"ENHANCING
SHAREHOLDER
VALUE
THROUGH
EXEMPLARY
CUSTOMER
SERVICE."
[GRAPHIC OMITTED]
2001 ANNUAL REPORT
[GRAPHIC OMITTED]
UNION BANKSHARES
CORPORATION
A UNION OF COMMUNITY BANKS
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
BUSINESS PROFILE
Union Bankshares Corporation is a multi-bank holding company committed to the
delivery of financial services through affiliated independent community banks
and financial services companies. The Company serves the Central and Northern
Neck regions of Virginia through its banking subsidiaries, Union Bank & Trust
Company, Northern Neck State Bank, Rappahannock National Bank, and Bank of
Williamsburg and its non-bank companies, Union Investment Services and Mortgage
Capital Investors.
The banking subsidiaries are Federal Reserve member banks whose deposits are
insured by the Federal Deposit Insurance Corporation. Each is a full-service
commercial bank offering commercial and consumer deposit accounts and loans,
credit cards, automated teller machines, Internet Banking and many other
services to its customers. Each is also independently operated by local
management and boards of directors enabling them to be responsive to the needs
of their communities. Through the consolidation of support functions including
data processing, item processing, customer accounting, financial accounting,
human resources, internal audit, credit administration and sales and marketing,
the banks are able to provide their customers high quality products and services
in a more efficient manner.
Through its 18 locations, Union Bank and Trust Company serves customers in a
primary service area which extends from its headquarters in Bowling Green along
the I-95 corridor from greater Fredericksburg to central Hanover County and east
to King William County. Northern Neck State Bank serves the Northern Neck and
Middle Peninsula regions through nine locations in this region. Rappahannock
National Bank serves the community surrounding Washington, Virginia. The Bank of
Williamsburg in its location at 5125 John Tyler Parkway serves the greater
Williamsburg region and recently opened a loan production office in Newport
News. Except for the Bank of Williamsburg, which opened in 1999, each of these
banks have met the financial needs of their communities for over 95 years.
Union Investment Services is a full-service brokerage firm providing a wide
variety of investment choices to customers throughout the Company's service
area. Mortgage Capital Investors offers a full array of mortgage products to
residents of our markets and outside markets through its origination offices. In
addition, it offers insurance products through a joint venture, Union Insurance
Group, L.L.C.
At December 31, 2001, Union Bankshares Corporation and subsidiaries had 427
employees, 2,264 shareholders of record, and assets totaling $983 million.
MISSION STATEMENT
"The primary mission of Union Bankshares Corporation and its subsidiaries is to
enhance shareholder value by remaining a strong, independent financial services
organization, providing exemplary customer service, a rewarding work environment
for its employees and a growing return for its shareholders."
On the cover from left to right: Northern Neck State Bank customer
Marty Mothershead with Vice President Rusty Brown; Union Bank & Trust customer
Jackie Payne with Vice President David Bohmke; Alice Dix, Personal Banker at
Northern Neck State Bank with customer Eugene Lewis; Union Bank & Trust
customer Scott McDougle with Vice President Doug Ransone.
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
PRESIDENT'S LETTER
Dear Shareholders:
Profits... Customer Service... Growth... People. These are the strengths of
Union Bankshares Corporation. Like pieces of twine woven together to make a
strong rope, the combination of people, customer service, profits, and growth
are intertwined within Union Bankshares Corporation. They make for a strong
organization built to create value for our shareholders.
[PHOTO OF G. WILLIAM BEALE, PRESIDENT]
[GRAPHIC OMITTED]
G. William Beale, President
Each of these four are so critical that without any one of them, our
organization would suffer. Over the last eight years, we have worked to build a
strong team within the holding company and each of our subsidiaries. Our team is
focused on customer service, profits, and growth, the three characteristics that
make up the remainder of our strength.
Customer service is at the forefront of what Union Bankshares Corporation's
subsidiaries are about. This is how we differentiate ourselves in a business
with products and services that people have come to view as commodities. We are
in business to deliver high quality financial services in a high touch manner to
our customers.
Union Bankshares companies are located in both high growth and low growth
markets, yet we consistently outgrow our competitors due to the outstanding
customer service we provide. Without growth, it is difficult to continue to
deliver increased profits. Over the past few years many of the products and
services that we offer, whether they be deposits, loans, mortgages, or
investments, have become priced as commodities. This has caused our net interest
margins and those of banks across the country to narrow. While it may seem very
basic, increased profits can be achieved on narrowing margins, but only if there
is growth in earning assets.
[GRAPHIC OMITTED]
Exemplary customer service is what differentiates Union Bankshares Corporation
from its competitors. Pictured are Susan Hartsook (left) from Union Bank &
Trust's Kenmore branch and one of her customers, real estate agent Janet
O'Malley.
Some years ago, Union Bankshares made investments in technology in conjunction
with a corporate commitment to consolidate back office support services. We
believed this was a way in which we could lower our costs of doing business and
become more efficient by leveraging people and technology. We began seeing
results of this investment in the year 2000. The financial performance of our
organization continues to reflect our effective use of technology and the
benefits of leveraging human resources through our back office consolidation. We
have accomplished much, yet we still see opportunity for improvements in the
coming years.
The community banking sector of Union Bankshares Corporation had an excellent
year. Net profits for that sector of our business increased by 14%. Our banks
saw deposit growth exceed loan growth for the first time in a number of years,
reflecting the turmoil and uncertainty in the equity markets. Deposits grew by
$91.6 million or 13%. On the asset side of the balance sheet, the Corporation's
residential construction lending and com-
PAGE 1
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
mercial real estate lending continued to be strong. Other sectors reflected the
downturn in the economy. Declines in mortgage rates saw customers refinance to
products with longer maturities than those typically offered by our banks.
Aggressive pricing, such as 0% interest, by automobile captive finance companies
resulted in reduced consumer lending. We saw overall declines in our residential
mortgage, commercial, and consumer automobile portfolios.
- --------------------------------------------------------------------------------
OUR NEW
INTERNET BANKING
IS AS FRIENDLY
TO USE AS
THE BANK ITSELF
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
This newspaper ad, which was taken from one of our television commercials and
part of a comprehensive campaign for our banks, is one way we conveyed the
message that Internet Banking would improve customer service by making it more
convenient to bank with us. Marge Perkins from Union Bank & Trust's Atlee branch
is pictured.
During 2001, each of our banks introduced full service Internet Banking, with
bill paying capabilities, to our retail deposit customers. Early in 2002, we
will begin introducing Internet Banking and cash management services to our
commercial deposit customers. Internet Banking continues our efforts to provide
the best in modern banking delivered in a community bank wrapper. We want to be
both big enough and small enough to meet our customers' financial needs.
The year 2002 will be a special year for Union Bank & Trust Company and
Rappahannock National Bank. Both banks will be celebrating their 100th year of
serving their community. Strong leadership and a community focus are
characteristics that allowed these banks to survive the Great Depression, as
well as more local economic downturns.
[GRAPHIC OMITTED]
The community banking staff at Bank of Williamsburg's new loan production office
in Newport News is dedicated to serving their customers. From left: Executive
Vice President Bob Bailey, Vice President Mary Kenerley, Portfolio Administrator
Stephanie Walter, and Vice President Margaret Cooper.
In connection with the recent acquisition of a community banking organization by
a North Carolina super regional bank, Bank of Williamsburg (BOW) had the
opportunity to hire three lenders and a portfolio administrator who wanted to
continue their careers as full service community bankers. On January 2, 2002,
BOW opened a loan production office in the Oyster Point area of Newport News,
Virginia. While the opening of this office will represent a short-term drag on
earnings, the loan volume generated by this new office is expected to enhance
future earnings to BOW.
In late summer, Union Bank & Trust Company will open a branch in Thornburg,
Virginia. The Thornburg location will deep-
PAGE 2
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
en our presence in fast growing Spotsylvania County and fill a hole in our
footprint along the rapidly developing US1/I-95 corridor.
REVENUE GROWTH
[GRAPHIC CHART OMITTED]
Despite being closed for ten days following the September 11 terrorist attacks,
Union Investment Services showed increased revenues and net profit for the year.
Union Investments Services currently has three full-time investment advisors.
During 2002, we expect to respond to customer demand and market growth by adding
additional brokers to our network.
In last year's annual report, we spoke to the many initiatives we had undertaken
at Mortgage Capital Investors to close offices, reduce overhead, and improve
efficiencies. Mortgage Capital Investors earned $1.2 million for your company
this year on $320 million in loan originations. We have compared these numbers
with other bank owned mortgage companies and found that our performance was
equal to or better than most. During 2001, as a result of the above initiatives
and increased volumes, we saw the fixed costs of generating a loan drop to less
than half the cost that was experienced in the year 2000 and the number of
commissioned loan officers working for Mortgage Capital Investors more than
doubled. While interest rates certainly worked in our favor, we are gratified
that refinance volume represented only a third of our total business. Our
mortgage business continues to focus on referrals from our bank employees and
our long-standing relationships with builders and realtors. Mortgage Capital
Investors, like our banks, is a strong advocate of customer service in meeting
the needs of its client base. Again, in a pricesensitive business, value is
added through knowledgeable people and a commitment to superior service.
The heyday of tech stocks seems a distant memory, except to those who heavily
invested in that sector. Community bank stocks represent the antithesis of the
high-flying tech stocks--value, stability, profits and dividends. As the
technology stock bubble inflated, community bank stocks lost value for their
shareholders and Union Bankshares lost more value than its peers. When the
technology bubble burst, many investors returned to value stocks, like community
banks.
In the year 2001, Union Bankshares was a come-back story. Our profits were much
improved and exceeded those of many of our peers. The results were reflected in
a 50% increase in our stock price, which exceeded that of the NASDAQ community
bank sector, and many of our Virginia peers. Even into the first part of the
year 2002, our stock price has continued to rise. I am sure this increase is
particularly gratifying to each of you who purchased Union Bankshares stock when
it was trading in the $10 and $11 range. I congratulate you on the astuteness of
your investment.
Since the formation of Union Bankshares Corporation we have not wavered from our
mission and although every endeavor has not worked out exactly as planned, we
are poised for the future. Our expectation is that through internal growth,
[GRAPHIC CHART OMITTED]
PAGE 3
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
Union Bankshares Corporation can reach $1.5 billion in assets within four years.
We believe that we have the platform of people, markets, and infrastructure to
achieve that growth. We also believe that the time is right for Union Bankshares
Corporation to grow through acquisition. We will focus on entering growth
markets and/or seeking affiliations with banks that offer a unique service or
niche that compliments our organization.
On behalf of our employees and the Board, I would like to thank you for being
interested and engaged shareholders. If you are not currently using one of our
companies for your financial needs, I encourage you to do so. You will enjoy
working with highly motivated people dedicated to providing exemplary customer
service and enhancing the value of your ownership. Please remember that the best
place to get accurate information about Union Bankshares is from your
management. Our doors, telephones, and e-mails are always open.
