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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1598552
(State of Incorporation) (I.R.S. Employer I.D. No.)
212 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive officers)
(804) 633-5031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $2
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes ________No
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The Aggregate Market Value of the Voting Stock Held by Nonaffiliates of the
Registrant was $90,612,908 as of February 25, 2000.
As of February 25, 2000, Union Bankshares Corporation had 7,487,829 shares
of Common Stock outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1999 are incorporated into Part II of this Form 10-K and
portions of the Proxy Statement for the 2000 annual meeting are incorporated
into Part III.
UNION BANKSHARES CORPORATION
FORM 10-K
INDEX
-----
PART 1
Page
----
Item 1. Business................................. 1
Item 2. Properties............................... 9
Item 3. Legal Proceedings........................ 11
Item 4. Submission of Matters to a Vote of
Security Holders......................... 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters......... 12
Item 6. Selected Financial Data................. 12
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................... 12
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk............... 13
Item 8. Financial Statements and
Supplementary Data.............. 17
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................... 17
PART III
Item 10. Directors and Executive Officers........ 18
Item 11. Executive Compensation.................. 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management................... 19
Item 13. Certain Relationships and Related
Transactions............................ 19
PART IV
Item 14. Exhibits, Financial Statements Schedules
and Reports on Form 8-K................... 20
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 12, 1993 merger of
Northern Neck Bankshares Corporation with and into Union Bancorp, Inc. On
September 1, 1996, King George State Bank and on July 1, 1998, Rappahannock
National Bank became wholly-owned subsidiaries of the Company. On February 22,
1999, the Bank of Williamsburg began business as a newly organized bank focused
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 MOST, CIRRUS
and PLUS networks.
Union Bankshares Corporation had assets of $822 million, deposits of $647
million, and shareholders' equity of $69 million at December 31, 1999. 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. 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 full range of investment services, and sells annuities, mutual funds,
bonds and stocks.
1
On February 22, 1999, the Company opened the Bank of Williamsburg, a full
service bank headquartered in Williamsburg, Virginia. The bank was organized and
chartered under the laws of Virginia in February 1999. On March 20, 2000, the
Bank moved from its temporary location to its headquarters located at 5125 John
Tyler Parkway. The Bank's primary trade area is Williamsburg and surrounding
James City County.
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 offices in
Virginia, Maryland, North Carolina, South Carolina, New Jersey and Connecticut.
It provides a variety of mortgage products to customers in those states, as well
as to customers in the service areas of the Subsidiary Banks. 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.
During 1999, Union Mortgage Company, LLC, a mortgage loan brokerage company and
subsidiary of Union Bank, merged with and into MCI.
For additional information on the acquisition on MCI, see the discussion
below on "Acquisition Program - Purchase of Mortgage Capital Investors, Inc."
and Note 1(A) to the Consolidated Financial Statements contained in the
Company's 1999 Annual Report to Shareholders.
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 1999 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 both internal growth and strategic acquisitions. During 1999, the
Company engaged in the following acquisition transactions:
2
Opening of the Bank of Williamsburg. On February 22, 1999, the Company
opened the Bank of Williamsburg in temporary headquarters in the Williamsburg
Crossing Shopping Center at 5251 John Tyler Parkway in Williamsburg. On March
20, 2000, Bank of Williamsburg moved to its new headquarters at 5125 John Tyler
Parkway. This full service bank puts the Company in a new market area located in
a rapidly growing region of Virginia.
Purchase of Mortgage Capital Investors. On February 11, 1999, the Company
purchased CMK Corporation t/a "Mortgage Capital Investors" to augment its
mortgage origination business. MCI originates and sells mortgage loans in the
mortgage market and is strategically designed to increase fee income with
limited or no asset quality risk.
COMPETITION
The Company experiences competition in all aspects of its business. In its
market area, the Company competes with large regional financial institutions,
savings and loans and other independent community banks, as well as credit
unions, mutual funds and life insurance companies. Competition has also
increasingly come from out-of-state banks through their acquisitions of
Virginia-based banks. Competition for deposits and loans is affected by factors
such as interest rates offered, the number and location of branches and types of
products offered, as well as the reputation of the institution.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following description briefly discusses certain
provisions of federal and state laws and certain regulations and proposed
regulations and the potential impact of such provisions on the Company and its
Subsidiary Banks.
Bank Holding Companies
As a bank holding company registered under the Bank Holding Company Act of
1956 (the "BHCA"), the Company is subject to regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). The
Federal Reserve Board has jurisdiction under the BHCA to approve any bank or
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.
