-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UqFBFxcDOeB6CJlQOaANyAr9fwAeBJ/PzVY+zzdqNuNee6xlzvYX4+gyKJOxAcbB Oz8ZtvdOLIdSkZHG0KEJdw== 0000928385-02-001235.txt : 20020415 0000928385-02-001235.hdr.sgml : 20020415 ACCESSION NUMBER: 0000928385-02-001235 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION BANKSHARES CORP CENTRAL INDEX KEY: 0000883948 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 540412820 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20293 FILM NUMBER: 02595735 BUSINESS ADDRESS: STREET 1: 212 NORTH MAIN ST STREET 2: P O BOX 446 CITY: BOWLING GREEN STATE: VA ZIP: 22427 BUSINESS PHONE: 8046335031 MAIL ADDRESS: STREET 1: PO BOX 446 STREET 2: 212 NORTH MAIN ST CITY: BOWLING GREEN STATE: VA ZIP: 22427 FORMER COMPANY: FORMER CONFORMED NAME: UNION BANCORP INC /VA/ DATE OF NAME CHANGE: 19930328 10-K405 1 d10k405.txt FORM 10-K405 DATED 12/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number: 0-20293 UNION BANKSHARES CORPORATION (Exact name of registrant as specified in its charter) VIRGINIA 54-1598552 (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.) 212 North Main Street, P.O. Box 446, Bowling Green, Virginia 22427 (Address or principal executive offices) (Zip code) (804) 633-5031 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of the registrant as of February 22, 2002 was $142,311,800. Number of shares of common stock outstanding as of February 22, 2002 was 7,543,068. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 2001 are incorporated into Part II of this Form 10-K and portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K. UNION BANKSHARES CORPORATION FORM 10-K INDEX -----
PART 1 Page ---- Item 1. Business ................................................................... 1 Item 2. Properties ................................................................. 8 Item 3. Legal Proceedings .......................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders ........................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...... 10 Item 6. Selected Financial Data .................................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................. 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................. 10 Item 8. Financial Statements and Supplementary Data ................................ 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................................. 10 PART III Item 10. Directors and Executive Officers ........................................... 11 Item 11. Executive Compensation ..................................................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management ............. 12 Item 13. Certain Relationships and Related Transactions ............................. 12 PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K ........... 13
i PART I Item 1. - Business GENERAL Union Bankshares Corporation (the "Company") is a multi-bank holding company organized under Virginia law which is headquartered in Bowling Green, Virginia. The Company is committed to the delivery of financial services through its four affiliated community banks, Union Bank & Trust Company ("Union Bank"), Northern Neck State Bank ("Northern Neck Bank"), Rappahannock National Bank ("Rappahannock Bank") and the Bank of Williamsburg (collectively, the "Subsidiary Banks"), and two non-bank financial services affiliates, Union Investment Services, Inc. ("Union Investment") and Mortgage Capital Investors, Inc. ("MCI"). The Company was formed in connection with the July 1993 merger of Northern Neck Bankshares Corporation with and into Union Bancorp, Inc. On September 1, 1996, King George State Bank and on July 1, 1998, Rappahannock National Bank became wholly-owned subsidiaries of the Company. On February 22, 1999, the Bank of Williamsburg began business as a newly organized bank focusing on the Williamsburg market. In June 1999, King George State Bank was merged into Union Bank and ceased to be a subsidiary bank. Each of the Subsidiary Banks is a full service retail commercial bank offering a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, and loans for commercial, industrial, residential mortgage and consumer purposes. The Subsidiary Banks also issue credit cards and can deliver automated teller machine services through the use of reciprocally shared ATMs in the STAR, CIRRUS and PLUS networks. During 2001, all the banks began offering Internet Banking access for banking services. Union Bankshares Corporation had assets of $983 million, deposits of $784 million, and shareholders' equity of $89 million at December 31, 2001. The Company serves, through its Subsidiary Banks, the Virginia counties of Caroline, Hanover, King George, King William, Spotsylvania, Stafford, Richmond, Westmoreland, Essex, Lancaster, Northumberland, the City of Williamsburg, James City County and the City of Fredericksburg. Late in 2001, the Company finalized plans to open a loan production office servicing Newport News beginning in January 2002. Through its Subsidiary Banks, the Company operated twenty-nine branches in its primary trade area at year end. Union Investment has provided securities, brokerage and investment advisory services since February 1993. It is a full service brokerage company which offers a wide range of investment services, and sells annuities, mutual funds, bonds and stocks. On February 22, 1999, the Company opened the Bank of Williamsburg, a full service bank headquartered in Williamsburg, Virginia. The bank was organized and 1 chartered under the laws of Virginia in February 1999. On March 20, 2000, the Bank of Williamsburg moved into its current headquarters located at 5125 John Tyler Parkway in Williamsburg. The Bank of Williamsburg's primary trade area is Williamsburg and surrounding James City County. The opening of the loan production office will extend the Bank's lending area to the Newport News/ Tidewater market. On February 11, 1999, the Company acquired CMK Corporation t/a "Mortgage Capital Investors," a mortgage loan brokerage company headquartered in Springfield, Virginia, by merger of CMK Corporation into Mortgage Capital Investors, Inc., a wholly owned subsidiary of Union Bank. MCI has seven offices in Virginia (3), Maryland (3) and South Carolina (1) and is also licensed to do business in