[GRAPHIC CHART OMITTED]
Sincerely,
/s/ WILLIAM BEALE
G. William Beale
President
QUARTERLY EARNINGS SUMMARY
2001 2000
FOURTH THIRD SECOND FIRST TOTAL FOURTH THIRD SECOND FIRST TOTAL
------ ----- ------ ----- ----- ------ ----- ------ ----- -----
(in thousands, except per share amounts)
Interest income $16,007 $16,477 $16,489 $16,603 $65,576 $16,680 $16,593 $16,228 $15,366 $64,867
Interest expense 7,203 8,083 8,531 8,666 32,483 8,765 8,703 8,382 7,680 33,530
----------------------------------------------- -----------------------------------------------
Net interest income 8,804 8,394 7,958 7,937 33,093 7,915 7,890 7,846 7,686 31,337
Provision for loan losses 846 455 393 432 2,126 434 522 581 564 2,101
----------------------------------------------- -----------------------------------------------
Net interest income after
provision for loan losses 7,958 7,939 7,565 7,505 30,967 7,481 7,368 7,265 7,122 29,236
Noninterest income 4,323 4,067 4,089 3,613 16,092 3,168 3,163 3,219 2,461 12,011
Noninterest expenses 8,626 8,092 7,971 7,758 32,447 7,888 8,342 8,163 8,031 32,424
----------------------------------------------- -----------------------------------------------
Income before income taxes 3,655 3,914 3,683 3,360 14,612 2,761 2,189 2,321 1,552 8,823
Income tax expense 569 877 797 690 2,933 373 292 427 131 1,223
----------------------------------------------- -----------------------------------------------
Net income $ 3,086 $ 3,037 $ 2,886 $ 2,670 $11,679 $ 2,388 $ 1,897 $ 1,894 $ 1,421 $ 7,600
=============================================== ===============================================
Net income per share
Basic $ 0.41 $ 0.40 $ 0.38 $ 0.36 $ 1.55 $ 0.32 $ 0.25 $ 0.25 $ 0.19 $ 1.01
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted $ 0.41 $ 0.40 $ 0.38 $ 0.35 $ 1.55 $ 0.32 $ 0.25 $ 0.25 $ 0.19 $ 1.01
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
PAGE 4
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
SELECTED FINANCIAL DATA
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
Interest income $ 65,576 $ 64,867 $ 55,636 $ 51,062 $ 44,821
Interest expense 32,483 33,530 27,067 24,463 21,057
------------------------------------------------------------------
Net interest income 33,093 31,337 28,569 26,599 23,764
Provision for loan losses 2,126 2,101 2,216 3,044 1,182
------------------------------------------------------------------
Net interest income after provision for loan losses 30,967 29,236 26,353 23,555 22,582
Noninterest income 16,092 12,011 13,246 5,567 4,495
Noninterest expenses 32,447 32,424 32,689 20,622 16,628
------------------------------------------------------------------
Income before income taxes 14,612 8,823 6,910 8,500 10,449
Income tax expense 2,933 1,223 636 1,678 2,283
------------------------------------------------------------------
Net income $ 11,679 $ 7,600 $ 6,274 $ 6,822 $ 8,166
==================================================================
KEY PERFORMANCE RATIOS
Return on average assets (ROA) 1.27% 0.88% 0.79% 1.00% 1.41%
Return on average equity (ROE) 13.55% 10.69% 8.74% 9.58% 12.80%
Efficiency ratio 62.13% 71.18% 74.50% 61.24% 56.20%
PER SHARE DATA
Net income per share - basic $ 1.55 $ 1.01 $ 0.84 $ 0.91 $ 1.10
Net income per share - diluted 1.55 1.01 0.84 0.91 1.09
Cash dividends declared 0.46 0.40 0.40 0.38 0.37
Book value at period-end 11.82 10.42 9.19 9.77 9.16
FINANCIAL CONDITION
Total assets $ 983,097 $ 881,961 $ 821,827 $ 733,947 $ 615,716
Total deposits 784,084 692,472 646,866 607,629 489,256
Total loans, net of unearned income 600,164 580,790 543,367 479,822 399,351
Stockholders' equity 88,979 78,352 68,794 73,359 68,427
ASSET QUALITY
Allowance for loan losses $ 7,336 $ 7,389 $ 6,617 $ 6,407 $ 4,798
Allowance as % of total loans 1.22% 1.27% 1.22% 1.33% 1.20%
OTHER DATA
Market value per share at period-end $ 16.24 $ 10.25 $ 14.75 $ 17.50 $ 21.94
Price to earnings ratio 10.5 10.1 17.6 19.2 19.9
Price to book value ratio 137% 98% 161% 179% 240%
Dividend payout ratio 29.68% 39.60% 42.62% 41.76% 32.73%
Weighted average shares outstanding, basic 7,523,566 7,508,238 7,473,869 7,489,873 7,455,369
Weighted average shares outstanding, diluted 7,541,572 7,513,000 7,498,000 7,516,000 7,482,000
PAGE 5
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
RETAIL LOCATIONS
[GRAPHIC MAP OMITTED]
PAGE 6
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
[GRAPHIC OMITTED] UNION BANK &
TRUST COMPANY
www.unionbankandtrust.com
ASHLAND
U.S. Route 1 & Ashcake Road
302 Ashcake Road
Ashland, Virginia 23005
(804) 798-4488
ATLEE
10469 Atlee Station Road
Ashland, Virginia 23005
(804) 550-2300
BOWLING GREEN
211 North Main Street
Bowling Green, Virginia 22427
(804) 633-5031
BROCK ROAD
Brock Road and Route 3
11625 Brock Road
Spotsylvania, Virginia 22553
(540) 972-2958
CHANCELLOR
4210 Plank Road
Fredericksburg, Virginia 22407
(540) 786-2265
COLONIAL BEACH
840 McKinney Blvd.
Colonial Beach,VA 22443
(804) 224-0101
FALL HILL
2811 Fall Hill Avenue
Fredericksburg, Virginia 22401
(540) 372-7760
FALMOUTH
Cambridge & Layhill Road
622 Cambridge Street
Fredericksburg, Virginia 22405
(540) 374-1300
FOUR MILE FORK
4540 Lafayette Boulevard
Fredericksburg, Virginia 22408
(540) 898-5100
HANOVER COMMONS
9534 Chamberlayne Road
Mechanicsville, Virginia 23111
(804) 730-1700
KENMORE AVENUE
700 Kenmore Avenue
Fredericksburg, Virginia 22401
(540) 371-0108
KING GEORGE
10045 Kings Highway
King George, VA 22485
(540) 775-9300
LADYSMITH
U.S. Route 1
18048 Jefferson Davis Highway
Ruther Glen, Virginia 22546
(804) 448-3100
LEAVELLS
10415 Courthouse Road
Spotsylvania, Virginia 22553
(540) 898-2700
PORT ROYAL
U.S. Route 301
Port Royal, Virginia 22535
(804) 742-5546
MANQUIN
U.S. Route 360
3708 Richmond Tappahannock Highway
Manquin, Virginia 23106
(804) 769-3031
MASSAPONAX
Massaponax Church Road &
U.S. Route 1
8520 Jefferson Davis Highway
Fredericksburg, Virginia 22407
(540) 891-0300
MECHANICSVILLE
610 Mechanicsville Turnpike
Mechanicsville, Virginia 23116
(804) 730-7055
[GRAPHIC OMITTED] BANK OF
WILLIAMSBURG
www.bankofwilliamsburg.com
5125 John Tyler Parkway
Williamsburg, Virginia 23187
(804) 229-5448
LOAN PRODUCTION OFFICE
610 Thimble Shoals Blvd,
Suite 102
Newport News, Virginia 23606
(757) 599-0895
NORTHERN [GRAPHIC OMITTED] NECK
STATE BANK
www.nnsbva.com
BURGESS
15043 Northumberland Highway
Burgess, VA 22432
(804) 453-4181
KILMARNOCK
284 North Main Street
Kilmarnock, VA 22842
(804) 435-2681
MONTROSS
17191 Kings Hwy.
Montross, VA 22520
(804) 493-9301
REEDVILLE
876 Main Street
Reedville, VA 22539
(804) 453-4151
TAPPAHANNOCK
1649 Tappahannock Blvd.
Tappahannock, VA 22560
(804) 443-4361
WAL-MART IN
TAPPAHANNOCK
1660 Tappahannock Blvd.
Tappahannock, VA 22560
(804) 443-9433
WARSAW - MAIN OFFICE
5839 Richmond Road
Warsaw, VA 22572
(804) 333-4066
WARSAW - TIME SQUARE
4256 Richmond Road
Warsaw, VA 22572
(804) 333-3019
WHITE STONE
485 Chesapeake Drive
White Stone, VA 22578
(804) 435-1626
RNB [LOGO] Rappahannock
National Bank
www.rappahannockbank.com
257 Gay Street
Washington, Virginia 22747
(540) 675-3519
[GRAPHIC OMITTED] MORTGAGE CAPITAL
----------------
INVESTORS, INC.
www.mtgcap.com
CAMP SPRINGS
5835 Allentown Way
Camp Springs, MD 20748
(301) 449-7200
FREDERICK
3 Hillcrest Drive, #A100
Frederick, MD 21703
(301) 620-9100
FREDERICKSBURG
5440 Jefferson Davis Highway,
#103
Fredericksburg, VA 22407
(540) 710-7830
GREENBELT
7501 Greenway Center Drive,
#140
Greenbelt, MD 20770
(301) 982-0800
MYRTLE BEACH
7901 N. Ocean Boulevard
Myrtle Beach, SC 29572
(843) 449-8004
SPRINGFIELD
6571 Edsall Road
Springfield, VA 22151
(703) 941-0711
VIRGINIA BEACH
6330 Newtown Road, #211
Norfolk, VA 23502
(757) 481-0400
UNION
INVESTMENTS
www.unioninvestments.com
ATLEE
(804) 550-7209
BOWLING GREEN
(804) 633-4489
FALL HILL
(540) 371-1000
PAGE 7
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
DIRECTORS OF UNION BANKSHARES CORPORATION
Ronald L. Hicks
Chairman
W. Tayloe Murphy, Jr.
Vice Chairman
G. William Beale
Frank B. Bradley, III
Walton Mahon
M. Raymond Piland, III
Charles H. Ryland
A. D. Whittaker
William M. Wright
[PHOTO OF DIRECTORS OMITTED]
Seated on the left: M. Raymond Piland, III, and Walton Mahon. Standing from left
to right: W. Tayloe Murphy, Jr., G. William Beale, William M. Wright, and Ronald
L. Hicks. Seated at the table left to right are: A.D. Whittaker, Charles H.
Ryland, and Frank B. Bradley, III
================================================================================
To describe Charles H. Ryland in a few words is difficult... attorney,
historian, investor, loving husband, father, banker, and advisor are just some
of the words that come to mind. Charles, a founding director of Union Bankshares
Corporation, has decided not to stand for re-election to the Board at the 2002
Annual Meeting. Charles has been a valuable contributor and visionary while
serving on your Board for the last eight years. He will continue to serve on the
Board of Northern Neck State Bank, as he has for the 62 years since April 5,
1940.
[PHOTO OF CHARLES H. RYLAND OMITTED]
================================================================================
PAGE 8
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
DIRECTORY OF UNION BANKSHARES CORPORATION
UNION BANKSHARES CORPORATION
Officers
G. William Beale, President & Chief Executive Officer
D. Anthony Peay, Senior Vice President,
Chief Financial Officer & Corporate Secretary
David S. Wilson, Senior Vice President
R. Tyler Ware, Senior Vice President
Elizabeth M. Bentley, Vice President
Joseph E. Brown, Jr., Vice President
Jeannette B. Burke, Vice President
Dawna D. Eacho, Vice President
Myles W. H. Gaythwaite, Vice President
John A. Lane, Vice President
Richard L. Love, Controller
Scott Q. Nininger, Vice President
George Washington, Jr., Vice President
Directors
Ronald L. Hicks, Chairman
W. Tayloe Murphy, Jr., Vice Chairman
G. William Beale
Frank B. Bradley, III
Walton Mahon
M. Raymond Piland, III
Charles H. Ryland
A. D. Whittaker
William M. Wright
UNION BANK & TRUST COMPANY
Officers
G. William Beale, President & Chief Executive Officer
John C. Neal, Executive Vice President &
Chief Operating Officer
William H. Hutton, Senior Vice President
John M. Randolph, Senior Vice President
Michael L. Torosian, Senior Vice President
David K. Bohmke, Vice President
Sylvia C.Buffkin, Vice President
Charles T. Bullock, Vice President
David F. Clare, Vice President
Maria S. Franklin, Vice President
Charles H. Gravatt, Vice President
Sherry C. Gravatt, Vice President
C. Thomas Parcell, III, Vice President
Douglas M. Ransone, Vice President
Raymond C. Ratcliffe, Jr., Vice President
Gary A. Salinsky, Vice President
Directors
Ronald L. Hicks, Chairman
Walton Mahon, Vice Chairman
G. William Beale
John S. Cheadle
William B. Gallahan
Daniel I. Hansen
Michael N. Manns
John C. Neal
J. E. Small, III
A. D. Whittaker
Honorary Directors
Estelle H. Kay
Guy C. Lewis, Jr.
M. Raymond Piland, III
H. Ashton Taylor
R. F. Upshaw, Jr.
King George Advisory Board
Michael C. Mayo
E. R. Morris, Jr.
William Storke
A. B. Walker, Jr.
Patrick H. Ward, Jr.
NORTHERN NECK STATE BANK
Officers
N. Byrd Newton, President & Chief Executive Officer
Russell G. Brown, Vice President
William E. Harrison, Vice President & Cashier
Geneva B. Lowery, Vice President &
Assistant Secretary
C. Wayne Penick, Vice President
Charles M. Sanford, Jr., Vice President
Gloria B. Smith, Vice President & Secretary
Directors
Shirley E. Bevans
Richard A. Farmar, Jr.
W. D. Gray
Edward L. Hammond
William H. Hughes
W. Tayloe Murphy, Jr.
N. Byrd Newton
Dexter C. Rumsey, III
Charles H. Ryland
Charles H. Williams, III
William M. Wright
Honorary Directors
William E. Bowen
Robert B. Delano
James V. Garland, Jr.
Thomas S. Herbert
Louis G. Packett
Lancaster/Northumberland
Advisory Board
Robert E. Crowther, III
William B. Graham
Lloyd B. Hubbard
David Jones
Burton D. Reed, Jr.
H. Chilton Treakle, Sr.
Herbert E. Vaughan
Nancy T. Young
Essex Advisory Board
N. Page Ball
Charles P. Gilchrist III
Trent C. Taliaferro
RAPPAHANNOCK NATIONAL BANK
Officers
Michael T. Leake, Executive Vice President &
Chief Executive Officer
Directors
Elisabeth J. Jones, Chairman
G. William Beale
Alphaeus F. Cannon
Michael T. Leake
Sharon G. Luke
Thomas B. Massie
Mary L. Payne
Thomas G. Taylor
George E. Williams
BANK OF WILLIAMSBURG
Officers
J. Michael Johnson, President
Robert L. Bailey, Executive Vice President
Margaret B. Cooper, Vice President
Kenneth M. Johnston, Vice President
Mary E. Kenerley, Vice President
Directors
Henry Aceto, Jr.