3
Since September 1995, the BHCA has permitted bank holding companies from
any state to acquire banks and bank holding companies located in any other
state, subject to certain conditions, including nationwide and state imposed
concentration limits. Banks are also able to branch across state lines,
provided certain conditions are met, including that applicable state law must
expressly permit such interstate branching. Virginia has adopted legislation
that permits branching across state lines, provided there is reciprocity with
the state in which the out-of-state bank is based.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the Federal Deposit Insurance
Corporation (the "FDIC") insurance funds in the event the depository institution
becomes in danger of default or is in default. For example, under a policy of
the Federal Reserve Board with respect to bank holding company operations, a
bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. In
addition, the "cross-guarantee" provisions of federal law require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by either the Savings Association Insurance
Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a result of the default of a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross-guarantee provisions if it determines that
a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The Federal Deposit Insurance Act ("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.
4
The Company is registered under the bank holding company laws of Virginia.
Accordingly, the Company and the Subsidiary Banks are subject to regulation and
supervision by the State Corporation Commission of Virginia (the "SCC").
Capital Requirements
The Federal Reserve Board, the Office of the Comptroller of the Currency
and the FDIC have issued substantially similar risk-based and leverage capital
guidelines applicable to United States banking organizations. In addition,
those regulatory agencies may from time to time require that a banking
organization maintain capital above the minimum levels because of its financial
condition or actual or anticipated growth. Under the risk-based capital
requirements of these federal bank regulatory agencies, the Company and each of
the Subsidiary Banks are required to maintain a minimum ratio of total capital
to risk-weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited
amount of subordinated and other qualifying debt (including certain hybrid
capital instruments) and a limited amount of the general loan loss allowance.
The Tier 1 and total capital to risk-weighted asset ratios of the Company as of
December 31, 1999 were 11.11% and 12.21%, respectively, exceeding the minimum
requirements.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of the Company as of December 31, 1999, 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.
5
Limits on Dividends and Other Payments
The Company is a legal entity, separate and distinct from its subsidiary
institutions. Substantially all of the revenues of the Company result from
dividends paid to it by the Subsidiary Banks. There are various legal
limitations applicable to the payment of dividends to the Company, as well as
the payment of dividends by the Company to its respective shareholders.
Under federal law, the Subsidiary Banks may not, subject to certain limited
exceptions, make loans or extensions of credit to, or investments in the
securities of, the Company or take securities of the Company as collateral for
loans to any borrower. The Subsidiary Banks are also subject to collateral
security requirements for any loans or extensions of credit permitted by such
exceptions.
The Subsidiary Banks are subject to various statutory restrictions on their
ability to pay dividends to the Company. Under the current supervisory
practices of the Subsidiary Banks' regulatory agencies, prior approval from
those agencies is required if cash dividends declared in any given year exceed
net income for that year plus retained earnings of the two proceeding years.
The payment of dividends by the Subsidiary Banks or the Company may also be
limited by other factors, such as requirements to maintain capital above
regulatory guidelines. Bank regulatory agencies have the authority to prohibit
the Subsidiary Banks or the Company from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending on
the financial condition of the Subsidiary Banks, or the Company, could be deemed
to constitute such an unsafe or unsound practice.
Under the FDIA, insured depository institutions such as the Subsidiary
Banks are prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" (as such term is used in the statute). Based on the
Subsidiary Banks' current financial condition, the Company does not expect that
this provision will have any impact on its ability to obtain dividends from the
Subsidiary Banks.
The Subsidiary Banks
The Subsidiary Banks are supervised and regularly examined by the Federal
Reserve Board, OCC for Rappahannock and the SCC. The various laws and
regulations administered by the regulatory agencies affect corporate practices,
such as the payment of dividends, incurring debt and acquisition of financial
institutions and other companies, and affect business practices, such as the
payment of interest on deposits, the charging of interest on loans, types of
business conducted and location of offices.
6
The Subsidiary Banks are also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of the local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.
As an institution with deposits insured by the BIF, the Bank also is
subject to insurance assessments imposed by the FDIC. The FDIC has implemented
a risk-based assessment schedule, imposing assessments ranging from zero (a
minimum of $2,000) to 0.53% 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 1999, the
Subsidiary Banks paid $75,316 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. While
certain portions of GLBA became effective upon enactment and on March 11, 2000,
many other provisions do not become effective until May 2001 and most of the
regulations implementing the law have not yet been issued. As a result, the
overall impact of GLBA on the Company cannot be predicted at this time. The
provisions of GLBA that are believed to be of most significance to the Company
are discussed below.
7
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
o securities activities such as underwriting, dealing, brokerage,
investment and merchant banking; and
o 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.
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.
