<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer Identification No.)
212 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $2 PAR VALUE
Union Bankshares Corporation (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ----
As of November 10, 2000, Union Bankshares Corporation had 7,515,332 shares of
Common Stock outstanding.
<PAGE>
UNION BANKSHARES CORPORATION
FORM 10-Q
September 30, 2000
INDEX
-----
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
<S> <C>
Consolidated Balance Sheets as of September 30, 2000 and 1999 (Unaudited)
and December 31, 1999 (Audited)......................................................................................... 1
Consolidated Statements of Income (Unaudited)
For the three months and nine months ended September 30, 2000 and 1999.................................................. 2
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the nine months ended September 30, 2000 and 1999................................................................... 3
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2000 and 1999................................................................... 4
Notes to Consolidated Financial Statements (Unaudited).................................................................. 5-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................................................... 10-18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........................................................ 19
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.................................................................................. 20
Signatures................................................................................................................. 21
Index to Exhibits.......................................................................................................... 22
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
ASSETS 2000 1999 1999
---- ---- ----
(Unaudited) (Unaudited)
<S> <C>
Cash and cash equivalents:
Cash and due from banks $ 18,647 $ 18,804 $ 19,187
Interest-bearing deposits in other banks 1,433 867 805
Federal funds sold 19 248 -
-------------- -------------- --------------
Total cash and cash equivalents 20,099 19,919 19,992
-------------- -------------- --------------
Securities available for sale, at fair value 198,273 201,721 204,537
Investment securities
fair value of $5,962; $9,518 and $10,512 , respectively 5,966 9,578 10,205
-------------- -------------- --------------
Total securities 204,239 211,299 214,742
-------------- -------------- --------------
Loans held for sale 15,599 6,680 6,459
-------------- -------------- --------------
Loans, net of unearned income 580,285 543,367 526,681
Less allowance for loan losses 7,857 6,617 7,677
-------------- -------------- --------------
Net loans 572,428 536,750 519,004
-------------- -------------- --------------
Bank premises and equipment, net 20,466 21,458 22,141
Other real estate owned 1,703 2,016 2,126
Other assets 23,334 23,705 22,677
-------------- -------------- --------------
Total assets $ 857,868 $ 821,827 $ 807,141
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 90,056 $ 79,048 $ 83,143
Interest-bearing deposits:
Savings accounts 55,466 58,209 61,287
NOW accounts 97,361 95,882 91,858
Money market accounts 61,380 63,249 61,268
Time deposits of $100,000 and over 108,085 107,654 93,547
Other time deposits 261,976 242,824 233,875
-------------- -------------- --------------
Total interest-bearing deposits 584,268 567,818 541,835
-------------- -------------- --------------
Total deposits 674,324 646,866 624,978
-------------- -------------- --------------
Short-term borrowings 22,653 39,159 53,363
Long-term borrowings 80,123 54,420 47,105
Other liabilities 6,210 12,588 11,881
-------------- -------------- --------------
Total liabilities 783,310 753,033 737,327
-------------- -------------- --------------
Stockholders' equity:
Common stock, $2 par value. Authorized 24,000,000 shares;
issued and outstanding, 7,515,332; 7,487,829 and 7,475,220 shares,
respectively 15,031 14,976 14,950
Surplus 411 163 -
Retained earnings 62,316 58,603 58,344
Accumulated other comprehensive income (losses) (3,200) (4,948) (3,480)
-------------- -------------- --------------
Total stockholders' equity 74,558 68,794 69,814
-------------- -------------- --------------
Total liabilities and stockholders' equity $ 857,868 $ 821,827 $ 807,141
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Interest income:
Interest and fees on loans $ 12,992 $ 11,080 $ 37,567 $ 31,820
Interest on securities:
Nontaxable 1,233 1,180 3,710 3,375
Taxable 2,315 2,010 6,805 5,466
Interest on Federal funds sold 37 74 57 162
Interest on interest-bearing deposits in other banks 16 12 48 41
----------- -------------- -------------- ---------------
Total interest income 16,593 14,356 48,187 40,864
----------- -------------- -------------- ---------------
Interest expense:
Interest on deposits 6,880 5,644 19,430 16,986
Interest on short-term borrowings 610 568 1,966 897
Interest on long-term borrowings 1,213 941 3,369 2,136
----------- -------------- -------------- ---------------
Total interest expense 8,703 7,153 24,765 20,019
----------- -------------- -------------- ---------------
Net interest income 7,890 7,203 23,422 20,845
Provision for loan losses 522 513 1,667 2,026
----------- -------------- -------------- ---------------
Net interest income after provision
for loan losses 7,368 6,690 21,755 18,819
----------- -------------- -------------- ---------------
Noninterest income:
Service charges on deposit accounts 933 786 2,650 2,216
Other service charges and fees 545 441 1,567 1,263
Gains (losses) on securities transactions, net (1,050) (1) (964) 18
Gains on sales of loans 1,496 1,511 4,134 6,340
Gains (losses) on sales of other real estate owned
and bank premises, net 71 (15) 76 (17)
Gains on termination of pension plan 1,087 - 1,087 -
Other operating income 81 547 293 950
----------- -------------- -------------- ---------------
Total noninterest income 3,163 3,269 8,843 10,770
----------- -------------- -------------- ---------------
Noninterest expenses:
Salaries and benefits 4,957 4,869 14,432 14,376
Occupancy expenses 576 610 1,737 1,528
Furniture and equipment expenses 730 604 2,201 1,657
Other operating expenses 2,079 2,375 6,166 6,727
----------- -------------- -------------- ---------------
Total noninterest expenses 8,342 8,458 24,536 24,288
----------- -------------- -------------- ---------------
Income before income taxes 2,189 1,501 6,062 5,301
Income tax expense 292 119 850 772
----------- -------------- -------------- ---------------
Net income $ 1,897 $ 1,382 $ 5,212 $ 4,529
=========== ============== ============== ===============
Basic net income per share $ 0.25 $ 0.18 $ 0.69 $ 0.60
=========== ============== ============== ===============
Diluted net income per share $ 0.25 $ 0.18 $ 0.69 $ 0.60
=========== ============== ============== ===============
Dividends per share $ - $ - $ 0.20 $ 0.20