Connecticut, New Jersey and Washington, D.C. MCI provides a variety of mortgage products to customers in those states. The mortgage loans originated by MCI are generally sold in the secondary market through purchase agreements with institutional investors. MCI also offers insurance services to its customers through a joint venture with an insurance agency. The Company has two reportable segments: traditional full service community banks and a mortgage loan origination business, each as described above. See Note 17 to the Notes to Consolidated Financial Statements and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are included in the Company's 2001 Annual Report to Shareholders for certain financial and other information about each of the Company's operating segments. ACQUISITION PROGRAM The Company looks to expand its market area and increase its market share through internal growth, de novo expansion and strategic acquisitions. On November 9, 2001, the Company's Northern Neck Bank subsidiary purchased the Tappahannock branch from Citizens & Farmers Bank. This purchase added $14.9 million in deposits and about $2.7 million in loans to the subsidiary's balance sheet. This site offers a better location from which to serve the Northern Neck Bank's customers with more potential for deposit and loan growth. COMPETITION The Company experiences competition in all aspects of its business. In its market area, the Company competes with large national and regional financial institutions, savings and loans and other independent community banks, as well as credit unions, mutual funds and life insurance companies. Competition has increasingly come from out-of-state banks through their acquisitions of Virginia-based banks. Competition for deposits and loans is affected by factors such as interest rates offered, the number and location of branches and types of products offered, as well as the reputation of the institution. 2 SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. The following description briefly addresses certain provisions of federal and state laws and certain regulations and proposed regulations and the potential impact of such provisions on the Company and the Subsidiary Banks. To the extent statutory or regulatory provisions or proposals are described herein, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. Bank Holding Companies As a bank holding company registered under the Bank Holding Company Act of 1956 (the "BHCA"), the Company is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks are also able to branch across state lines, provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. Virginia has adopted legislation that permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (the "FDIC") insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a result of the default of a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions. 3 The Federal Deposit Insurance Act (the "FDIA") also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general creditor or stockholder. This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the assets of the bank. The Company is registered under the bank holding company laws of Virginia. Accordingly, the Company and the Subsidiary Banks are subject to regulation and supervision by the State Corporation Commission of Virginia (the "SCC"). Capital Requirements The Federal Reserve Board, the Office of the Comptroller of the Currency (the "OCC") and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements of these federal bank regulatory agencies, the Company and each of the Subsidiary Banks are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be "Tier 1 capital", which consists principally of common and certain qualifying preferred shareholders' equity, less certain intangibles and other adjustments. The remainder ("Tier 2 capital") consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company as of December 31, 2001 were 11.14% and 12.16%, respectively, exceeding the minimum requirements. In addition, each of the federal regulatory agencies has established a minimum leverage capital ratio (Tier 1 capital to average tangible assets) ("Tier 1 leverage ratio"). These guidelines provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as of December 31, 2001, was 8.35%, which is above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Limits on Dividends and Other Payments The Company is a legal entity, separate and distinct from its subsidiary institutions. A significant portion of the revenues of the Company result from dividends paid to it by the Subsidiary Banks. There are various legal limitations applicable to the 4 payment of dividends by the Subsidiary Banks to the Company, as well as the payment of dividends by the Company to its respective shareholders. Under federal law, the Subsidiary Banks may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, the Company or take securities of the Company as collateral for loans to any borrower. The Subsidiary Banks are also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions. The Subsidiary Banks are subject to various statutory restrictions on their ability to pay dividends to the Company. Under the current supervisory practices of the Subsidiary Banks' regulatory agencies, prior approval from those agencies is required if cash dividends declared in any given year exceed net income for that year plus retained net profits of the two proceeding years. The payment of dividends by the Subsidiary Banks or the Company may also be limited by other factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit the Subsidiary Banks or the Company from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending on the financial condition of the Subsidiary Banks, or the Company, could be deemed to constitute such an unsafe or unsound practice. Under the FDIA, insured depository institutions such as the Subsidiary Banks are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the statute). Based on the Subsidiary Banks' current financial condition, the Company does not expect that this provision will have any impact on its ability to obtain dividends from the Subsidiary Banks. In addition to dividends it receives from the Subsidiary Banks, the Company receives management fees from its affiliated companies for various services provided to them