Robert L. Bailey
A. G. W. Christopher
Randall K. Cooper
L. Mark Griggs
J. Michael Johnson
Svein J. Lassen
Christopher A. Mayer
Alison Morrison
D. Anthony Peay
Thomas R. Tucker
Scott A. Wise
UNION INVESTMENT SERVICES
Officers
Bernard W. Mahon, Jr., President
Darryl Barnes, Vice President
Randall W. Vaughan, Jr., Vice President
Directors
G. William Beale, Chairman
Russell G. Brown
Myles W. H. Gaythwaite
Bernard W. Mahon, Jr.
Michael N. Manns
J. E. Small, III
MORTGAGE CAPITAL INVESTORS
Officers
Kevin P. Keegan, President & Chief Executive Officer
Patricia Schurtz, Vice President
Dennick M. Skeels, Controller
Directors
G. William Beale, Chairman
John S. Cheadle
Daniel I. Hansen
Ronald L. Hicks
Kevin P. Keegan
John C. Neal
D. Anthony Peay
PAGE 9
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
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 subsidiaries (the "Company" or "Union
Bankshares"). This discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the Notes to the Consolidated
Financial Statements presented elsewhere in this Annual Report.
OVERVIEW
Union Bankshares Corporation's net income for 2001 totaled $11.7 million or
$1.55 per share on a basic and diluted basis, up 53.7% from $7.6 million or
$1.01 per share on a basic and diluted basis for 2000. Profitability as measured
by return on average assets (ROA) for 2001 was 1.27% as compared to .88% a year
earlier, while return on average equity (ROE) for 2001 was 13.55% as compared to
10.69% in 2000. Core profitability continued to improve as net interest income
increased by 5.6% and noninterest income was up 34%.
Union Bankshares Corporation's financial performance in 2001 was significantly
influenced by the effect of rapidly falling interest rates and general economic
conditions. Net income for the community bank segment was $10.5 million, an
increase of $1.3 million, or 13.8% over 2000. In the community bank segment,
reductions in interest rates were offset by increases in volume and the
repricing of deposits and reduction of other borrowings combined to increase net
interest income. Net interest income increased $1.2 million or 3.9%, despite
continued margin compression. Consolidation and centralization initiatives
implemented in recent years continued to contribute to this increase, as
technology and human resource efficiencies were realized. Noninterest expense in
this sector increased only 1.7% while assets grew by over 11.2%. This ability to
grow on a stable cost platform has allowed the Company to realize efficiencies
from both internal growth and recent expansion activities. The Company continues
to seek opportunities to expand its presence in strong growth markets.
The decline in interest rates in 2001 also stimulated mortgage loan originations
and enhanced the financial performance of the Company's mortgage banking
segment. Mortgage loan originations in 2001 totaled $320 million and the gains
on the sales of those loans totaled $8.9 million, a 60.6% increase over 2000.
Net income for the mortgage banking segment was $1.2 million, an improvement of
$2.8 million over the $1.6 million loss in 2000. Contributing to this
improvement were reductions in noninterest expense of $390,000 which reflect the
impact of the closing of offices and consolidation of functions. The hiring of
additional commission-based loan officers provided increased capacity to
generate loans without increasing fixed operating expenses. Although declining
rates led to increased production, refinanced mortgages represented only 30% of
the mortgage segment's loan production in 2001. The Company continues to focus
on developing and maintaining relationships with builders and realtors to
generate loan referrals, not relying heavily on refinance business.
As net interest margins continue to tighten, the Company has continued to seek
sources of noninterest income. Gains on sales of mortgage loans, fees for
customer services and brokerage commissions from our investment subsidiary
resulted in a 34.0% increase in noninterest income in 2001.
Assets grew to $983.1 million at December 31, 2001, up 11.5% from $882.0 million
a year ago. Loans grew to $600.2 million, up 3.3% over year end 2000 totals
reflecting uncertainty in the economy and slower loan demand. Deposits increased
from $692.5 million at December 31, 2000 to $784.1 million at December 31, 2001,
a 13.2% increase. The Company's capital position grew by 13.6%, from $78.4
million at December 31, 2000 to $89.0 million a year later and remains strong at
9.1% 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 and the net
interest margin.
During 2001, net interest income, on a taxable equivalent basis (which reflects
the tax benefits of nontaxable investments), 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 from 4.80% in 2000 to 4.42% in 2001. Average
interest-bearing liabilities increased by $35.3 million, or 5.0% while average
earning assets grew by $53.1 million, or 6.6%. In 2001, deposits increased
through both internal growth and a branch acquisition which brought $14.9
million in deposits. In addition, we believe many investors left the stock
market and chose to maintain their liquidity in bank deposits. As loan demand
slowed due to economic uncertainty, the banks' excess funds were invested in
lower yielding assets (including securities and Federal funds sold), compressing
the net interest margin. Despite this compression, the volume of earning assets
more than offset the decline in rates, increasing net interest income by $1.7
million on a taxable equivalent basis.
During 2000, net interest income, on a taxable equivalent basis, totaled $34.2
million, an increase of 9.8% from $31.1 million in 1999. The Company's net
interest margin declined to 4.23% in 2000, as compared to 4.27% in 1999. The
yield on earning assets increased to 8.39% from 7.97% in 1999 while the cost of
interest-bearing liabilities increased from 4.37% in 1999 to 4.80% in 2000.
Average interest-bearing liabilities increased by $79.3 million, or 12.8% while
average earning assets grew by $77.5 million, or 10.6%.
PAGE 10
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
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. Some items were restated to
conform to current year presentation.
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ------------------------------ -----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------------------------- ------------------------------ -----------------------------
ASSETS (dollars in thousands)
Securities:
Taxable ....................... $ 138,175 $ 9,125 6.60% $ 121,826 $ 8,979 7.37% $ 117,938 $ 7,567 6.42%
Tax-exempt(1) ................. 91,538 7,039 7.69% 97,080 7,424 7.65% 89,211 6,945 7.78%
Total securities ........... 229,713 16,164 7.04% 218,906 16,403 7.49% 207,149 14,512 7.01%
Loans, net ....................... 589,347 50,148 8.51% 573,989 50,300 8.76% 508,217 42,804 8.42%
Loans held for sale .............. 25,862 1,559 6.03% 10,864 827 7.61% 10,306 620 6.02%
Federal funds sold ............... 13,233 412 3.11% 2,607 118 4.53% 3,004 209 6.96%
Money market investments ......... 1,116 23 2.06% -- -- -- -- -- --
Interest-bearing deposits
in other banks ................ 1,154 37 3.21% 936 59 6.30% 1,165 56 4.81%
--------------------- --------------------- ---------------------
Total earning assets ....... 860,425 68,343 7.94% 807,302 67,707 8.39% 729,841 58,201 7.97%
Allowance for loan losses ........ (7,725) (7,488) (7,270)
Total non-earning assets ......... 69,421 61,449 68,964
--------- --------- ---------
Total assets ..................... $ 922,121 $ 861,263 $ 791,535
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Checking ...................... $ 100,112 1,646 1.64% $ 99,377 2,116 2.13% $ 88,806 1,845 2.08%
Money market savings .......... 67,680 1,838 2.72% 62,197 2,022 3.25% 63,452 2,070 3.26%
Regular savings ............... 63,311 1,443 2.28% 56,992 1,367 2.40% 59,897 1,576 2.63%
Certificates of deposit:
$100,000 and over ............. 128,117 7,243 5.65% 108,740 6,251 5.75% 92,123 4,669 5.07%
Under $100,000 ................ 269,578 14,970 5.55% 258,162 14,756 5.72% 237,734 12,609 5.30%
--------------------- --------------------- ---------------------
Total interest-bearing
deposits ................ 628,798 27,140 4.32% 585,468 26,512 4.53% 542,012 22,769 4.20%
Other borrowings ................. 105,284 5,343 5.07% 113,339 7,018 6.19% 77,497 4,298 5.55%
--------------------- --------------------- ---------------------
Total interest-bearing
liabilities ............. 734,082 32,483 4.42% 698,807 33,530 4.80% 619,509 27,067 4.37%
--------- --------- ---------
Noninterest bearing liabilities:
Demand deposits ............... 96,127 86,416 85,017
Other liabilities ............. 5,719 4,951 15,242
--------- --------- ---------
Total liabilities .......... 835,928 790,174 719,768
Stockholders' equity ............. 86,193 71,089 71,767
--------- --------- ---------
Total liabilities and
stockholders' equity .......... $ 922,121 $ 861,263 $ 791,535
========= ========= =========
Net interest income .............. $ 35,860 $ 34,177 $ 31,134
========= ========= =========
Interest rate spread ............. 3.52% 3.59% 3.60%
Interest expense as a percent
of average earning assets ..... 3.78% 4.15% 3.71%
Net interest margin .............. 4.17% 4.23% 4.27%
(1) Income and yields are reported on a taxable equivalent basis.
PAGE 11
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
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.
VOLUME AND RATE ANALYSIS* (TAXABLE EQUIVALENT BASIS)
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
EARNING ASSETS:
Securities:
Taxable .............................. $ 1,134 $ (988) $ 146 $ 257 $ 1,155 $ 1,412
Tax-exempt ........................... (425) 40 (385) 603 (124) 479
Loans, net ............................. 1,327 (1,479) (152) 5,711 1,785 7,496
Loans held for sale .................... 936 (204) 732 35 172 207
Federal funds sold ..................... 341 (47) 294 (25) (66) (91)
Money market investments ............... 11 12 23 -- -- --
Interest-bearing deposits
in other banks ....................... 11 (33) (22) (12) 15 3
----------------------------- -----------------------------
Total earning assets ............... 3,335 (2,699) 636 6,569 2,937 9,506
----------------------------- -----------------------------
INTEREST-BEARING LIABILITIES:
Checking ............................... 15 (485) (470) 225 46 271
Money market savings ................... 168 (352) (184) (41) (7) (48)
Regular savings ........................ 146 (70) 76 (75) (134) (209)
CDs $100,000 and over .................. 1,097 (105) 992 908 674 1,582
CDs ** $100,000 ........................ 641 (427) 214 1,128 1,019 2,147
----------------------------- -----------------------------
Total interest-bearing
deposits ......................... 2,067 (1,439) 628 2,145 1,598 3,743
Other borrowings ....................... (474) (1,201) (1,675) 2,173 547 2,720
----------------------------- -----------------------------
Total interest-bearing
liabilities ...................... 1,593 (2,640) (1,047) 4,318 2,145 6,463
----------------------------- -----------------------------
Change in net interest
income ............................... $ 1,742 $ (59) $ 1,683 $ 2,251 $ 792 $ 3,043
============================= =============================
* 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, 2001, the Company had $148.3 million more liabilities than
assets subject to repricing within one year and was, therefore, in a
liability-sensitive position. A liability-sensitive company's net interest
margin and net interest income generally will be impacted favorably by declining
interest rates, while that of an asset-sensitive company generally will be
impacted favorably by increasing interest rates. At December 31, 2000, the
Company had $246.0 million more liabilities than assets subject to repricing
within one year.
Although the gap report shows the Company to be liability-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 1.0% (100 basis points or bps), the change
on certificates of deposit may
PAGE 12
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
only be around 0.75% (75 bps), while other interest bearing deposit accounts may
only change 0.1% (10 bps). Also, despite their fixed terms, loan products are
often refinanced as rates decline but rarely refinanced as rates rise. In 2001,
with rapidly declining rates, the market moved from an inverted yield curve to a
more normal curve by year end. Assets repriced early in the year while
liabilities repriced later in the year resulting in a modest 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 7.6%
Flat 0
-200 basis points -8.4%
MARKET VALUE SIMULATION
Market value simulation is used to calculate the estimated fair value of assets
and liabilities over different interest rate environments. Market values are
calculated based on discounted cash flow analysis. The net market value is the
market value of all assets minus the market value of all liabilities. The change
in net market value over different rate environments is an indication of the
longer term repricing risk in the balance sheet. The same assumptions are used
in the market value simulation as in the earnings simulation.
The following chart reflects the change in net market value over different rate
environments:
CHANGE IN NET MARKET VALUE
CHANGE IN PRIME RATE (DOLLARS IN THOUSANDS)
-------------------- ----------------------
+200 basis points $-287
+100 basis points -158
Flat 0
-100 basis points -40
-200 basis points -42
NONINTEREST INCOME
Declining net interest margins and interest rate pressures have prompted banks
to continually seek supplemental sources of revenue. The Company has focused on
providing quality customer service and collecting fees commensurate with that
service. In addition, Union Investment Services and Mortgage Capital Investors
provide significant noninterest income to the Company. Noninterest income
increased by 34.0% from $12.0 million in 2000 to $16.1 million in 2001. This
increase is primarily due to a $3.3 million increase in gains on sales of loans,
which rose from $5.5 million in 2000 to $8.9 million in 2001. The growth in
mortgage originations stimulated by declining interest rates led to this
increase. In addition, other operating income was up from $498,000 in 2000 to
$906,000 in 2001. This rise was principally the result of increases in the cash
surrender value of bank owned life insurance. Other service charges, commissions
and fees income was up $325,000 from $2.2 million in 2000 as brokerage fees and
ATM fees continued to grow. Service charges on deposits rose slightly from $3.6
million to $3.7 million.