=========== ============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Changes In Stockholders' Equity (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Common Retained
Stock Surplus Earnings
----- ------- --------
<S> <C>
Balance - December 31, 1998 $ 15,015 $ 311 $ 55,690
Comprehensive income:
Net income - for nine months ended September 30, 1999 4,529
Other comprehensive income net of tax:
Unrealized holding losses arising during the period (net of tax, $2,994)
Reclassification adjustment (net of tax, $6 )
Other comprehensive income (net of tax, $3,000)
Total comprehensive income
Cash dividends - 1999 ($.40 per share semi annually) (1,495)
Issuance of common stock under Dividend Reinvestment Plan (10,848 shares) 22 145
Stock repurchased under Stock Repurchase Plan (104,912 shares) (210) (1,704) -
Discretionary transfer of retained earnings to surplus 367 (367)
Issuance of common stock under Incentive Stock Option Plan (400 shares) 1 4 -
Issuance of common stock in exchange for net assets in acquisition
(61,490 shares) 122 877 (13)
---------------------------------------
Balance - September 30, 1999 $ 14,950 $ 0 $ 58,344
=======================================
Balance - December 31, 1999 $ 14,976 $ 163 $ 58,603
Comprehensive income:
Net income - for nine months ended September 30, 2000 5,212
Other comprehensive income net of tax:
Unrealized holding losses arising during the period (net of tax, $572)
Reclassification adjustment (net of tax, $328)
Other comprehensive income (net of tax, $ 900)
Total comprehensive income
Cash dividends - 2000 ($.40 per share semi annually) (1,499)
Issuance of common stock under Dividend Reinvestment Plan (16,090 shares) 33 140
Stock repurchased under Stock Repurchase Plan (11,300 shares) (23) (115)
Issuance of common stock under Incentive Stock Option Plan (5040 shares) 10 22
Issuance of common stock in exchange for net assets in acquisition
(17,673 shares) 35 201
----------------------------------------
Balance - September 30, 2000 $ 15,031 $ 411 $ 62,316
========================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income (Loss) Total
------------- -------------- -----
<S> <C>
Balance - December 31, 1998 $ 2,343 $ 73,359
Comprehensive income:
Net income - for nine months ended September 30, 1999 $ 4,529 4,529
Other comprehensive income net of tax:
Unrealized holding losses arising during the period (net of tax, $2,994) (5,811)
Reclassification adjustment (net of tax, $6 ) (12)
----------------
Other comprehensive income (net of tax, $3,000) (5,823) (5,823) (5,823)
----------------
Total comprehensive income $ (1,294)
================
Cash dividends - 1999 ($.40 per share semi annually) (1,495)
Issuance of common stock under Dividend Reinvestment Plan (10,848 shares) 167
Stock repurchased under Stock Repurchase Plan (104,912 shares) (1,914)
Discretionary transfer of retained earnings to surplus -
Issuance of common stock under Incentive Stock Option Plan (400 shares) 5
Issuance of common stock in exchange for net assets in acquisition
(61,490 shares) 986
---------------- -------------
Balance - September 30, 1999 $ (3,480) $ 69,814
================ =============
Balance - December 31, 1999 $ (4,948) $ 68,794
Comprehensive income:
Net income - for nine months ended September 30, 2000 $ 5,212 5,212
Other comprehensive income net of tax:
Unrealized holding losses arising during the period (net of tax, $572) 1,112
Reclassification adjustment (net of tax, $328) 636
----------------
Other comprehensive income (net of tax, $ 900) 1,748 1,748 1,748
----------------
Total comprehensive income $ 6,960 -
================
Cash dividends - 2000 ($.40 per share semi annually) (1,499)
Issuance of common stock under Dividend Reinvestment Plan (16,090 shares) 173
Stock repurchased under Stock Repurchase Plan (11,300 shares) (138)
Issuance of common stock under Incentive Stock Option Plan (5040 shares) 32
Issuance of common stock in exchange for net assets in acquisition
(17,673 shares) 236
--------------- -------------
Balance - September 30, 2000 $ (3,200) $ 74,558
=============== =============
</TABLE>
See accompanying notes to consolidated financial statement
3
<PAGE>
UNION BANKSHARES CORPORATION
AND SUBSIDIARIES Consolidated
Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2000 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C>
Operating activities:
Net income $ 5,212 $ 4,529
Adjustments to reconcile net income to net cash and
cash equivalents used in operating activities:
Depreciation of bank premises and equipment 1,802 1,463
Amortization 426 467
Provision for loan losses 1,667 2,026
(Gains) losses on sales of securities available for sale 964 (18)
(Gains) losses on sale of other real estate owned and fixed (76) 17
assets, net
(Increase) in loans held for (8,919) (6,340)
sale
Decrease in other assets 215 194
Increase (decrease) in other liabilities (7,278) 7,706
------------ ------------
Net cash and cash equivalents (used in) provided by
operating activities (5,987) 10,044
------------ ------------
Investing
activities:
Net (increase) decrease in 8,717 (46,379)
securities
Net increase in loans (37,406) (47,926)
Acquisition of bank premises and equipment (885) (3,736)
Proceeds from sales of bank premises and equipment 181 -
Proceeds from sales of other real estate owned 337 190
------------ ------------
Net cash and cash equivalents used in
investing activities (29,056) (97,851)
------------ ------------
Financing
activities:
Net increase in noninterest-bearing deposits 11,008 1,814
Net increase in interest-bearing 16,450 15,535
deposits
Net increase (decrease) in short-term borrowings (16,506) 33,887
Proceeds from long-term borrowings 26,000 18,870
Issuance of common stock 205 172
Repurchase of common stock (138) (1,914)
Cash dividends paid (1,499) (1,495)
Repayment of long-term borrowings (297) (90)
------------ ------------
Net cash and cash equivalents provided by
financing activities 35,223 66,779
------------ ------------
Increase (decrease) in cash and cash equivalents 180 (21,028)
Cash and cash equivalents at beginning of period 19,919 41,020
------------ ------------
Cash and cash equivalents at end of period $ 20,099 $ 19,992
============ ============
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest 19,314 17,522
Income taxes 915 825
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000
1. ACCOUNTING POLICIES
-------------------
The consolidated financial statements include the accounts of Union
Bankshares Corporation and its subsidiaries (the "Company"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
The information contained in the financial statements is unaudited and does
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
in the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of the
interim periods presented have been made. Operating results for the three and
nine month periods ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1999 Annual Report. Certain previously reported amounts have been
reclassified to conform to current period presentation.
