Back to GetFilings.com



Table of Contents

 

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, 2002

 

Commission file number: 0-20293

 


 

UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

VIRGINIA

 

54-1598552

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employee

Identification No.)

 

212 North Main Street, P.O. Box 446, Bowling Green, Virginia 22427

(Address or principal executive offices) (Zip code)

 

(804) 633-5031

(Registrant’s telephone number including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $2 par value

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b – 2 of the Act). Yes  x  No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

The aggregate market value of voting stock held by non-affiliates of the registrant as of February 21, 2003 was $174,363,576.

 

The number of shares of common stock outstanding as of February 21, 2003 was 7,589,524.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be used in conjunction with the registrant’s 2003 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.

 



Table of Contents

 

UNION BANKSHARES CORPORATION

FORM 10-K

INDEX

 

         

Page


PART I

Item 1.

  

Business

  

1

Item 2.

  

Properties

  

7

Item 3.

  

Legal Proceedings

  

8

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

8

PART II

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

  

9

Item 6.

  

Selected Financial Data

  

10

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

11

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

  

28

Item 8.

  

Financial Statements and Supplementary Data

  

29

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

55

PART III

Item 10.

  

Directors and Executive Officers of the Registrant

  

56

Item 11.

  

Executive Compensation

  

56

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

56

Item 13.

  

Certain Relationships and Related Transactions

  

57

Item 14.

  

Controls and Procedures

  

57

PART IV

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

58

 

i


Table of Contents

 

PART I

 

Item 1.—Business

 

GENERAL

 

Union Bankshares Corporation (the “Company”) is a multi-bank holding company organized under Virginia law and registered under the Bank Holding Company Act of 1956. The Company is headquartered in Bowling Green, Virginia. The Company is committed to the delivery of financial services through its four affiliated community banks (the “Community Banks”) and two non-bank financial services affiliates:

 

Community Banks

    

Union Bank & Trust Company

  

Bowling Green, Virginia

Northern Neck State Bank

  

Warsaw, Virginia

Rappahannock National Bank

  

Washington, Virginia

Bank of Williamsburg

  

Williamsburg, Virginia

Financial Services Affiliates

    

Mortgage Capital Investors, Inc.

  

Springfield, Virginia

Union Investment Services, Inc.

  

Bowling Green, Virginia

 

The Company was formed in connection with the July 1993 merger of Northern Neck Bankshares Corporation and Union Bancorp, Inc. into Union Bankshares Corporation. 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. In June 1999, after the retirement of its president, King George State Bank was merged into Union Bank & Trust Company (“Union Bank”) and ceased to be a subsidiary bank.

 

Each of the Community Banks is a full service retail commercial bank offering consumers and businesses 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 Community Banks also issue credit cards and can deliver automated teller machine services through the use of reciprocally shared ATMs in the major ATM networks. All of the Community Banks offer Internet banking access for banking services and online bill payment for both consumers and commercial companies.

 

The Company principally serves, through its Community Banks, the Virginia counties of Caroline, Hanover, James City, King George, King William, Spotsylvania, Stafford, Richmond, Westmoreland, Essex, Lancaster and Northumberland, and the Cities of Williamsburg, Newport News and Fredericksburg, Virginia. In January 2002, the Bank of Williamsburg opened a loan production office servicing Newport News and converted it to a full service branch in May 2002. In August 2002, Union Bank opened a loan production office in the Manassas area (Prince William County) and anticipates opening a loan production office in the Greater Richmond market (Western Henrico County) in early 2003. Through its Community Banks, the Company operated 31 branches in its primary trade area at December 31, 2002.

 

Union Investment Services has provided securities, brokerage and investment advisory services since its formation in February 1993. It is a full service investment company handling all aspects of wealth management including stocks, bonds, annuities, mutual funds and financial planning.

 

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


Table of Contents

Corporation into Mortgage Capital Investors, Inc., a wholly owned subsidiary of Union Bank (“MCI”). MCI has seven offices located in Virginia (3), Maryland (3) and South Carolina (1), and is also licensed to do business in Washington, D.C. MCI provides a variety of mortgage products to customers in those states. The mortgage loans originated by MCI are generally sold in the secondary market through purchase agreements with institutional investors. MCI also offers insurance services to its customers through a joint venture with an insurance agency.

 

Union Bankshares Corporation had assets of $1.116 billion, deposits of $897.6 million and stockholders’ equity of $105.5 million at December 31, 2002. The Community Banks range in asset size from $40.9 to $766.7 million at December 31, 2002.

 

SEGMENTS

 

The Company has two reportable segments: traditional full service community banks and a mortgage loan origination business, each as described above. See Note 17 in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statement and Supplementary Data, of this Form 10-K and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K, for certain financial and other information about each of the Company’s operating segments.

 

ACQUISITION PROGRAM

 

The Company looks to expand its market area and increase its market share through internal growth, de novo expansion and strategic acquisitions. In 2002, the Company, through two of its Community Banks, opened two loan production offices as a means to enter new markets in Virginia: Newport News and Manassas. The Newport News location received regulatory approval in May 2002 to become a full service branch.

 

EMPLOYEES

 

As of December 31, 2003 the Company had 471 employees, including executive officers, loan and other banking officers, branch personnel, operations personnel and others. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers their employee relations to be excellent.

 

COMPETITION

 

The Company experiences strong competition in all aspects of its business. In its market area, the Company competes with large national and regional financial institutions, savings and loans and other independent community banks, as well as credit unions, consumer finance companies, mortgage companies, loan productions offices, mutual funds and life insurance companies. Competition has increasingly come from out-of-state banks through their acquisitions of Virginia-based banks. Competition for deposits and loans is affected by factors such as interest rates offered, the number and location of branches and types of products offered, as well as the reputation of the institution. The Company’s non-bank financial services affiliates also operate in highly competitive environments.

 

Union Bankshares Corporation is the second largest independent bank holding company headquartered in Virginia, after the announced acquisition of First Virginia Bank by BB&T Corp. The Company’s Community Banks generally have a strong market share within the markets they serve, but due to the significant presence of out of state banks and the Company’s absence in many Virginia markets, the Company’s deposit market share in Virginia is only .69% of the total banking deposits in Virginia.

 

2


Table of Contents

 

SUPERVISION AND REGULATION

 

Bank holding companies and banks are extensively regulated under both federal and state law. The following description briefly addresses certain provisions of federal and state laws and certain regulations and proposed regulations and the potential impact of such provisions on the Company and the Community Banks. To the extent statutory or regulatory provisions or proposals are described herein, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

 

Bank Holding Companies

 

As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), the Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

 

Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks are also able to branch across state lines, provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. Virginia has adopted legislation that permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

 

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (the “FDIC”) insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund (“SAIF”) or the Bank Insurance Fund (“BIF”) as a result of the default of a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC’s claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

 

The Federal Deposit Insurance Act (the “FDIA”) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general creditor or stockholder. This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the assets of the bank.

 

The Company is registered under the bank holding company laws of Virginia. Accordingly, the Company and the Community Banks (other than Rappahannock National Bank, which is federally regulated) are subject to regulation and supervision by the State Corporation Commission of Virginia (the “SCC”).

 

3


Table of Contents

 

Capital Requirements

 

The Federal Reserve Board, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements of these federal bank regulatory agencies, the Company and each of the Subsidiary Banks are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be “Tier 1 capital”, which consists principally of common and certain qualifying preferred shareholders’ equity, less certain intangibles and other adjustments. The remainder (“Tier 2 capital”) consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company as of December 31, 2002 were 11.05% and 12.15%, respectively, exceeding the minimum requirements.

 

In addition, each of the federal regulatory agencies has established a minimum leverage capital ratio (Tier 1 capital to average tangible assets) (“Tier 1 leverage ratio”). These guidelines provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as of December 31, 2002, was 8.49%, which is above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

 

Limits on Dividends and Other Payments

 

The Company is a legal entity, separate and distinct from its subsidiary institutions. A significant portion of the revenues of the Company result from dividends paid to it by the Community Banks. There are various legal limitations applicable to the payment of dividends by the Community Banks to the Company, as well as the payment of dividends by the Company to its respective shareholders.

 

Under federal law, the Community 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 Community Banks are also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.

 

The Community Banks are subject to various statutory restrictions on their ability to pay dividends to the Company. Under the current supervisory practices of the Community Banks’ regulatory agencies, prior approval from those agencies is required if cash dividends declared in any given year exceed net income for that year plus retained net profits of the two preceding years. The payment of dividends by the Community 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 Community 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 Community Banks, or the Company, could be deemed to constitute such an unsafe or unsound practice.

 

Under the FDIA, insured depository institutions such as the Community Banks are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution,

 

4


Table of Contents

the institution would become “undercapitalized” (as such term is used in the statute). Based on the Community Banks’ current financial condition, the Company does not expect that this provision will have any impact on its ability to obtain dividends from the Community Banks.

 

In addition to dividends it receives from the Community Banks, the Company receives management fees from its affiliated companies for various services provided to them including: data processing, item processing, customer accounting, financial accounting, human resources, funds management, credit administration, sales and marketing, collections, facilities management, call center and internal audit. These fees are charged to each subsidiary based upon various specific allocation methods measuring the usage of such services by that subsidiary. The fees are eliminated in the consolidation process.

 

The Community Banks

 

The Community Banks are supervised and regularly examined by the Federal Reserve Board and the SCC, and in the case of Rappahannock National Bank, the OCC. The various laws and regulations administered by the regulatory agencies affect corporate practices, such as the payment of dividends, incurring debt and acquisition of financial institutions and other companies, and affect business practices, such as the payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices.

 

The Community 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 institutions with deposits insured by the BIF, the Community Banks also are subject to insurance assessments imposed by the FDIC. There is a base assessment for all institutions. In addition, the FDIC has implemented a risk-based assessment schedule, imposing assessments ranging from zero to 0.27% of an institution’s average assessment base. The actual assessment to be paid by each BIF member is based on the institution’s assessment risk classification, which is determined based on whether the institution is considered “well capitalized,” “adequately capitalized” or “undercapitalized,” as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. In 2002, the Company paid only the base assessment rate through the Community Banks which amounted to $134,713 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

 

5


Table of Contents

banking, securities and insurance. The provisions of GLBA that are believed to be of most significance to the Company are discussed below.

 

GLBA repealed 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 created 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

 

    securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and

 

    insurance underwriting, sales and brokerage activities.

 

A bank holding company may elect to become a financial holding company only if all of its depository institution subsidiaries are well-capitalized, well-managed and have at least a satisfactory CRA rating. For various reasons, the Company has not elected to be treated as a financial holding company.

 

GLBA establishes a system of functional regulation under which the federal banking agencies regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the Securities and Exchange Commission regulate their securities activities and state insurance regulators will regulate their insurance activities.

 

GLBA and certain regulations issued by federal banking agencies also provide protection 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 privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.

 

Neither the provisions of GLBA nor the act’s implementing regulations have had a material impact on the Company’s or the Community Banks’ regulatory capital ratios (as discussed above) or ability to continue to operate in a safe and sound manner.

 

SEC Filings

 

The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission. These reports are posted and are available at the Company’s website, ubsh.com.

 

6


Table of Contents

 

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 the Notes to Consolidated Financial Statements contained in Item 8, Financial Statement and Supplementary Data, of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.

 

Unless otherwise indicated, the properties below are owned by the Company and its subsidiaries as of December 31, 2002.

 

Locations

 

Corporate Headquarters

    

212 North Main Street

  

Bowling Green, Virginia

Banking Offices—Union Bank & Trust Company

    

211 North Main Street

  

Bowling Green, Virginia

Route 1

  

Ladysmith, Virginia

Route 301

  

Port Royal, Virginia

4540 Lafayette Boulevard

  

Fredericksburg, Virginia

Route 1 and Ashcake Road

  

Ashland, Virginia

4210 Plank Road

  

Fredericksburg, Virginia

10415 Courthouse Road

  

Spotsylvania, Virginia

9665 Sliding Hill Road

  

Ashland, Virginia

700 Kenmore Avenue

  

Fredericksburg, Virginia

Route 360

  

Manquin, Virginia

9534 Chamberlayne Road

  

Mechanicsville, Virginia

Cambridge and Layhill Road

  

Fredericksburg, Virginia (leased)

Massaponax Church Road and Route 1

  

Spotsylvania, Virginia (leased)

Brock Road and Route 3

  

Spotsylvania, Virginia (leased)

2811 Fall Hill Avenue

  

Fredericksburg, Virginia

610 Mechanicsville Turnpike

  

Mechanicsville, Virginia (leased)

10045 Kings Highway

  

King George, Virginia

840 McKinney Blvd.

  

Colonial Beach, Virginia

5510 Morris Road

  

Thornburg, Virginia

Loan Production Offices—Union Bank & Trust Company

    

9282 Corporate Circle, Building 7

    

Ashton Professional Center

  

Manassas, Virginia (leased)

Banking Offices—Northern Neck State Bank

    

5839 Richmond Road

  

Warsaw, Virginia

4256 Richmond Road

  

Warsaw, Virginia

Route 3, Kings Highway

  

Montross, Virginia

1649 Tappahannock Blvd

  

Tappahannock, Virginia

1660 Tappahannock Blvd (Wal-Mart)

  

Tappahannock, Virginia (leased)

15043 Northumberland Highway

  

Burgess, Virginia

284 North Main Street

  

Kilmarnock, Virginia

876 Main Street

  

Reedville, Virginia

485 Chesapeake Drive

  

White Stone, Virginia

 

7


Table of Contents

Banking Office—Rappahannock National Bank

    

257 Gay Street

  

Washington, Virginia

Banking Office—Bank of Williamsburg

    

5125 John Tyler Parkway

  

Williamsburg, Virginia (land lease)

610 Thimble Shoals Boulevard

  

Newport News, Virginia (leased)

Union Investment Services, Inc.

    

111 Davis Court

  

Bowling Green, Virginia

9665 Sliding Hill Road

  

Ashland, Virginia

2811 Fall Hill Avenue

  

Fredericksburg, Virginia

Mortgage Capital Investors, Inc. (All leased)

    

5835 Allentown Way

  

Camp Springs, Maryland

5440 Jeff Davis Highway, #103

  

Fredericksburg, Virginia

3 Hillcrest Drive #A100

  

Frederick, Maryland

7501 Greenway Center, #140

  

Greenbelt, Maryland

7901 N. Ocean Boulevard

  

Myrtle Beach, South Carolina

6330 Newtown Road, #211

  

Norfolk, Virginia

6571 Edsall Road

  

Springfield, Virginia

 

Item 3.—Legal Proceedings

 

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.

 

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, 2002.

 

8


Table of Contents

 

PART II

 

Item 5.—Market for Registrant’s Common Equity and Related Stockholder Matters

 

Union Bankshares Corporation’s common stock is traded on the Nasdaq National Market under the symbol “UBSH”. The Company’s common stock began trading on the Nasdaq National Market in October 1993.

 

There were 7,579,707 shares of the Company’s common stock outstanding at the close of business on December 31, 2002, which were held by 2,255 shareholders of record. The closing price of the Company’s stock on December 31, 2002 was $27.25 per share as compared to $16.24 on December 31, 2001.

 

The following table summarizes the high and low sales prices and dividends declared for the two years ended December 31, 2002.