including: data processing, item processing, customer accounting, financial accounting, human resources, funds management, credit administration, sales and marketing, collections and internal audit. These fees are charged to each subsidiary based upon various specific allocation methods measuring the usage of such services by that subsidiary. The fees are eliminated in the consolidation process. The Subsidiary Banks The Subsidiary Banks are supervised and regularly examined by the Federal Reserve Board and the SCC, and in the case of Rappahannock National Bank, the OCC. The various laws and regulations administered by the regulatory agencies affect corporate practices, such as the payment of dividends, incurring debt and acquisition of financial institutions and other companies, and affect business practices, such as the payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices. 5 The Subsidiary Banks are also subject to the requirements of the Community Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. As an institution with deposits insured by the BIF, the Bank also is subject to insurance assessments imposed by the FDIC. There is a base assessment for all institutions. In addition, the FDIC has implemented a risk-based assessment schedule, imposing assessments ranging from zero to 0.27% of an institution's average assessment base. The actual assessment to be paid by each BIF member is based on the institution's assessment risk classification, which is determined based on whether the institution is considered "well capitalized," "adequately capitalized" or "undercapitalized," as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. In 2001, the Company paid only the base assessment rate through the Subsidiary Banks which amounted to $130,286 in deposit insurance premiums. Other Safety and Soundness Regulations The federal banking agencies have broad powers under current federal law to make prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." All such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. The Gramm-Leach-Bliley Act of 1999 The Gramm-Leach-Bliley Act of 1999 ("GLBA") was signed into law on November 12, 1999. The main purpose of GLBA is to permit greater affiliations within the financial services industry, primarily banking, securities and insurance. The provisions of GLBA that are believed to be of most significance to the Company are discussed below. GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which separated commercial banking from investment banking, and substantially amends the BHCA, which limited the ability of bank holding companies to engage in the securities and insurance businesses. To achieve this purpose, GLBA creates a new type of company, the "financial holding company." A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including 6 . securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and . insurance underwriting, sales and brokerage activities. A bank holding company may elect to become a financial holding company only if all of its depository institution subsidiaries are well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. For various reasons, the Company has not elected to be treated as a financial holding company under GLBA. GLBA establishes a system of functional regulation under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the Securities and Exchange Commission ("SEC") will regulate their securities activities and state insurance regulators will regulate their insurance activities. GLBA and certain new regulations issued by federal banking agencies also provide new protections against the transfer and use by financial institutions of consumers nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. The new privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure. Many of GLBA's provisions, including the customer privacy protection provisions, require the Federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement those respective provisions. Most of the required implementing regulations have been proposed and/or adopted by the bank regulatory agencies as of December 31, 2001. Neither the provisions of GLBA nor the act's implementing regulations as proposed or adopted have had a material impact on the Company's or the Subsidiary Banks' regulatory capital ratios (as discussed above) or ability to continue to operate in a safe and sound manner. 7 Item 2. - Properties The Company, through its subsidiaries, owns or leases buildings that are used in the normal course of business. The main office is located at 212 N. Main Street, Bowling Green, Virginia, in a building owned by the Company. The Company's subsidiaries own or lease various other offices in the counties and cities in which they operate. See Notes to Consolidated Financial Statements for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases. Unless otherwise indicated, the properties below are owned by the Company and its subsidiaries as of December 31, 2001. Locations --------- Corporate Headquarters 212 North Main Street, Bowling Green, Virginia Banking Offices - Union Bank & Trust Company 211 North Main Street, Bowling Green, Virginia Route 1, Ladysmith, Virginia Route 301, Port Royal, Virginia 4540 Lafayette Boulevard, Fredericksburg, Virginia Route 1 and Ashcake Road, Ashland, Virginia 4210 Plank Road, Fredericksburg, Virginia 10415 Courthouse Road, Fredericksburg, Virginia 10469 Atlee Station Road, Ashland, Virginia 700 Kenmore Avenue, Fredericksburg, Virginia Route 360, Manquin, Virginia 9534 Chamberlayne Road, Mechanicsville, Virginia Cambridge and Layhill Road, Falmouth, Virginia (leased) Massaponax Church Road and Route 1, Spotsylvania, Virginia (leased) Brock Road and Route 3, Fredericksburg, Virginia (leased) 2811 Fall Hill Avenue, Fredericksburg, Virginia 6110 Mechanicsville Turnpike, Mechanicsville, Virginia (leased) 10045 Kings Highway, King George, Virginia 840 McKinney Blvd., Colonial Beach, Virginia 8 Banking Offices - Northern Neck State Bank 5839 Richmond Road, Warsaw, Virginia 4256 Richmond Road, Warsaw, Virginia Route 3, Kings Highway, Montross, Virginia Route 17 and Earl Street, Tappahannock, Virginia (closed) 1649 Tappahannock Blvd, Tappahannock, Virginia 1660 Tappahannock Blvd (Walmart), Tappahannock, Virginia (leased) 15043 Northumberland Highway, Burgess, Virginia 284 North