In 2000, noninterest income decreased by 9.3% from $13.2 million in 1999 to
$12.0 million in 2000. This decrease was largely attributable to a $2.1 million
decrease in gains on sales of loans, which declined from $7.6 million in 1999 to
$5.5 million in 2000 as mortgage originations declined. A $545,000 increase in
service charges on deposits and a $447,000 increase in other service charges,
commissions and fees (including a $227,000 increase in brokerage fees from Union
Investment Services) offset much of this decline.
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.
PAGE 13
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
NONINTEREST 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.
Noninterest expenses totaled $32.4 million in 2000, down .8% versus $32.7
million in 1999. Much of this decline was related to declines in 2000 mortgage
production, and nonrecurring conversion and expansion costs in 1999. Most of the
increase in 2000 expenses over 1999 was the result of a full year of expenses
from MCI and the impact of a full year of depreciation and amortization for new
equipment and systems.
LOAN PORTFOLIO
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. Loans secured by real
estate represent the Company's largest category, comprising 68.8% of the total
loan portfolio at December 31, 2001. Of this total, single-family, residential
loans, not including home equity lines, comprised 28.2% of the total loan
portfolio at December 31, 2001, down slightly from 30.5% in 2000. Loans secured
by commercial real estate comprised 25.8% of the total loan portfolio at
December 31, 2001, as compared to 24.1% in 2000, and consist principally of
commercial and industrial loans where real estate constitutes a secondary source
of collateral. The Company attempts to reduce its exposure to the risk of the
local real estate markets by limiting the aggregate size of its commercial real
estate portfolio, and by making such loans primarily on owner-occupied
properties. Real estate construction loans accounted for 9.7% of total loans
outstanding at December 31, 2001. The Company's charge-off rate for all loans
secured by real estate has historically been low.
LOAN PORTFOLIO
DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Commercial ........................................... $ 70,739 $ 74,261 $ 67,649 $ 61,678 $ 45,541
Loans to finance agriculture production
and other loans to farmers ...................... 4,075 2,793 3,015 2,595 1,590
Real estate:
Real estate construction ........................ 57,940 33,560 33,218 38,128 28,206
Real estate mortgage:
Residential (1-4 family) ................... 169,426 177,282 179,246 155,843 125,205
Home equity lines .......................... 24,474 20,049 20,987 18,737 21,061
Multi-family ............................... 3,418 4,666 4,592 3,979 1,905
Commercial (1) ............................. 155,093 139,737 120,490 108,063 93,568
Agriculture ................................ 2,497 2,859 2,373 2,536 2,292
----------------------------------------------------
Total real estate .......................... 412,848 378,153 360,906 327,286 272,237
Loans to individuals:
Consumer ........................................ 94,620 107,876 102,713 79,492 77,505
Credit card ..................................... 4,140 4,958 4,346 3,232 2,682
----------------------------------------------------
Total loans to individuals ................. 98,760 112,834 107,059 82,724 80,187
All other loans ...................................... 14,048 13,507 5,855 6,559 879
----------------------------------------------------
Total loans ................................ 600,470 581,548 544,484 480,842 400,434
Less unearned income ................................. 306 758 1,117 1,020 1,083
----------------------------------------------------
Total net loans ................................. $600,164 $580,790 $543,367 $479,822 $399,351
====================================================
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a secondary source of collateral.
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 totaled 15.8% of total loans at December
31, 2001, down from 18.6% in 2000. The increased competition for automobile
loans including zero percent financing by automobile companies impacted this
portfolio significantly in 2001. Commercial loans secured by non-real estate
business assets comprised 11.8% of total loans at the end of 2001, a slight
decrease from 12.8% at the end of 2000. Loans to the agricultural industry
totaled less than 1.0% of the loan portfolio in each of the last five years.
PAGE 14
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
REMAINING MATURITIES OF SELECTED LOANS
At December 31, 2001 VARIABLE RATE FIXED RATE
(in thousands) ---------------------------------------------------------------------------------------------
Within 1 year 1 to 5 After 5 Total 1 to 5 After 5 Total Total maturities
years years years years
Commercial $ 38,249 435 -- 435 27,858 4,197 32,055 $ 70,739
Real Estate Construction $ 53,475 476 -- 476 2,987 1,002 3,989 $ 57,940
Loans, net of unearned income, totaled $580.8 million at December 31, 2000, an
increase of 6.9% over $543.4 million at December 31, 1999, 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 serves as a mortgage brokerage operation, selling the majority
of its loan production in the secondary market or selling loans to the
affiliated banks which 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, 2001, the allowance for loan losses 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 was $2.1 million in both 2001 and 2000.
The allowance for loan losses as of December 31, 2000 was $7.4 million, or 1.27%
of total loans as compared to $6.6 million, or 1.22% in 1999. The provision for
loan losses in 2000 totaled $2.1 million as compared to $2.2 million in 1999.
ALLOWANCE FOR LOAN LOSSES DECEMBER 31,
----------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands)
Balance, beginning of year ......................... $7,389 $6,617 $6,407 $4,798 $4,612
Loans charged-off:
Commercial ...................................... 1,716 777 1,544 597 247
Real estate ..................................... 3 48 62 34 4
Consumer ........................................ 880 825 746 1,078 958
----------------------------------------------
Total loans charged-off ...................... 2,599 1,650 2,352 1,709 1,209
----------------------------------------------
Recoveries:
Commercial ...................................... 154 16 12 126 8
Real estate ..................................... 15 10 8 18 49
Consumer ........................................ 251 295 326 130 156
----------------------------------------------
Total recoveries ............................. 420 321 346 274 213
----------------------------------------------
Net loans charged-off .............................. 2,179 1,329 2,006 1,435 996
Provision for loan losses .......................... 2,126 2,101 2,216 3,044 1,182
----------------------------------------------
Balance, end of year ............................... $7,336 $7,389 $6,617 $6,407 $4,798
==============================================
Ratio of allowance for loan losses to total
loans outstanding at end of year ................ 1.22% 1.27% 1.22% 1.33% 1.20%
Ratio of net charge-offs to average
loans outstanding during year ................... 0.37% 0.23% 0.40% 0.32% 0.27%
PAGE 15
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
Union Bankshares maintains a general allowance for loan losses and does not
allocate its allowance for loan losses to individual categories for management
purposes. 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.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31: 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------
ALLOWANCE PERCENT ALLOWANCE PERCENT ALLOWANCE PERCENT ALLOWANCE PERCENT ALLOWANCE PERCENT
--------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial, financial
and agriculture $2,846 12.5% $3,369 13.3% $3,215 13.0% $3,382 13.4% $2,433 11.8%
Real Estate Construction 2,205 9.7% 1,467 5.8% 1,511 6.1% 2,007 7.9% 1,299 7.1%
Real estate mortgage 383 59.1% 406 59.3% 264 59.7% 189 60.3% 166 61.1%
Consumer & other 1,902 18.7% 2,147 21.6% 1,627 21.2% 829 18.4% 900 20.0%
--------------------------------------------------------------------------------------------------
$7,336 100.0% $7,389 100.0% $6,617 100.0% $6,407 100.0% $4,798 100.0%
====== ====== ====== ====== ======
(Percent is loans in category divided by total loans.)
NONPERFORMING ASSETS
Nonperforming assets were $1.7 million at December 31, 2001, down from $2.5
million at December 31, 2000. Non-accrual loans increased from $830,000 in 2000
to $915,000 in 2001 and foreclosed properties were down from $844,000 in 2000 to
$639,000 in 2001.
NONPERFORMING ASSETS DECEMBER 31,
----------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------
(dollars in thousands)
Nonaccrual loans ........................................ $ 915 $ 830 $1,487 $2,813 $2,244
Foreclosed properties ................................... 639 844 1,113 1,101 1,746
Real estate investment .................................. 129 867 903 730 1,050
----------------------------------------------
Total nonperforming assets ......................... $1,683 $2,541 $3,503 $4,644 $5,040
==============================================
Loans past due 90 days and accruing interest ............ $2,757 $1,531 $ 980 $2,979 $2,675
==============================================
Nonperforming assets to year-end
loans, foreclosed properties and
real estate investment .......................... 0.28% 0.44% 0.64% 0.97% 1.26%
Allowance for loan losses to nonaccrual loans ........... 801.75% 890.24% 444.99% 227.73% 213.81%
As of December 31, 2001, nonperforming assets include approximately $129,000
representing an investment in income-producing property and included in other
assets. This property consists of 2 single family homes which are either rented
or listed for sale and are located near Fredericksburg, Virginia. The Company
had previously acquired a limited interest in this property through settlement
of a loan and, in 1996, acquired the remaining ownership and control from the
general partner. The carrying value of this investment in real estate is
supported by residential appraisals of the homes which are being sold in an
orderly manner, and management expects no loss on this investment. Because the
initial downpayment on many of these houses was insufficient to qualify for full
accrual sale treatment, they are being carried as nonaccrual loans until such
time as the borrowers' investment in the property exceeds the required
threshold. In 2000, this asset consisted of 11 homes. In 2001, 9 of the homes
were sold at a modest gain and this investment is down to 2 homes.
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.
At December 31, 2000, nonperforming assets totaled $2.5 million, down from $3.5
million at December 31, 1999. Nonaccrual loans decreased by $657,000 in 2000
while other real estate owned declined by $269,000.
PAGE 16
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
SECURITIES
At December 31, 2001, all $257.1 million of the Company's securities were
classified as available for sale, as compared to $210.3 million at December 31,
2000. 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.
At December 31, 2000, $210.3 million, or over 97%, of the Company's securities
were classified as available for sale, as compared to $201.7 million at December
31, 1999.
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 cashflows 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, 2001
---------------------------------------------------------
OVER 10
YEARS &
1 YEAR 1-5 5-10 EQUITY
OR LESS YEARS YEARS SECURITIES TOTAL
---------------------------------------------------------
U.S. Government and agency securities: (dollars in thousands)
Amortized cost ............................... $ 750 $ 7,110 $ 867 $ -- $ 8,727
Fair value ................................... 754 7,036 877 -- 8,667
Weighted average yield(1) .................... 5.59% 3.61% 3.97% 3.82%
Mortgage backed securities:
Amortized cost ............................... $ -- $ 3,313 $ 18,400 $ 56,176 $ 77,889
Fair value ................................... -- 3,440 18,508 57,012 78,960
Weighted average yield(1) .................... 7.04% 5.79% 6.46% 6.33%
Municipal bonds:
Amortized cost ............................... $ 2,380 $ 21,502 $ 22,491 $ 52,972 $ 99,345
Fair value ................................... 2,408 22,209 23,262 53,128 101,007
Weighted average yield(1) .................... 7.07% 7.19% 7.40% 6.98% 7.12%
Other securities:
Amortized cost ............................... $ -- $ 36,771 $ -- $ 31,206 $ 67,977
Fair value ................................... -- 36,962 -- 31,466 68,428
Weighted average yield(1) .................... 4.87% -- 8.08% 6.34%
Total securities:
Amortized cost ............................... $ 3,130 $ 68,696 $ 41,758 $140,354 $253,938
Fair value ................................... 3,162 69,647 42,647 141,606 257,062
Weighted average yield(1) .................... 6.72% 5.57% 6.62% 7.02% 6.56%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
PAGE 17
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
DEPOSITS
Total deposits grew $91.6 million or 13.2% in 2001 with deposits in existing
branches accounting for most of that growth. 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. 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 $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. A
$30.8 million increase in certificates of deposit, a $6.3 million increase in
savings and a $5.4 million increase in money market accounts represent the
majority of the increase in average deposits. In 2001, the Company's lowest cost
source of funds, noninterest-bearing demand deposits increased by a total of
$18.8 million helping to reduce the overall cost of funds. On an average balance
basis, demand deposits were up $9.7 million compared to 2000. The Company has no
brokered deposits.
AVERAGE DEPOSITS AND RATES PAID
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999
---------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------------------------------------------------------
(dollars in thousands)
Noninterest-bearing demand deposits ................... $ 96,127 -- $ 86,416 -- $ 85,017 --
Interest-bearing deposits:
NOW accounts .................................... 100,112 1.64% 99,377 2.13% 88,806 2.08%
Money market accounts ........................... 67,680 2.72% 62,197 3.25% 63,452 3.26%
Savings accounts ................................ 63,311 2.28% 56,992 2.40% 59,897 2.63%
Time deposits of $100,000 and over .............. 128,117 5.65% 108,740 5.75% 92,123 5.07%
Other time deposits ............................. 269,578 5.55% 258,162 5.72% 237,734 5.30%
-------- -------- --------
Total interest-bearing ................................ 628,798 4.32% 585,468 4.53% 542,012 4.20%
-------- -------- --------
Total average deposits .......................... $724,925 $671,884 $627,029
======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
PERCENT
WITHIN 3 - 6 6 - 12 OVER 12 OF TOTAL
3 MONTHS MONTHS MONTHS MONTHS TOTAL DEPOSITS
-------------------------------------------------------------------------
(dollars in thousands)
At December 31, 2001 ........... $ 30,098 $ 27,050 $ 22,343 $ 54,138 $ 133,629 17.04%
Total deposits grew from $646.9 million at December 31, 1999 to $692.5 million
at December 31, 2000. Over this same period, average interest-bearing deposits
were $585.5 million, or 8.0% over the 1999 average of $542.0 million.