 

    

Market Values


  

Declared

Dividends


    

2002


  

2001


  
    

High


  

Low


  

High


  

Low


  

2002


  

2001


First Quarter

  

$

21.80

  

$

15.50

  

$

19.50

  

$

10.19

  

$

—  

  

$

—  

Second Quarter

  

 

27.95

  

 

20.96

  

 

16.88

  

 

11.50

  

 

0.25

  

 

0.22

Third Quarter

  

 

29.00

  

 

22.54

  

 

17.40

  

 

14.19

  

 

—  

  

 

—  

Fourth Quarter

  

 

29.33

  

 

22.25

  

 

17.20

  

 

15.05

  

 

0.27

  

 

0.24

                                

  

                                

$

0.52

  

$

0.46

                                

  

 

Restrictions on the ability of the Community Banks to transfer funds to the Company at December 31, 2002, are set forth in Note 16 of the Notes to the Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. A discussion of certain limitations on the ability of the Community Banks to pay dividends to the Company and the ability of the Company to pay dividends on its common stock, is set forth in Part I, Business, of this Form 10-K under the headings “Supervision and Regulation—Limits on Dividends and Other Payments” and “—The Community Banks”.

 

The dividend amount on the Company’s common stock is established by the Board of Directors semi-annually and dividends are typically paid on May 1st and November 1st of each year. In making its decision on the payment of dividends on the Company’s common stock, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns and other factors.

 

9


Table of Contents

 

Item 6.—Selected Financial Data

 

The following table sets forth selected financial data for the Company for the last five years.

 

    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(dollars in thousands, except per share amounts)

 

RESULTS OF OPERATIONS

      

Interest income

  

$

65,205

 

  

$

65,576

 

  

$

64,867

 

  

$

55,636

 

  

$

51,062

 

Interest expense

  

 

24,627

 

  

 

32,483

 

  

 

33,530

 

  

 

27,067

 

  

 

24,463

 

    


  


  


  


  


Net interest income

  

 

40,578

 

  

 

33,093

 

  

 

31,337

 

  

 

28,569

 

  

 

26,599

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

 

  

 

2,101

 

  

 

2,216

 

  

 

3,044

 

    


  


  


  


  


Net interest income after provision for loan losses

  

 

37,700

 

  

 

30,967

 

  

 

29,236

 

  

 

26,353

 

  

 

23,555

 

Noninterest income

  

 

17,538

 

  

 

16,092

 

  

 

12,011

 

  

 

13,246

 

  

 

5,567

 

Noninterest expenses

  

 

35,922

 

  

 

32,447

 

  

 

32,424

 

  

 

32,689

 

  

 

20,622

 

    


  


  


  


  


Income before income taxes

  

 

19,316

 

  

 

14,612

 

  

 

8,823

 

  

 

6,910

 

  

 

8,500

 

Income tax expense

  

 

4,811

 

  

 

2,933

 

  

 

1,223

 

  

 

636

 

  

 

1,678

 

    


  


  


  


  


Net income

  

$

14,505

 

  

$

11,679

 

  

$

7,600

 

  

$

6,274

 

  

$

6,822

 

    


  


  


  


  


KEY PERFORMANCE RATIOS

                                            

Return on average assets (ROA)

  

 

1.41

%

  

 

1.27

%

  

 

0.88

%

  

 

0.79

%

  

 

1.00

%

Return on average equity (ROE)

  

 

14.91

%

  

 

13.55

%

  

 

10.69

%

  

 

8.74

%

  

 

9.58

%

Efficiency ratio

  

 

58.90

%

  

 

62.13

%

  

 

71.18

%

  

 

74.50

%

  

 

61.24

%

PER SHARE DATA

                                            

Net income per share—basic

  

$

1.92

 

  

$

1.55

 

  

$

1.01

 

  

$

0.84

 

  

$

0.91

 

Net income per share—diluted

  

 

1.90

 

  

 

1.55

 

  

 

1.01

 

  

 

0.83

 

  

 

0.91

 

Cash dividends declared

  

 

0.52

 

  

 

0.46

 

  

 

0.40

 

  

 

0.40

 

  

 

0.38

 

Book value at period-end

  

 

13.92

 

  

 

11.82

 

  

 

10.42

 

  

 

9.19

 

  

 

9.77

 

FINANCIAL CONDITION

                                            

Total assets

  

$

1,115,725

 

  

$

983,097

 

  

$

881,961

 

  

$

821,827

 

  

$

733,947

 

Total deposits

  

 

897,642

 

  

 

784,084

 

  

 

692,472

 

  

 

646,866

 

  

 

607,629

 

Total loans, net of unearned income

  

 

714,764

 

  

 

600,164

 

  

 

580,790

 

  

 

543,367

 

  

 

479,822

 

Stockholders’ equity

  

 

105,492

 

  

 

88,979

 

  

 

78,352

 

  

 

68,794

 

  

 

73,359

 

ASSET QUALITY

                                            

Allowance for loan losses

  

$

9,179

 

  

$

7,336

 

  

$

7,389

 

  

$

6,617

 

  

$

6,407

 

Allowance as % of total loans

  

 

1.28

%

  

 

1.22

%

  

 

1.27

%

  

 

1.22

%

  

 

1.33

%

OTHER DATA

                                            

Market value per share at period-end

  

$

27.25

 

  

$

16.24

 

  

$

10.25

 

  

$

14.75

 

  

$

17.50

 

Price to earnings ratio

  

 

14.3

 

  

 

10.5

 

  

 

10.1

 

  

 

17.6

 

  

 

19.2

 

Price to book value ratio

  

 

196

%

  

 

137

%

  

 

98

%

  

 

161

%

  

 

179

%

Equity to assets

  

 

9.5

%

  

 

9.1

%

  

 

8.9

%

  

 

8.4

%

  

 

10.0

%

Dividend payout ratio

  

 

27.08

%

  

 

29.68

%

  

 

39.60

%

  

 

42.62

%

  

 

41.76

%

Weighted average shares outstanding, basic

  

 

7,555,906

 

  

 

7,523,566

 

  

 

7,508,238

 

  

 

7,473,869

 

  

 

7,489,873

 

Weighted average shares outstanding, diluted

  

 

7,623,169

 

  

 

7,541,572

 

  

 

7,513,000

 

  

 

7,498,000

 

  

 

7,516,000

 

 

10


Table of Contents

 

Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of Union Bankshares Corporation and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

 

CRITICAL ACCOUNTING POLICIES

 

General

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

 

Allowance for Loan Losses

 

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

 

The Company’s allowance for loan losses model has three basic components: the formula allowance, the specific allowance and a calculation for unfunded loans. Each of these components is determined based upon estimates that can and do change when actual events occur. These estimates are reevaluated at least quarterly as part of a review of the adequacy of the allowance for loan loss. The allowance formula uses historical losses and current economic and business conditions in developing estimated loss factors as an indicator of future losses for various loan classifications; as a result, the estimated losses could differ from the losses incurred in the future. The specific allowance uses various techniques such as historical loss information, expected cash flows and fair market value of collateral to arrive at an estimate of losses. The use of these values is inherently subjective and actual losses could be greater or less than the estimates. The allowance calculation for unfunded loans uses historical factors to determine the losses that are attributable to these loans. Management periodically reassesses the approach taken in these estimates in order to enhance the process.

 

Goodwill and Intangibles

 

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business

 

11


Table of Contents

combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

 

The Company adopted SFAS No. 142 on January 1, 2002. Goodwill is included in other assets and totaled $864,000 at December 31, 2002 and 2001. The goodwill is no longer amortized, but instead tested for impairment at least annually. Based on the testing, there were no impairment charges for 2002. Application of the nonamortization provisions of the Statement resulted in additional net income of $82,500 for the year ended December 31, 2002.

 

Core deposit intangibles are included in other assets and are being amortized on a straight-line basis over the period of expected benefit, which ranges from 10 to 15 years. Core deposits, net of amortization amounted to $5,500,000 and $6,093,000 at December 31, 2002 and 2001, respectively. The Company adopted SFAS 147 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over the estimated useful life.

 

OVERVIEW

 

Union Bankshares Corporation’s net income for 2002 totaled $14.5 million or $1.92 per share on a basic and $1.90 on a diluted basis, up 24.2% from $11.7 million or $1.55 per share on a basic and diluted basis for 2001. Profitability as measured by return on average assets (ROA) for 2002 was 1.41% as compared to 1.27% a year earlier, while return on average equity (ROE) for 2002 was 14.91% as compared to 13.55% in 2001. Core profitability continued to improve as net interest income increased by 22.6% and noninterest income was up 9.0%.

 

Union Bankshares Corporation’s financial performance in 2002 was significantly influenced by the effect of lower interest rates on both the community bank segment and the mortgage banking segment. Net income for the community bank segment was $12.9 million, an increase of $2.4 million, or 22.7% over 2001. In 2002, reductions in interest rates resulted in a slight decline in interest income while the repricing of deposits and the reduction of rates on other borrowings combined to decrease interest expense and increase net interest income. Net interest income increased $7.0 million or 21.6%, resulting in the highest net interest margin in several years. Noninterest income in the community bank segment grew modestly in 2002 at 3.0%. Service charges and fees, the primary component of noninterest income, increased 8.1% in 2002. Noninterest expense in this sector increased 10.3% while assets grew by over 13.5%. This ability to grow on a stable cost platform has allowed the Company to realize efficiencies from both internal growth and expansion opportunities.

 

The decline in mortgage interest rates in 2002 stimulated mortgage loan originations and enhanced the financial performance of the Company’s mortgage banking segment. Mortgage loan originations in 2002 totaled $385 million and the gains on the sales of those loans totaled $10.1 million, a 13.9% increase over 2001. Net income for the mortgage banking segment was $1.6 million, an improvement of $400,000 over $1.2 million in 2001. This improvement was largely the result of increased volume but continued expense controls resulted in a decrease of $135,000 in noninterest expense excluding salaries and benefits. Refinanced mortgages represented 42% of the mortgage segment’s loan production for the year as compared to 30% in 2001. The Company continues to focus on developing and maintaining relationships with builders and realtors to generate loan referrals, to provide a more steady source of origination volume in a more stable rate environment.

 

12


Table of Contents

Assets grew to $1.116 billion at December 31, 2002, up 13.5% from $983.1 million a year ago. Loans grew to $714.8 million, up 19.1% over year-end 2001 totals reflecting growth in our loan production in all entities. Deposits increased to $897.6 million at December 31, 2002 from $784.1 million at December 31, 2001, a 14.5% increase. The Company’s capital position grew by 18.6%, from $89.0 million at December 31, 2001 to $105.5 million a year later and remains strong at 9.5% of total assets.

 

NET INTEREST INCOME

 

Net interest income, which represents the principal source of earnings for the Company is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest-earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income, the net interest margin and net income.

 

Various world and national events over the last two years, including the terrorist attacks and corporate scandals, have contributed to economic uncertainty that appears likely to continue into 2003. This prolonged period of economic weakness resulted in interest rate cuts by the Federal Reserve Board that reduced interest rates by 475 basis points in 2001 and an additional 50 basis points in 2002. Although the Company has not seen significant weakening in the economies of the markets it serves, the impact of the interest rate reductions has had a significant impact. During 2002 the Company benefited from the maturity of higher-rate certificates of deposit issued in prior years that were renewed at significantly lower interest rates. The impact of changes in rates on certificates of deposit resulted in a reduction in interest expense of over $6.2 million in 2002. During the same timeframe, lower interest rates resulted in loan prepayments and repricings that reduced interest income on loans by $6.2 million. However, increased loan volumes offset much of that decline, contributing $5.6 million in additional interest income. (see Volume and Rate Analysis table).

 

During 2002, net interest income, on a taxable equivalent basis, which reflects the tax benefits of nontaxable interest income, totaled $43.3 million, an increase of 20.8% from $35.9 million in 2001. The Company’s net interest margin increased to 4.49% in 2002, as compared to 4.17% in 2001. The yield on earning assets decreased to 7.04% from 7.94% in 2001 while the cost of interest-bearing liabilities decreased from 4.42% in 2001 to 3.05% in 2002. Average interest-bearing liabilities increased by $72.8 million, or 9.9% while average earning assets grew by $104.7 million, or 12.2%. In 2002, deposits increased through both internal growth and the addition of two new branches, which brought $13.9 million in deposits. Many investors left the stock market and chose to maintain their liquidity in bank deposits, which is reflected in the rapid growth in interest-bearing transaction accounts and demand deposit balances. While the margin increased on a year-to-year basis, some compression was seen in the fourth quarter as asset repricing and prepayments accelerated. The majority of the repricing of higher-rate certificates of deposit was completed in 2002. The Company anticipates that interest rates will begin to rise in the second half of 2003 and that in a rising rate environment the net interest margin will improve. However, should interest rates remain at their current levels for an extended time period, the Company would expect additional declines in the yields on investments and loans and would cause the net interest margin to gradually decline over the next several quarters.

 

During 2001, net interest income, on a taxable equivalent basis totaled $35.9 million, an increase of 4.9% from $34.2 million in 2000. The Company’s net interest margin declined to 4.17% in 2001, as compared to 4.23% in 2000. The yield on earning assets decreased to 7.94% from 8.39% in 2000 while the cost of interest-bearing liabilities decreased to 4.42% in 2001 from 4.80% in 2000. Average interest-bearing liabilities increased by $35.3 million, or 5.0% while average earning assets grew by $53.1 million, or 6.6%.

 

13


Table of Contents

The following table shows interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated.