2. ALLOWANCE FOR LOAN LOSSES
-------------------------
The following summarizes activity in the allowance for loan losses for the
nine months ended September 30, (in thousands):
2000 1999
------ -----
Balance, January 1 $6,617 $ 6,407
Provisions charged to operations 1,667 2,026
Recoveries credited to allowance 266 263
Loans charged off (693) (1,019)
----- -------
Balance, September 30 $7,857 $ 7,677
====== =======
5
<PAGE>
3. Earnings Per Share
------------------
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of shares outstanding during the period. Weighted
average shares used for the computation of basic EPS were 7,515,332 and
7,475,220 for the three months ended September 30, 2000 and 1999. Weighted
average shares used for the computation of basic EPS were 7,504,579 and
7,499,309 for the nine months ended September 30, 2000 and 1999. Diluted
EPS is computed using the weighted number of common shares outstanding during
the period, including the effect of dilutive potential common shares
outstanding attributable to stock options. Weighted average shares used for
the computation of diluted EPS were 7,515,332 and 7,495,991 for the three
months ended September 30, 2000 and 1999. Weighted average shares used for
the computation of diluted EPS were 7,506,711 and 7,530,415 for the nine
months ended September 30, 2000 and 1999. At September 30, 2000 stock
options representing 241,756 shares were anti-dilutive and were not
considered in the computation of EPS.
4. SEGMENT REPORTING DISCLOSURES
-----------------------------
Union Bankshares Corporation has two reportable segments: its traditional
full service community banks and its 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. Through its mortgage subsidiary, the Company
provides a variety of mortgage loan products in a multi-state market. These
loans are originated and sold principally in the secondary market through
purchase commitments from investors, which subject the company to only de
minimis market 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 banks
provide a distribution and referral network to their customers for the
mortgage services. Due largely to the lack of overlapping geographic markets,
the mortgage company does not offer a similar network for the banks. Another
major distinction between the segments is the source of income. The mortgage
business is a fee based business while the banks are driven principally by
net interest income.
Information about reportable segments and reconciliation of such information
to the consolidated financial statements as of September 30, 2000 and
September 30, 1999 follows:
6
<PAGE>
<TABLE>
<CAPTION>
Three Months ended September 30, 2000 Community
(in thousands) Banks Mortgage Other Elimination Consolidated
--------- -------- ----- ----------- ------------
<S> <C>
Net interest income $ 7,928 $ 70 $ (108) $ - $ 7,890
Provision for loan losses 522 - - - 522
--------------------------------------------------------------------------
Net interest income after provision for loan losses 7,406 70 (108) - 7,368
Noninterest income 1,432 1,496 7,746 (7,511) 3,163
Noninterest expense 5,791 2,031 2,115 (1,595) 8,342
--------------------------------------------------------------------------
Income before taxes 3,047 (465) 5,523 (5,916) 2,189
Income tax expense (benefit) 616 (153) (171) - 292
--------------------------------------------------------------------------
- - - - -
Net income (loss) $ 2,431 $ (312) $ 5,694 $ (5,916) $ 1,897
==========================================================================
-
Total assets $858,369 $ 16,902 $ 81,432 $ (98,835) $ 857,868
==========================================================================
</TABLE>
The following summary reconciles segment profit (loss) to income after taxes
(in thousands):
Net Income
Segment profit $ 2,119
Other subsidiary 22
Parent (244)
Intersegment profit elimination -
--------------
Net Income $ 1,897
==============
<TABLE>
<CAPTION>
Three Months ended September 30, 1999 Community
(in thousands) Banks Mortgage Other Elimination Consolidated
--------- -------- ----- ----------- ------------
<S> <C>
Net interest income $ 7,488 $ (187) $ (98) $ - $ 7,203
Provision for loan losses 513 - - - 513
---------------------------------------------------------------------------
Net interest income after provision for loan losses 6,975 (187) (98) - 6,690
Noninterest income 1,128 1,520 6,304 (5,683) 3,269
Noninterest expense 5,157 2,363 938 8,458
---------------------------------------------------------------------------
Income before taxes 2,946 (1,030) 5,268 (5,683) 1,501
Income tax expense (benefit) 601 (291) (191) - 119
---------------------------------------------------------------------------
- - - - -
Net income (loss) $ 2,345 $ (739) $ 5,459 $ (5,683) $ 1,382
===========================================================================
-
Total assets $799,346 $ 8,929 $ 78,213 $ (79,347) $ 807,141
===========================================================================
</TABLE>
The following summary reconciles segment profit (loss) to income after
taxes (in thousands):
Net Income
Segment profit $ 1,606
Other subsidiary 44
Parent (268)
Intersegment profit elimination -
--------------
Net Income $ 1,382
==============
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended September 30, 2000 Community
(in thousands) Banks Mortgage Other Elimination Consolidated
--------- -------- ----- ----------- ------------
<S> <C>
Net interest income $ 23,658 $ 59 $ (295) $ - $ 23,422
Provision for loan losses 1,667 1,667
--------------------------------------------------------------------------
Net interest income after provision for loan losses 21,991 59 (295) 21,755
Noninterest income 3,925 4,134 11,388 (10,604) 8,843
Noninterest expense 17,066 6,118 6,036 (4,684) 24,536
--------------------------------------------------------------------------
Income before taxes 8,850 (1,925) 5,057 (5,920) 6,062
Income tax expense (benefit) 1,789 (661) (278) - 850
--------------------------------------------------------------------------
Net income (loss) $ 7,061 $ (1,264) $ 5,335 $ (5,920) $ 5,212