PAGE 18
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
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, along with the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, has adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-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 12.16% and 11.82% on December 31, 2001 and
2000, respectively. The Company's ratio of Tier 1 capital to risk-weighted
assets was 11.14% and 10.72% at December 31, 2001 and 2000, respectively. Both
of these ratios exceeded the fully phased-in capital requirements in 2001 and
2000.
The Company's strategic plan includes a targeted equity to asset ratio between
8% and 9%.
ANALYSIS OF CAPITAL
DECEMBER 31,
-------------------------------------
2001 2000 1999
-------------------------------------
(dollars in thousands)
Tier 1 capital:
Common stock ............................................... $ 15,052 $ 15,033 $ 14,976
Surplus .................................................... 446 403 163
Retained earnings .......................................... 71,419 63,201 58,603
-------------------------------------
Total equity .......................................... 86,917 78,637 73,742
Less: core deposit intangibles/goodwill .................... (6,924) (6,295) (6,569)
-------------------------------------
Total Tier 1 capital ....................................... 79,993 72,342 67,173
-------------------------------------
Tier 2 capital:
Allowance for loan losses .................................. 7,336 7,389 6,617
-------------------------------------
Total Tier 2 capital ....................................... 7,336 7,389 6,617
-------------------------------------
Total risk-based capital ................................... $ 87,329 $ 79,731 $ 73,790
=====================================
Risk-weighted assets ................................................ $ 718,225 $ 674,687 $ 604,525
=====================================
Capital ratios:
Tier 1 risk-based capital ratio ............................ 11.14% 10.72% 11.11%
Total risk-based capital ratio ............................. 12.16% 11.82% 12.21%
Tier 1 capital to average adjusted total assets ............ 8.35% 8.46% 8.35%
Equity to total assets ..................................... 9.05% 8.88% 8.37%
PAGE 19
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
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, 2001, cash and cash equivalents and securities classified as
available for sale were 30.1% of total assets, compared to 26.4% at December 31,
2000. 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 $60.5 million at
December 31, 2001. At year end 2001, the banks had outstanding $41.1 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 $140 million at December 31,
2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued two statements -
Statement 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets, which will impact the accounting for goodwill and other
intangible assets. Statement 141 eliminates the pooling method of accounting for
business combinations and requires all such combinations be accounted for by the
purchase method of accounting. This statement also requires that intangible
assets that meet certain criteria be reported separately from goodwill and that
negative goodwill arising from a business combination be recorded as an
extraordinary gain. Statement 142 eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life. The Statement
requires, at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to re-evaluate
goodwill and other intangible assets that arose from business combinations
entered into before July 1, 2001. If the recorded other intangibles assets do
not meet the criteria for recognition, they should be classified as goodwill.
Similarly, if there are other intangible assets that meet the criteria for
recognition but were not separately recorded from goodwill, they should be
reclassified from goodwill. An organization also must reassess the useful lives
of intangible assets and adjust the remaining amortization periods accordingly.
Any negative goodwill must be written-off.
The standards generally are required to be implemented by the Company in its
2002 financial statements. The Company had core deposit premiums, net of
amortization of $6,093,000 and goodwill, net of amortization of $864,000 at
December 31, 2000. Under the new accounting requirement, the core deposit amount
will continue to be amortized, while the goodwill will be subject to impairment
analysis and potential write-down on an annual basis. Core deposit amortization
in 2001 totaled $487,000. Goodwill amortization in 2001 was $117,000.
In June 2001, the Financial Accounting Standards Board issued Statement 143,
Accounting for Asset Retirement Obligations. This Statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and associated retirement costs. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Statement is not expected to have a material effect on the
Company's financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement is effective for financial statements issued
for fiscal years and interim periods beginning after December 15, 2001. The
Statement is not expected to have a material effect on the Company's financial
statements.
FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that its expectations with respect to certain
forward-looking statements are based upon reasonable assumptions within the
bounds of its 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 and new products
and delivery systems.
PAGE 20
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
INDEPENDENT AUDITOR'S REPORT
YHB
Yount, Hyde & Barbour, P.C.
Certified Public Accountants
and Consultants
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, 2001 and 2000, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 2001, 2000 and 1999. 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 5% and 13%, respectively, in 2001, 2% and 8%, respectively,
in 2000 and 11% of revenues in 1999, 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, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 16, 2002
PAGE 21
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
CONSOLIDATED BALANCE SHEETS
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
DECEMBER 31, 2001 AND 2000
(dollars in thousands )
ASSETS 2001 2000
- ------ ---- ----
Cash and cash equivalents:
Cash and due from banks $ 28,769 $ 22,174
Interest-bearing deposits in other banks 462 315
Money market investments 2,023 --
Federal funds sold 7,661 380
--------- ---------
Total cash and cash equivalents 38,915 22,869
--------- ---------
Securities available for sale, at fair value 257,062 210,312
Investment securities, at amortized cost
Fair value of $5,528 in 2000 -- 5,465
--------- ---------
Total securities 257,062 215,777
--------- ---------
Loans held for sale 43,485 16,472
--------- ---------
Loans, net of unearned income 600,164 580,790
Less allowance for loan losses 7,336 7,389
--------- ---------
Net loans 592,828 573,401
--------- ---------
Bank premises and equipment, net 19,191 20,077
Other real estate owned 768 1,701
Other assets 30,848 31,664
--------- ---------
Total assets $ 983,097 $ 881,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Noninterest-bearing demand deposits $ 110,913 $ 92,067
Interest-bearing deposits:
NOW accounts 112,940 96,751
Money market accounts 79,176 62,438
Savings accounts 72,897 56,540
Time deposits of $100,000 and over 133,629 121,548
Other time deposits 274,529 263,128
--------- ---------
Total interest-bearing deposits 673,171 600,405
--------- ---------
Total deposits 784,084 692,472
--------- ---------
Securities sold under agreement to repurchase 41,083 25,114
Other short-term borrowings -- 6,000
Long-term borrowings 62,731 74,023
Other liabilities 6,220 6,000
--------- ---------
Total liabilities 894,118 803,609
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares; issued and
outstanding, 7,525,912 shares in 2001 and 7,516,534 shares in 2000 15,052 15,033
Surplus 446 403
Retained earnings 71,419 63,201
Accumulated other comprehensive income (loss) 2,062 (285)
--------- ---------
Total stockholders' equity 88,979 78,352
--------- ---------
Total liabilities and stockholders' equity $ 983,097 $ 881,961
========= =========
See accompanying notes to consolidated financial statements.
PAGE 22
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
CONSOLIDATED STATEMENTS OF INCOME
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(dollars in thousands, except per share amounts)
2001 2000 1999
---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 51,333 $ 50,811 $ 43,220
Interest on Federal funds sold 412 118 209
Interest on interest-bearing deposits in other banks 37 59 56
Interest on money market investment 23 -- --
Interest and dividends on securities:
Taxable 9,125 8,979 7,567
Nontaxable 4,646 4,900 4,584
-------- -------- --------
Total interest and dividend income 65,576 64,867 55,636
-------- -------- --------
Interest expense:
Interest on deposits 27,140 26,512 22,769
Interest on short-term borrowings 1,200 2,451 1,010
Interest on long-term borrowings 4,143 4,567 3,288
-------- -------- --------
Total interest expense 32,483 33,530 27,067
-------- -------- --------
Net interest income 33,093 31,337 28,569
Provision for loan losses 2,126 2,101 2,216
-------- -------- --------
Net interest income after provision
for loan losses 30,967 29,236 26,353
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 3,665 3,623 3,078
Other service charges, commissions and fees 2,488 2,163 1,716
Gains (losses) on securities transactions, net 125 (957) 16
Gains on sales of loans 8,857 5,516 7,581
Gains on sales of other real estate owned
and bank premises, net 51 81 312
Gains on termination of pension plan -- 1,087 --
Other operating income 906 498 543
-------- -------- --------
Total noninterest income 16,092 12,011 13,246
-------- -------- --------
Noninterest expenses:
Salaries and benefits 19,102 18,729 18,844
Occupancy expenses 2,179 2,300 2,149
Furniture and equipment expenses 2,859 2,956 2,411
Other operating expenses 8,307 8,439 9,285
-------- -------- --------
Total noninterest expenses 32,447 32,424 32,689
-------- -------- --------
Income before income taxes 14,612 8,823 6,910
Income tax expense 2,933 1,223 636
-------- -------- --------
Net income $ 11,679 $ 7,600 $ 6,274
======== ======== ========
Earnings per share, basic and diluted $ 1.55 $ 1.01 $ 0.84
======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 23
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(dollars in thousands, except per share amounts)
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL
-------- -------- -------- ------------- ------------ --------
Balance - December 31, 1998 $ 15,015 $ 311 $ 55,690 $ 2,343 $ 73,359
Comprehensive (loss):
Net income - 1999 6,274 $ 6,274 6,274
Unrealized holding losses arising during the period
(net of tax, $3,761) (7,280)
Reclassification adjustment for gains included in net
income (net of tax, $5) (11)
--------
Other comprehensive income (net of tax, $3,756) (7,291) (7,291) (7,291)
--------
Total comprehensive (loss) $ (1,017)
========
Cash dividends - 1999 ($.40 per share) (2,994) (2,994)
Issuance of common stock under Dividend Reinvestment Plan
(22,257 shares) 45 291 336
Stock repurchased under Stock Repurchase Plan (104,912 shares) (210) (1,705) (1,915)
Discretionary transfer of retained earnings to surplus 367 (367) --
Issuance of common stock under Incentive Stock Option Plan
(400 shares) 1 4 5
Issuance of common stock for services rendered (1,200 shares) 2 18 20
Issuance of common stock in exchange for net assets in
acquisition (61,490 shares) 123 877 1,000
------------------------------------------ --------
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) (330)
Issuance of common stock under Incentive Stock Option Plan
(5,040 shares) 10 23 33
Issuance of common stock for services rendered (1,200 shares) 2 10 12
Issuance of common stock in exchange for net assets in
acquisition (17,673 shares) 36 200 236
------------------------------------------ --------
Balance - December 31, 2000 $ 15,033 $ 403 $ 63,201 $ (285) $ 78,352
Comprehensive income:
Net income - 2001 11,679 $ 11,679 11,679
Unrealized holding gains arising during the period
(net of tax, $1,251) 2,430
Reclassification adjustment for gains included in
net income (net of tax, $42) (83)
--------
Other comprehensive income (net of tax, $1,209) 2,347 2,347 2,347
--------
Total comprehensive income $ 14,026
========
Cash dividends - 2001 ($.46 per share) (3,461) (3,461)
Issuance of common stock under Dividend Reinvestment Plan
(26,330 shares) 53 350 403
Stock repurchased under Stock Repurchase Plan (38,158 shares) (76) (521) (597)
Issuance of common stock for services rendered (1,600 shares) 3 22 25
Issuance of common stock in exchange for net assets in
acquisition (19,606 shares) 39 192 231
------------------------------------------ --------
Balance - December 31, 2001 $ 15,052 $ 446 $ 71,419 $ 2,062 $ 88,979
========================================== ========
See accompanying notes to consolidated financial statements.
PAGE 24
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
YEARS ENDING DECEMBER 31, 2001, 2000 AND 1999
(dollars in thousands)
2001 2000 1999
--------- --------- ---------
Operating activities:
Net income $ 11,679 $ 7,600 $ 6,274
Adjustments to reconcile net income to net cash and
cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment 1,961 1,898 1,683
Amortization 1,460 1,117 1,082
Provision for loan losses 2,126 2,101 2,216
(Gains) losses on securities transactions, net (125) 957 (16)
Origination of loans held for sale (319,893) (155,523) (65,076)
Proceeds from sale of loans held for sale 292,880 145,731 58,396
Gains on sales of other real estate owned and fixed assets, net (51) (81) (312)
Deferred income tax expense (benefit) 209 (226) (397)
Other, net 654 (17,044) 8,236
--------- --------- ---------
Net cash and cash equivalents provided by (used in) operating activities (9,100) (13,470) 12,086
--------- --------- ---------
Investing activities:
Purchases of investment securities -- -- (199)
Proceeds from maturities of investment securities -- 4,109 3,697
Purchases of securities available for sale (86,605) (39,657) (77,484)
Proceeds from sales of securities available for sale 1,886 26,147 14,259
Proceeds from maturities of securities available for sale 46,756 11,000 13,387
Net increase in loans (18,888) (38,822) (65,862)
Purchases of bank premises and equipment (1,085) (1,443) (1,732)
Proceeds from sales of bank premises and equipment 30 491 --
Proceeds from sales of other real estate owned 906 384 300
Acquisition of branch, net of cash acquired 10,552 -- --
--------- --------- ---------
Net cash and cash equivalents used in investing activities (46,448) (37,791) (113,634)
--------- --------- ---------
Financing activities:
Net increase (decrease) in noninterest-bearing deposits 16,719 13,019 (2,281)
Net increase in interest-bearing deposits 59,853 32,587 41,518
Net increase (decrease) in short-term borrowings 9,969 (8,045) 19,683
Proceeds from long-term borrowings -- 26,000 26,500
Repayment of long-term borrowings (11,292) (6,397) (405)
Cash dividends paid (3,461) (3,002) (2,994)
Issuance of common stock 403 379 341
Purchase of common stock (597) (330) (1,915)
--------- --------- ---------
Net cash and cash equivalents provided by financing activities 71,594 54,211 80,447
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 16,046 2,950 (21,101)
Cash and cash equivalents at beginning of year 22,869 19,919 41,020
--------- --------- ---------
Cash and cash equivalents at end of year $ 38,915 $ 22,869 $ 19,919
========= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 32,926 $ 33,184 $ 27,566
Income taxes 2,460 1,376 1,840
Supplemental schedule of noncash investing and financing activities:
Loan balances transferred to foreclosed properties -- 70 311
Unrealized gain (loss) on securities available for sale 3,556 7,065 (11,047)
Issuance of common stock in exchange for net assets in acquisition 231 236 1,000
Issuance of common stock for services rendered 25 12 20
Transfer of investment securities to securities available for sale $ 5,465 $ -- $ --
See accompanying notes to consolidated financial statements.