Main Street, Kilmarnock, Virginia 876 Main Street, Reedville, Virginia 485 Chesapeake Drive, White Stone, Virginia Banking Office - Rappahannock National Bank 257 Gay Street, Washington, Virginia Banking Office - Bank of Williamsburg 5125 John Tyler Parkway, Williamsburg, Virginia (land lease) Union Investment Services, Inc. 111 Davis Court, Bowling Green, Virginia 10469 Atlee Station Road, Ashland, Virginia 2811 Fall Hill Avenue, Fredericksburg, Virginia Mortgage Capital Investors, Inc. (All leased) 5835 Allentown Way, Camp Spring, Maryland 5440 Jeff Davis Highway, #103, Fredericksburg, Virginia 3 Hillcrest Drive #A100, Frederick, Maryland 7501 Greenway Center, Greenbelt, Maryland 7901 N. Ocean Boulevard, Myrtle Beach, South Carolina 6330 Newtown Road, #211, Norfolk, Virginia 6571 Edsall Road, Springfield, Virginia Item 3. - Legal Proceedings In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations. Item 4. - Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2001. 9 PART II Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters This information is incorporated herein by reference from the inside back cover of the Annual Report to Shareholders for the year ended December 31, 2001. Item 6. - Selected Financial Data This information is incorporated herein by reference from the section captioned "Selected Financial Data" on page 5 in the Annual Report to Shareholders for the year ended December 31, 2001. Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is incorporated herein by reference from the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 10 through 20 in the Annual Report to Shareholders for the year ended December 31, 2001. Item 7A. - Quantitative and Qualitative Disclosures About Market Risk This information is incorporated herein by reference from the Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 12 through 13 of the Annual Report to Shareholders for the year ended December 31, 2001. Item 8. - Financial Statements and Supplementary Data This information is incorporated herein by reference from the Consolidated Financial Statements on pages 21 through 40 and the Quarterly Earnings Summary on page 4 of the Annual Report to Shareholders for the year ended December 31, 2001. Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 10 PART III Item 10. - Directors and Executive Officers of the Registrant This information, as applicable to directors, is incorporated herein by reference from pages 2 and 3 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 16, 2002 ("Proxy Statement") from the section titled "Election of Directors." Executive officers of the Company are listed below: Title and Principal Occupation Name (Age) During Past Five Years - ---------- ---------------------- G. William Beale (52) President and Chief Executive Officer of the Company since its inception; President of Union Bank since 1991. D. Anthony Peay (42) Senior Vice President since 2000 and Vice President and Chief Financial Officer of the Company since December 1994. John C. Neal (52) Executive Vice President and Chief Operating Officer of Union Bank since 1997. N. Byrd Newton (58) President and Chief Executive Officer of Northern Neck State Bank since 2000 and Senior Vice President and Secretary since 1992. Information on Section 16(a) beneficial ownership reporting compliance for the directors and executive officers of the Company is incorporated herein by reference from page 12 of the Proxy Statement from the section titled "Section 16(a) Beneficial Ownership Reporting Compliance." 11 Item 11. - Executive Compensation This information is incorporated herein by reference from page 4 and 6 through 10 of the Proxy Statement from the sections titled "Election of Directors--Directors' Fees" and "Executive Compensation." Item 12. - Security Ownership of Certain Beneficial Owners and Management This information is incorporated herein by reference from page 5 of the Proxy Statement from section titled "Ownership of Company Common Stock." Item 13. - Certain Relationships and Related Transactions This information is incorporated herein by reference from pages 11 of the Proxy Statement from the section titled "Interest of Directors and Officers in Certain Transactions." 12 PART IV Item 14. - Exhibits, Financial Statement Schedules and Reports on Form 8-K The following documents are filed as part of this report: (a)(1) Financial Statements The following documents are included in the 2001 Annual Report to Shareholders and are incorporated by reference in this report: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditor's Report (a)(2) Financial Statement Schedules All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. 13 (a)(3) Exhibits Exhibit No. Description ----------- ----------- 3.1 Articles of Incorporation (incorporate by reference to Form S-4 Registration Statement; SEC file no. 33-60458) 3.2 By-Laws (incorporated by reference to Form S-4 Registration Statement; SEC file no. 33-60458) 10.1 Change in Control Employment Agreement of G. William Beale (incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 1996) 10.2 Employment Agreement of G. William Beale (incorporated by reference to the registrant's Annual Report on Form 10 K for the year ended December 31, 1999). 10.3 Change in Control Employment Agreement of D. Anthony Peay 11.0 Statement re: Computation of Per Share Earnings (incorporated by reference to note 12 of the notes to consolidated financial statements included in the 2001 Annual Report to Shareholders) 13.0 2001 Annual Report to Shareholders 21.0 Subsidiaries of the Registrant 23.1 Consent of Yount, Hyde & Barbour, P.C. (b) Reports on Form 8-K None 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Union Bankshares Corporation By: / s/ G. William Beale Date: March 27, 2002 ------------------------------ G. William Beale President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 2002. Signature Title --------- ----- /s/ G. William Beale President, Chief Executive Officer and - -------------------------------- G. William Beale Director (principal executive officer) /s/ Frank B. Bradley, III Director - ------------------------- Walton Mahon /s/ Ronald L. Hicks Chairman of the Board of Directors - --------------------------- Ronald L. Hicks /s/ W. Tayloe Murphy, Jr Vice Chairman of the Board of Directors - --------------------------- W. Tayloe Murphy, Jr. /s/ Walton Mahon Director - --------------------------- Walton Mahon /s/ D. Anthony Peay Senior Vice President and Chief - --------------------------- D. Anthony Peay Financial Officer (principal financial officer) /s/ M. Raymond Piland, III Director - ---------------------------- M. Raymond Piland, III /s/ A.D. Whittaker Director - --------------------------------- A.D. Whittaker /s/ William M. Wright Director - --------------------------- William M. Wright 15 EX-10.3 3 dex103.txt MANAGEMENT CONTINUITY AGREEMENT Exhibit 10.3 MANAGEMENT CONTINUITY AGREEMENT This Agreement ("Agreement"), dated as of November 21, 2000, is between Union Bankshares Corporation, a Virginia corporation (the "Company"), and D. Anthony Peay (the "Executive") and provides as follows. 