 

    

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

YEARS ENDED DECEMBER 31,


 
    

2002


    

2001


    

2000


 
    

Average

Balance


    

Interest

Income/

Expense


  

Yield/

Rate


    

Average

Balance


    

Interest

Income/

Expense


  

Yield/

Rate


    

Average Balance


    

Interest

Income/

Expense


  

Yield/

Rate


 
    

(dollars in thousands)

 

ASSETS

                                                           

Securities:

                                                                    

Taxable

  

$

168,787

 

  

$

9,619

  

5.70

%

  

$

138,175

 

  

$

9,125

  

6.60

%

  

$

121,826

 

  

$

8,979

  

7.37

%

Tax-exempt(1)

  

 

91,814

 

  

 

7,015

  

7.64

%

  

 

91,538

 

  

 

7,039

  

7.69

%

  

 

97,080

 

  

 

7,424

  

7.65

%

    


  

         


  

         


  

      

Total securities

  

 

260,601

 

  

 

16,634

  

6.38

%

  

 

229,713

 

  

 

16,164

  

7.04

%

  

 

218,906

 

  

 

16,403

  

7.49

%

Loans, net

  

 

658,836

 

  

 

49,428

  

7.50

%

  

 

589,347

 

  

 

50,148

  

8.51

%

  

 

573,989

 

  

 

50,300

  

8.76

%

Loans held for sale

  

 

27,606

 

  

 

1,638

  

5.93

%

  

 

25,862

 

  

 

1,559

  

6.03

%

  

 

10,864

 

  

 

827

  

7.61

%

Federal funds sold

  

 

14,153

 

  

 

206

  

1.46

%

  

 

13,233

 

  

 

412

  

3.11

%

  

 

2,607

 

  

 

118

  

4.53

%

Money market investments

  

 

2,778

 

  

 

40

  

1.44

%

  

 

1,116

 

  

 

23

  

2.06

%

  

 

—  

 

  

 

—  

  

—  

 

Interest-bearing deposits in other banks

  

 

1,146

 

  

 

17

  

1.48

%

  

 

1,154

 

  

 

37

  

3.21

%

  

 

936

 

  

 

59

  

6.30

%

    


  

         


  

         


  

      

Total earning assets

  

 

965,120

 

  

 

67,963

  

7.04

%

  

 

860,425

 

  

 

68,343

  

7.94

%

  

 

807,302

 

  

 

67,707

  

8.39

%

Allowance for loan losses

  

 

(8,370

)

                

 

(7,725

)

                

 

(7,488

)

             

Total non-earning assets

  

 

71,684

 

                

 

69,421

 

                

 

61,449

 

             
    


                


                


             

Total assets

  

$

1,028,434

 

                

$

922,121

 

                

$

861,263

 

             
    


                


                


             

LIABILITIES AND STOCKHOLDERS EQUITY

                                                           

Interest-bearing deposits:

                                                                    

Checking

  

$

120,878

 

  

 

1,028

  

0.85

%

  

$

100,112

 

  

 

1,646

  

1.64

%

  

$

99,377

 

  

 

2,116

  

2.13

%

Money market savings

  

 

84,623

 

  

 

1,193

  

1.41

%

  

 

67,680

 

  

 

1,838

  

2.72

%

  

 

62,197

 

  

 

2,022

  

3.25

%

Regular savings

  

 

78,497

 

  

 

1,014

  

1.29

%

  

 

63,311

 

  

 

1,443

  

2.28

%

  

 

56,992

 

  

 

1,367

  

2.40

%

Certificates of deposit:

                                                                    

$100,000 and over

  

 

135,429

 

  

 

5,718

  

4.22

%

  

 

128,117

 

  

 

7,243

  

5.65

%

  

 

108,740

 

  

 

6,251

  

5.75

%

Under $100,000

  

 

286,076

 

  

 

11,506

  

4.02

%

  

 

269,578

 

  

 

14,970

  

5.55

%

  

 

258,162

 

  

 

14,756

  

5.72

%

    


  

         


  

         


  

      

Total interest-bearing deposits

  

 

705,503

 

  

 

20,459

  

2.90

%

  

 

628,798

 

  

 

27,140

  

4.32

%

  

 

585,468

 

  

 

26,512

  

4.53

%

Other borrowings

  

 

101,385

 

  

 

4,168

  

4.11

%

  

 

105,284

 

  

 

5,343

  

5.07

%

  

 

113,339

 

  

 

7,018

  

6.19

%

    


  

         


  

         


  

      

Total interest-bearing liabilities

  

 

806,888

 

  

 

24,627

  

3.05

%

  

 

734,082

 

  

 

32,483

  

4.42

%

  

 

698,807

 

  

 

33,530

  

4.80

%

    


  

                  

                  

      

Noninterest bearing liabilities:

                                                                    

Demand deposits

  

 

115,552

 

                

 

96,127

 

                

 

86,416

 

             

Other liabilities

  

 

8,734

 

                

 

5,719

 

                

 

4,951

 

             
    


                


                


             

Total liabilities

  

 

931,174

 

                

 

835,928

 

                

 

790,174

 

             

Stockholders’ equity

  

 

97,260

 

                

 

86,193

 

                

 

71,089

 

             
    


                


                


             

Total liabilities and stockholders’ equity

  

$

1,028,434

 

                

$

922,121

 

                

$

861,263

 

             
    


                


                


             

Net interest income

           

$

43,336

                  

$

35,860

                  

$

34,177

      
             

                  

                  

      

Interest rate spread

                  

3.99

%

                  

3.52

%

                  

3.59

%

Interest expense as a percent of average earning assets

                  

2.55

%

                  

3.78

%

                  

4.15

%

Net interest margin

                  

4.49

%

                  

4.17

%

                  

4.23

%

 

(1)   Income and yields are reported on a taxable equivalent basis.

 

The following table summarizes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities compared to changes in interest rates. Nonaccrual loans are included in average loans outstanding.

 

14


Table of Contents

 

VOLUME AND RATE ANALYSIS* (TAXABLE EQUIVALENT BASIS)

 

    

Years Ended December 31,


 
    

2002 vs. 2001

Increase (Decrease)

Due to Changes in:


    

2001 vs. 2000

Increase (Decrease)

Due to Changes in:


 
    

Volume


    

Rate


    

Total


    

Volume


    

Rate


    

Total


 
    

(dollars in thousands)

 

EARNING ASSETS:

                                                     

Securities:

                                                     

Taxable

  

$

1,850

 

  

$

(1,356

)

  

$

494

 

  

$

1,134

 

  

$

(988

)

  

$

146

 

Tax-exempt

  

 

21

 

  

 

(45

)

  

 

(24

)

  

 

(425

)

  

 

40

 

  

 

(385

)

Loans, net

  

 

5,563

 

  

 

(6,283

)

  

 

(720

)

  

 

1,327

 

  

 

(1,479

)

  

 

(152

)

Loans held for sale

  

 

103

 

  

 

(24

)

  

 

79

 

  

 

936

 

  

 

(204

)

  

 

732

 

Federal funds sold

  

 

26

 

  

 

(232

)

  

 

(206

)

  

 

341

 

  

 

(47

)

  

 

294

 

Money market investments

  

 

25

 

  

 

(8

)

  

 

17

 

  

 

11

 

  

 

12

 

  

 

23

 

Interest-bearing deposits in other banks

  

 

—  

 

  

 

(20

)

  

 

(20

)

  

 

11

 

  

 

(33

)

  

 

(22

)

    


  


  


  


  


  


Total earning assets

  

 

7,588

 

  

 

(7,968

)

  

 

(380

)

  

 

3,335

 

  

 

(2,699

)

  

 

636

 

    


  


  


  


  


  


INTEREST-BEARING LIABILITIES:

                                                     

Checking

  

 

291

 

  

 

(909

)

  

 

(618

)

  

 

15

 

  

 

(485

)

  

 

(470

)

Money market savings

  

 

384

 

  

 

(1,029

)

  

 

(645

)

  

 

168

 

  

 

(352

)

  

 

(184

)

Regular savings

  

 

292

 

  

 

(721

)

  

 

(429

)

  

 

146

 

  

 

(70

)

  

 

76

 

CDs $100,000 and over

  

 

394

 

  

 

(1,919

)

  

 

(1,525

)

  

 

1,097

 

  

 

(105

)

  

 

992

 

CDs < $100,000

  

 

870

 

  

 

(4,334

)

  

 

(3,464

)

  

 

641

 

  

 

(427

)

  

 

214

 

    


  


  


  


  


  


Total interest-bearing deposits

  

 

2,231

 

  

 

(8,912

)

  

 

(6,681

)

  

 

2,067

 

  

 

(1,439

)

  

 

628

 

Other borrowings

  

 

(192

)

  

 

(983

)

  

 

(1,175

)

  

 

(474

)

  

 

(1,201

)

  

 

(1,675

)

    


  


  


  


  


  


Total interest-bearing liabilities

  

 

2,039

 

  

 

(9,895

)

  

 

(7,856

)

  

 

1,593

 

  

 

(2,640

)

  

 

(1,047

)

    


  


  


  


  


  


Change in net interest income

  

$

5,549

 

  

$

1,927

 

  

$

7,476

 

  

$

1,742

 

  

$

(59

)

  

$

1,683

 

    


  


  


  


  


  


 

*   The change in interest, due to both rate and volume, has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.

 

INTEREST SENSITIVITY

 

An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which are variable rate instruments, by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact of rising or falling interest rates on net interest income.

 

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors. The Company uses computer simulations to measure the effect of various interest rate scenarios on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

 

At December 31, 2002, the Company had $168.1 million more assets than liabilities subject to repricing within one year and was, therefore, in an asset-sensitive position. An asset-sensitive Company generally will be impacted favorably by increasing interest rates while a liability-sensitive company’s net interest margin and net interest income generally will be impacted favorably by declining interest rates. At December 31, 2001, the Company had $148.3 million more liabilities than assets subject to repricing within one year.

 

15


Table of Contents

 

Although the gap report shows the Company to be asset-sensitive, computer simulation shows the Company’s net interest income tends to increase when interest rates rise and fall when interest rates decline. The explanation for this is that interest rate changes affect bank products differently. For example, if the prime rate changes by 1.00% (100 basis points or bps), the change on certificates of deposit may only be 0.75% (75 bps), while other interest bearing deposit accounts may only change 0.10% (10 bps). Also, despite their fixed terms, loan products are often refinanced as rates decline but rarely refinanced as rates rise. In 2002, with slightly declining rates, the market stayed in a more normal curve. Liabilities repriced early in the year while assets repriced throughout the year resulting in an increase in net interest income.

 

EARNINGS SIMULATION ANALYSIS

 

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis discussed above.

 

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

 

The following table represents the interest rate sensitivity on net interest income for the Company using different rate scenarios:

 

Change in Prime Rate


    

% Change in Net Interest Income


+200 basis points

    

6.0%

Flat

    

0

-200 basis points

    

-3.1%

 

ECONOMIC VALUE SIMULATION

 

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value is the economic value of all assets minus the market value of all liabilities. The change in net economic 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 economic value simulation as in the earnings simulation. The following chart reflects the change in net economic value over different rate environments:

 

16


Table of Contents

 

 

Change in Prime Rate


    

Change in Net Market Value

(Dollars in Thousands)


+200 basis points

    

$6,885

+100 basis points

    

5,107

Flat

    

0

-100 basis points

    

-7,404

-200 basis points

    

-17,993

 

NONINTEREST INCOME

 

Noninterest income increased by 9.0% from $16.1 million in 2001 to $17.5 million in 2002. This increase is primarily due to a $1.2 million increase in gains on sales of loans, which rose from $8.9 million in 2001 to $10.1 million in 2002. The growth in mortgage originations, stimulated by low mortgage interest rates, led to this increase. Service charges on deposits rose 11.5% from $3.7 million to $4.1 million. Other service charges, commissions and fee income were up slightly from $2.5 million in 2001 to $2.6 million as ATM fees continued to grow while brokerage commissions were slowed by the down stock market. A securities loss of $159,000 represents a $284,000 change from gains of $125,000 a year ago. This was partially offset by gains on the sale of other real estate and fixed assets as a result of sales of a former branch site and several nonperforming asset properties. In addition, other operating income was down from $906,000 in 2001 to $800,000 in 2002. This decline was principally the result of a decrease in the earnings rate on bank owned life insurance.

 

In 2001, noninterest income increased by 34.0% from $12.0 million in 2000 to $16.1 million in 2001. This increase was primarily attributable to a $3.3 million increase in gains on sales of loans, which increased from $5.5 million in 2000 to $8.9 million in 2001 as mortgage originations increased. In addition, other operating income was up from $498,000 in 2000 to $906,000 in 2001. The rise was principally the result of increases in the cash surrender value of bank owned life insurance. Other service charges, commissions and fee income were up $325,000 from $2.2 million in 2000 to $2.5 million as brokerage fees and ATM fees continued to grow. Service charges on deposits rose slightly from $3.6 million to $3.7 million.

 

In the third quarter of 2000, the Company restructured its securities portfolio, selling lower-yielding securities to invest in higher-yielding instruments and resulting in a loss of $1.1 million. In the same quarter, the Company completed the termination of its defined benefit plan resulting in a $1.1 million gain. In connection with the termination of the defined benefit plan, the Company redirected a portion of the expense of the prior plan to enhance the existing compensation of employees to be more competitive with the market. The net impact of these two nonrecurring transactions on noninterest income was minimal.

 

NONINTEREST EXPENSES

 

Noninterest expenses totaled $35.9 million in 2002, an increase of $3.5 million versus $32.4 million in 2001. Salaries and benefits were $21.3 million in 2002, up $2.2 million or 11.6% compared to $19.1 million in 2001. The increase in mortgage loan originations and gains on loan sales within the mortgage segment resulted in an increase of $1.1 million in salaries and benefits of which $572,000 was commission compensation. The community bank segment’s salaries and benefits were up $1.1 million year-to-year. This was the result of two new branches, a loan production office in Manassas, Virginia, higher group insurance, some increased support staffing and normal increases. Occupancy expenses were $2.3 million, up $139,000 over $2.2 million in 2001. Equipment expense was down slightly at $2.7 million versus $2.9 million in 2001. Other operating expense was $9.5 million up $1.2 million compared to $8.3 million in 2001. This was the result of increases in operating expense, marketing, other taxes and other expenses rose. Much of these increased costs were related to the new

 

17


Table of Contents

locations, new product advertising, Centennial celebrations at two of the Company’s Community Banks and operating costs and core deposit expenses.

 

Noninterest expenses totaled $32.4 million in 2001, flat versus $32.4 million in 2000. Salaries and benefits were $19.1 million in 2001, up $373,000 or 2.0% compared to $18.7 million in 2000. The increase in mortgage loan production and gains on loan sales within the mortgage segment resulted in an increase of $1.2 million in commission compensation but this was largely offset by a decrease in salaries of $700,000. This reflects reductions in staffing related to the closing of mortgages offices and severance payments in 2000. The community bank segment’s salaries and benefits expenses were flat year-to-year. Occupancy expenses were $2.2 million, down $121,000 over $2.3 million in 2000. Equipment expense was down slightly at $2.9 million versus $3.0 million in 2000. Other operating expense was $8.3 million down slightly compared to $8.4 million in 2000. This was the result of professional fees being down while marketing, other taxes and other expenses rose. Much of these cost efficiencies are attributable to the consolidation of virtually all back office functions and the Company’s investment in technology.

 

LOAN PORTFOLIO

 

Loans, net of unearned income, totaled $714.8 million at December 31, 2002, an increase of 19.1% over $600.2 million at December 31, 2001. Loans secured by real estate represent the Company’s largest category, comprising 72.2% of the total loan portfolio at December 31, 2002. Of this total, 1-4 family residential loans, not including home equity lines, comprised 26.6% of the total loan portfolio at December 31, 2002, down slightly from 28.2% in 2001. Loans secured by commercial real estate comprised 28.0% of the total loan portfolio at December 31, 2002, as compared to 25.8% in 2001, and consist of income producing properties, as well as commercial and industrial loans where real estate constitutes a secondary source of collateral. Real estate construction loans accounted for 11.9% of total loans outstanding at December 31, 2002. The Company’s charge-off rate for all loans secured by real estate has historically been low.