PAGE 25
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and practices of Union Bankshares Corporation
and subsidiaries (the "Company") conform to accounting principles
generally accepted in the United States of America and to general
practice within the banking industry. Major policies and practices are
described below:
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its wholly-owned subsidiaries. Union
Bankshares Corporation is a bank holding company that owns all of the
outstanding common stock of its banking subsidiaries, Union Bank and
Trust Company, Northern Neck State Bank, Rappahannock National Bank,
and Bank of Williamsburg and of Union Investment Services. Mortgage
Capital Investors ("MCI") is a wholly owned subsidiary of Union Bank
and Trust Company. All significant intercompany balances and
transactions have been eliminated. The accompanying consolidated
financial statements for prior periods reflect certain
reclassifications in order to conform with the 2001 presentation.
(B) INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
When securities are purchased, they are classified as investment
securities when management has the intent and the Company has the
ability to hold them to maturity. Investment securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts.
Securities classified as available for sale are those debt and equity
securities that management intends to hold for an indefinite period of
time, including securities used as part of the Company's
asset/liability strategy, and that may be sold in response to changes
in interest rates, liquidity needs or other similar factors. Securities
available for sale are recorded at estimated fair value. The net
unrealized gains or losses on securities available for sale, net of
deferred taxes, are included in accumulated other comprehensive income
(loss) in stockholders' equity.
Purchased premiums and discounts are recognized in interest income
using the interest method over the terms of the securities. Declines in
the fair value of held to maturity and available for sale securities
below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. Gains and losses on the sale
of securities are recorded on the trade date and are determined using
the specific identification method.
(C) LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value, determined in the
aggregate based on sales commitments to permanent investors or on
current market rates for loans of similar quality and type. In
addition, the Company requires a firm purchase commitment from a
permanent investor before a loan can be closed, thus limiting interest
rate risk. As a result, loans held for sale are stated at fair value.
Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income.
(D) LOANS
The Company grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is represented
by mortgage loans throughout its market area. The ability of the
Company's debtors to honor their contracts is dependent upon the real
estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported
at their outstanding unpaid principal balances adjusted for
charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless the
credit is well-secured and in process of collection. Credit card loans
and other personal loans are typically charged off no later than 180
days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection or principal and interest
is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income if it is
from current period or charged against allowance if it is from a prior
period. The interest on these loans is accounted for on the cash-basis
or cost-recovery method, until qualifying for return to accrual. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are
reasonably assured.
PAGE 26
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
(E) ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to operations is an amount
sufficient to bring the allowance for loan losses to an estimated
balance that management considers adequate to absorb potential losses
in the portfolio. Loans are charged against the allowance when
management believes the collectibility of the principal is unlikely.
Recoveries of amounts previously charged off are credited to the
allowance. Management's determination of the adequacy of the allowance
is based on an evaluation of the composition of the loan portfolio, the
value and adequacy of collateral, current economic conditions,
historical loan loss experience, and other risk factors. Management
believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly those affecting real estate values.
In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company generally does not
separately identify individual consumer and residential loans for
impairment disclosures.
(F) BANK PREMISES AND EQUIPMENT
Bank premises and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
computed using either the straight-line or accelerated method based on
the type of asset involved. It is the policy of the Company to
capitalize additions and improvements and to depreciate the cost
thereof over their estimated useful lives. Maintenance, repairs and
renewals are expensed as they are incurred.
(G) INTANGIBLE ASSETS
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 $6,093,000 and $5,306,000 at December 31, 2001 and 2000,
respectively. Other assets also includes goodwill, which is being
amortized on a straight-line basis over the period of expected benefit,
approximately ten years. Goodwill, net of amortization, totaled
$864,000 and $989,000 at December 31, 2001 and 2000, respectively.
(H) INCOME TAXES
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is determined based on the tax effects
of the temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
(I) OTHER REAL ESTATE OWNED
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
(J) CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash, due from banks, interestbearing deposits in other
banks, money market investments and Federal funds sold.
(K) EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by
the weighted average number of common shares outstanding during the
year. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from
the assumed issuance. Potential common shares that may be issued by the
Company relate solely to outstanding stock options and are determined
using the treasury stock method.
PAGE 27
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
(L) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period. Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but excluded
from net income, such as unrealized gains and losses on certain
investments in debt and equity securities.
(M) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
these estimates. Material estimates that are particularly susceptible
to significant change in the near term relate to the determination of
the allowance for loan losses and the valuation of foreclosed real
estate and deferred tax assets.
(N) ADVERTISING COSTS
The Company follows the policy of charging the cost of advertising to
expense as incurred. Total advertising costs included in other
operating expenses for 2001, 2000 and 1999 was $1,046,000, $805,000 and
$786,000, respectively.
2 INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available for sale at December 31, 2001 and
2000 are summarized as follows (in thousands):
2001
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- --------- --------- ---------
U.S. government and agency securities $ 8,727 $ 43 $ (103) $ 8,667
Obligations of states and
political subdivisions 99,345 2,215 (553) 101,007
Corporate and other bonds 63,022 834 (369) 63,487
Mortgage-backed securities 77,889 1,267 (196) 78,960
Federal Reserve Bank stock 648 -- -- 648
Federal Home Loan Bank stock 3,783 -- -- 3,783
Other securities 524 4 (18) 510
--------- --------- --------- ---------
$ 253,938 $ 4,363 $ (1,239) $ 257,062
========= ========= ========= =========
2000
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- --------- --------- ---------
U.S. government and agency securities $ 19,995 $ -- $ (476) $ 19,519
Obligations of states and
political subdivisions 94,324 1,955 (620) 95,659
Corporate and other bonds 29,643 62 (1,318) 28,387
Mortgage-backed securities 61,944 315 (351) 61,908
Federal Reserve Bank stock 706 -- -- 706
Federal Home Loan Bank stock 3,783 -- -- 3,783
Other securities 349 14 (13) 350
--------- --------- --------- ---------
$ 210,744 $ 2,346 $ (2,778) $ 210,312
========= ========= ========= =========
PAGE 28
ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
The amortized cost, gross unrealized gains and losses and estimated
fair value of investment securities at December 31, 2000 are summarized
as follows (in thousands):
2000
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- --------- --------- ---------
U.S. government and
agency securities $ 900 $ -- $ -- $ 900
Obligations of states and
political subdivisions 4,342 64 (1) 4,405
Corporate and other bonds 223 -- -- 223
--------- --------- --------- ---------
$ 5,465 $ 64 $ (1) $ 5,528
========= ========= ========= =========
The amortized cost and estimated fair value (in thousands) of
securities available for sale at December 31, 2001, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
SECURITIES AVAILABLE
FOR SALE
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ---------
Due in one year or less $ 3,154 $ 3,185
Due after one year through five years 68,672 69,623
Due after five years through ten years 41,758 42,647
Due after ten years 135,399 136,666
--------- ---------
248,983 252,121
Federal Reserve Bank stock 648 648
Federal Home Loan Bank stock 3,783 3,783
Other securities 524 510
--------- ---------
$ 253,938 $ 257,062
========= =========
Securities with an amortized cost of approximately $66,212,000 and
$74,706,000 at December 31, 2001 and 2000 were pledged to secure public
deposits, repurchase agreements and for other purposes.
Sales of securities available for sale produced the following results
for the years ended December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
-------- -------- --------
Proceeds $ 1,886 $ 26,147 $ 14,259
======== ======== ========
Gross realized gains $ 129 $ 147 $ 20
Gross realized (losses) (4) (1,104) (4)
-------- -------- --------
Net realized gains (losses) $ 125 $ (957) $ 16
======== ======== ========
Tax provision (benefit) applicable
to the net realized gains and losses $ 43 $ (325) $ 5
======== ======== ========
As permitted under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," the Company transferred investment securities
with a book value of $5,465,000 and a market value of $5,528,000 to
securities available for sale as of January 1, 2001.
PAGE 29
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
3 LOANS
Loans are stated at their face amount, net of unearned income, and
consist of the following at December 31, 2001 and 2000 (in thousands):
2001 2000
-------- --------
Mortgage loans on real estate:
Residential 1-4 family $154,099 $162,184
Commercial 155,093 139,737
Construction 57,940 33,560
Second mortgages 15,327 15,098
Equity lines of credit 24,474 20,049
Multifamily 3,418 4,666
Agriculture 2,497 2,859
-------- --------
Total real estate loans 412,848 378,153
-------- --------
Commercial Loans 70,739 74,261
-------- --------
Consumer installment loans
Personal 94,620 107,876
Credit cards 4,140 4,958
-------- --------
Total consumer installment loans 98,760 112,834
-------- --------
All other loans and agriculture loans 18,123 16,300
-------- --------
Gross loans 600,470 581,548
Less unearned income on loans 306 758
-------- --------
Loans, net of unearned income $600,164 $580,790
======== ========
At December 31, 2001 and 2000, the recorded investment in loans which
have been identified as impaired loans, in accordance with Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114), totaled $1,011,000 and $1,002,000,
respectively. The valuation allowance related to impaired loans on
December 31, 2001 and 2000 is $215,000 and $252,000, respectively. At
December 31, 2001, 2000 and 1999, the average investment on impaired
loans was $1,202,000, $755,000 and $1,579,000, respectively. The amount
of interest income recorded by the Company during 2001, 2000 and 1999
on impaired loans was approximately $49,000, $31,000 and $12,000,
respectively.
There were no nonaccrual loans excluded from impaired loan disclosure
at December 31, 2001. Nonaccrual loans excluded from impaired loan
disclosure amounted to $348,000 at December 31, 2000. If interest on
these loans had been accrued, such income would have approximated
$27,000 for 2000.
4 ALLOWANCE FOR LOAN LOSS
Activity in the allowance for loan losses for the years ended December
31, 2001, 2000 and 1999 is summarized below (in thousands):
2001 2000 1999
-------- -------- --------
Balance, beginning of year $ 7,389 $ 6,617 $ 6,407
Provision charged to operations 2,126 2,101 2,216
Recoveries credited to allowance 420 321 346
-------- -------- --------
Total 9,935 9,039 8,969
Loans charged off 2,599 1,650 2,352
-------- -------- --------
Balance, end of year $ 7,336 $ 7,389 $ 6,617
======== ======== ========
PAGE 30
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
5 BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31, 2001 and 2000 are as
follows (in thousands):
2001 2000
--------- --------
Land $ 4,753 $ 4,860
Land improvements and buildings 15,441 14,694
Leasehold improvements 507 517
Furniture and equipment 13,325 13,071
Construction in progress 100 114
--------- --------
34,126 33,256
Less accumulated depreciation and amortization 14,935 13,179
--------- --------
Bank premises and equipment, net $ 19,191 $ 20,077
========= ========
Depreciation expense for 2001, 2000 and 1999 was $1,961,000,
$1,898,000, and $1,683,000 respectively. Future minimum rental payments
required under non-cancelable operating leases that have initial or
remaining terms in excess of one year as of December 31, 2001 are
approximately $439,500 for 2002, $450,100 for 2003, $397,300 for 2004,
$323,400 for 2005, $292,900 for 2006, and $1,990,000 thereafter. Rental
expense for years ended December 31, 2001, 2000 and 1999 totaled
$1,110,000, $1,158,000, and $980,000 respectively.
6 DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or
more at December 31, 2001 and 2000 was $133,629,000 and $121,548,000,
respectively. At December 31, 2001, the scheduled maturities of time
deposits are as follows (in thousands):
2002 $ 245,296
2003 54,889
2004 60,751
2005 25,631
2006 20,862
Thereafter 729
----------
$ 408,158
==========
7 BORROWINGS
Short-term borrowings consist of the following at December 31, 2001 and
2000 (dollars in thousands):
2001 2000
--------- ---------
Securities sold under agreements to repurchase $ 41,083 $ 25,114
Other short-term borrowings -- 6,000
--------- ---------
Total $ 41,083 $ 31,114
========= =========
Weighted interest rate 1.37% 5.61%
Average for the year ended December 31:
Outstanding $ 41,746 $ 27,519
Interest rate 3.26% 5.76%
Maximum month-end outstanding $ 41,083 $ 47,033
Short-term borrowings consist of securities sold under agreements to
repurchase which are secured transactions with customers and generally
mature the day following the date sold. Short-term borrowings also
include Federal funds purchased, which are unsecured overnight
borrowings from other financial institutions, and advances from the
Federal Home Loan Bank of Atlanta, which are secured by
mortgage-related assets. The carrying value of the loans pledged as
collateral for FHLB advances total $136 million at December 31, 2001.
