginia. See Notes to Consolidated Financial Statements for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases. On February 17, 1998, the Company acquired five former branch offices of Signet Bank, four of which were allocated to Northern Neck Bank and the remaining branch to King George Bank. See "Item 1--Business--Acquisition Program." The properties on the following page are those owned or leased by the Company and its subsidiaries as of December 31, 1998. 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 & Ashcake Road, Ashland, Virginia 4210 Plank Road, Fredericksburg, Virginia 10415 Courthouse Road, Fredericksburg, Virginia 10469 Atlee Station Road, Ashland, Virginia 700 Kenmore Avenue, Fredericksburg, Virginia Route 360, Manquin, Virginia 9534 Chamberlayne Road, Mechanicsville, Virginia Cambridge & Layhill Road, Falmouth, Virginia Massaponax Church Road & Route 1, Spotsylvania, Virginia Brock Road and Route 3, Fredericksburg, Virginia 2811 Fall Hill Avenue, Fredricksburg, Virginia 610 Mechanicsville Turnpike, Mechanicsville, Virginia BANKING OFFICES - NORTHERN NECK STATE BANK 5839 Richmond Road, Warsaw, Virginia 4256 Richmond Road, Warsaw, Virginia Route 3, Kings Highway, Montross, Virginia Route 17 & Earl Street, Tappahannock, Virginia 1660 Tappahannock Blvd, Tappahannock, Virginia 15043 Northumberland Highway, Burgess, Virginia 284 North Main Street, Kilmarnock, Virginia 876 Main Street, Reedville, Virginia 485 Chesapeake Drive, White Stone, Virginia BANKING OFFICES - KING GEORGE STATE BANK 10045 Kings Highway, King George, Virginia 840 McKinney Blvd., Colonial Beach, Virginia BANKING OFFICES - RAPPAHANNOCK NATIONAL BANK 257 Gay Street, Washington, Virginia UNION INVESTMENT SERVICES, INC. 111 Davis Court, Bowling Green, Virginia 10469 Atlee Station Road, Ashland, Virginia UNION MORTGAGE COMPANY, LLC. 211 North Main Street, Bowling Green, 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. 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. PART II ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated herein by reference from the inside back cover of the Annual Report to Shareholders for the year ended December 31, 1998. ITEM 6. - SELECTED FINANCIAL DATA This information is incorporated herein by reference from the section captioned "Selected Financial Data" on page 2 in the Annual Report to Shareholders for the year ended December 31, 1998. ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information is incorporated herein by reference from the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 21 in the Annual Report to Shareholders for the year ended December 31, 1998. ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's primary market risk is interest rate risk. The main objective of interest rate risk management is to avoid large fluctuations in net interest income from changes in interest rates on interest-sensitive assets and interest-sensitive liabilities. The Asset/Liability Management Committee of the Company ("ALCO") is responsible for monitoring and limiting exposure to interest rate risk. Management uses balance sheet repositioning as a tool to manage interest rate risk. This is accomplished through pricing of asset and liability accounts. The expected result of pricing is the development of appropriate maturity and repricing opportunities in those accounts to produce consistent net interest income during changing interest rate environments. The ALCO also sets policy guidelines and establishes strategies with respect to interest rate exposures. The ALCO meets quarterly to review the Company's interest rate exposure in relation to present and prospective market and business conditions, and reviews balance sheet management strategies intended to ensure the potential impact of changes in interest rates on earnings is within acceptable standards. The Company uses three methods to measure interest rate risk; static gap analysis, earnings simulation analysis and market value simulation analysis. STATIC GAP ANALYSIS Gap analysis measures the amount of repricing risk in the balance sheet. It does this by taking the difference between the amount of rate sensitive assets and rate sensitive liabilities which reprice within a specified time period. This is the least reliable measurement of interest rate risk because it only measures rate sensitive assets minus rate sensitive liabilities at one point in time. It does not reflect the different degrees of rate sensitivity each asset and liability account have. An example of this: If prime rate changes by 100 bps, the interest rate change on a money market account might be 25 bps and that of a certificate of deposit might be 75 bps. The best information obtained from a gap report is the amount of assets or liabilities which can be repriced at any one point in the future, not the degree of rate sensitivity. The following table shows the Company's gap report over the next five years. To reflect anticipated prepayments, mortgage backed securities are included in the table based on estimated rather than contractual maturity dates.