 

LOAN PORTFOLIO

 

    

DECEMBER 31,


    

2002


  

2001


  

2000


  

1999


  

1998


    

(in thousands)

Commercial

  

$

78,289

  

$

70,739

  

$

74,261

  

$

67,649

  

$

61,678

Loans to finance agriculture production and other loans to farmers

  

 

1,128

  

 

4,075

  

 

2,793

  

 

3,015

  

 

2,595

Real estate:

                                  

Real estate construction

  

 

85,335

  

 

57,940

  

 

33,560

  

 

33,218

  

 

38,128

Real estate mortgage:

                                  

Residential (1-4 family)

  

 

190,427

  

 

169,426

  

 

177,282

  

 

179,246

  

 

155,843

Home equity lines

  

 

32,320

  

 

24,474

  

 

20,049

  

 

20,987

  

 

18,737

Multi-family

  

 

3,066

  

 

3,418

  

 

4,666

  

 

4,592

  

 

3,979

Commercial (1)

  

 

200,125

  

 

155,093

  

 

139,737

  

 

120,490

  

 

108,063

Agriculture

  

 

4,466

  

 

2,497

  

 

2,859

  

 

2,373

  

 

2,536

    

  

  

  

  

Total real estate

  

 

515,739

  

 

412,848

  

 

378,153

  

 

360,906

  

 

327,286

Loans to individuals:

                                  

Consumer

  

 

102,528

  

 

94,620

  

 

107,876

  

 

102,713

  

 

79,492

Credit card

  

 

5,350

  

 

4,140

  

 

4,958

  

 

4,346

  

 

3,232

    

  

  

  

  

Total loans to individuals

  

 

107,878

  

 

98,760

  

 

112,834

  

 

107,059

  

 

82,724

All other loans

  

 

11,836

  

 

14,048

  

 

13,507

  

 

5,855

  

 

6,559

    

  

  

  

  

Total loans

  

 

714,870

  

 

600,470

  

 

581,548

  

 

544,484

  

 

480,842

Less unearned income

  

 

106

  

 

306

  

 

758

  

 

1,117

  

 

1,020

    

  

  

  

  

Total net loans

  

$

714,764

  

$

600,164

  

$

580,790

  

$

543,367

  

$

479,822

    

  

  

  

  

 

The Company’s consumer loan portfolio, its second largest category, consists principally of installment loans. Total loans to individuals for household, family and other personal expenditures

 

18


Table of Contents

 

totaled 14.3% of total loans at December 31, 2002, down from 15.8% in 2001. The increased competition for automobile loans including zero percent financing by automobile companies continued to impact this portfolio significantly in 2002. Commercial loans, secured by non-real estate business assets comprised 11.0% of total loans at the end of 2002, a slight decrease from 11.8% at the end of 2001. Loans to the agricultural industry totaled less than 1.0% of the loan portfolio in each of the last five years.

 

REMAINING MATURITIES OF SELECTED LOANS

 

                                           
    

VARIABLE RATE:


  

FIXED RATE:


    

Within 1 year


  

1 to 5 years


  

After 5 years


  

Total


  

1 to 5 years


  

After 5 years


  

Total


    

Total maturities


    

(in thousands)

At December 31, 2002

                                             

Commercial

  

$

39,699

  

6,161

  

—  

  

6,161

  

27,555

  

4,874

  

32,429

    

$

78,289

Real Estate Construction

  

$

77,827

  

1,239

  

—  

  

1,239

  

2,470

  

3,799

  

6,269

    

$

85,335

 

Loans, net of unearned income, totaled $600.2 million at December 31, 2001, an increase of 3.3% over $580.8 million at December 31, 2000, fueled largely by commercial real estate and commercial loan growth.

 

The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade area. The Company maintains a policy not to originate or purchase loans to foreign entities or loans classified by regulators as highly leveraged transactions. To manage the growth of the real estate loans in the loan portfolio, facilitate asset/liability management and generate additional fee income, the Company sells a portion of conforming first mortgage residential real estate loans to the secondary market as they are originated. Mortgage Capital Investors, Inc. serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market or selling loans to the affiliated banks that meet the banks’ current asset/liability management needs. This venture has provided the banks’ customers with enhanced mortgage products and the Company with improved efficiencies through the consolidation of this function.

 

ASSET QUALITY—ALLOWANCE/PROVISION FOR LOAN LOSSES

 

The allowance for loan losses represents management’s estimate of the amount adequate to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies.

 

Management maintains a list of loans which have a potential weakness that may need special attention. This list is used to monitor such loans and is used in the determination of the sufficiency of the Company’s allowance for loan losses. As of December 31, 2002, the allowance for loan losses was $9.2 million or 1.28% of total loans as compared to $7.3 million, or 1.22% in 2001. The provision for loan losses was $2.9 million in 2002 and $2.1 million in 2001.

 

19


Table of Contents

 

The allowance for loan losses as of December 31, 2001 was $7.3 million or 1.22% of total loans as compared to $7.4 million, or 1.27% in 2000. The provision for loan losses in both 2001 and 2000 was $2.1 million.

 

ALLOWANCE FOR LOAN LOSSES

 

    

DECEMBER 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
           

(dollars in thousands)

 

Balance, beginning of year

  

$

7,336

 

  

$

7,389

 

  

$

6,617

 

  

$

6,407

 

  

$

4,798

 

Loans charged-off:

                                            

Commercial

  

 

310

 

  

 

1,716

 

  

 

777

 

  

 

1,544

 

  

 

597

 

Real estate

  

 

—  

 

  

 

3

 

  

 

48

 

  

 

62

 

  

 

34

 

Consumer

  

 

1,271

 

  

 

880

 

  

 

825

 

  

 

746

 

  

 

1,078

 

    


  


  


  


  


Total loans charged-off

  

 

1,581

 

  

 

2,599

 

  

 

1,650

 

  

 

2,352

 

  

 

1,709

 

    


  


  


  


  


Recoveries:

                                            

Commercial

  

 

245

 

  

 

154

 

  

 

16

 

  

 

12

 

  

 

126

 

Real estate

  

 

33

 

  

 

15

 

  

 

10

 

  

 

8

 

  

 

18

 

Consumer

  

 

268

 

  

 

251

 

  

 

295

 

  

 

326

 

  

 

130

 

    


  


  


  


  


Total recoveries

  

 

546

 

  

 

420

 

  

 

321

 

  

 

346

 

  

 

274

 

    


  


  


  


  


Net loans charged-off

  

 

1,035

 

  

 

2,179

 

  

 

1,329

 

  

 

2,006

 

  

 

1,435

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

 

  

 

2,101

 

  

 

2,216

 

  

 

3,044

 

    


  


  


  


  


Balance, end of year

  

$

9,179

 

  

$

7,336

 

  

$

7,389

 

  

$

6,617

 

  

$

6,407

 

    


  


  


  


  


Ratio of allowance for loan losses to total loans outstanding at end of year

  

 

1.28

%

  

 

1.22

%

  

 

1.27

%

  

 

1.22

%

  

 

1.33

%

Ratio of net charge-offs to average loans outstanding during year

  

 

0.16

%

  

 

0.37

%

  

 

0.23

%

  

 

0.40

%

  

 

0.32

%

 

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.

(Percent is loans in category divided by total loans.)

 

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

    

2002


   

2001


   

2000


   

1999


   

1998


 
    

Allowance


  

Percent


   

Allowance


  

Percent


   

Allowance


  

Percent


   

Allowance


 

Percent


   

Allowance


 

Percent


 
    

(dollars in thousands)

 

December 31:

                                                               

Commercial, financial and agriculture

  

$

3,249

  

11.1

%

 

$

2,846

  

12.5

%

 

$

3,369

  

13.3

%

 

$

3,215

 

13.0

%

 

$

3,382

 

13.4

%

Real estate construction

  

 

3,492

  

11.9

%

 

 

2,205

  

9.7

%

 

 

1,467

  

5.8

%

 

 

1,511

 

6.1

%

 

 

2,007

 

7.9

%

Real estate mortgage

  

 

426

  

60.2

%

 

 

383

  

59.1

%

 

 

406

  

59.3

%

 

 

264

 

59.7

%

 

 

189

 

60.3

%

Consumer & other

  

 

2,012

  

16.8

%

 

 

1,902

  

18.7

%

 

 

2,147

  

21.6

%

 

 

1,627

 

21.2

%

 

 

829

 

18.4

%

    

  

 

  

 

  

 

 

 

 

    

$

9,179

  

100.0

%

 

$

7,336

  

100.0

%

 

$

7,389

  

100.0

%

 

$

6,617

 

100.0

%

 

$

6,407

 

100.0

%

    

        

        

        

       

     

 

NONPERFORMING ASSETS

 

Nonperforming assets were $910,000 at December 31, 2002, down from $1.7 million at December 31, 2001. Nonaccrual loans decreased to $136,000 in 2002 from $915,000 in 2001 and foreclosed properties were up from $639,000 in 2001 to $774,000 in 2002.

 

20


Table of Contents

 

NONPERFORMING ASSETS

 

    

DECEMBER 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(dollars in thousands)

 

Nonaccrual loans

  

$

136

 

  

$

915

 

  

$

830

 

  

$

1,487

 

  

$

2,813

 

Foreclosed properties

  

 

774

 

  

 

639

 

  

 

844

 

  

 

1,113

 

  

 

1,101

 

Real estate investment

  

 

—  

 

  

 

129

 

  

 

867

 

  

 

903

 

  

 

730

 

    


  


  


  


  


Total nonperforming assets

  

$

910

 

  

$

1,683

 

  

$

2,541

 

  

$

3,503

 

  

$

4,644

 

    


  


  


  


  


Loans past due 90 days and accruing interest

  

$

896

 

  

$

2,757

 

  

$

1,531

 

  

$

980

 

  

$

2,979

 

    


  


  


  


  


Nonperforming assets to year-end loans, foreclosed properties and real estate investment

  

 

0.13

%

  

 

0.28

%

  

 

0.44

%

  

 

0.64

%

  

 

0.97

%

Allowance for loan losses to nonaccrual loans

  

 

6749.26

%

  

 

801.75

%

  

 

890.24

%

  

 

444.99

%

  

 

227.73

%

 

Most of the nonperforming assets are secured by real estate within the Company’s trade area. Based on the estimated fair values of the related real estate, management considers these amounts to be recoverable, with any individual deficiency considered in the allowance for loan losses. As of December 31, 2002, all nonperforming assets representing an investment in income-producing property and included in other assets have been sold at no additional loss to the Company.

 

At December 31, 2001, nonperforming assets totaled $1.7 million, down from $2.5 million at December 31, 2000. Nonaccrual loans increased by $85,000 in 2001 while foreclosed properties declined by $205,000.

 

21


Table of Contents

 

SECURITIES

 

At December 31, 2002, all $272.8 million of the Company’s securities were classified as available for sale, as compared to $257.1 million at December 31, 2001. Investment securities which totaled $5.5 million at December 31, 2000 were transferred to the available for sale classification as permitted in the implementation of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in 2001.

 

The Company seeks to diversify its portfolio to minimize risk and to maintain a large amount of securities issued by states and political subdivisions due to the tax benefits such securities provide. It also purchases mortgage backed securities because of the reinvestment opportunities from the cash flows and the higher yield offered from these securities. The investment portfolio has a high percentage of municipals and mortgage backed securities, which is the main reason for the high taxable equivalent yield the portfolio attains compared to its peers. The Company does not have any derivative or hedging activities.

 

MATURITIES OF INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE

 

    

DECEMBER 31, 2002


 
    

1 YEAR OR LESS


    

1-5 YEARS


    

5-10 YEARS


    

OVER 10 YEARS & EQUITY SECURITIES


    

TOTAL


 
    

(dollars in thousands)

 

U.S. government and agency securities:

                                            

Amortized cost

  

$

999

 

  

$

16,302

 

  

$

—  

 

  

$

—  

 

  

$

17,301

 

Fair value

  

 

1,010

 

  

 

16,445

 

  

 

—  

 

  

 

—  

 

  

 

17,455

 

Weighted average yield(1)

  

 

2.65

%

  

 

3.18

%

  

 

—  

 

  

 

—  

 

  

 

3.15

%

Mortgage backed securities:

                                            

Amortized cost

  

$

18

 

  

$

1,986

 

  

$

24,863

 

  

$

51,528

 

  

$

78,395

 

Fair value

  

 

18

 

  

 

2,081

 

  

 

25,484

 

  

 

53,303

 

  

 

80,886

 

Weighted average yield(1)

  

 

6.47

%

  

 

7.19

%

  

 

5.15

%

  

 

5.78

%

  

 

5.62

%

Municipal bonds:

                                            

Amortized cost

  

$

4,757

 

  

$

22,543

 

  

$

20,558

 

  

$

49,418

 

  

$

97,276

 

Fair value

  

 

4,816

 

  

 

23,532

 

  

 

21,650

 

  

 

51,715

 

  

 

101,713

 

Weighted average yield(1)

  

 

7.07

%

  

 

7.33

%

  

 

7.08

%

  

 

7.00

%

  

 

7.09

%

Other securities:

                                            

Amortized cost

  

$

9,073

 

  

$

28,913

 

  

$

—  

 

  

$

31,352

 

  

$

69,338

 

Fair value

  

 

9,119

 

  

 

30,022

 

  

 

—  

 

  

 

33,560

 

  

 

72,701

 

Weighted average yield(1)

  

 

4.46

%

  

 

4.89

%

  

 

—  

 

  

 

8.43

%

  

 

6.31

%

Total securities:

                                            

Amortized cost

  

$

14,847

 

  

$

69,744

 

  

$

45,421

 

  

$

132,298

 

  

$

262,310

 

Fair value

  

 

14,963

 

  

 

72,080

 

  

 

47,134

 

  

 

138,578

 

  

 

272,755

 

Weighted average yield(1)

  

 

5.17

%

  

 

5.34

%

  

 

6.02

%

  

 

6.86

%

  

 

6.22

%

 

(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.

 

DEPOSITS

 

Total deposits grew $113.6 million or 14.5% in 2002 with deposits in existing branches accounting for most of that growth. The Company also opened two new branches, which had deposits of $13.8 million at year-end. Increased competition for customer deposits continues to be a challenge for the Company and the Company continues to focus on customer relationships and delivery of financial products and services to those customers.

 

Total deposits increased from $784.1 million at December 31, 2001 to $897.6 million at December 31, 2002. Over this same period, average interest-bearing deposits were $705.5 million, or 12.2% over

 

 

22


Table of Contents

 

the 2001 average of $628.8 million. A $20.8 million increase in NOW accounts, a $16.9 million increase in money market accounts and a $23.8 million increase in certificates of deposits represent the majority of the increase in average deposits. In 2002, the Company’s lowest cost source of funds, noninterest-bearing demand deposits increased by a total of $23.3 million helping to reduce the overall cost of funds. On an average balance basis, demand deposits were up $19.4 million compared to 2001. The Company has no brokered deposits.

 

AVERAGE DEPOSITS AND RATES PAID

 

    

YEARS ENDED DECEMBER 31,


 
    

2002


    

2001


    

2000


 
    

AMOUNT


  

RATE


    

AMOUNT


  

RATE


    

AMOUNT


  

RATE


 
    

(dollars in thousands)

 

Noninterest-bearing demand deposits

  

$

115,552

  

—  

 

  

$

96,127

  

—  

 

  

$

86,416

  

—  

 

Interest-bearing deposits:

                                         

NOW accounts

  

 

120,878

  

0.85

%

  

 

100,112

  

1.64

%

  

 

99,377

  

2.13

%

Money market accounts

  

 

84,623

  

1.41

%

  

 

67,680

  

2.72

%

  

 

62,197

  

3.25

%

Savings accounts

  

 

78,497

  

1.29

%

  

 

63,311

  

2.28

%

  

 

56,992

  

2.40

%

Time deposits of $100,000 and over

  

 

135,429

  

4.22

%

  

 

128,117

  

5.65

%

  

 

108,740

  

5.75

%

Other time deposits

  

 

286,076

  

4.02

%

  

 

269,578

  

5.55

%

  

 

258,16

  

5.72

%

    

         

         

      

Total interest-bearing

  

 

705,503

  

2.90

%

  

 

628,798

  

4.32

%

  

 

585,468

  

4.53

%

    

         

         

      

Total average deposits

  

$

821,055

         

$

724,925

         

$

671,884

      
    

         

         

      

 

MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER

 

    

WITHIN 3 MONTHS


  

3–6 MONTHS


  

6–12 MONTHS


  

OVER 12 MONTHS


  

TOTAL


  

PERCENT

OF TOTAL

DEPOSITS


 
    

(dollars in thousands)

 

At December 31, 2002

  

$

20,112

  

$

15,232

  

$

16,994

  

$

100,630

  

$

152,968

  

17.04

%

 

Total deposits grew from $692.5 million at December 31, 2000 to $784.1 million at December 31, 2001. Over this same period, average interest-bearing deposits were $628.8 million, or 7.4% over the 2000 average of $585.5 million. The Company also acquired about $14.9 million in deposits from another institution through the purchase of a branch in the 4th quarter of 2001.