1. Purpose ------- The Company recognizes that the possibility of a Change in Control exists and the uncertainty and questions that it may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the purpose of this Agreement is to encourage the Executive to continue employment after a Change in Control by providing reasonable employment security to the Executive and to recognize the prior service of the Executive in the event of a termination of employment under certain circumstances after a Change in Control. 2. Term of the Agreement --------------------- This Agreement will be effective on January 1, 2001 and will expire on December 31, 2001; provided that on December 31, 2001 and on each December 31/st/ thereafter (each such December 31/st/ is referred to as the "Renewal Date"), this Agreement will be automatically extended for an additional calendar year. This Agreement will not, however, be extended if the Company gives written notice of such non-renewal to the Executive no later than September 30/th/. before the Renewal Date (the original and any extended term of this Agreement is referred to as the "Change in Control Period"). 3. Employment After Change in Control ---------------------------------- If a Change in Control of the Company (as defined in Section 12) occurs during the Change in Control Period and the Executive is employed by the Company on the date the Change in Control occurs (the "Change in Control Date"), the Company will continue to employ the Executive in accordance with the terms and conditions of this Agreement for the period beginning on the Change in Control Date and ending on the third anniversary of such date (the "Employment Period"). If a Change in Control occurs on account of a series of transactions, the Change in Control Date is the date of the last of such transactions. 4. Terms of Employment ------------------- (a) Position and Duties. During the Employment Period, (i) the Executive's ------------------- position, authority, duties and responsibilities will be commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Change in Control Date and (ii) the Executive's services will be performed at the location where the Executive was employed immediately preceding the Change in Control Date or any office that is the headquarters of the Company and is less than 35 miles from such location. (b) Compensation. ------------ (i) Base Salary. During the Employment Period, the Executive ----------- will receive an annual base salary (the "Annual Base Salary") at least equal to the base salary paid or payable to the Executive by the Company and its affiliated companies for the twelve-month period immediately preceding the Change of Control Date. During the Employment Period, the Annual Base Salary will be reviewed at least annually and will be increased at any time and from time to time as will be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in the Annual Base Salary will not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary will not be reduced after any such increase, and the term Annual Base Salary as used in this Agreement will refer to the Annual Base Salary as so increased. The term "affiliated companies" includes any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to the Annual Base Salary, the ------------ Executive will be awarded for each year ending during the Employment Period an annual bonus (the "Annual Bonus") in cash at least equal to the average annual bonus paid or payable, including by reason of any deferral, for the two years immediately preceding the year in which the Change in Control Date occurs. Each such Annual Bonus will be paid no later than the end of the third month of the year next following the year for which the Annual Bonus is awarded. (iii) Incentive, Savings and Retirement Plans. During the --------------------------------------- Employment Period, the Executive will be entitled to participate in all incentive (including stock incentive), savings and retirement, insurance plans, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event will such plans, policies and programs provide the Executive with incentive opportunities, savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than those provided by the Company and its affiliated companies for the Executive under such plans, policies and programs as in effect at any time during the six months immediately preceding the Change in Control Date. (iv) Welfare Benefit Plans. During the Employment Period, the --------------------- Executive and/or the Executive's family, as the case may be, will be eligible for participation in and will receive all benefits under welfare benefit plans, policies and programs provided by the Company and its affiliated companies to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event will such plans, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, policies and programs in effect at any time during the six months immediately preceding the Change in Control Date. (v) Fringe Benefits. During the Employment Period, the Executive --------------- will be entitled to fringe benefits in accordance with the most favorable plans, policies and programs of the Company and its affiliated companies in effect for the Executive at any time during the six months immediately preceding the Change in Control Date or, if more favorable to the Executive, as in effect generally from time to time after the Change in Control Date with respect to other peer executives of the Company and its affiliated companies. (vi) Vacation. During