==========================================================================
-
Total assets $858,369 $ 16,902 $ 81,432 $ (98,835) $ 857,868
==========================================================================
</TABLE>
The following summary reconciles segment profit (loss) to income after taxes
(in thousands):
Net Income
Segment profit $ 5,797
Other subsidiary 115
Parent (700)
Intersegment profit elimination -
--------------
Net Income $ 5,212
==============
<TABLE>
<CAPTION>
Nine Months ended September 30, 1999 Community
(in thousands) Banks Mortgage Other Elimination Consolidated
--------- -------- ----- ----------- ------------
<S> <C>
Net interest income $ 21,293 $ (235) $ (213) $ - $ 20,845
Provision for loan losses 2,026 2,026
--------------------------------------------------------------------------
Net interest income after provision for loan losses 19,267 (235) (213) 18,819
Noninterest income 3,221 6,561 6,671 (5,683) 10,770
Noninterest expense 14,891 6,993 2,404 - 24,288
--------------------------------------------------------------------------
Income before taxes 7,597 (667) 4,054 (5,683) 5,301
Income tax expense (benefit) 1,547 (223) (552) - 772
--------------------------------------------------------------------------
Net income (loss) $ 6,050 $ (444) $ 4,606 $ (5,683) $ 4,529
==========================================================================
Total assets $799,346 $ 8,929 $ 78,213 $ (79,347) $ 807,141
==========================================================================
</TABLE>
The following summary reconciles segment profit (loss) to income after taxes
(in thousands):
Net Income
Segment profit $ 5,606
Other subsidiary 96
Parent (1,173)
Intersegment profit elimination -
--------------
Net Income $ 4,529
==============
8
<PAGE>
5. RECENT ACCOUNTING STATEMENTS
----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that a company recognize all derivative instruments
as either assets or liabilities in the consolidated balance sheet and measure
those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. In June of 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments Hedging Activities--Deferral of the Effective Date
of FASB Statement 133". SFAS 137 delayed the effective date of SFAS133 until
fiscal years beginning after June 15, 2000. As such, the effective date for
the Company will be January 1, 2001. The impact of adopting SFAS 133 will
be dependent on the specific derivative instruments in place at the date of
adoption. At this time, management believes the adoption of this new standard
will not have a material impact on the financial condition or results of
operations of the Company.
6. 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.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Union Bankshares Corporation (the "Company") is a multi-bank holding company
organized under Virginia law which provides financial services through its
wholly-owned bank subsidiaries, Union Bank & Trust Company, Northern Neck State
Bank, Rappahannock National Bank, Bank of Williamsburg, as well as Union
Investment Services, Inc., and Mortgage Capital Investors, Inc. The four
subsidiary banks are full service retail commercial banks offering a wide range
of banking and related financial services, including demand and time deposits,
as well as commercial, industrial, residential construction, residential
mortgage and consumer loans. Union Investment Services Inc., is a full service
discount brokerage company, which offers a full range of investment services and
sells mutual funds, stocks and bonds. Mortgage Capital Investors, Inc., a
subsidiary of Union Bank & Trust Company, provides a wide array of mortgage
products through its 10 offices in Virginia, Maryland, New Jersey, Connecticut,
and South Carolina.
The Company's primary trade area stretches from Rappahannock County to
Fredericksburg, south to Hanover County, east to Williamsburg and throughout the
Northern Neck region of Virginia. The corporate headquarters is located in
Bowling Green, Virginia. Through its banking subsidiaries, the Company operates
29 branches in its primary trade area. In addition to the primary banking trade
area, Mortgage Capital Investors, Inc. expands the Company's mortgage
origination business to four additional states.
The Company has received regulatory approval for the purchase of
approximately $5.0 million in deposits from the Kilmarnock branch of First
Virginia Bank - Hampton Roads in a divestiture transaction from the Bank of
Lancaster. These deposit customers will be served by Northern Neck State Bank's
Kilmarnock office. This transaction should close on or about November 10, 2000.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of the Company. The analysis focuses on the consolidated financial statements,
the footnotes thereto, and the other financial data herein. Highlighted in the
discussion are material changes from prior reporting periods and any
identifiable trends affecting the Company. Amounts are rounded for presentation
purposes, while the percentages presented are computed based on unrounded
amounts.
Results of Operations
---------------------
Net income for the third quarter of 2000 was $1.9 million, up from $1.4
million for the same period in 1999. The increase in net income for the period
was caused primarily by an increase in net interest income of $687,000 over the
same period in 1999. The net interest income increase reflects the growth of
the community banking segment and higher interest rates. Diluted earnings per
share amounted to $.25 in the third quarter of 2000, as compared to $.18 in the
third quarter of 1999. The Company's annualized return on average assets for
the third quarter of 2000 was .87% as compared to .68% a year ago. The Company's
annualized return on average equity totaled 10.42% and 7.83% for the three
months ended September 30, 2000 and 1999, respectively.
Net income from the Company's community banking segment increased from
approximately $2.3 million in the third quarter of 1999 to over $2.4 million in
the third quarter of 2000.