With regard to Federal securities laws, GLBA removes the blanket exemption
for banks from being considered brokers or dealers under the Securities Exchange
Act of 1934, and sets out a number of limited activities, including trust and
fiduciary activities, in which a bank may engage without being considered a
broker, and a set of activities in which a bank may engage without being
considered a dealer. The Investment Advisers Act of 1940 also will be amended
to eliminate certain provisions exempting banks from the registration
requirements of that statute, and the Investment Company Act of 1940 will be
amended to provide the SEC with regulatory authority over various bank mutual
fund activities.
8
GLBA also provides 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 will 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.
At this time, the Company is unable to predict the impact GLBA may have
upon its or its subsidiaries' financial condition or results of operations. The
Company is currently reviewing the new law and at this time has not elected to
be treated as a financial holding company under GLBA.
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.
The properties on the following page are those owned or leased by the Company
and its subsidiaries as of December 31, 1999.
9
Locations
---------
Corporate Headquarters
212 North Main Street, Bowling Green, Virginia
Banking Offices - Union Bank & Trust Company
211 North Main Street, Bowling Green, Virginia
Route 1, Ladysmith, Virginia
Route 301, Port Royal, Virginia
4540 Lafayette Boulevard, Fredericksburg, Virginia
Route 1 & Ashcake Road, Ashland, Virginia
4210 Plank Road, Fredericksburg, Virginia
10415 Courthouse Road, Fredericksburg, Virginia
10469 Atlee Station Road, Ashland, Virginia
700 Kenmore Avenue, Fredericksburg, Virginia
Route 360, Manquin, Virginia
9534 Chamberlayne Road, Mechanicsville, Virginia
Cambridge & Layhill Road, Falmouth, Virginia
Massaponax Church Road & Route 1, Spotsylvania, Virginia
Brock Road and Route 3, Fredericksburg, Virginia
2811 Fall Hill Avenue, Fredericksburg, Virginia
610 Mechanicsville Turnpike, Mechanicsville, Virginia
10045 Kings Highway, King George, Virginia
840 McKinney Blvd., Colonial Beach, Virginia
Banking Offices - Northern Neck State Bank
5839 Richmond Road, Warsaw, Virginia
4256 Richmond Road, Warsaw, Virginia
Route 3, Kings Highway, Montross, Virginia
Route 17 & Earl Street, Tappahannock, Virginia
1660 Tappahannock Blvd, Tappahannock, Virginia
15043 Northumberland Highway, Burgess, Virginia
284 North Main Street, Kilmarnock, Virginia
876 Main Street, Reedville, Virginia
485 Chesapeake Drive, White Stone, Virginia
Banking Office - Rappahannock National Bank
257 Gay Street, Washington, Virginia
Banking Office - Bank of Williamsburg
5125 John Tyler Parkway, Williamsburg, Virginia
10
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.
1421 Prince Street #230, Alexandria , Virginia
3012 Mitchellville Road, Bowie, Maryland
5835 Allentown Way, Camp Spring, Maryland
5440 Jeff Davis Highway, #103, Fredericksburg, Virginia
3 Hillcrest Drive #A100, Fredrick, Maryland
7501 Greenway Center, Greenbelt, Maryland
1898 Andell Bluff Boulevard, John's Island, South Carolina
5000 Dearborn Circle, #200, Mount Laurel, New Jersey
7901 N. Ocean Boulevard, Myrtle Beach, South Carolina
6330 Newtown Road, #211, Norfolk, Virginia
15800 Crabbs Branch Way #200, Rockville, Maryland
2600 Post Road, Southport, Connecticut
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, 1999.
11
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, 1999.
Item 6. - Selected Financial Data
This information is incorporated herein by reference from the section
captioned "Selected Financial Data" on page 2 in the Annual Report to
Shareholders for the year ended December 31, 1999.
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
With the exception of the information below, 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, 1999.
LOAN PORTFOLIO
The following table gives detail of the maturities as of December 31,
1999.