the Employment Period, the Executive will -------- be entitled to paid vacation in accordance with the most favorable plans, policies and programs of the Company and its affiliated companies in effect for the Executive at any time during the six months immediately preceding the Change in Control Date or, if more favorable to the Executive, as in effect generally from time to time after the Change in Control Date with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment Following Change in Control ----------------------------------------------------- (a) Death or Disability. The Executive's employment will terminate ------------------- automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period, it may terminate the Executive's employment. For purposes of this Agreement, "Disability" means the Executive's inability to perform his duties with the Company on a full time basis for 180 consecutive days or a total of at least 240 days in any twelve month period as a result of the Executive's incapacity due to physical or mental illness (as determined by an independent physician selected by the Board). (b) Cause. The Company may terminate the Executive's employment during the ----- Employment Period for Cause. For purposes of this Agreement, "Cause" means (i) gross incompetence, gross negligence, willful misconduct in office or breach of a material fiduciary duty owed to the Company or any affiliated company; (ii) conviction of a felony or a crime of moral turpitude (or a plea of nolo contendere thereto) or commission of an act of embezzlement or fraud against the Company or any affiliated company; (iii) any material breach by the Executive of a material term of this Agreement, including, without limitation, material failure to perform a substantial portion of his duties and responsibilities hereunder; or (iv) deliberate dishonesty of the Executive with respect to the Company or any affiliated company. (c) Good Reason; Window Period. The Executive's employment may be -------------------------- terminated (i) during the Employment Period by the Executive for Good Reason or (ii) during the Window Period by the Executive without any reason. For purposes of this Agreement, the "Window Period" means the 45-day period beginning on the later of the one-year anniversary of the Change in Control Date or the date of closing of the corporate transaction that is the subject of shareholder approval in Section 12. For purposes of this Agreement, "Good Reason" means: (i) a material reduction in the Executive's duties or authority; (ii) a failure by the Company to comply with any of the provisions of Section 4(b); (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(ii); (iv) the failure by the Company to comply with and satisfy Section 7(b); or (v) the Company fails to honor any term or provision of this Agreement; (d) Notice of Termination. Any termination during the Employment Period by --------------------- the Company or by the Executive for Good Reason or during the Window Period shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (e) Date of Termination. "Date of Termination" means (i) if the ------------------- Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the date specified in the Notice of Termination (which shall not be less than 30 nor more than 60 days from the date such Notice of Termination is given), and (iii) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given, provided that the Executive shall not have returned to the full-time performance of his duties during such 30-day period. 6. Compensation Upon Termination ----------------------------- (a) Termination Without Cause or for Good Reason or During Window Period. -------------------------------------------------------------------- The Executive will be entitled to the following benefits if, during the Employment Period, the Company terminates his employment without Cause or the Executive terminates his employment with the Company or any affiliated company for Good Reason or during the Window Period. (i) Accrued Obligations. The Accrued Obligations are the sum of: (1) ------------------- the Executive's Annual Base Salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given; (2) the amount, if any, of any incentive or bonus compensation theretofore earned which has not yet been paid; (3) the product of the Annual Bonus paid or payable, including by reason of deferral, for the most recently completed year and a fraction, the numerator of which is the number of days in the current year through the Date of Termination and the denominator of which is 365; and (4) any benefits or awards (including both the cash and stock components) which pursuant to the terms of any plans, policies or programs have been earned or become payable, but which have not yet been paid to the Executive (but not including amounts that previously had been deferred at the Executive's request, which amounts will be paid in accordance with the Executive's existing directions). The Accrued Obligations will be paid to the Executive in a lump sum cash payment within ten days after the Date of Termination; (ii) Salary Continuance Benefit. The Salary Continuance Benefit -------------------------- is an amount equal to 2.0 times the Executive's Final Compensation. For purposes of this Agreement, "Final Compensation" means the Annual Base Salary in effect at the Date of Termination, plus the highest Annual Bonus paid or payable for the two most recently completed years and any amount contributed by the Executive during the most recently completed year pursuant to a salary reduction agreement or any other program that provides for pre-tax salary reductions or compensation deferrals. The Salary Continuance Benefit will be paid to the Executive in a lump sum cash payment not later than the 45/th/ day following the Date of Termination; (iii) Welfare Continuance Benefit. For 24 months following the --------------------------- Date of Termination, the Executive and his dependents will continue to be covered under all health and dental plans, disability plans, life insurance plans and all other welfare benefit plans (as defined in Section 3(1) of ERISA) ("Welfare Plans") in which the Executive or his dependents were participating immediately prior to the Date of Termination (the "Welfare Continuance