 

CAPITAL RESOURCES

 

Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by Management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.

 

The Federal Reserve Board, along with the OCC and the FDIC, has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighed categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity, retained earnings and a limited amount of perpetual

preferred stock, less certain goodwill items. The Company had a ratio of total capital to risk-weighted assets of 12.15% and 12.16% on December 31, 2002 and 2001, respectively. The Company’s ratio of Tier 1 capital to risk-weighted assets was 11.05% and 11.14% at December 31, 2002 and 2001, respectively. Both of these ratios exceeded the fully phased-in capital requirements in 2002 and 2001. The Company’s strategic plan includes a targeted equity to asset ratio between 8% and 9%.

 

23


Table of Contents

 

ANALYSIS OF CAPITAL

 

    

DECEMBER 31,


 
    

2002


    

2001


    

2000


 
    

(dollars in thousands)

 

Tier 1 capital:

                          

Common stock

  

$

15,159

 

  

$

15,052

 

  

$

15,033

 

Surplus

  

 

1,442

 

  

 

446

 

  

 

403

 

Retained earnings

  

 

81,997

 

  

 

71,419

 

  

 

63,201

 

    


  


  


Total equity

  

 

98,598

 

  

 

86,917

 

  

 

78,637

 

Less: core deposit intangibles/goodwill

  

 

(6,342

)

  

 

(6,924

)

  

 

(6,295

)

    


  


  


Total Tier 1 capital

  

 

92,256

 

  

 

79,993

 

  

 

72,342

 

    


  


  


Tier 2 capital:

                          

Allowance for loan losses

  

 

9,179

 

  

 

7,336

 

  

 

7,389

 

    


  


  


Total Tier 2 capital

  

 

9,179

 

  

 

7,336

 

  

 

7,389

 

    


  


  


Total risk-based capital

  

$

101,435

 

  

$

87,329

 

  

$

79,731

 

    


  


  


Risk-weighted assets

  

$

834,560

 

  

$

718,225

 

  

$

674,687

 

    


  


  


Capital ratios:

                          

Tier 1 risk-based capital ratio

  

 

11.05

%

  

 

11.14

%

  

 

10.72

%

Total risk-based capital ratio

  

 

12.15

%

  

 

12.16

%

  

 

11.82

%

Tier 1 capital to average adjusted total assets

  

 

8.49

%

  

 

8.35

%

  

 

8.46

%

Equity to total assets

  

 

9.46

%

  

 

9.05

%

  

 

8.88

%

 

LIQUIDITY

 

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, Federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity, which is sufficient to satisfy its depositors’ requirements and to meet it customers’ credit needs.

 

At December 31, 2002, cash and cash equivalents and securities classified as available for sale were 28.6% of total assets, compared to 30.1% at December 31, 2001. Asset liquidity is also provided by managing loan and securities maturities and cash flows.

 

Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The subsidiary banks maintain Federal funds lines with several regional banks totaling approximately $63.8 million at December 31, 2002. At year-end 2002, the banks had outstanding $43.2 million of borrowings pursuant to securities sold under agreements to repurchase transactions with a maturity of one day. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $415 million at December 31, 2002.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2001, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others, to reconcile and conform the

 

 

24


Table of Contents

 

accounting and financial reporting provisions established by various AICPA industry audit guides. SOP No. 01-6 is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001, and did not have a material impact on the Company’s consolidated financial statements.

 

On March 13, 2002, the Financial Accounting Standards Board (“FASB”) determined that commitments for the origination of mortgage loans that will be held for sale must be accounted for as derivatives instruments, effective for fiscal quarters beginning after April 10, 2002. The Community Banks enter into commitments to originate loans whereby the interest rate on the loan is determined prior to funding. Such rate lock commitments on mortgage loans to be sold in the secondary market are considered derivatives. Accordingly, these commitments including any fees received from the potential borrower are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. The cumulative effect of adopting SFAS No. 133 for rate lock commitments as of December 31, 2002, was not material. The Company originally adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001.

 

In April 2002, FASB issued SFAS No. 145, Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The amendment to SFAS No. 13, eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are in effect for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, with early application encouraged.

 

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires recognition of a liability, when incurred, for costs associated with an exit or disposal activity. The liability should be measured at fair value. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002.

 

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, SFAS No. 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their estimated useful life. Branch acquisition transactions were outside the scope of SFAS No. 142 and therefore any intangible asset arising from such transactions remained subject to amortization over their estimated useful life.

 

In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 amends previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of SFAS No. 141, Business Combinations, and SFAS No. 142 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of SFAS No. 147 do not apply to transactions between two or more mutual enterprises. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment of Long-Lived Assets, to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used.

 

 

25


Table of Contents

 

The adoption of SFAS Nos. 142, 145, 146 and 147 did not have a material impact on the Company’s consolidated financial statements.

 

FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of Statement No. 123, in December 2002. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about the effects of stock options in interim financial information. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendments to APB No. 28 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Early application is encouraged for both amendments. The Company continues to record stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees, and has not adopted the alternative methods allowable under SFAS No. 148.

 

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. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

 

26


Table of Contents

 

QUARTERLY RESULTS

 

The table below lists the Company’s quarterly performance for the years ended December 31, 2002 and 2001.

 

    

2002


    

FOURTH


  

THIRD


  

SECOND


  

FIRST


  

TOTAL


    

(in thousands, except per share amounts)

Interest income

  

$

16,778

  

$

16,441

  

$

16,119

  

$

15,867

  

$

65,205

Interest expense

  

 

6,206

  

 

6,114

  

 

6,072

  

 

6,235

  

 

24,627

    

  

  

  

  

Net interest income

  

 

10,572

  

 

10,327

  

 

10,047

  

 

9,632

  

 

40,578

Provision for loan losses

  

 

659

  

 

650

  

 

739

  

 

830

  

 

2,878

    

  

  

  

  

Net interest income after provision for loan losses

  

 

9,913

  

 

9,677

  

 

9,308

  

 

8,802

  

 

37,700

Noninterest income

  

 

5,154

  

 

4,724

  

 

3,832

  

 

3,828

  

 

17,538

Noninterest expenses

  

 

9,557

  

 

9,067

  

 

8,649

  

 

8,649

  

 

35,922

    

  

  

  

  

Income before income taxes

  

 

5,510

  

 

5,334

  

 

4,491

  

 

3,981

  

 

19,316

Income tax expense

  

 

1,527

  

 

1,323

  

 

1,038

  

 

923

  

 

4,811

    

  

  

  

  

Net income

  

$

3,983

  

$

4,011

  

$

3,453

  

$

3,058

  

$

14,505

    

  

  

  

  

Net income per share

                                  

Basic

  

$

0.52

  

$

0.53

  

$

0.46

  

$

0.41

  

$

1.92

    

  

  

  

  

Diluted

  

$

0.52

  

$

0.52

  

$

0.46

  

$

0.40

  

$

1.90

    

  

  

  

  

 

    

2001


    

FOURTH


  

THIRD


  

SECOND


  

FIRST


  

TOTAL


    

(in thousands, except per share amounts)

Interest income

  

$

16,007

  

$

16,477

  

$

16,489

  

$

16,603

  

$

65,576

Interest expense

  

 

7,203

  

 

8,083

  

 

8,531

  

 

8,666

  

 

32,483

    

  

  

  

  

Net interest income

  

 

8,804

  

 

8,394

  

 

7,958

  

 

7,937

  

 

33,093

Provision for loan losses

  

 

846

  

 

455

  

 

393

  

 

432

  

 

2,126

    

  

  

  

  

Net interest income after provision for loan losses

  

 

7,958

  

 

7,939

  

 

7,565

  

 

7,505

  

 

30,967

Noninterest income

  

 

4,323

  

 

4,067

  

 

4,089

  

 

3,613

  

 

16,092

Noninterest expenses

  

 

8,626

  

 

8,092

  

 

7,971

  

 

7,758

  

 

32,447

    

  

  

  

  

Income before income taxes

  

 

3,655

  

 

3,914

  

 

3,683

  

 

3,360

  

 

14,612

Income tax expense

  

 

569

  

 

877

  

 

797

  

 

690

  

 

2,933

    

  

  

  

  

Net income

  

$

3,086

  

$

3,037

  

$

2,886

  

$

2,670

  

$

11,679

    

  

  

  

  

Net income per share

                                  

Basic

  

$

0.41

  

$

0.40

  

$

0.38

  

$

0.36

  

$

1.55

    

  

  

  

  

Diluted

  

$

0.41

  

$

0.40

  

$

0.38

  

$

0.35

  

$

1.55

    

  

  

  

  

 

27


Table of Contents

 

Item 7A.—Quantitative and Qualitative Disclosures About Market Risk

 

This information is incorporated herein by reference from Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, on pages 15 through 17 of this Form 10-K.

 

28


Table of Contents

 

Item 8.—Financial Statements and Supplementary Data

 

INDEPENDENT AUDITOR’S REPORT

 

To the Stockholders and Directors

Union Bankshares Corporation

Bowling Green, Virginia

 

We have audited the accompanying consolidated balance sheets of Union Bankshares Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Mortgage Capital Investors, a consolidated subsidiary, which statements reflect total assets and revenue constituting 4% and 14%, respectively, in 2002, 5% and 13%, respectively, in 2001, 2% and 8%, respectively, in 2000, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mortgage Capital Investors, is based solely on the report of the other auditors.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Bankshares Corporation and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America.

 

/s/    Yount, Hyde & Barbour, P.C.

 

Winchester, Virginia

January 15, 2003

 

29


Table of Contents

 

UNION BANK SHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

 

    

2002


  

2001


    

(dollars in thousands)

ASSETS

             

Cash and cash equivalents:

             

Cash and due from banks

  

$

29,104

  

$

28,769

Interest-bearing deposits in other banks

  

 

909

  

 

462

Money market investments

  

 

15,142

  

 

2,023

Federal funds sold

  

 

1,247

  

 

7,661

    

  

Total cash and cash equivalents

  

 

46,402

  

 

38,915

    

  

Securities available for sale, at fair value

  

 

272,755

  

 

257,062

    

  

Loans held for sale

  

 

39,771

  

 

43,485

    

  

Loans, net of unearned income

  

 

714,764

  

 

600,164

Less allowance for loan losses

  

 

9,179

  

 

7,336

    

  

Net loans

  

 

705,585

  

 

592,828

    

  

Bank premises and equipment, net

  

 

21,577

  

 

19,191

Other real estate owned

  

 

774

  

 

768

Other assets

  

 

28,861

  

 

30,848

    

  

Total assets

  

$

1,115,725

  

$

983,097

    

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Noninterest-bearing demand deposits

  

$

134,172

  

$

110,913

Interest-bearing deposits:

             

NOW accounts

  

 

128,764

  

 

112,940

Money market accounts

  

 

88,440

  

 

79,176

Savings accounts

  

 

84,983

  

 

72,897

Time deposits of $100,000 and over

  

 

152,968

  

 

133,629

Other time deposits

  

 

308,315

  

 

274,529

    

  

Total interest-bearing deposits

  

 

763,470

  

 

673,171

    

  

Total deposits

  

 

897,642

  

 

784,084

    

  

Securities sold under agreements to repurchase

  

 

43,227

  

 

41,083

Other short-term borrowings

  

 

1,550

  

 

—  

Long-term borrowings

  

 

62,219

  

 

62,731

Other liabilities

  

 

5,595

  

 

6,220

    

  

Total liabilities

  

 

1,010,233

  

 

894,118

    

  

Commitments and contingencies

             

Stockholders’ equity:

             

Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,579,707 shares in 2002 and 7,525,912 shares in 2001

  

 

15,159

  

 

15,052

Surplus

  

 

1,442

  

 

446

Retained earnings

  

 

81,997

  

 

71,419

Accumulated other comprehensive income

  

 

6,894

  

 

2,062

    

  

Total stockholders’ equity

  

 

105,492

  

 

88,979

    

  

Total liabilities and stockholders’ equity

  

$

1,115,725

  

$

983,097

    

  

 

See accompanying notes to consolidated financial statements.

 

30


Table of Contents

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

    

2002


    

2001


  

2000


 
    

(dollars in thousands, except per share amounts)

 

Interest and dividend income:

                        

Interest and fees on loans

  

$

50,693

 

  

$

51,333

  

$

50,811

 

Interest on Federal funds sold

  

 

206

 

  

 

412

  

 

118

 

Interest on interest-bearing deposits in other banks

  

 

17

 

  

 

37

  

 

59

 

Interest on money market investments

  

 

40

 

  

 

23

  

 

—  

 

Interest and dividends on securities:

                        

Taxable

  

 

9,619

 

  

 

9,125

  

 

8,979

 

Nontaxable

  

 

4,630

 

  

 

4,646

  

 

4,900

 

    


  

  


Total interest and dividend income

  

 

65,205

 

  

 

65,576

  

 

64,867

 

    


  

  


Interest expense:

                        

Interest on deposits

  

 

20,459

 

  

 

27,140

  

 

26,512

 

Interest on short-term borrowings

  

 

475

 

  

 

1,200

  

 

2,451

 

Interest on long-term borrowings

  

 

3,693

 

  

 

4,143

  

 

4,567

 

    


  

  


Total interest expense

  

 

24,627

 

  

 

32,483

  

 

33,530

 

    


  

  


Net interest income

  

 

40,578

 

  

 

33,093

  

 

31,337

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

  

 

2,101

 

    


  

  


Net interest income after provision for loan losses

  

 

37,700

 

  

 

30,967

  

 

29,236

 

    


  

  


Noninterest in come:

                        

Service charges on deposit accounts

  

 

4,088

 

  

 

3,665

  

 

3,623

 

Other service charges, commissions and fees

  

 

2,563

 

  

 

2,488

  

 

2,163

 

Gains (losses) on securities transactions, net

  

 

(159

)

  

 

125

  

 

(957

)

Gains on sales of loans

  

 

10,089

 

  

 

8,857

  

 

5,516

 

Gains on sales of other real estate owned and bank premises, net

  

 

157

 

  

 

51

  

 

81

 

Gain on termination of pension plan

  

 

—  

 

  

 

—  

  

 

1,087

 

Other operating income

  

 

800

 

  

 

906

  

 

498

 

    


  

  


Total noninterest income

  

 

17,538

 

  

 

16,092

  

 

12,011

 

    


  

  


Noninterest expenses:

                        

Salaries and benefits

  

 

21,326

 

  

 

19,102

  

 

18,729

 

Occupancy expenses

  

 

2,318

 

  

 

2,179

  

 

2,300

 

Furniture and equipment expenses

  

 

2,742

 

  

 

2,859

  

 

2,956

 

Other operating expenses

  

 

9,536

 

  

 

8,307

  

 

8,439

 

    


  

  


Total noninterest expenses

  

 

35,922

 

  

 

32,447

  

 

32,424

 

    


  

  


Income before income taxes

  

 

19,316

 

  

 

14,612

  

 

8,823

 

Income tax expense

  

 

4,811

 

  

 

2,933

  

 

1,223

 

    


  

  


Net income

  

$

14,505

 

  

$

11,679

  

$

7,600

 

    


  

  


Earnings per share, basic

  

$

1.92

 

  

$

1.55

  

$

1.01

 

    


  

  


Earnings per share, diluted

  

$

1.90

 

  

$

1.55

  

$

1.01

 

    


  

  


 

See accompanying notes to consolidated financial statements.