INTEREST SENSITIVITY ANALYSIS (dollars in thousands) DECEMBER 31, 1998 (1) -------------------------------------------------------------- WITHIN 90 90-365 1-5 OVER 5 DAYS DAYS YEARS YEARS TOTAL ---------- ----------- ------ ------- -------- EARNING ASSETS: Loans, net of unearned income (2) $ 104,454 $38,229 $206,801 $127,525 $477,009 Investment securities - 2,920 10,049 3,173 16,142 Securities available for sale 2,176 3,097 41,393 114,562 161,228 Other short-term investments 1,413 - - - 1,413 ------------ ------------ ------------- ---------- ----------- Total Earning Assets 108,043 44,246 258,243 245,260 655,792 ============ ============ ============= ========== =========== INTEREST-BEARING LIABILITIES: Interest checking (3) - - 81,514 - 81,514 Regular savings (3) - 8,156 53,125 - 61,281 Money market savings - 64,331 - - 64,331 Certificates of deposit: $100,000 and over 26,974 35,019 18,833 100 80,926 Under $100,000 33,810 105,454 98,848 136 238,248 Short-term borrowings 19,476 - - - 19,476 Long-term borrowings 5,075 75 17,275 5,900 28,325 ------------ ------------ ------------- ---------- ----------- Total Interest-Bearing Liabilities 85,335 213,035 269,595 6,136 574,101 ------------ ------------ ------------- ---------- ----------- Period Gap 22,708 (168,789) (11,352) 239,124 Cumulative Gap $22,708 $(146,081) $(157,433) $ 81,691 $81,691 ============ ============ ============= ========== =========== Ratio of cumulative gap to total earning assets 3.46% (22.28)% (24.01)% 12.46% ============ ============ ============= ========== ===========
(1) THE REPRICING DATES MAY DIFFER FROM MATURITY DATES FOR CERTAIN ASSETS DUE TO PREPAYMENT ASSUMPTIONS. (2) EXCLUDES NON-ACCRUAL LOANS (3) THE COMPANY HAS DETERMINED THAT INTEREST-BEARING CHECKING DEPOSITS AND REGULAR SAVINGS DEPOSITS ARE NOT SENSITIVE TO CHANGES IN RELATED MARKET RATES AND THEREFORE, IT HAS PLACED THEM PREDOMINATELY IN THE "1-5 YEARS" COLUMN. EARNINGS SIMULATION ANALYSIS Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis. Assumptions used in the model include loan and deposit growth rates are derived from seasonal trends and management's outlook as are the assumptions used to project yields and rates for new loans and deposits. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios. The following table represents the interest rate sensitivity on net interest income for the Company using different rate scenarios: % CHANGE IN CHANGE IN PRIME RATE NET INTEREST INCOME -------------------- ------------------- +200 basis points -2.75% Flat 0 -200 basis points +2.20% MARKET VALUE SIMULATION Market value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Market values are calculated based on discounted cash flow analysis. The net market value is the market value of all assets minus the market value of all liabilities. The change in net market value over different rate environments is an indication of the larger term repricing risk in the balance sheet. The same assumptions are used in the market value simulation as in the earnings simulation. The following chart reflects the change in net market value over different rate environments: CHANGE IN NET MARKET VALUE CHANGE IN PRIME RATE (DOLLARS IN THOUSANDS) -------------------- ---------------------- +200 basis points $-15,639 +100 basis points -4,733 Flat 2,387 -100 basis points 15,846 -200 basis points 24,896 ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated herein by reference from the Consolidated Financial Statements on pages 22 through 39 and the Quarterly Earnings Summary on the inside front cover of the Annual Report to Shareholders for the year ended December 31, 1998. ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no disagreements between the Company and its independent accountants. PART III ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information, as applicable to directors, is incorporated herein by reference from pages 2 and 3 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 20, 1999 ("Proxy Statement") from the section titled "Election of Directors." Executive officers of the Company as of December 31, 1998 are listed on the following page: TITLE AND PRINCIPAL OCCUPATION NAME (AGE) DURING PAST FIVE YEARS - ---------- ------------------------------- G. William Beale (49) President and Chief Executive Officer of the Company since its inception; President of Union Bank since 1991. E. Peyton Motley (54) Executive Vice President and Chief Operating Officer of the Company since its inception; President of Northern Neck Bank since 1978. D. Anthony Peay (39) Vice President and Chief Financial Officer since December 1994; Certified Public Accountant, Senior Manager - Deloitte & Touche. John C. Neal (49) Executive Vice President and Chief Operating Officer - Union Bank Myles W. H. Gaythwaite (54) Vice President - Sales, Marketing and Human Resources Information on Section 16(a) beneficial ownership reporting compliance for the directors and executive officers of the Company is incorporated herein by reference from page 4 of the Proxy Statement from the section titled "Section 16(a) Beneficial Ownership Reporting Compliance". ITEM 11 - EXECUTIVE COMPENSATION This information is incorporated herein by reference from page 3 and pages 5 trough 10 of the Proxy Statement from the sections titled "Election of Directors--Directors' Fees" and "Executive Compensation". ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated herein by reference from page 4 of the Proxy Statement from section titled "Ownership of Company Common Stock." ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated herein by reference from page 11 of the Proxy Statement from the section titled "Interest of Directors and Officers in Certain Transactions." PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (1) FINANCIAL STATEMENTS The following consolidated financial statements of Union Bankshares Corporation and subsidiaries included in the 1998 Annual Report to Shareholders are incorporated by reference in this report: Consolidated Balance Sheets Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report (2) FINANCIAL STATEMENT SCHEDULES All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (3) EXHIBITS Exhibit No. Description ----------- ----------- 3.1 Articles of Incorporation (incorporated by reference to Form S-4 Registration Statement - 33-60458) 3.2 By-Laws (incorporated by reference to Form S-4 Registration Statement - 33-60458) 10.1 Form of Employment Agreement of G. William Beale and E. Peyton Motley, respectively (incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998) 11.0 Statement re Computation of Per Share Earnings (incorporated by reference to note 11 of the notes to consolidated financial statements included in the 1998 Annual Report to Shareholders) 13.0 1998 Annual Report to Shareholders 21.0 Subsidiaries of the Registrant 27.0 Financial Data Schedule (4) REPORTS ON FORM 8-K No reports were filed on Form 8-K during the fourth quarter ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNION BANKSHARES CORPORATION By: / s/ G. William Beale ---------------------- Date: March 31, 1999 G. William Beale President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 31, 1999.
SIGNATURE TITLE --------- ----- / s/ G. William Beale - -------------------------------- President, Chief Executive Officer and G. William Beale Director / s/ E. Peyton Motley - -------------------------------- Executive Vice President, Chief Operating E. Peyton Motley Officer and Director / s/ D. Anthony Peay Vice President and Chief Financial Officer - -------------------------------- D. Anthony Peay - -------------------------------- Chairman of the Board of Directors Ronald L. Hicks / s/ Charles H. Ryland - -------------------------------- Vice Chairman of the Board of Directors Charles H. Ryland / s/ W. Tayloe Murphy, Jr. - -------------------------------- Director W. Tayloe Murphy, Jr. /s/ Walton Mahon - -------------------------------- Director Walton Mahon - -------------------------------- Director M. Raymond Piland, III - -------------------------------- Director A.D. Whittaker