Benefit"). The Company will pay all or a portion of the cost of the Welfare Continuance Benefit for the Executive and his dependents under the Welfare Plans on the same basis as applicable, from time to time, to active employees covered under the Welfare Plans and the Executive will pay any additional costs. If participation in any one or more of the Welfare Plans included in the Welfare Continuance Benefit is not possible under the terms of the Welfare Plan or any provision of law would create an adverse tax effect for the Executive or the Company due to such participation, the Company will provide substantially identical benefits directly or through an insurance arrangement. The Welfare Continuance Benefit as to any Welfare Plan will cease if and when the Executive has obtained coverage under one or more welfare benefit plans of a subsequent employer that provides for equal or greater benefits to the Executive and his dependents with respect to the specific type of benefit. The Executive or his dependents will become eligible for COBRA continuation coverage as of the date the Welfare Continuance Benefit ceases for all health and dental benefits. (b) Death. If the Executive dies during the Employment Period, this ----- Agreement will terminate without any further obligation on the part of the Company under this Agreement, other than for (i) payment of the Accrued Obligations and six months of the Executive's Base Salary (which shall be paid to the Executive's beneficiary designated in writing or his estate, as applicable, in a lump sum cash payment within 30 days of the date of death); (ii) the timely payment or provision of the Welfare Continuance Benefit to the Executive's spouse and other dependents for 24 months following the date of death; and (iii) the timely payment of all death and retirement benefits pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies. (c) Disability. If the Executive's employment is terminated because of the ---------- Executive's Disability during the Employment Period, this Agreement will terminate without any further obligation on the part of the Company under this Agreement, other than for (i) payment of the Accrued Obligations and six months of the Executive's Base Salary (which shall be paid to the Executive in a lump sum cash payment within 30 days of the Date of Termination); (ii) the timely payment or provision of the Welfare Continuance Benefit for 24 months following the Date of Termination; and (iii) the timely payment of all disability and retirement benefits pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies. (d) Cause; Other than for Good Reason. If the Executive's employment is --------------------------------- terminated for Cause during the Employment Period, this Agreement will terminate without further obligation to the Executive other than the payment to the Executive of the Annual Base Salary through the Date of Termination, plus the amount of any compensation previously deferred by the Executive. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or during the Window Period, this Agreement will terminate without further obligation to the Executive other than for the Accrued Obligations (which will be paid in a lump sum in cash within 30 days of the Date of Termination) and any other benefits to which the Executive may be entitled pursuant to the terms of any plan, program or arrangement of the Company and its affiliated companies. (e) Gross-Up Payment. In the event any payment or distribution by the ---------------- Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 6(e)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (collectively, the "Excise Tax"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any income taxes and interest or penalties imposed with respect to such taxes) and the Excise Tax imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. All determinations required to be made under this Section 6(e), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made by the independent accounting firm of the Company immediately prior to the Executive's termination of employment (the "Accounting Firm"). All fees and expenses of the Accounting Firm will be borne solely by the Company, and any determination by the Accounting Firm will be binding upon the Company and the Executive. Any Gross-Up Payment, as determined pursuant to this Section 6(e), will be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm's determination. (i) If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall so indicate to the Executive in writing. (ii) In the event there is an under-payment of the Gross-Up Payment due to the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm will determine the amount of any such under-payment that has occurred and such amount will be promptly paid by the Company to or for the benefit of the Executive. 7. Binding Agreement; Successors ----------------------------- (a) This Agreement will be binding upon and inure to the benefit of the Executive (and his personal representative), the Company and any successor organization or organizations which shall succeed to substantially all of the business and property of the Company, whether by means of merger, consolidation, acquisition of all or substantially of all of the assets of the Company or otherwise, including by operation of law. (b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (c) For purposes of this Agreement, the term "Company" includes any subsidiaries of the Company and any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist; provided, however, that for purposes of determining whether a Change in Control has occurred herein, the term "Company" refers to Union Bankshares Corporation or its successors. 8. Fees and Expenses; Mitigation ----------------------------- (a) The Company will pay or reimburse the Executive for all costs and expenses, including without limitation court costs and reasonable attorneys' fees, incurred by the Executive (i) in contesting or disputing any termination of the Executive's employment or (ii) in seeking to obtain or enforce any right or benefit provided by this Agreement, in each case provided the Executive's claim is upheld by a court of competent jurisdiction. (b) The Executive shall not be required to mitigate the amount of any payment the Company becomes obligated to make to the Executive in connection with this Agreement, by seeking other employment or otherwise. Except as specifically provided above with respect to the Wefare Continuance Benefit, the amount of any payment provided for in Section 6 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. 