10
<PAGE>
Continued growth in existing markets, as well as the performance of acquired and
denovo banks and branches and previously implemented initiatives to consolidate
backoffice functions are reflected in improved operating efficiencies and
contributed to the improvement in the profitability of the community banking
segment.
Rising interest rates, coupled with continued strong loan demand and
competition for deposits, have continued to compress the net interest margin.
Deposit competition has heightened as banks, seeking to fund this loan growth,
have offered higher rates on deposits, often repricing their liabilities more
rapidly than their assets. In addition to increasing certain deposit rates to
attract deposits, the Company has also utilized Federal Home Loan Bank Advances
and other borrowings to fund this growth. Such funding is typically more
expensive than lower cost customer deposits and compresses the net interest
margin, but increases net interest income by enabling the Company to grow
earning assets.
The mortgage banking segment continued to suffer from the effects of higher
mortgage rates, the inversion in the yield curve and, in some markets, reduced
inventories of homes. The mortgage company has reduced its noncommission
personnel and closed several marginal loan production offices. The third
quarter reflected a slowing of the losses experienced by the mortgage business
to $312,000 versus $316,000 in the second quarter of 2000. Despite a reduction
of $15,000 in gains on sales of loans, the mortgage banking segment loss for the
third quarter of 2000 decreased $427,000 to $312,000 from the $739,000 loss in
the third quarter of 1999. The Company is continuing to make adjustments to
increase the production volumes and improve operating efficiencies of this
segment of our business.
Net income for the first nine months of 2000 was $5.2 million, up from $4.5
million for the same period in 1999. The increase in net income for the period
was caused primarily by an increase in net interest income of $2.6 million and a
decrease of $359,000 in the provision for loan losses from the same period in
1999. The net interest income increase reflects the growth of the core banking
business and the effect of rising interest rates. Diluted earnings per share
amounted to $.69 in the first nine months of 2000, as compared to $.60 in the
same period of 1999. The Company's annualized return on average assets for the
first nine months of 2000 was .81% as compared to .78% a year ago. The Company's
annualized return on average equity totaled 9.93% and 8.35% for the nine months
ended September 30, 2000 and 1999, respectively.
Net Interest Income
Net interest income on a tax-equivalent basis for the third quarter of 2000
increased by 7.7% to $8.4 million from $7.8 million for the same period a year
ago. By managing its interest rate spread and increasing the volume of earning
assets over interest-bearing liabilities, the Company has been able to maintain
a strong net interest margin. Even with an active management of the margin, the
cost of funds has risen significantly in this year's third quarter versus last
year's. The current interest rate environment and competition for deposits
continue to put pressure on net interest margins. In addition, the subsidiary
banks have periodically engaged in wholesale leverage transactions to invest in
securities by borrowing funds at lower margins of 150 - 200 basis points.
Although such transactions increase net income and return on equity, they do
reduce the net interest margin. As of September 30, 2000 such transactions
accounted for $25 million of the Company's total borrowings. Average earning
assets during the third quarter of 2000 increased by $73.1 million to $874.0
million from the third quarter of 1999, while average interest-bearing
liabilities grew by $62.9 million to $705.7 million over this same period. The
11
<PAGE>
Company's yield on average earning assets was 8.50%, up 36 basis points from
8.14% a year ago, while its cost of average interest-bearing liabilities
increased 48 basis points from 4.42% in third quarter 1999 to 4.90% in third
quarter 2000.
In late September, the Company restructured a portion of its securities
portfolio, selling $ 20.5 million of its lowest yielding securities at a loss of
$1.1 million and reinvesting the proceeds in higher yielding earning assets. It
is expected that this transaction will enable the Company to improve its net
interest margin in future periods.
12
<PAGE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
---------------------------------------------------------------------------------------------
Three Months September 30,
---------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------
<S><C>
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . . $.125,953 $ 2,315 7.31% $122,668 $ 2,010 6.50%
Tax-exempt(1) . . . . . . . . . 97,649 1,787 7.28% 88,963 1,788 7.98%
-------------------------- ----------------------------
Total securities . . . . . 223,602 4,102 7.30% 211,631 3,798 7.12%
Loans, net. . . . . . . . . . . . . . 576,811 12,992 8.96% 516,681 11,080 8.51%
Federal funds sold . . . . . . . . . 1,075 37 13.68% 616 74 47.02%
Interest-bearing deposits
in other banks . . . . . . . . . 1,042 16 6.11% 540 12 8.82%
-------------------------- ----------------------------
Total earning assets . . . . 802,530 17,147 8.50% 729,468 14,964 8.14%
Allowance for loan losses . . . . . . (7,811) (7,497)
Total non-earning assets . . . . . . . 79,268 84,732
-------------- ---------------
Total assets . . . . . . . . . . . . . $ 873,987 $806,703
============== ===============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . 99,000 545 2.19% $ 90,340 479 2.10%
Regular savings . . . . . . . . 56,178 339 2.40% 61,410 419 2.71%
Money market savings . . . . . . 61,714 513 3.31% 62,501 490 3.11%
Certificates of deposit:
$100,000 and over . . . . . . . 109,390 1,615 5.87% 93,230 1,142 4.86%
Under $100,000 . . . . . . . . . 262,762 3,868 5.86% 235,198 3,114 5.25%
---------------------------- ----------------------------