At December 31, 2001, the Company's fixed-rate long-term debt totals
$59,875,000 and matures through April 25, 2011. The interest rate on
the fixed-rate note payable ranges from 5.22% to 6.61%. At December 31,
2000, the Company had fixed-rate long-term debt totaling $63,025,000,
maturing through 2010. The interest rate on the notes payable ranged
from 5.13% to 6.61% at December 31, 2000.
At December 31, 2001, the Company's floating-rate long-term debt totals
$2,856,000 and matures through September 30, 2005. The floating rates
are based on the 30 day LIBOR plus 95 basis points. The interest rate
on floating-rate long-term debt ranged from 3.06% to 7.73% during 2001.
At December 31, 2000, the Company had floating-rate long-term debt
totaling $10,998,000.
PAGE 31
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
The contractual maturities of long-term debt are as follows (in
thousands):
2001
FIXED FLOATING
RATE RATE TOTAL
--------- --------- ---------
Due in 2002 $ 150 $ 762 $ 912
Due in 2003 150 762 912
Due in 2004 12,575 762 13,337
Due in 2005 -- 570 570
Due in 2006 -- -- --
Thereafter 47,000 -- 47,000
--------- --------- ---------
Total long term debt $ 59,875 $ 2,856 $ 62,731
========= ========= =========
The subsidiary banks maintain Federal funds lines with several regional
banks totaling approximately $60.5 million at December 31, 2001. The
Company also had a line of credit with the Federal Home Loan Bank of
Atlanta for $140 million at December 31, 2001.
8 INCOME TAXES
Net deferred tax assets consist of the following components as of
December 31, 2001 and 2000 (in thousands):
2001 2000
-------- --------
Deferred tax assets:
Allowance for loan losses $ 2,494 $ 2,512
Benefit plans 355 354
Other 458 617
Securities available for sale -- 147
-------- --------
Total deferred tax assets 3,307 3,630
-------- --------
Deferred tax liabilities:
Depreciation 657 659
Other 240 205
Securities available for sale 1,062 --
-------- --------
Total deferred tax liabilities 1,959 864
-------- --------
Net deferred tax asset (included in other assets) $ 1,348 $ 2,766
======== ========
In assessing the realizability of deferred tax assets, management
considers the scheduled reversal of temporary differences, projected
future taxable income, and tax planning strategies. Management believes
it is more likely than not the Company will realize its deferred tax
assets and, accordingly, no valuation allowance has been established.
The provision for income taxes charged to operations for the years
ended December 31, 2001, 2000 and 1999 consists of the following (in
thousands):
2001 2000 1999
--------- --------- ---------
Current tax expense $ 2,724 $ 1,449 $ 1,033
Deferred tax expense (benefit) 209 (226) (397)
--------- --------- ---------
Income tax expense $ 2,933 $ 1,223 $ 636
========= ========= =========
The income tax provision differs from the amount of income tax
determined by applying the U.S. Federal income tax rate to pretax
income for the years ended December 31, 2001, 2000 and 1999, due to the
following (in thousands):
2001 2000 1999
--------- --------- ---------
Computed "expected" tax expense $ 4,968 $ 3,000 $ 2,350
(Decrease) in taxes resulting from:
Tax-exempt interest income (1,555) (1,395) (1,485)
Other, net (480) (382) (229)
--------- --------- ---------
Income tax expense $ 2,933 $ 1,223 $ 636
========= ========= =========
Low income housing credits totaled $79,735, $72,425 and $72,425 for the
years ended December 31, 2001, 2000 and 1999, respectively.
PAGE 32
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
9 EMPLOYEE BENEFITS
The Company had a noncontributory, defined benefit pension plan
covering all full-time employees. Termination of this plan was
completed in 2000. Significant assumptions used in determining net
periodic pension cost and projected benefit obligation were:
2000 1999
-------- --------
Expected long-term rate of return on assets 9.0% 9.0%
Discount rate 5.0% 5.0%
Salary increase rate -- 5.0%
Average remaining service -- 20 years
The following table sets forth the plan's funded status as calculated
at September 30, 2000, and 1999 and amounts recognized in the Company's
consolidated balance sheets at December 31, 2000 and 1999 (in
thousands):
2000 1999
-------- --------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,953 $ 4,120
Service cost -- 544
Interest cost 198 325
Actuarial (gain) loss 195 (568)
Benefits paid -- (468)
Terminate plan (4,346) --
-------- --------
Benefit obligation at end of year -- 3,953
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year 3,953 3,109
Actual return on plan assets 393 524
Employer contribution -- 788
Benefits paid -- (468)
Terminate plan - distribution (4,346) --
-------- --------
Fair value of plan assets at end of year -- 3,953
-------- --------
Funded status -- --
Unrecognized net obligation at transition -- 6
Unrecognized actuarial (gain) -- (1,447)
Unrecognized prior service cost -- 257
-------- --------
Accrued pension liability (included in other liabilities) $ -- $ (1,184)
======== ========
Net periodic pension cost (benefit) for 2000 and 1999 included the
following components (in thousands):
2000 1999
-------- --------
Service cost $ -- $ 544
Interest cost 198 326
Expected return on assets (356) (329)
Net amortization and deferral (929) 13
-------- --------
Net periodic pension cost (benefit) $ (1,087) $ 554
======== ========
The Company has a 401(k) Plan that allows employees to save for
retirement on a pre-tax basis. The 401(k) Plan provides for matching
contributions by the Company up to 3% of each employee's contributions.
The Company also has an Employee Stock Ownership Plan ("ESOP"). The
Company makes discretionary profit sharing contributions into the
401(k) Plan, ESOP and in cash. Company discretionary contributions to
both the 401(k) Plan and the ESOP are allocated to participant accounts
in proportion to each participant's compensation and vest over a seven
year time interval. Employee contributions to the ESOP are not allowed
and the 401(k) does not provide for investment in the Company's stock.
Company discretionary profit sharing payments made in 2001, 2000, and
1999 are as follows:
PAGE 33
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
2001 2000 1999
---------- ---------- ----------
401(k) Plan $ 299,934 $ 619,145 $ 324,561
ESOP 677,465 378,410 227,941
Cash 224,279 242,635 288,793
---------- ---------- ----------
$1,201,678 $1,240,190 $ 841,294
========== ========== ==========
The Company has an obligation to certain members of the subsidiary
banks' Boards of Directors under deferred compensation plans in the
amount of $969,000, and $974,000 at December 31, 2001 and 2000,
respectively. A portion of the benefits will be funded by life
insurance.
The Company has a stock option plan (the "Plan") adopted in 1993 that
authorizes the reservation of up to 400,000 shares of common stock and
provides for the granting of incentive options to certain employees.
Under the Plan, the option price cannot be less than the fair market
value of the stock on the date granted. An option's maximum term is ten
years from the date of grant. Options granted under the Plan may be
subject to a graded vesting schedule. A summary of changes for the Plan
for the years 2001, 2000 and 1999 follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Year end December 31, 2001 2000 1999
-------------------- -------------------- --------------------
Options outstanding, January 1 148,380 $ 16.63 153,232 $ 17.20 146,132 $ 17.25
Granted 13,350 12.81 26,040 13.07 7,500 16.00
Forfeited (5,215) 19.83 (25,852) 18.41 -- --
Exercised -- -- (5,040) 6.53 (400) 12.50
-------- -------- --------
Options outstanding, December 31 156,515 $ 16.20 148,380 $ 16.63 153,232 $ 17.20
======== ======== ========
Weighted average fair value per option
of options granted during year $ 4.55 $ 4.98 $ 5.71
======== ======== ========
A summary of options outstanding at December 31, 2001 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER REMAINING EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE CONTRACTUAL LIFE PRICE
-------------- ----------- ---------------- -------- ----------- ---------------- --------
$ 11.00 20,000 3.1 yrs $ 11.00 20,000 3.1 yrs $ 11.00
12.50 16,200 4.5 12.50 14,760 4.5 12.50
12.81 13,350 9.1 12.81 -- 9.1 12.81
12.88 - 13.38 25,825 8.1 13.07 5,165 8.1 13.07
16.00 7,000 7.1 16.00 2,800 7.1 16.00
20.13 74,140 6.1 20.13 44,484 6.1 20.13
----------- -----------
$11.00 - 20.13 156,515 6.2 $ 16.20 87,209 5.3 $ 16.19
=========== ===========
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the Company's
stock options. Proforma adjustment of compensation cost for the
stock-based compensation plans are determined based on the grant date
fair values of awards (the method described in SFAS No. 123,
"Accounting for Stock-Based Compensation"). For the purpose of
computing the proforma amount, the fair value of each option on the
date of grant is estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants
in 2001, 2000 and 1999, respectively: dividend yields of 2.47%, 2.25%
and 2.24%; expected volatility of 30.81%, 26.44% and 25.45%; a risk
free interest rate of 5.07%, 6.73% and 6.50%; and an expected option
life of 10 years. For 2001, 2000 and 1999, proforma net income was
$11,560,000, $7,500,000 and $6,183,000 respectively; proforma basic and
diluted earnings per share were $1.54 and $1.53; $1.00 and $1.00 and
$0.83 and $0.82, respectively.
10 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instru-
PAGE 34
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
ments include commitments to extend credit and standby letters of
credit. These instruments involve elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance
sheets. The contractual amounts of these instruments reflect the extent
of the Company's involvement in particular classes of financial
instruments. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit written is
represented by the contractual amount of these instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Unless noted
otherwise, the Company does not require collateral or other security to
support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments may expire without being completely drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. At December 31, 2001 and 2000, the Company had
outstanding loan commitments approximating $163,800,000 and
$91,325,000, respectively.
Standby letters of credit written are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
The amount of standby letters of credit whose contract amounts
represent credit risk totaled approximately $12,984,000 and $8,851,000
at December 31, 2001 and 2000, respectively.
11 RELATED PARTY TRANSACTIONS
The Company has entered into transactions with its directors, principal
officers and affiliated companies in which they are principal
stockholders. Such transactions were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related
parties totaled $19,996,000 and $9,168,000 as of December 31, 2001 and
2000, respectively. During 2001 new advances to such related parties
amounted to $22,808,000 and repayments amounted to $11,980,000.
12 EARNINGS PER SHARE
The following is a reconciliation of the denominators of the basic and
diluted EPS computations for December 31, 2001, 2000 and 1999:
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------- --------- ---------
(dollars and shares information in thousands)
For the Year Ended December 31, 2001
Basic EPS $ 11,679 7,524 $ 1.55
Effect of dilutive stock options -- 18 --
--------- --------- ---------
Diluted EPS $ 11,679 7,542 $ 1.55
--------- --------- ---------
For the Year Ended December 31, 2000
Basic EPS $ 7,600 7,508 $ 1.01
Effect of dilutive stock options -- 5 --
--------- --------- ---------
Diluted EPS $ 7,600 7,513 $ 1.01
--------- --------- ---------
For the Year Ended December 31, 1999
Basic EPS $ 6,274 7,474 $ 0.84
Effect of dilutive stock options -- 24 --
--------- --------- ---------
Diluted EPS $ 6,274 7,498 $ 0.84
--------- --------- ---------
In 2001, 2000 and 1999, stock options representing 74,140, 204,764 and
98,940 average shares, respectively were not included in the
calculation of earnings per share as their effect would have been
antidilutive.
13 COMMITMENTS AND LIABILITIES
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material
effect on the Corporation's consolidated financial statements.
PAGE 35
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
The Company must maintain a reserve against its deposits in accordance
with Regulation D of the Federal Reserve Act. For the final weekly
reporting period in the years ended December 31, 2001 and 2000, the
aggregate amount of daily average required reserves was approximately
$1,095,000 and $1,067,000.
The Company has approximately $660,000 in deposits in financial
institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) at December 31, 2001.
14 REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on
the Company's and Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Company and Banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors. Prompt corrective action provisions are
not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Banks to maintain minimum amounts and
ratios of total and Tier I capital (as defined) to risk-weighted assets
(as defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2001 and 2000, that
the Company and Banks meet all capital adequacy requirements to which
they are subject.
The most recent notification from the Federal Reserve Bank as of
December 31, 2001, categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action (PCA). To be
categorized as adequately capitalized, an institution must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Banks' category.
The Company's and principal banking subsidiaries' actual capital
amounts and ratios are also presented in the table.