9. No Employment Contract ---------------------- Nothing in this Agreement will be construed as creating an employment contract between the Executive and the Company prior to Change in Control. 10. Continuance of Welfare Benefits Upon Death ------------------------------------------ If the Executive dies while receiving a Welfare Continuation Benefit, the Executive's spouse and other dependents will continue to be covered under all applicable Welfare Plans during the remainder of the 24-month coverage period. The Executive's spouse and other dependents will become eligible for COBRA continuation coverage for health and dental benefits at the end of such 24-month period. 11. Notice ------ Any notices and other communications provided for by this Agreement will be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid (in which case notice will be deemed to have been given on the third day after mailing), or by overnight delivery by a reliable overnight courier service (in which case notice will be deemed to have been given on the day after delivery to such courier service). Notices to the Company shall be directed to the Secretary of the Company, with a copy directed to the Chairman of the Board of the Company. Notices to the Executive shall be directed to his last known address. 12. Definition of a Change in Control --------------------------------- No benefits shall be payable hereunder unless there shall have been a Change in Control of the Company as set forth below. For purposes of this Agreement, a "Change in Control" means: (a) The acquisition by any Person of beneficial ownership of 20% or more of the then outstanding shares of common stock of the Company, provided that an acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege) shall not constitute a Change in Control; (b) Individuals who constitute the Board on the date of this Agreement (the "Incumbent Board") cease to constitute a majority of the Board, provided that any director whose nomination was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board will be considered a member of the Incumbent Board, but excluding any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company (as such terms are used in Rule 14a-11 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act")); (c) Approval by the shareholders of the Company of a reorganization, merger, share exchange or consolidation (a "Reorganization"), provided that shareholder approval of a Reorganization will not constitute a Change in Control if, upon consummation of the Reorganization, each of the following conditions is satisfied: (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from the Reorganization is beneficially owned by all or substantially all of the former shareholders of the Company in substantially the same proportions as their ownership existed in the Company immediately prior to the Reorganization; (ii) no Person beneficially owns 20% or more of either (1) the then outstanding shares of common stock of the corporation resulting from the transaction or (2) the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors; and (iii) at least a majority of the members of the board of directors of the corporation resulting from the Reorganization were members of the Incumbent Board at the time of the execution of the initial agreement providing for the Reorganization. (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, or of the sale or other disposition of all or substantially all of the assets of the Company. (e) For purposes of this Agreement, "Person" means any individual, entity or group (within the meaning of Section 13(d)(3) of the Exchange Act, other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company, and "beneficial ownership" has the meaning given the term in Rule 13d-3 under the Exchange Act. 13. Confidentiality --------------- The Executive will hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses, which was obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which will not be or become public knowledge. After termination of the Executive's employment with the Company, the Executive will not, without the prior written consent of the Company or except as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 13 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 14. Miscellaneous ------------- No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in a writing signed by the Executive and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 15. Governing Law ------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. 16. Validity -------- The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by Union Bankshares Corporation by its duly authorized officer, and by the Executive, as of the date first above written. UNION BANKSHARES CORPORATION By: /s/ Ronald L. Hicks --------------------------- Ronald L. Hicks Chairman of the Board EXECUTIVE: /s/ D. Anthony Peay -------------------------------- D. Anthony Peay EX-13 4 dex13.txt ANNUAL REPORT "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 EX-21 5 dex21.txt SUBSIDIARIES OF UNION BANKSHARES CORPORATION Exhibit 21.0 Subsidiaries of Union Bankshares Corporation Subsidiary State of Incorporation ---------- ---------------------- Union Bank & Trust Company Virginia Northern Neck State Bank Virginia Rappahannock National Bank Federally Chartered Union Investment Services, Inc. Virginia Bank of Williamsburg Virginia Mortgage Capital Investors, Inc. Virginia EX-23.1 6 dex231.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors The Board of Directors Union Bankshares Corporation We consent to incorporation by reference in Registration Statements No. 333-81199 on Form S-3 and No. 33-99900 on Form S-8 of Union Bankshares Corporation of our report dated January 16, 2002, relating to the consolidated balance sheets of Union Bankshares Corporation and subsidiaries (the Company) 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, which report appears in the Company's 2001 Form 10-K. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----