 

31


Table of Contents

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

    

Common Stock


    

Surplus Earnings


    

Retained Income


      

Accumulated Other Comprehensive Income (Loss)


      

Comprehensive Income (Loss)


    

Total


 
    

(dollars in thousands, except per share amounts)

 

Balance—December 31, 1999

  

$

14,976

 

  

$

163

 

  

$

58,603

 

    

$

(4,948

)

             

$

68,794

 

Comprehensive income:

                                                         

Net income—2000

                    

 

7,600

 

               

$

7,600

 

  

 

7,600

 

Unrealized holding gains arising during the period (net of tax, $2,077)

                                          

 

4,031

 

        

Reclassification adjustment for losses included in net income (net of tax, $325)

                                          

 

632

 

        
                                            


        

Other comprehensive income (net of tax, $2,402)

                               

 

4,663

 

    

 

4,663

 

  

 

4,663

 

                                            


        

Total comprehensive income

                                          

$

12,263

 

        
                                            


        

Cash dividends—2000 ($.40 per share)

                    

 

(3,002

)

                        

 

(3,002

)

Issuance of common stock under Dividend Reinvestment Plan (35,092 shares)

  

 

70

 

  

 

276

 

                                 

 

346

 

Stock repurchased under Stock Repurchase Plan (30,300 shares)

  

 

(61

)

  

 

(269

)

                                 

 

(330

)

Issuance of common stock under Incentive Stock Option Plan (5,040 shares)

  

 

10

 

  

 

23

 

                                 

 

33

 

Issuance of common stock for services rendered (1,200 shares)

  

 

2

 

  

 

10

 

                                 

 

12

 

Issuance of common stock in exchange for net assets in acquisition (17,673 shares)

  

 

36

 

  

 

200

 

                                 

 

236

 

    


  


  


    


             


Balance—December 31, 2000

  

$

15,033

 

  

$

403

 

  

$

63,201

 

    

$

(285

)

             

$

78,352

 

Comprehensive income:

                                                         

Net income—2001

                    

 

11,679

 

               

$

11,679

 

  

 

11,679

 

Unrealized holding gains arising during the period (net of tax, $1,251)

                                          

 

2,430

 

        

Reclassification adjustment for gains included in net income (net of tax, $42)

                                          

 

(83

)

        
                                            


        

Other comprehensive income (net of tax, $1,209)

                               

 

2,347

 

    

 

2,347

 

  

 

2,347

 

                                            


        

Total comprehensive income

                                          

$

14,026

 

        
                                            


        

Cash dividends—2001 ($.46 per share)

                    

 

(3,461

)

                        

 

(3,461

)

Issuance of common stock under Dividend Reinvestment Plan (26,330 shares)

  

 

53

 

  

 

350

 

                                 

 

403

 

Stock repurchased under Stock Repurchase Plan (38,158 shares)

  

 

(76

)

  

 

(521

)

                                 

 

(597

)

Issuance of common stock for services rendered (1,600 shares)

  

 

3

 

  

 

22

 

                                 

 

25

 

Issuance of common stock in exchange for net assets in acquisition (19,606 shares)

  

 

39

 

  

 

192

 

                                 

 

231

 

    


  


  


    


             


Balance—December 31, 2001

  

$

15,052

 

  

$

446

 

  

$

71,419

 

    

$

2,062

 

             

$

88,979

 

Comprehensive income:

                                                         

Net income—2002

                    

 

14,505

 

               

$

14,505

 

  

 

14,505

 

Unrealized holding gains arising during the period (net of tax, $2,435)

                                          

 

4,727

 

        

Reclassification adjustment for losses included in net income (net of tax, $54)

                                          

 

105

 

        
                                            


        

Other comprehensive income (net of tax, $2,489)

                               

 

4,832

 

    

 

4,832

 

  

 

4,832

 

                                            


        

Total comprehensive income

                                          

$

19,337

 

        
                                            


        

Cash dividends—2002 ($.52 per share)

                    

 

(3,927

)

                        

 

(3,927

)

Issuance of common stock under Dividend Reinvestment Plan (18,389 shares)

  

 

37

 

  

 

387

 

                                 

 

424

 

Issuance of common stock under Incentive Stock Option Plan (16,850 shares)

  

 

33

 

  

 

274

 

                                 

 

307

 

Issuance of common stock for services rendered (1,400 shares)

  

 

3

 

  

 

36

 

                                 

 

39

 

Issuance of common stock in exchange for net assets in acquisition (17,156 shares)

  

 

34

 

  

 

299

 

                                 

 

333

 

    


  


  


    


             


Balance—December 31, 2002

  

$

15,159

 

  

$

1,442

 

  

$

81,997

 

    

$

6,894

 

             

$

105,492

 

    


  


  


    


             


 

See accompanying notes to consolidated financial statements.

 

32


Table of Contents

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDING DECEMBER 31, 2002, 2001 AND 2000

 

    

2002


    

2001


    

2000


 
    

(dollars in thousands)

 

Operating activities:

                          

Net income

  

$

14,505

 

  

$

11,679

 

  

$

7,600

 

Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:

                          

Depreciation of bank premises and equipment

  

 

2,062

 

  

 

1,961

 

  

 

1,898

 

Amortization

  

 

1,879

 

  

 

1,460

 

  

 

1,117

 

Provision for loan losses

  

 

2,878

 

  

 

2,126

 

  

 

2,101

 

(Gains) losses on securities transactions, net

  

 

159

 

  

 

(125

)

  

 

957

 

Origination of loans held for sale

  

 

(384,511

)

  

 

(319,893

)

  

 

(155,523

)

Proceeds from sales of loans held for sale

  

 

388,225

 

  

 

292,880

 

  

 

145,731

 

Gains on sales of other real estate owned and fixed assets, net

  

 

(157

)

  

 

(51

)

  

 

(81

)

Deferred income tax expense (benefit)

  

 

(304

)

  

 

209

 

  

 

(226

)

Other, net

  

 

(1,219

)

  

 

654

 

  

 

(17,044

)

    


  


  


Net cash and cash equivalents provided by (used in) operating activities

  

 

23,517

 

  

 

(9,100

)

  

 

(13,470

)

    


  


  


Investing activities:

                          

Proceeds from maturities of investment securities

  

 

—  

 

  

 

—  

 

  

 

4,109

 

Purchases of securities available for sale

  

 

(63,043

)

  

 

(86,605

)

  

 

(39,657

)

Proceeds from sales of securities available for sale

  

 

6,118

 

  

 

1,886

 

  

 

26,147

 

Proceeds from maturities of securities available for sale

  

 

47,724

 

  

 

46,756

 

  

 

11,000

 

Net increase in loans

  

 

(116,134

)

  

 

(18,888

)

  

 

(38,822

)

Purchases of bank premises and equipment

  

 

(5,045

)

  

 

(1,085

)

  

 

(1,443

)

Proceeds from sales of bank premises and equipment

  

 

347

 

  

 

30

 

  

 

491

 

Proceeds from sales of other real estate owned

  

 

459

 

  

 

906

 

  

 

384

 

Acquisition of branch, net of cash acquired

  

 

—  

 

  

 

10,552

 

  

 

—  

 

    


  


  


Net cash and cash equivalents used in investing activities

  

 

(129,574

)

  

 

(46,448

)

  

 

(37,791

)

    


  


  


Financing activities:

                          

Net increase in noninterest-bearing deposits

  

 

23,259

 

  

 

16,719

 

  

 

13,019

 

Net increase in interest-bearing deposits

  

 

90,299

 

  

 

59,853

 

  

 

32,587

 

Net increase (decrease) in short-term borrowings

  

 

3,694

 

  

 

9,969

 

  

 

(8,045

)

Proceeds from long-term borrowings

  

 

400

 

  

 

—  

 

  

 

26,000

 

Repayment of long-term borrowings

  

 

(912

)

  

 

(11,292

)

  

 

(6,397

)

Cash dividends paid

  

 

(3,927

)

  

 

(3,461

)

  

 

(3,002

)

Issuance of common stock

  

 

731

 

  

 

403

 

  

 

379

 

Purchase of common stock

  

 

—  

 

  

 

(597

)

  

 

(330

)

    


  


  


Net cash and cash equivalents provided by financing activities

  

 

113,544

 

  

 

71,594

 

  

 

54,211

 

    


  


  


Increase in cash and cash equivalents

  

 

7,487

 

  

 

16,046

 

  

 

2,950

 

Cash and cash equivalents at beginning of year

  

 

38,915

 

  

 

22,869

 

  

 

19,919

 

    


  


  


Cash and cash equivalents at end of year

  

$

46,402

 

  

$

38,915

 

  

$

22,869

 

    


  


  


Supplemental Disclosure of Cash Flow Information

                          

Cash payments for:

                          

Interest

  

$

24,895

 

  

$

32,926

 

  

$

33,184

 

Income taxes

  

 

4,833

 

  

 

2,460

 

  

 

1,376

 

Supplemental schedule of noncash investing and financing activities:

                          

Loan balances transferred to foreclosed properties

  

 

499

 

  

 

—  

 

  

 

70

 

Unrealized gain on securities available for sale

  

 

7,321

 

  

 

3,556

 

  

 

7,065

 

Issuance of common stock in exchange for net assets in acquisition

  

 

333

 

  

 

231

 

  

 

236

 

Issuance of common stock for services rendered

  

 

39

 

  

 

25

 

  

 

12

 

Transfer of investment securities to securities available for sale

  

 

—  

 

  

 

5,465

 

  

 

—  

 

 

See accompanying notes to consolidated financial statements.

 

33


Table of Contents

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accounting policies and practices of Union Bankshares Corporation and subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. Major policies and practices are described below:

 

(A) Principles Of Consolidation

 

The consolidated financial statements include the accounts of Union Bankshares Corporation and its wholly owned subsidiaries. Union Bankshares Corporation is a bank holding Company that owns all of the outstanding common stock of its banking subsidiaries, Union Bank and Trust Company, Northern Neck State Bank, Rappahannock National Bank, Bank of Williamsburg and of Union Investment Services. Mortgage Capital Investors is a wholly owned subsidiary of Union Bank and Trust Company. During 2002 Bank of Williamsburg acquired a 51% non-controlling interest in Johnson Mortgage Company, which is accounted for under the equity method of accounting. All significant intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements for prior periods reflect certain reclassifications in order to conform to the 2002 presentation.

 

(B) Investment Securities And Securities Available For Sale

 

When securities are purchased, they are classified as investment securities when management has the intent and the Company has the ability to hold them to maturity. Investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts.

 

Securities classified as available for sale are those debt and equity securities that management intends to hold for an indefinite period of time, including securities used as part of the Company’s asset/liability strategy, and that may be sold in response to changes in interest rates, liquidity needs or other similar factors. Securities available for sale are recorded at estimated fair value. The net unrealized gains or losses on securities available for sale, net of deferred taxes, are included in accumulated other comprehensive income (loss) in stockholders’ equity.

 

Purchased premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

(C) Loans Held For Sale

 

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, determined in the aggregate based on sales commitments to permanent investors or on current market rates for loans of similar quality and type. In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be closed, thus limiting interest rate risk. As a result, loans held for sale are stated at fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

 

34


Table of Contents

 

(D) Loans

 

The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout its market area. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Credit card loans and other personal loans are typically charged-off no later than 180 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal and interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income if it is from current period or charged against allowance if it is from a prior period. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

(E) Allowance For Loan Losses

 

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectibility of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s

 

35


Table of Contents

 

effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

 

(F) Bank Premises And Equipment

 

Bank premises and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using either the straight-line or accelerated method based on the type of asset involved. It is the policy of the Company to capitalize additions and improvements and to depreciate the cost thereof over their estimated useful lives. Maintenance, repairs and renewals are expensed as they are incurred.

 

(G) Intangible Assets

 

Core deposit intangibles are included in other assets and are being amortized on a straight-line basis over the period of expected benefit, which ranges from 10 to 15 years. Core deposits, net of amortization amounted to $5,500,000 and $6,093,000 at December 31, 2002 and 2001, respectively. The Company adopted SFAS 147 on January 1, 2002 and determined that the core deposit intangible will continue to be amortized over the estimated useful life.

 

(H) Goodwill

 

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

 

The Company adopted SFAS No. 142 on January 1, 2002. Goodwill is included in other assets and totaled $864,000 at December 31, 2002 and 2001. The goodwill is no longer amortized, but instead tested for impairment at least annually. Based on the testing, there were no impairment charges for 2002. Application of the nonamortization provisions of the Statement resulted in additional net income of $82,500 for the year ended December 31, 2002.

 

(I) Income Taxes

 

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

 

36


Table of Contents

 

(J) Other Real Estate Owned

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

 

(K) Consolidated Statements Of Cash Flows

 

For purposes of reporting cash flows, the Company defines cash and cash equivalents as cash, due from banks, interest-bearing deposits in other banks, money market investments and Federal funds sold.

 

(L) Earnings Per Share

 

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

 

(M) Comprehensive Income (Loss)

 

Comprehensive income (loss) represents all changes in equity of an enterprise that result from recognized transactions and other economic events of the period. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income, such as unrealized gains and losses on certain investments in debt and equity securities.

 

(N) Use Of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets and liabilities.

 

(O) Advertising Costs

 

The Company follows the policy of charging the cost of advertising to expense as incurred. Total advertising costs included in other operating expenses for 2002, 2001 and 2000 was $1,448,000, $1,046,000, and $805,000, respectively.

 

(P) Off Balance Sheet Credit Related Financial Instruments

 

In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.

 

37


Table of Contents

 

(Q) Rate Lock Commitments

 

The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 60 to 120 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.

 

The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.