Remaining Maturities of Selected Loans
December 31, 1999
------------------------------
Commercial Real Estate
Construction
------------------------------
Within 1 year $38,850 $26,888
Variable Rate:
1 to 5 years
After 5 years
------- -------
Total - -
Fixed Rate:
1 to 5 years 22,697 4,987
After 5 years 6,102 1,343
------- -------
Total 28,799 6,330
------- -------
Total $67,649 $33,218
maturities
12
ASSET QUALITY - ALLOWANCE/PROVISION FOR LOAN LOSS
Union Bankshares maintains a general allowance for loan loss 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
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Loans Loans Loans Loans Loans
-----------------------------------------------------------------------------------------------------------------
December 31: (Dollars
in
thousands)
Commercial,
financial and
agriculture $3,215 13.0% $3,382 13.4% $2,433 11.8% $2,338 11.4% $2,167 12.0%
Real Estate
Construction 1,511 6.1% 2,007 7.9% 1,299 7.1% 1,249 3.9% 1,157 5.3%
Real estate
mortgage 264 59.7% 189 60.3% 166 61.1% 160 62.2% 148 60.2%
Consumer &
other 1,627 21.2% 829 18.4% 900 20.0% 865 22.5% 802 22.5%
----- ------ ----- ------ ----- ----- ----- ----- ----- -----
$6,617 100.0% $6,407 100.0% $4,798 100.0% $4,612 100.0% $4,274 100.0%
Item 7A. - Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's primary market risk is interest rate risk. The main
objective of interest rate risk management is to avoid large fluctuations in net
interest income from changes in interest rates on interest-sensitive assets and
interest-sensitive liabilities. The Asset/Liability Management Committee of the
Company ("ALCO") is responsible for monitoring and limiting exposure to interest
rate risk. Management uses balance sheet repositioning as a tool to manage
interest rate risk. This is accomplished through pricing of asset and liability
accounts. The expected result of pricing is the development of appropriate
maturity and repricing opportunities in those accounts to produce consistent net
interest income during changing interest rate environments. The ALCO also sets
policy guidelines and establishes strategies with respect to interest rate
exposures. The ALCO meets quarterly to review the Company's interest rate
exposure in relation to present and prospective market and business conditions,
and reviews balance sheet management strategies intended to ensure the potential
impact of changes in interest rates on earnings is within acceptable standards.
13
The Company uses three methods to measure interest rate risk; static gap
analysis, earnings simulation analysis and market value simulation analysis.
Static Gap Analysis
Gap analysis measures the amount of repricing risk in the balance sheet. It
does this by taking the difference between the amount of rate sensitive assets
and rate sensitive liabilities which reprice within a specified time period.
This is the least reliable measurement of interest rate risk because it only
measures rate sensitive assets minus rate sensitive liabilities at one point in
time. It does not reflect the different degrees of rate sensitivity each asset
and liability account has. An example of this: If prime rate changes by 100
bps, the interest rate change on a money market account might be 25 bps and that
of a certificate of deposit might be 75 bps. The best information obtained from
a gap report is the amount of assets or liabilities which can be repriced at any
one point in the future, not the degree of rate sensitivity.
The following table shows the Company's gap report over the next five
years. To reflect anticipated prepayments, mortgage backed securities are
included in the table based on estimated rather than contractual maturity dates.
14
INTEREST SENSITIVITY ANALYSIS
(dollars in thousands)
December 31, 1999 (1)
Within 90-365 1-5 Over 5
90 Days Days Years Years Total
---- ---- ----- ------- ------
Earning Assets:
- ---------------------------------
Loans, net of unearned income (2) $ 98,937 $ 33,904 $ 246,399 $162,640 $541,880
Investment securities 615 3,844 3,452 1,667 9,578
Securities available for sale 911 8,340 69,885 122,585 201,721
Other short-term investments 1,115 - - - 1,115
Total Earning Assets 101,578 46,088 319,736 286,892 754,294
====================================================================================
Interest-Bearing
- ----------------
Liabilities:
- ------------
Interest checking (3) - - 95,882 - 95,882
Regular savings (3) - - 58,209 - 58,209
Money market savings - 63,249 - - 63,249
Certificates of deposit:
$100,000 and over 29,335 61,680 16,639 - 107,654
Under $100,000 48,924 122,876 70,795 229 242,824
Short-term borrowings 39,159 - - - 39,159
Long-term borrowings 5,320 75 34,025 15,000 54,420
------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 122,738 247,880 275,550 15,229 661,397
------------------------------------------------------------------------------------
Period Gap (21,160) (201,792) 44,186 271,663
Cumulative Gap $(21,160) $(222,952) $(178,766) $ 92,897 $ 92,897
====================================================================================
Ratio of cumulative gap to total
earning assets (2.81)% (29.56)% (23.70)% 12.32%
====================================================================================
(1) The repricing dates may differ from maturity dates for certain assets due
to prepayment assumptions.
(2) Excludes non-accrual loans
(3) The Company has determined that interest-bearing checking deposits and
regular savings deposits are not sensitive to changes in related market rates
and therefore, it has placed them in the "1-5 Years" column.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is
subject to the accuracy of the assumptions that underlie the process, but it
provides a better analysis of the sensitivity of earnings to changes in interest
rates than other analysis such as the static gap analysis.