Total interest-bearing
deposits . . . . . . . 589,044 6,880 4.65% 542,679 5,644 4.13%
Other borrowings . . . . . . . . . . . 116,648 1,823 6.21% 100,064 1,509 5.98%
---------------------------- ----------------------------
Total interest-bearing
liabilities . . . . . . 705,692 8,703 4.90% 642,743 7,153 4.42%
-------------- -------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . 88,437 89,149
Other liabilities . . . . . . . 7,457 2,716
-------------- ---------------
Total liabilities . . . . . 801,586 734,608
Stockholders' equity . . . . . . . . . 72,401 72,095
-------------- ---------------
Total liabilities and
stockholders' equity . . . . . . $ 873,987 $806,703
============== ===============
Net interest income . . . . . . . . . $ 8,444 $ 7,811
============== =============
Interest rate spread . . . . . . . . . 3.60% 3.72%
Interest expense as a percent
of average earning assets . . . 4.31% 3.89%
Net interest margin . . . . . . . . . 4.19% 4.25%
</TABLE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
-----------------------------------------------
Three Months September 30,
-----------------------------------------------
1999
-----------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
-----------------------------------------------
<S><C>
(Dollars in thousands)
Assets:
Securities:
Taxable . . . . . . . . . . . . . . $ 93,622 $ 1,578 6.69%
Tax-exempt(1) . . . . . . . . . . . 74,599 1,405 7.47%
---------------------------
Total securities . . . . . . . . 168,221 2,983 7.04%
Loans, net. . . . . . . . . . . . . . . . 461,579 10,260 8.82%
Federal funds sold . . . . . . . . . . . . 11,974 121 4.01%
Interest-bearing deposits
in other banks . . . . . . . . . . . 2,227 11 1.96%
---------------------------
Total earning assets . . . . . . 644,001 13,375 8.24%
Allowance for loan losses . . . . . . . . . (5,319)
Total non-earning assets . . . . . . . . . 57,889
--------------
Total assets . . . . . . . . . . . . . . . $696,571
==============
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . $ 74,790 455 2.41%
Regular savings . . . . . . . . . . . 59,388 449 3.00%
Money market savings . . . . . . . . 62,477 530 3.37%
Certificates of deposit:
$100,000 and over . . . . . . . . . . 71,041 968 5.41%
Under $100,000 . . . . . . . . . . . 231,804 3,243 5.55%
---------------------------
Total interest-bearing
deposits . . . . . . . . . . 499,500 5,645 4.48%
Other borrowings . . . . . . . . . . . . . 42,256 593 5.57%
---------------------------
Total interest-bearing
liabilities . . . . . . . . 541,756 6,238 4.57%
-------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . 76,838
Other liabilities . . . . . . . . . . 6,657
--------------
Total liabilities . . . . . . . . 625,251
Stockholders' equity . . . . . . . . . . . 71,320
--------------
Total liabilities and
stockholders' equity . . . . . . . . $696,571
==============
Net interest income . . . . . . . . . . . . $ 7,137
=============
Interest rate spread . . . . . . . . . . . 3.67%
Interest expense as a percent
of average earning assets . . . . . . 3.84%
Net interest margin . . . . . . . . . . . . 4.39%
</TABLE>
(1) Income and yields are reported on a taxable equivalent basis.
13
<PAGE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
----------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------
(Dollars in thousands)
<S><C>
Assets:
Securities:
Taxable . . . . . . . . . . . . . . . . . . $ 123,179 $ 6,805 7.38% $ 117,934 $ 5,466 6.20%
Tax-exempt(1) . . . . . . . . . . . . . . . 98,116 5,376 7.32% 86,984 5,113 7.86%
Total securities . . . . . . . . . . . 221,295 12,181 7.35% 204,918 10,579 6.90%
Loans, net . . . . . . . . . . . . . . . . . . . 571,543 37,567 8.78% 498,142 31,820 8.54%
Federal funds sold . . . . . . . . . . . . . . . 642 57 11.86% 2,976 162 7.28%
Interest-bearing deposits
in other banks . . . . . . . . . . . . . . . 995 48 6.44% 1,073 41 5.11%
Total earning assets . . . . . . . . . . 794,475 49,853 8.38% 707,109 42,602 8.06%
Allowance for loan losses . . . . . . . . . . . . (7,333) (7,093)
Total non-earning assets . . . . . . . . . . . . . 70,092 82,672
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . $ 857,234 $ 782,688
========= =========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . . . . . 99,715 1,601 2.14% $ 86,651 1,350 2.08%$
Regular savings . . . . . . . . . . . . . . 57,309 1,027 2.39% 59,682 1,208 2.71%
Money market savings . . . . . . . . . . . . 62,280 1,528 3.28% 63,511 1,565 3.29%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . . . 106,788 4,468 5.59% 91,694 3,491 5.09%
Under $100,000 . . . . . . . . . . . . . . . 257,170 10,806 5.61% 236,159 9,372 5.31%
--------- --------- --------- ------- ----
Total interest-bearing
deposits . . . . . . . . . . . . . 583,262 19,430 4.45% 537,697 16,986 4.22%
Other borrowings . . . . . . . . . . . . . . . . . 114,588 5,335 6.22% 74,337 3,033 5.46%
--------- --------- --------- ------- ----
Total interest-bearing
liabilities . . . . . . . . . . . . 697,850 24,765 4.74% 612,034 20,019 4.37%
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 85,025 83,964
Other liabilities . . . . . . . . . . . . . 4,416 13,502
--------- ---------
Total liabilities . . . . . . . . . . . 787,291 709,500
Stockholders' equity . . . . . . . . . . . . . . . 69,943 73,188
--------- ---------
Total liabilities and
stockholders' equity . . . . . . . . . . . . $ 857,234 $ 782,688
========= =========
Net interest income . . . . . . . . . . . . . . . $ 25,088 22,583
========= ======
Interest rate spread . . . . . . . . . . . . . . . 3.64% 3.69%
Interest expense as a percent
of average earning assets . . . . . . . . . 4.16% 3.79%
Net interest margin . . . . . . . . . . . . . . . 4.22% 4.27%
</TABLE>
<TABLE>
<CAPTION>
Union Bankshares Corporation
Average Balances, Income and Expenses, Yields and Rates (Taxable Equivalent Basis)
----------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------------------------
1998
-------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
-------------------------------------------
(Dollars in thousands)