 

(R) Stock Compensation Plan

 

The Company accounts for the Plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the Plan have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Net income, as reported

  

$

14,505,000

 

  

$

11,679,000

 

  

$

7,600,000

 

Total stock-based compensation expense determined under fair value based method for all awards

  

 

(201,000

)

  

 

(119,000

)

  

 

(100,000

)

    


  


  


Pro forma net income

  

$

14,304,000

 

  

$

11,560,000

 

  

$

7,500,000

 

    


  


  


Earning per share:

                          

Basic—as reported

  

$

1.92

 

  

$

1.55

 

  

$

1.01

 

    


  


  


Basic—pro forma

  

$

1.90

 

  

$

1.54

 

  

$

1.00

 

    


  


  


Diluted—as reported

  

$

1.90

 

  

$

1.55

 

  

$

1.01

 

    


  


  


Diluted—pro forma

  

$

1.88

 

  

$

1.53

 

  

$

1.00

 

    


  


  


 

38


Table of Contents

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Dividend yield

  

2.51

%

  

2.47

%

  

2.25

%

Expected life

  

10 years

 

  

10 years

 

  

10 years

 

Expected volatility

  

36.91

%

  

30.81

%

  

26.44

%

Risk-free interest rate

  

5.13

%

  

5.07

%

  

6.73

%

 

2. SECURITIES AVAILABLE FOR SALE

 

The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale at December 31, 2002 and 2001 are summarized as follows (in thousands):

 

    

2002


    

Amortized Cost


  

Gross Unrealized


    

Estimated Fair

Value


       

Gains


  

(Losses)


    

U.S. government and agency securities

  

$

17,301

  

$

154

  

$

—  

 

  

$

17,455

Obligations of states and political subdivisions

  

 

97,276

  

 

4,454

  

 

(17

)

  

 

101,713

Corporate and other bonds

  

 

64,253

  

 

3,444

  

 

(72

)

  

 

67,625

Mortgage-backed securities

  

 

78,395

  

 

2,507

  

 

(16

)

  

 

80,886

Federal Reserve Bank stock

  

 

648

  

 

—  

  

 

—  

 

  

 

648

Federal Home Loan Bank stock

  

 

3,758

  

 

—  

  

 

—  

 

  

 

3,758

Other securities

  

 

679

  

 

36

  

 

(45

)

  

 

670

    

  

  


  

    

$

262,310

  

 

10,595

  

$

(150

)

  

$

272,755

    

  

  


  

 

 

    

2001


    

Amortized Cost


  

Gross Unrealized


    

Estimated Fair

Value


       

Gains


  

(Losses)


    

U.S. government and agency securities

  

$

8,727

  

$

43

  

$

(103

)

  

$

8,667

Obligations of states and political subdivisions

  

 

99,345

  

 

2,215

  

 

(553

)

  

 

101,007

Corporate and other bonds

  

 

63,022

  

 

834

  

 

(369

)

  

 

63,487

Mortgage-backed securities

  

 

77,889

  

 

1,267

  

 

(196

)

  

 

78,960

Federal Reserve Bank stock

  

 

648

  

 

—  

  

 

—  

 

  

 

648

Federal Home Loan Bank stock

  

 

3,783

  

 

—  

  

 

—  

 

  

 

3,783

Other securities

  

 

524

  

 

4

  

 

(18

)

  

 

510

    

  

  


  

    

$

253,938

  

$

4,363

  

$

(1,239

)

  

$

257,062

    

  

  


  

 

The amortized cost and estimated fair value (in thousands) of securities available for sale at December 31, 2002, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

39


Table of Contents

 

    

Securities Available for Sale


    

Amortized Cost


  

Estimated Fair Value


Due in one year or less

  

$

14,845

  

$

14,941

Due after one year through five years

  

 

69,744

  

 

71,990

Due after five years through ten years

  

 

45,422

  

 

47,104

Due after ten years

  

 

127,214

  

 

133,644

    

  

    

 

257,225

  

 

267,679

Federal Reserve Bank stock

  

 

648

  

 

648

Federal Home Loan Bank stock

  

 

3,758

  

 

3,758

Other securities

  

 

679

  

 

670

    

  

    

$

262,310

  

$

272,755

    

  

 

Securities with an amortized cost of approximately $72,319,000 and $66,212,000 at December 31, 2002 and 2001 were pledged to secure public deposits, repurchase agreements and for other purposes.

 

Sales of securities available for sale produced the following results for the years ended December 31, 2002, 2001 and 2000 (in thousands):

 

    

2002


    

2001


    

2000


 

Proceeds

  

$

6,118

 

  

$

1,886

 

  

$

26,147

 

    


  


  


Gross realized gains

  

$

2

 

  

$

129

 

  

$

147

 

Gross realized (losses)

  

 

(161

)

  

 

(4

)

  

 

(1,104

)

    


  


  


Net realized gains (losses)

  

$

(159

)

  

$

125

 

  

$

(957

)

    


  


  


 

As permitted under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the Company transferred investment securities with a book value of $5,465,000 and a market value of $5,528,000 to securities available for sale as of January 1, 2001.

 

40


Table of Contents

 

3. LOANS

 

Loans are stated at their face amount, net of unearned income, and consist of the following at December 31, 2002 and 2001 (in thousands):

 

    

2002


  

2001


Mortgage loans on real estate:

             

Residential 1-4 family

  

$

172,582

  

$

154,099

Commercial

  

 

200,125

  

 

155,093

Construction

  

 

85,335

  

 

57,940

Second mortgages

  

 

17,845

  

 

15,327

Equity lines of credit

  

 

32,320

  

 

24,474

Multifamily

  

 

3,066

  

 

3,418

Agriculture

  

 

4,466

  

 

2,497

    

  

Total real estate loans

  

 

515,739

  

 

412,848

    

  

Commercial Loans

  

 

78,289

  

 

70,739

    

  

Consumer installment loans

             

Personal

  

 

102,528

  

 

94,620

Credit cards

  

 

5,350

  

 

4,140

    

  

Total consumer installment loans

  

 

107,878

  

 

98,760

    

  

All other loans and agriculture loans

  

 

12,964

  

 

18,123

    

  

Gross loans

  

 

714,870

  

 

600,470

Less unearned income on loans

  

 

106

  

 

306

    

  

Loans, net of unearned income

  

$

714,764

  

$

600,164

    

  

 

At December 31, 2002 and 2001, the recorded investment in loans which have been identified as impaired loans, in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (SFAS 114), totaled $136,000 and $1,011,000, respectively. The valuation allowance related to impaired loans on December 31, 2002 and 2001 is $32,000 and $215,000, respectively. At December 31, 2002, 2001 and 2000, the average investment on impaired loans was $742,000, $1,202,000 and $755,000, respectively. The amount of interest income recorded by the Company during 2002, 2001 and 2000 on impaired loans was approximately $50,000, $49,000 and $31,000, respectively. There were no nonaccrual loans excluded from impaired loan disclosure at December 31, 2002 and December 31, 2001.

 

41


Table of Contents

 

4. ALLOWANCE FOR LOAN LOSSES

 

Activity in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 is summarized below (in thousands):

 

    

2002


  

2001


  

2000


Balance, beginning of year

  

$

7,336

  

$

7,389

  

$

6,617

Provision charged to operations

  

 

2,878

  

 

2,126

  

 

2,101

Recoveries credited to allowance

  

 

546

  

 

420

  

 

321

    

  

  

Total

  

 

10,760

  

 

9,935

  

 

9,039

Loans charged off

  

 

1,581

  

 

2,599

  

 

1,650

    

  

  

Balance, end of year

  

$

9,179

  

$

7,336

  

$

7,389

    

  

  

 

5. BANK PREMISES AND EQUIPMENT

 

Bank premises and equipment as of December 31, 2002 and 2001 are as follows (in thousands):

 

    

2002


  

2001


Land

  

$

4,129

  

$

4,753

Land improvements and buildings

  

 

16,840

  

 

15,441

Leasehold improvements

  

 

520

  

 

507

Furniture and equipment

  

 

13,167

  

 

13,325

Construction in progress

  

 

2,263

  

 

100

    

  

    

 

36,919

  

 

34,126

Less accumulated depreciation and amortization

  

 

15,342

  

 

14,935

    

  

Bank premises and equipment, net

  

$

21,577

  

$

19,191

    

  

 

Depreciation expense for 2002, 2001 and 2000 was $2,062,000, $1,961,000, and $1,898,000 respectively. Future minimum rental payments required under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 2002 are approximately $705,000 for 2003, $558,500 for 2004, $411,700 for 2005, $382,900 for 2006, $300,800 for 2007, and $2,307,000 thereafter. Rental expense for years ended December 31, 2002, 2001 and 2000 totaled $1,118,000, $1,110,000, and $1,158,000 respectively.

 

42


Table of Contents

 

6. DEPOSITS

 

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $152,968,000 and $133,629,000, respectively. At December 31, 2002, the scheduled maturities of time deposits are as follows (in thousands):

 

2003

  

$

188,082

2004

  

 

90,393

2005

  

 

77,513

2006

  

 

24,910

2007

  

 

79,599

Thereafter

  

 

786

    

    

$

461,283

    

 

7. OTHER BORROWINGS

 

Short-term borrowings consist of the following at December 31, 2002 and 2001 (dollars in thousands):

 

    

2002


    

2001


 

Securities sold under agreements to repurchase

  

$

43,227

 

  

$

41,083

 

Other short-term borrowings

  

 

1,550

 

  

 

—  

 

    


  


Total

  

$

44,777

 

  

$

41,083

 

    


  


Weighted interest rate

  

 

0.86

%

  

 

1.37

%

Average for the year ended December 31:

                 

Outstanding

  

$

41,159

 

  

$

41,746

 

Interest rate

  

 

1.16

%

  

 

3.26

%

Maximum month-end outstanding

  

$

46,687

 

  

$

41,083

 

 

Short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings may also include Federal funds purchased, which are unsecured overnight borrowings from other financial institutions, and advances from the Federal Home Loan Bank of Atlanta, which are secured by mortgage-related assets. The carrying value of the loans pledged as collateral for FHLB advances total $147 million at December 31, 2002.

 

At December 31, 2002, the Company’s fixed-rate long-term debt totals $60,125,000 and matures through 2011. The interest rate on the fixed-rate note payable ranges from 3.20% to 6.61%. At December 31, 2001, the Company had fixed-rate long-term debt totaling $59,875,000, maturing through 2011. The interest rate on the notes payable ranged from 5.22% to 6.61% at December 31, 2001.

 

At December 31, 2002, the Company’s floating-rate long-term debt totals $2,094,000 and matures through 2005. The floating rates are based on the 30 day LIBOR plus 95 basis points. The interest rate on floating-rate long-term debt ranged from 2.39% to 3.06% during 2002. At December 31, 2001, the Company had floating-rate long-term debt totaling $2,856,000.

 

43


Table of Contents

 

The contractual maturities of long-term debt are at December 31, 2002 as follows (dollars in thousands):

 

 

    

Fixed

Rate


  

Floating

Rate


  

Total


Due in 2003

  

$

250

  

$

762

  

$

1,012

Due in 2004

  

 

12,675

  

 

762

  

 

13,437

Due in 2005

  

 

100

  

 

570

  

 

670

Due in 2006

  

 

100

  

 

—  

  

 

100

Due in 2007

                    

Thereafter

  

 

47,000

  

 

—  

  

 

47,000

    

  

  

Total long term debt

  

$

60,125

  

$

2,094

  

$

62,219

    

  

  

 

The subsidiary banks maintain Federal funds lines with several regional banks totaling approximately $63.8 million at December 31, 2002. The Company also had a line of credit with the Federal Home Loan Bank of Atlanta for $415 million at December 31, 2002. The Company has a $10 million line of credit with Suntrust Bank for general corporate purposes.

 

8. INCOME TAXES

 

Net deferred tax assets (liabilities) consist of the following components as of December 31, 2002 and 2001 (in thousands):

 

    

2002


    

2001


Deferred tax assets:

               

Allowance for loan losses

  

$

3,139

 

  

$

2,494

Benefit plans

  

 

388

 

  

 

355

Other

  

 

222

 

  

 

458

    


  

Total deferred tax assets

  

 

3,749

 

  

 

3,307

    


  

Deferred tax liabilities:

               

Depreciation

  

 

772

 

  

 

657

Other

  

 

263

 

  

 

240

Securities available for sale

  

 

3,530

 

  

 

1,062

    


  

Total deferred tax liabilities

  

 

4,565

 

  

 

1,959

    


  

Net deferred tax asset (included in other assets)

  

$

(816

)

  

$

1,348

    


  

 

In assessing the realizability of deferred tax assets, management considers the scheduled reversal of temporary differences, projected future taxable income, and tax planning strategies. Management believes it is more likely than not the Company will realize its deferred tax assets and, accordingly, no valuation allowance has been established.

 

The provision for income taxes charged to operations for the years ended December 31, 2002, 2001 and 2000 consists of the following (in thousands):

 

    

2002


    

2001


  

2000


 

Current tax expense

  

$

5,115

 

  

$

2,724

  

$

1,449

 

Deferred tax expense (benefit)

  

 

(304

)

  

 

209

  

 

(226

)

    


  

  


Income tax expense

  

$

4,811

 

  

$

2,933

  

$

1,223

 

    


  

  


 

44


Table of Contents

 

The income tax expense differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income for the years ended December 31, 2002, 2001 and 2000, due to the following (in thousands):

 

    

2002


    

2001


    

2000


 

Computed”expected” tax expense

  

$

6,606

 

  

$

4,968

 

  

$

3,000

 

(Decrease) in taxes resulting from:

                          

Tax-exempt interest income

  

 

(1,634

)

  

 

(1,555

)

  

 

(1,395

)

Other, net

  

 

(161

)

  

 

(480

)

  

 

(382

)

    


  


  


Income tax expense

  

$

4,811

 

  

$

2,933

 

  

$

1,223

 

    


  


  


 

Low income housing credits totaled $41,581, $79,735 and $72,425 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

9. EMPLOYEE BENEFITS

 

The Company has a 401 (k) Plan that allows employees to save for retirement on a pre-tax basis. The 401 (k) Plan provides for matching contributions by the Company for employee contributions of up to 3% of each employee’s compensation. The Company also has an Employee Stock Ownership Plan (‘ESOP”). The Company makes discretionary profit sharing contributions into the 401 (k) Plan, ESOP and in cash. Company discretionary contributions to both the 401 (k) Plan and the ESOP are allocated to participant accounts in proportion to each participant’s compensation and vested over a six year time interval. Employee contributions to the ESOP are not allowed and the 401 (k) does not provide for investment in the Company’s stock. Company discretionary profit sharing payments made in 2002, 2001 and 2000 are as follows (in thousands):

 

    

2002


  

2001


  

2000


401(k) Plan

  

$

1,104

  

$

300

  

$

619

ESOP

  

 

—  

  

 

677

  

 

378

Cash

  

 

253

  

 

224

  

 

243

    

  

  

    

$

1,357

  

$

1,201

  

$

1,240

    

  

  

 

The Company has an obligation to certain members of the subsidiary banks’ Boards of Directors under deferred compensation plans in the amount of $992,000 and $969,000 at December 31, 2002 and 2001, respectively. A portion of the benefits will be funded by life insurance.

 

The Company has a stock option plan (the “Plan”) adopted in 1993 that authorizes the reservation of up to 400,000 shares of common stock and provides for the granting of incentive options to certain employees. Under the Plan, the option price cannot be less than the fair market value of the stock on the date granted. An option’s maximum term is ten years from the date of grant. Options granted under the Plan may be subject to a graded vesting schedule.