15
Assumptions used in the model rates 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
Change in Prime Rate Net Interest Income
-------------------- -------------------
+200 basis points -9.02%
Flat 0
-200 basis points +11.33%
Market Value Simulation
Market value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Market values
are calculated based on discounted cash flow analysis. The net market value is
the market value of all assets minus the market value of all liabilities. The
change in net market value over different rate environments is an indication of
the larger term repricing risk in the balance sheet. The same assumptions are
used in the market value simulation as in the earnings simulation.
16
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 $-47,781
+100 basis points -31,932
Flat -16,911
-100 basis points 550
-200 basis points 15,970
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 7 of the Annual Report to Shareholders for the year
ended December 31, 1999.
Item 9. - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
See Part IV, Item 14(b) of this report for information about the Company's
change in its independent public accountants, which was previously reported.
On October 20, 1999, the Company engaged Cherry, Bekaert & Holland, LLP as
independent accountants to audit MCI's year ended December 31, 1999.
17
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 18, 2000 ("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 (50) President and Chief Executive Officer of the
Company since its inception;
President of Union Bank since 1991.
D. Anthony Peay (40) Vice President and Chief Financial Officer of the
Company since December 1994.
John C. Neal (50) Executive Vice President - Union Bank since 1991
and Chief Operating Officer - Union Bank since
August 1998.
Myles W. H. Gaythwaite (55) Vice President - Sales and Marketing since
September 1997. During 1995 to September 1997,
self-employed executive consultant. During 1994
and 1995, Executive Vice President, Centura
Securities, Inc., and Senior Vice President,
Centura Insurance Services, Inc., wholly owned
subsidiaries of Centura Bank, Inc., Rocky Mount,
North Carolina.
David S. Wilson (58) Senior Vice President - Operations and Technology
since January 1999. Vice President - Information
Technology Bank of Hudson, Poughkeepsie, N.Y.,
from January 1987 to January 1999.
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."
18
Item 11. - Executive Compensation
This information is incorporated herein by reference from pages 4 through
11 of the Proxy Statement from the sections titled "Election of Directors--
Directors' Fees" and "Executive Compensation."
Item 12. - Security Ownership of Certain Beneficial Owners and
Management
This information is incorporated herein by reference from page 4 of the
Proxy Statement from section titled "Ownership of Company Common Stock."
Item 13. - Certain Relationships and Related Transactions
This information is incorporated herein by reference from pages 11-12 of
the Proxy Statement from the section titled "Interest of Directors and Officers
in Certain Transactions."
19
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 1999 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 Auditors' Report
Note: The independent auditors' report for the year ended December 31,
1998 is included in this report as Exhibit 99.0
(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.
(a)(3) Exhibits
Exhibit No. Description
- ----------- ---------------------------
3.1 Articles of Incorporation (incorporated by reference to Form S-4
Registration Statement - 33-60458)
3.2 By-Laws (incorporated by reference to Form S-4 Registration
Statement - 33-60458)
10.1 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
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 1999 Annual Report to Shareholders)
13.0 1999 Annual Report to Shareholders
21.0 Subsidiaries of the Registrant
23.1 Consent of Yount, Hyde & Barbour, P.C.
23.2 Consent of KPMG LLP
27.0 Financial Data Schedule
99.0 Report of KPMG LLP, as the Registrant's independent public
accountant for the year ended December 31, 1998.
20
(b) Reports on Form 8-K
On October 4, 1999, the Company filed a Current Report on Form 8-K dated
September 27, 1999, disclosing in Item 4 of the report a change in the
Company's independent public accountants. The Company filed an amendment to
the Form 8-K on October 14, 1999. No financial statements were included in
either of the filings.
21
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 30, 2000
------------------------------ President and Chief Executive Officer
G. William Beale
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on March 30, 2000.
Signature Title
--------- -----
/ s/ G. William Beale President, Chief Executive Officer and
----------------------------- Director
G. William Beale
/ s/ D. Anthony Peay Vice President and Chief Financial
---------------------------- Officer
D. Anthony Peay
/s/ Ronald L. Hicks Chairman of the Board of Directors
-----------------------------
Ronald L. Hicks
/ s/ Charles H. Ryland Vice Chairman of the Board of Directors
--------------------------
Charles H. Ryland
/ s/ W. Tayloe Murphy, Jr. Director
- ---------------------------
W. Tayloe Murphy, Jr.
/s/ Walton Mahon Director
-----------------------------
Walton Mahon
/s/ M. Raymond Piland, III Director
--------------------------
M. Raymond Piland, III
/s/ A.D. Whittaker Director
--------------------------
A.D. Whittaker
22