<S><C>
Assets:
Securities:
Taxable . . . . . . . . . . . . . . . . . . $ 93,858 $ 4,575 6.52%
Tax-exempt(1) . . . . . . . . . . . . . . . 72,959 4,306 7.89%
--------- --------- ------
Total securities . . . . . . . . . . . . 166,817 8,881 7.12%
Loans, net . . . . . . . . . . . . . . . . . . . 441,699 30,010 9.08%
Federal funds sold . . . . . . . . . . . . . . . 10,384 420 5.41%
Interest-bearing deposits
in other banks . . . . . . . . . . . . . . . 1,652 58 4.69%
--------- --------- ------
Total earning assets . . . . . . . . 620,552 39,369 8.48%
Allowance for loan losses . . . . . . . . . . (5,121)
Total non-earning assets . . . . . . . . . 60,197
---------
Total assets . . . . . . . . . . . . . . . . . . . $ 675,628
=========
Liabilities & Stockholders' Equity:
Interest-bearing deposits:
Checking . . . . . . . . . . . . . . . . . . $ 71,090 1,274 2.40%
Regular savings . . . . . . . . . . . . . . . 57,686 1,314 3.05%
Money market savings . . . . . . . . . . 60,311 1,542 3.42%
Certificates of deposit:
$100,000 and over . . . . . . . . . . . . . . 68,424 2,774 5.42%
Under $100,000 . . . . . . . . . . . . . . . 221,061 9,233 5.58%
--------- --------- -----
Total interest-bearing
deposits . . . . . . . . . . . . . . 478,572 16,137 4.51%
Other borrowings . . . . . . . . . . . . . . . . . 46,902 1,985 5.66%
--------- --------- ------
Total interest-bearing
liabilities . . . . . . . . . . . . 525,474 18,122 4.61%
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 74,344
Other liabilities . . . . . . . . . . . . . . 6,157
---------
Total liabilities . . . . . . . . . . . . 605,975
Stockholders' equity . . . . . . . . . . . . . . 69,653
---------
Total liabilities and
stockholders' equity . . . . . . . . . . . $ 675,628
==========
Net interest income . . . . . . . . . . . . . . $ 21,247
==========
Interest rate spread . . . . . . . . . . . . . . . 3.87%
Interest expense as a percent
of average earning assets . . . . . . . . . 3.90%
Net interest margin . . . . . . . . . . . . . . . 4.58%
</TABLE>
(1) Income and yields are reported on a taxable equivalent basis.
14
<PAGE>
Provision for Loan Losses
The provision for loan losses totaled $522,000 for the third quarter of 2000,
up from $513,000 for the third quarter of 1999. For the first nine months of
2000, the provision was $1,667,000 versus $2,026,000 for the same period in
1999. The provision for loan losses for the first quarter and first nine months
of 1999 included $350,000 related to a single credit relationship. These
provisions reflect the performance of the loan portfolio and management's
assessment of the credit risk in the portfolio. (See Asset Quality)
Noninterest Income
Noninterest income for the three months ended September 30, 2000 totaled $3.2
million, down from $3.3 million for the same period a year ago. Gains on sales
of loans in the mortgage banking segment decreased $15,000 versus the same
period in 1999. Service charges on deposit accounts increased $147,000 and other
service charges and fees increased $104,000, reflecting deposit growth and
initiatives to enhance fee income. During the third quarter, the Company
completed the termination of its pension plan with the final distribution of
funds to the participants. In connection with this transaction a nonrecurring
gain on termination of $1.1 million was recognized. The termination of the
pension plan allowed the Company to modify its compensation structure, providing
employees with more current cash compensation and allowing them more flexibility
and direct control of their deferred compensation. Management continues to seek
additional sources of noninterest income, including increased emphasis on cross-
selling services and better leveraging the financial services available
throughout the organization.
Noninterest Expense
Noninterest expense in the third quarter of 2000 totaled $8.3 million, a
decrease of $116,000 over the same period in 1999. Personnel costs rose $88,000
over last year's third quarter. Occupancy expense was down $34,000 and furniture
& equipment expense was up $126,000. Other operating expenses were down $296,000
over last year's third quarter. The increases reflect depreciation expenses for
major technology investments made in the second and third quarters of 1999. The
decrease in other expenses are the result of volume declines and cost reduction
initiatives in the mortgage segment and consolidation of operating functions at
the parent company level.
Financial Condition
-------------------
Total assets as of September 30, 2000 were $857.9 million, an increase of
6.3% from $807.1 million at September 30, 1999. Asset growth was fueled by loan
growth, as loans totaled $580.3 million at September 30, 2000, an increase of
10.2% from $526.7 million at September 30, 1999. The securities portfolio
declined to $204.2 million in the third quarter of 2000 versus $214.7 for the
same period in 1999. This was the result of the portfolio restructuring.
Stockholders' equity totaled $74.6 million at September 30, 2000, which
represents a book value of $9.92 per share.
15
<PAGE>
Deposit growth was good as the banks continued to increase market share.
Total deposits at September 30, 2000 were $674.3 million, up 7.9% from $625.0
million at September 30, 1999. Other borrowings totaled $102.7 million at
September 30, 2000, a 2.2% increase over $100.4 million at September 30, 1999.
As a result of the loan growth over the period, the Company utilizes other
borrowings to fund the excess growth which compresses the net interest margin
but increases net interest income. The Company also periodically engages in
wholesale leverage transactions to better leverage its capital position. The
increases in other borrowings reflect about $25 million in net leverage
transactions over the last five quarters. These wholesale leverage transactions
have typically been executed at spreads of approximately 150 to 200 basis points
and, although they have negatively impacted the Company's net interest margin
(as a percentage), they have had a positive effect on earnings and return on
equity.