REQUIRED FOR REQUIRED IN ORDER TO
CAPITAL ADEQUACY BE WELL CAPITALIZED
ACTUAL PURPOSES UNDER PCA
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- --------- ---------
As of December 31, 2001 (dollars in thousands)
Total capital to risk weighted assets
Consolidated $ 87,329 12.16% $ 57,453 8.00% NA NA
Union Bank & Trust 56,817 11.14% 40,802 8.00% $ 51,003 10.00%
Northern Neck State Bank 20,027 11.63% 13,776 8.00% 17,220 10.00%
Tier 1 capital to risk weighted assets
Consolidated 79,993 11.14% 28,723 4.00% NA NA
Union Bank & Trust 51,384 10.08% 20,390 4.00% 30,586 6.00%
Northern Neck State Bank 18,394 10.69% 6,883 4.00% 10,324 6.00%
Tier 1 capital to average assets
Consolidated 79,993 8.35% 38,320 4.00% NA NA
Union Bank & Trust 51,384 7.81% 26,317 4.00% 32,896 5.00%
Northern Neck State Bank 18,394 7.41% 9,929 4.00% 12,412 5.00%
As of December 31, 2000
Total capital to risk weighted assets
Consolidated $ 79,730 11.82% $ 53,975 8.00% NA NA
Union Bank & Trust 54,382 11.39% 38,184 8.00% $ 47,730 10.00%
Northern Neck State Bank 19,588 11.66% 13,440 8.00% 16,800 10.00%
Tier 1 capital to risk weighted assets
Consolidated 72,341 10.72% 26,987 4.00% NA NA
Union Bank & Trust 48,728 10.21% 19,092 4.00% 28,638 6.00%
Northern Neck State Bank 18,070 10.76% 6,720 4.00% 10,080 6.00%
Tier 1 capital to average assets
Consolidated 72,341 8.46% 34,200 4.00% NA NA
Union Bank & Trust 48,728 8.24% 23,654 4.00% 29,568 5.00%
Northern Neck State Bank 18,070 7.89% 9,161 4.00% 11,451 5.00%
PAGE 36
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
15 FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The fair value of a financial instrument is the current amount that
would be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based on quoted market
prices. However, in many instances, there are no quoted market prices
for the Company's various financial instruments. In cases where quoted
market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the
instruments. SFAS 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of the Company.
CASH AND CASH EQUIVALENTS
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
For investment securities and securities available for sale, fair value
is determined by quoted market price. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
LOANS HELD FOR SALE
Fair values of mortgage loans held for sale are based on commitments on
hand from investors or prevailing market prices.
LOANS
The fair value of performing loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. Fair value for significant nonperforming loans is
based on recent external appraisals. If appraisals are not available,
estimated cash flows are discounted using a rate commensurate with the
risk associated with the estimated cash flows.
DEPOSITS
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
BORROWINGS
The carrying value of short-term borrowings is a reasonable estimates
of fair value. The fair value of long-term borrowings is estimated
based on interest rates currently available for debt with similar terms
and remaining maturities.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. At December 31, 2001 and 2000,
the carrying amount approximated fair value of loan commitments and
standby letters of credit.
The carrying amounts and estimated fair values of the Company's
financial instruments as of December 31, 2001 and 2000 are as follows
(in thousands):
PAGE 37
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
2001 2000
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents $ 38,915 $ 38,915 $ 22,869 $ 22,869
Investment securities -- -- 5,465 5,528
Securities available for sale 257,062 257,062 210,312 210,312
Loans held for sale 43,485 43,485 16,472 16,472
Net loans 592,828 617,144 573,401 572,265
Accrued interest receivable 6,979 6,979 6,314 6,314
Financial liabilities:
Deposits 784,084 753,499 692,472 695,009
Borrowings 103,814 106,801 105,137 105,515
Accrued interest payable 1,794 1,794 2,237 2,237
The Company assumes interest rate risk (the risk that general interest
rate levels will change) as a result of its normal operations. As a
result, the fair values of the Company's financial instruments will
change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match
maturities of assets and liabilities to the extent believed necessary
to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and
more likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to
do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing
in securities with terms that mitigate the Company's overall interest
rate risk.
16 PARENT COMPANY FINANCIAL INFORMATION
The primary source of funds for the dividends paid by Union Bankshares
Corporation (the "Parent Company") is dividends received from its
subsidiary banks. The payment of such dividends by the subsidiary banks
and the ability of the banks to loan or advance funds to the Parent
Company are subject to certain statutory limitations which contemplate
that the current year earnings and earnings retained for the two
preceding years may be paid to the Parent Company without regulatory
approval. As of December 31, 2001, the aggregate amount of unrestricted
funds which could be transferred from the Company's subsidiaries to the
Parent Company, without prior regulatory approval, totaled $14,116,000
or 15.9% of the consolidated net assets.
Financial information for the Parent Company follows:
UNION BANKSHARES CORPORATION ("PARENT COMPANY ONLY")
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(dollars in thousands)
2001 2000
-------- --------
Assets:
Cash $ 1,938 $ 1,050
Securities available for sale 320 235
Premises and equipment, net 2,988 3,342
Other assets 1,126 1,729
Investment in subsidiaries 86,025 77,287
-------- --------
Total assets $ 92,397 $ 83,643
======== ========
Liabilities and Stockholders' Equity:
Long-term debt $ 2,856 $ 4,998
Other liabilities 562 293
-------- --------
Total liabilities 3,418 5,291
-------- --------
Common stock 15,052 15,033
Surplus 446 403
Retained earnings 71,419 63,201
Accumulated other comprehensive income (loss) 2,062 (285)
-------- --------
Total stockholders' equity 88,979 78,352
-------- --------
Total liabilities and stockholders' equity $ 92,397 $ 83,643
======== ========
PAGE 38
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(dollars in thousands) 2001 2000 1999
--------- --------- ---------
Income:
Interest income $ 7 $ 7 $ 9
Dividends received from subsidiaries 5,739 2,827 5,488
Management fee received from subsidiaries 6,619 6,067 --
Equity in undistributed net income of subsidiaries 6,154 5,560 2,402
Other income 105 31 626
--------- --------- ---------
Total income 18,624 14,492 8,525
--------- --------- ---------
Expense:
Interest expense 247 412 305
Operating expenses 6,698 6,480 1,946
--------- --------- ---------
Total expense 6,945 6,892 2,251
--------- --------- ---------
Net income $ 11,679 $ 7,600 $ 6,274
========= ========= =========
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(dollars in thousands) 2001 2000 1999
--------- --------- ---------
Operating activities:
Net income $ 11,679 $ 7,600 $ 6,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (6,154) (5,560) (2,402)
Decrease in other assets 603 1,433 913
Other, net 970 765 (1,038)
--------- --------- ---------
Net cash provided by operating activities 7,098 4,238 3,747
--------- --------- ---------
Investing activities:
Purchase of securities (162) (61) (89)
Proceeds from sales of securities 87 138 38
Purchase of equipment (338) (166) (691)
Increase in investment in subsidiary -- -- (4,000)
Decrease in investment in subsidiary -- -- 83
--------- --------- ---------
Net cash used in investing activities (413) (89) (4,659)
--------- --------- ---------
Financing activities:
Net increase in borrowings -- 3,498 4,000
Repayment of long-term borrowings (2,142) (3,865) (255)
Cash dividends paid (3,461) (3,002) (2,994)
Issuance of common stock under plans 403 379 341
Repurchase of common stock under plans (597) (330) (1,915)
--------- --------- ---------
Net cash used in financing activities (5,797) (3,320) (823)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 888 829 (1,735)
Cash and cash equivalents at beginning of year 1,050 221 1,956
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,938 $ 1,050 $ 221
========= ========= =========
PAGE 39
UNION BANKSHARES CORPORATION o ANNUAL REPORT 2001
17 SEGMENT REPORTING
Union Bankshares Corporation has two reportable segments: traditional
full service community banks and a mortgage loan origination business.
The community bank business includes four banks which provide loan,
deposit, investment and trust services to retail and commercial
customers throughout their locations in Virginia. The mortgage segment
provides a variety of mortgage loan products principally in Virginia
and Maryland. These loans are originated and sold primarily in the
secondary market through purchase commitments from investors which
subject the company to only de minimis risk.
Profit and loss is measured by net income after taxes including
realized gains and losses on the Company's investment portfolio. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Intersegment transactions are recorded at cost and eliminated as part
of the consolidation process.
Both of the Company's reportable segments are service based. The
mortgage business is a fee based business while the banks are driven
principally by net interest income. The banks provide a distribution
and referral network through their customers for the mortgage loan
origination business. The mortgage segment offers a more specialized
and limited network for the banks, due largely to the minimal degree of
overlapping geographic markets.
The community bank segment provides the mortgage segment with the short
term funds needed to originate mortgage loans through a warehouse line
of credit and charges the mortgage banking segment interest at the 3
month libor rate. These transactions are eliminated in the
consolidation process. A management fee for back office support
services is charged to all subsidiaries and eliminated in the
consolidation totals.
Information about reportable segments and reconciliation of such
information to the consolidated financial statements for the years
ended December 31, 2001 and 2000 follows:
2001
- ----
COMMUNITY CONSOLIDATED
(dollars in thousands) BANKS MORTGAGE ELIMINATION TOTALS
---------- ---------- ---------- ----------
Net interest income $ 32,416 $ 677 $ -- $ 33,093
Provision for loan losses 2,126 -- -- 2,126
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 30,290 677 -- 30,967
Noninterest income 7,403 8,859 (170) 16,092
Noninterest expenses 24,882 7,735 (170) 32,447
---------- ---------- ---------- ----------
Income before income taxes 12,811 1,801 -- 14,612
Income tax expense 2,321 612 -- 2,933
---------- ---------- ---------- ----------
Net income $ 10,490 $ 1,189 $ -- $ 11,679
========== ========== ========== ==========
Total assets $ 984,247 $ 45,656 $ (46,806) $ 983,097
========== ========== ========== ==========
Capitalized expenditures $ 1,561 $ 73 -- $ 1,634
========== ========== ========== ==========
2000
- ----
COMMUNITY CONSOLIDATED
(dollars in thousands) BANKS MORTGAGE ELIMINATION TOTALS
---------- ---------- ---------- ----------
Net interest income $ 31,196 $ 141 $ -- $ 31,337
Provision for loan losses 2,101 -- -- 2,101
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 29,095 141 29,236
Noninterest income 6,656 5,516 (161) 12,011
Noninterest expenses 24,460 8,125 (161) 32,424
---------- ---------- ---------- ----------
Income (loss) before income taxes 11,291 (2,468) -- 8,823
Income tax expense (benefit) 2,072 (849) -- 1,223
---------- ---------- ---------- ----------
Net income (loss) $ 9,219 $ (1,619) $ -- $ 7,600
========== ========== ========== ==========
Total assets $ 885,009 $ 17,584 $ (20,632) $ 881,961
========== ========== ========== ==========
Capitalized expenditures $ 1,342 $ 101 -- $ 1,443
========== ========== ========== ==========
PAGE 40
"ENHANCING SHAREHOLDER VALUE THROUGH EXEMPLARY CUSTOMER SERVICE."
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS
Union Bankshares Corporation
P.O. Box 446
212 North Main Street
Bowling Green, Virginia 22427-0446
Phone:(804) 633-5031
Fax: (804) 633-1800
Website: www.ubsh.com
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 6:00 p.m. on Tuesday, April
16, 2002, at the Richmond County Elementary School, Warsaw, Virginia. All
shareholders are cordially invited to attend.
COMMON STOCK
Union Bankshares' Common Stock is quoted on the NASDAQ National Market where our
symbol is UBSH. (CUSIP # 905399101)
Union Bankshares is also listed in some newspapers under the NASDAQ National
Market heading "UnBkCp" or "UnionBS".
COMMON STOCK PRICES AND DIVIDENDS
Union Bankshares Corporation began trading its stock via NASDAQ in October 1993.
Dividends are typically paid semi-annually on June 1st and December 1st of each
year.
There were 7,525,912, shares of stock outstanding on December 31, 2001, held by
2,264 shareholders of record. The most recent trades at February 14, 2002 were
$20.62 per share which compares to a year earlier trading price of $12.25.
The following schedule summarizes the high and low sales prices and dividends
declared for the two years ended December 31, 2001.
DIVIDENDS
MARKET VALUES DECLARED
---------------------------------------- ------------------
2001 2000 2001 2000
------------------ ------------------ ------- -------
HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter $ 19.50 $ 10.19 $ 14.75 $ 8.75 $ -- $ --
Second Quarter 16.88 11.50 12.37 10.25 0.22 0.20
Third Quarter 17.40 14.19 11.62 8.62 -- --
Fourth Quarter 17.20 15.05 10.75 9.00 0.24 0.20
------- -------
$ 0.46 $ 0.40
======= =======
DIVIDEND REINVESTMENT PLAN
Union Bankshares' Dividend Reinvestment Plan provides each registered
shareholder with an economical and convenient method of investing cash dividends
in additional shares of the Company's common stock without fees and at a 5%
discount from the prevailing market price. For a prospectus on the Dividend
Reinvestment Plan, contact our Transfer Agent at the address indicated below.
INVESTOR RELATIONS
Union Bankshares' Annual Report, Form 10-K, and other corporate publications are
available to shareholders on request, without charge, by writing:
D. Anthony Peay
Senior Vice President and Chief Financial Officer
Union Bankshares Corporation
P.O. Box 446
Bowling Green, Virginia 22427-0446
(804) 632-2112
e-mail: tpeay@ubsh.com
INDEPENDENT AUDITORS
Yount, Hyde & Barbour, P.C.
50 South Cameron Street
Winchester, VA 22601
TRANSFER AGENT
Shareholders requiring information on stock transfer requirements, lost
certificates, dividends and other shareholder matters should contact our
transfer agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
e-mail: info@rtco.com
web site: www.rtco.com
PAGE 41
UNION BANKSHARES
CORPORATION
P.O. Box 446
212 North Main Street
Bowling Green, Virginia
22427-0446
Phone: (804) 633-5031
www.ubsh.com
PAGE 42