Continued competition for deposits, particularly as it impacts certificate of
deposit rates, is reflected in the deposit mix. Management continues to focus
on increasing lower cost deposit products, including noninterest bearing demand
deposits and savings accounts and effective management of competitive rates on
interest sensitive products. Increased competition for funds, by banks seeking
to fund strong loan growth and by non-bank lending companies, continues to
contribute to a narrowing of the net interest margin, which has been largely
offset by increases in the volume of earning assets.
Asset Quality
------------------
The allowance for loan losses is an estimate of an amount adequate to provide
for losses inherent in the loan portfolio. General economic trends as well as
conditions affecting individual borrowers affect the level of credit losses.
The allowance is also subject to regulatory examinations and determination as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance and comparison to peer groups.
The allowance for loan losses totaled $7.9 million at September 30, 2000 or
1.35% of total loans, as compared to 1.22% at December 31, 1999 and 1.46% at
September 30, 1999.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
------------- ------------ -------------
<S> <C> <C> <C>
2000 1999 1999
------ ------ ------
(dollars in thousands)
Non-accrual loans $1,603 $1,487 $2,178
Foreclosed properties 1,704 2,016 2,126
------ ------ ------
Non-performing assets $3,307 $3,503 $4,304
====== ====== ======
Allowance for loan losses $7,857 $6,617 $7,677
Allowance as % of total loans 1.35% 1.22% 1.46%
Non-performing assets to loans
and foreclosed properties .57% .64% .81%
</TABLE>
At September 30, 1999, the allowance for loan losses included reserves of
approximately $1.4 million related to a single credit relationship totaling
approximately $1.8 million. Management had previously restructured this credit
with the borrowers in an attempt to work out repayment of this debt, but
collection is uncertain and accordingly, in late 1999, $1.1 million of this
credit was charged off against previously established reserves.
16
<PAGE>
Capital Resources
-----------------
Capital resources represent funds, earned or obtained, over which financial
institutions can exercise greater or longer control in comparison with deposits
and borrowed funds. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to the size, composition, and
quality of the Company's resources and consistency with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
will assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, has adopted capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1
capital, consisting of common equity and retained earnings, less certain
goodwill items.
At September 30, 2000, the Company's ratio of total capital to risk-weighted
assets was 12.02% and its ratio of Tier 1 capital to risk-weighted assets was
10.83%. Both ratios exceed the fully phased-in capital requirements. The
following summarizes the Company's regulatory capital and related ratios at
September 30, 2000 (dollars in thousands):
Tier 1 capital $ 71,607
Tier 2 capital 7,857
Total risk-based capital 79,464
Total risk-weighted assets 661,250
Capital Ratios:
Tier 1 risk-based capital ratio 10.83%
Total risk-based capital ratio 12.02%
Leverage ratio (Tier 1 capital to
average adjusted total assets) 8.25%
Equity to assets ratio 9.06%
The Company's book value per share at September 30, 2000 was $9.92.
Dividends to stockholders are typically declared and paid semi-annually in June
and December.
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 (available for sale) and loans maturing within one year. The
Company's ability to obtain deposits and purchase funds at favorable rates
determines its liability liquidity. Additional sources of liquidity available
to the Company include its capacity to borrow additional funds when necessary
through federal funds lines with several regional banks and a line of credit
with the Federal Home Loan Bank. Management considers the Company's overall
liquidity to be sufficient to satisfy its depositors' requirements and to meet
its customers' credit needs.
17
<PAGE>
At September 30, 2000 cash, interest-bearing deposits in other banks, Federal
funds sold, securities available for sale and loans maturing or repricing in one
year were 19.8% of total earning assets. At September 30, 2000 approximately
$147.0 million or 24.7% of total loans would mature or reprice within the next
year. The Company utilizes Federal funds purchased, FHLB advances, securities
sold under agreements to repurchase and customer repurchase agreements, in
addition to deposits, to fund the growth in its loan portfolio, and to fund
securities purchases, periodically in wholesale leverage transactions.
18
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is
subject to the accuracy of the assumptions that underlie the process, but it
provides a better analysis of the sensitivity of earnings to changes in interest
rates than other analysis such as the static gap analysis.
Assumptions used in the model, including loan and deposit growth rates, are
derived from seasonal trends and management's outlook, as are the assumptions
used to project yields and rates for new loans and deposits. All maturities,
calls and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different asset and liability accounts move
differently when the prime rate changes and are accounted for in the different
rate scenarios.
The following table represents the interest rate sensitivity on net interest
income for the Company using different rate scenarios as of September 30, 2000:
% Change in
Change in Prime Rate Net Interest Income
-------------------- -------------------
+200 basis points -1.74%
Flat 0
-200 basis points +2.00%
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 as of September 30, 2000:
Change in Net Market Value
Change in Prime Rate (dollars in thousands)
---------------------------- ----------------------
+200 basis points $-46,850
+100 basis points -29,696
Flat -14,523
-100 basis points 5,863
-200 basis points 21,905
19
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
(a) See attached list of exhibits
20
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Bankshares Corporation
----------------------------
(Registrant)
November 14, 2000 /s/ G. William Beale,
--------------------------
(Date) G. William Beale,
President, Chief Executive Officer
and Director
November 14, 2000 /s/ D. Anthony Peay,
--------------------------
(Date) D. Anthony Peay,
Senior Vice President and
Chief Financial Officer
21
<PAGE>
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
Form 10-Q /September 30, 2000
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession - Not Applicable
4 Instruments defining the rights of security holders,
including indentures Not Applicable
10 Material contracts Not Applicable
11 Statement re: computation of per share earnings Not Applicable
15 Letter re: unaudited interim financial
information Not Applicable
18 Letter re: change in accounting principles Not Applicable
19 Previously unfiled documents Not Applicable
20 Report furnished to security holders Not Applicable
22 Published report re: matters submitted to
vote of security holders None
23 Consents of experts and counsel Not Applicable
24 Power of Attorney Not Applicable
99 Additional Exhibits None
</TABLE>
22