 

45


Table of Contents

 

A summary of changes for the Plan for the years 2002, 2001 and 2000 follows:

 

    

2002


  

Year end December 31, 2001


  

2000


    

Shares


    

Weighted

Average

Exercise

Price


  

Shares


    

Weighted

Average

Exercise

Price


  

Shares


    

Weighted

Average

Exercise

Price


Options outstanding, January 1

  

156,515

 

  

$

16.20

  

148,380

 

  

$

16.63

  

153,232

 

  

$

17.20

Granted

  

55,350

 

  

 

16.00

  

13,350

 

  

 

12.81

  

26,040

 

  

 

13.07

Forfeited

  

(600

)

  

 

20.13

  

(5,215

)

  

 

19.83

  

(25,852

)

  

 

18.41

Exercised

  

(16,850

)

  

 

12.91

  

—  

 

  

 

—  

  

(5,040

)

  

 

6.53

    

         

         

      

Options outstanding, December 31

  

194,415

 

  

$

16.47

  

156,515

 

  

$

16.20

  

148,380

 

  

$

16.63

    

         

         

      

Weighted average fair value per option of options granted during year

         

$

6.37

         

$

4.55

         

$

4.98

           

         

         

 

A summary of options outstanding at December 31, 2002 follows:

 

      

Options Outstanding


    

Options Exercisable


Range of

Exercise Price


    

Number

Outstanding


    

Weighted

Average

Remaining

Contractual Life


  

Weighted

Average

Exercise

Price


    

Number

Outstanding


    

Weighted

Average

Remaining

Contractual Life


  

Weighted

Average

Exercise Price


$

11.50

    

14,000

    

      2.1 yrs

  

$

11.50

    

14,000

    

      2.1 yrs

  

$

11.50

 

12.50

    

8,300

    

3.5

  

 

12.50

    

8,300

    

3.5

  

 

12.50

 

12.81

    

13,250

    

8.1

  

 

12.81

    

2,570

    

8.1

  

 

12.81

 

    12.88—13.38

    

25,825

    

7.1

  

 

13.07

    

10,330

    

7.1

  

 

13.07

 

16.00

    

60,200

    

6.1

  

 

16.00

    

10,050

    

6.1

  

 

16.00

 

20.13

    

72,840

    

5.1

  

 

20.13

    

58,272

    

5.1

  

 

20.13

        
                  
             

$

11.50—20.13

    

194,415

    

5.6

  

$

16.66

    

103,522

    

5.1

  

$

17.48

        
                  
             

 

The Company had a noncontributory, defined benefit pension plan covering all full-time employees. Termination of this plan was completed in 2000. The gain on termination of the plan was $1,087,000.

 

10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. At December 31, 2002 and 2001, the Company had outstanding loan commitments approximating $231,841,000 and $207,285,000, respectively.

 

46


Table of Contents

 

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $12,368,000 and $12,984,000 at December 31, 2002 and 2001, respectively.

 

11. RELATED PARTY TRANSACTIONS

 

The Company has entered into transactions with its directors, principal officers and affiliated companies in which they are principal stockholders. Such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties totaled $17,481,000 and $19,996,000 as of December 31, 2002 and 2001, respectively. During 2002 new advances to such related parties amounted to $12,837,000 and repayments amounted to $15,352,000.

 

12. EARNINGS PER SHARE

 

The following is a reconciliation of the denominators of the basic and diluted EPS computations for December 31, 2002, 2001 and 2000:

 

    

Income (Numerator)


    

Weighted Average

Shares

(Denominator)


  

Per Share Amount


 
    

(dollars and shares information in thousands)

 

For the Year Ended December 31, 2002

                      

Basic EPS

  

$

14,505

    

7,556

  

$

1.92

 

Effect of dilutive stock options

  

 

—  

    

67

  

 

(0.02

)

    

    
  


Diluted EPS

  

$

14,505

    

7,623

  

$

1.90

 

    

    
  


For the Year Ended December 31, 2001

                      

Basic EPS

  

$

11,679

    

7,524

  

$

1.55

 

Effect of dilutive stock options

  

 

—  

    

18

  

 

—  

 

    

    
  


Diluted EPS

  

$

11,679

    

7,542

  

$

1.55

 

    

    
  


For the Year Ended December 31, 2000

                      

Basic EPS

  

 $

7,600

    

7,508

  

$

1.01

 

Effect of dilutive stock options

  

 

—  

    

5

  

 

—  

 

    

    
  


Diluted EPS

  

$

7,600

    

7,513

  

$

1.01

 

    

    
  


 

In 2001 and 2000, stock options representing 74,140 and 204,764 average shares, respectively were not included in the calculation of earnings per share as their effect would have been antidilutive in those years.

 

13. COMMITMENTS AND LIABILITIES

 

Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

 

47


Table of Contents

 

The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the years ended December 31, 2002 and 2001, the aggregate amount of daily average required reserves was approximately $1,495,000 and $1,095,000.

 

The Company has approximately $1,040,000 in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at December 31, 2002.

 

14. REGULATORY MATTERS

 

The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), the Company and Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios of Total and Tier I capital (as defined) to Average Assets (as defined). Management believes, as of December 31, 2002, that the Company and Banks meet all capital adequacy requirements to which they are subject.

 

The most recent notification from the Federal Reserve Bank as of December 31, 2002, categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, an institution must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks’ category.

 

48


Table of Contents

 

The Company’s and principal banking subsidiaries’ actual capital amounts and ratios are also presented in the table.

 

    

Actual


    

Required for

Capital Adequacy

Purposes


    

Required in Order to Be

Well Capitalized

Under PCA


 
    

Amount


  

Ratio


    

Amount


  

Ratio


    

Amount


  

Ratio


 

As of December 31, 2002

                

(dollars in thousands)

             

Total capital to risk weighted assets Consolidated

  

$

101,435

  

12.15

%

  

$

66,788

  

8.00

%

  

 

NA

  

NA

 

Union Bank & Trust

  

 

65,284

  

11.10

%

  

 

47,052

  

8.00

%

  

$

58,814

  

10.00

%

Northern Neck State Bank

  

 

22,386

  

12.28

%

  

 

14,584

  

8.00

%

  

 

18,230

  

10.00

%

Tier 1 capital to risk weighted assets

                                         

Consolidated

  

 

92,256

  

11.05

%

  

 

33,396

  

4.00

%

  

 

NA

  

NA

 

Union Bank & Trust

  

 

58,632

  

9.97

%

  

 

23,523

  

4.00

%

  

 

35,285

  

6.00

%

Northern Neck State Bank

  

 

20,542

  

11.27

%

  

 

7,291

  

4.00

%

  

 

10,936

  

6.00

%

Tier 1 capital to average adjusted assets

                                         

Consolidated

  

 

92,256

  

8.49

%

  

 

43,466

  

4.00

%

  

 

NA

  

NA

 

Union Bank & Trust

  

 

58,632

  

7.83

%

  

 

29,952

  

4.00

%

  

 

37,441

  

5.00

%

Northern Neck State Bank

  

 

20,542

  

7.71

%

  

 

10,657

  

4.00

%

  

 

13,322

  

5.00

%

As of December 31, 2001

                                         

Total capital to risk weighted assets

                                         

Consolidated

  

$

87,329

  

12.16

%

  

$

57,453

  

8.00

%

  

 

NA

  

NA

 

Union Bank & Trust

  

 

56,817

  

11.14

%

  

 

40,802

  

8.00

%

  

$

51,003

  

10.00

%

Northern Neck State Bank

  

 

20,027

  

11.63

%

  

 

13,776

  

8.00

%

  

 

17,220

  

10.00

%

Tier 1 capital to risk weighted assets

                                         

Consolidated

  

 

79,993

  

11.14

%

  

 

28,723

  

4.00

%

  

 

NA

  

NA

 

Union Bank & Trust

  

 

51,384

  

10.08

%

  

 

20,390

  

4.00

%

  

 

30,586

  

6.00

%

Northern Neck State Bank

  

 

18,394

  

10.69

%

  

 

6,883

  

4.00

%

  

 

10,324

  

6.00

%

Tier 1 capital to average adjusted assets

                                         

Consolidated

  

 

79,993

  

8.35

%

  

 

38,320

  

4.00

%

  

 

NA

  

NA

 

Union Bank & Trust

  

 

51,384

  

7.81

%

  

 

26,317

  

4.00

%

  

 

32,896

  

5.00

%

Northern Neck State Bank

  

 

18,394

  

7.41

%

  

 

9,929

  

4.00

%

  

 

12,412

  

5.00

%

 

15. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK

 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instruments. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

CASH AND CASH EQUIVALENTS

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE

For investment securities and securities available for sale, fair value is determined by quoted market price. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

49


Table of Contents

 

LOANS HELD FOR SALE

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

 

LOANS

The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.

 

DEPOSITS

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

 

BORROWINGS

The carrying value of short-term borrowings is a reasonable estimate of fair value. The fair value of long-term borrowings is estimated based on interest rates currently available for debt with similar terms and remaining maturities.

 

ACCRUED INTEREST

The carrying amounts of accrued interest approximate fair value.

 

COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2002 and 2001, the carrying amount approximated fair value of loan commitments and standby letters of credit.

 

50


Table of Contents

 

The carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2002 and 2001 are as follows (in thousands):

 

    

2002


  

2001


    

Carrying

Amount


  

Fair

Value


  

Carrying

Amount


  

Fair

Value


Financial assets:

                           

Cash and cash equivalents

  

$

46,402

  

$

46,402

  

$

38,915

  

$

38,915

Securities available for sale

  

 

272,755

  

 

272,755

  

 

257,062

  

 

257,062

Loans held for sale

  

 

39,771

  

 

39,771

  

 

43,485

  

 

43,485

Net loans

  

 

705,585

  

 

744,782

  

 

592,828

  

 

617,144

Accrued interest receivable

  

 

7,123

  

 

7,123

  

 

6,979

  

 

6,979

Financial liabilities:

                           

Deposits

  

 

897,642

  

 

886,427

  

 

784,084

  

 

753,499

Borrowings

  

 

106,996

  

 

115,399

  

 

103,814

  

 

106,801

Accrued interest payable

  

 

1,556

  

 

1,556

  

 

1,794

  

 

1,794

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

16. PARENT COMPANY FINANCIAL INFORMATION

 

The primary source of funds for the dividends paid by Union Bankshares Corporation (the “Parent Company”) is dividends received from its subsidiary banks. The payment of such dividends by the subsidiary banks and the ability of the banks to loan or advance funds to the Parent Company are subject to certain statutory limitations which contemplate that the current year earnings and earnings retained for the two preceding years may be paid to the Parent Company without regulatory approval. As of December 31, 2002, the aggregate amount of unrestricted funds, which could be transferred from the Company’s subsidiaries to the Parent Company, without prior regulatory approval, totaled $20,680,000 or 19.6% of the consolidated net assets.

 

51


Table of Contents

 

Financial information for the Parent Company follows:

 

UNION BANKSHARES CORPORATION (“PARENT COMPANY ONLY”)

BALANCE SHEETS

DECEMBER 31, 2002 AND 2001

    

2002


  

2001


    

(dollars in thousands)

Assets:

             

Cash

  

$

3,307

  

$

1,938

Securities available for sale

  

 

550

  

 

320

Premises and equipment, net

  

 

3,070

  

 

2,988

Other assets

  

 

479

  

 

1,126

Investment in subsidiaries

  

 

100,637

  

 

86,025

    

  

Total assets

  

$

108,043

  

$

92,397

    

  

Liabilities and Stockholders’ Equity:

             

Long-term debt

  

$

2,094

  

$

2,856

Other liabilities

  

 

457

  

 

562

    

  

Total liabilities

  

 

2,551

  

 

3,418

    

  

Common stock

  

 

15,159

  

 

15,052

Surplus

  

 

1,442

  

 

446

Retained earnings

  

 

81,997

  

 

71,419

Accumulated other comprehensive income

  

 

6,894

  

 

2,062

    

  

Total stockholders’ equity

  

 

105,492

  

 

88,979

    

  

Total liabilities and stockholders’ equity

  

$

108,043

  

$

92,397

    

  

 

CONDENSED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2002, 2001 and 2000

    

2002


  

2001


  

2000


    

(dollars in thousands)

Income:

                    

Interest income

  

$

5

  

$

7

  

$

7

Dividends received from subsidiaries

  

 

6,259

  

 

5,739

  

 

2,827

Management fee received from subsidiaries

  

 

6,996

  

 

6,619

  

 

6,067

Equity in undistributed net income of subsidiaries

  

 

8,966

  

 

6,154

  

 

5,560

Other income

  

 

13

  

 

105

  

 

31

    

  

  

Total income

  

 

22,239

  

 

18,624

  

 

14,492

    

  

  

Expense:

                    

Interest expense

  

 

72

  

 

247

  

 

412

Operating expenses

  

 

7,662

  

 

6,698

  

 

6,480

    

  

  

Total expense

  

 

7,734

  

 

6,945

  

 

6,892

    

  

  

Net income

  

$

14,505

  

$

11,679

  

$

7,600

    

  

  

 

52


Table of Contents

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2002, 2001 and 2000

    

2002


    

2001


    

2000


 
    

(dollars in thousands)

 

Operating activities:

                          

Net income

  

$

14,505

 

  

$

11,679

 

  

$

7,600

 

Adjustments to reconcile net income to net cash provided by operating activities:

                          

Equity in undistributed net income of subsidiaries

  

 

(8,966

)

  

 

(6,154

)

  

 

(5,560

)

Decrease in other assets

  

 

484

 

  

 

603

 

  

 

1,433

 

Other, net

  

 

(105

)

  

 

970

 

  

 

765

 

    


  


  


Net cash provided by operating activities

  

 

5,918

 

  

 

7,098

 

  

 

4,238

 

    


  


  


Investing activities:

                          

Purchase of securities

  

 

(240

)

  

 

(162

)

  

 

(61

)

Proceeds from maturity of securities

  

 

38

 

  

 

87

 

  

 

138

 

Purchase of equipment

  

 

(389

)

  

 

(338

)

  

 

(166

)

    


  


  


Net cash used in investing activities

  

 

(591

)

  

 

(413

)

  

 

(89

)

    


  


  


Financing activities:

                          

Net increase in borrowings

  

 

—  

 

  

 

—  

 

  

 

3,498

 

Repayment of long-term borrowings

  

 

(762

)

  

 

(2,142

)

  

 

(3,865

)

Cash dividends paid

  

 

(3,927

)

  

 

(3,461

)

  

 

(3,002

)

Issuance of common stock under plans

  

 

731

 

  

 

403

 

  

 

379

 

Repurchase of common stock under plans

  

 

—  

 

  

 

(597

)

  

 

(330

)

    


  


  


Net cash used in financing activities

  

 

(3,958

)

  

 

(5,797

)

  

 

(3,320

)

    


  


  


Increase in cash and cash equivalents

  

 

1,369

 

  

 

888

 

  

 

829

 

Cash and cash equivalents at beginning of year

  

 

1,938

 

  

 

1,050

 

  

 

221

 

    


  


  


Cash and cash equivalents at end of year

  

$

3,307

 

  

$

1,938

 

  

$

1,050

 

    


  


  


 

17. SEGMENT REPORTING

 

Union Bankshares Corporation has two reportable segments: traditional full service community banks and a mortgage loan origination business. The community bank business includes four banks, which provide loan, deposit, investment, and trust services to retail and commercial customers throughout their 31 retail locations in Virginia. The mortgage segment provides a variety of mortgage loan products principally in Virginia and Maryland. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which subject the Company to only de minimis risk.

 

Profit and loss is measured by net income after taxes including realized gains and losses on the Company’s investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process.

 

Both of the Company’s reportable segments are service based. The mortgage business is a fee-based business while the banks are driven principally by net interest income. The banks provide a distribution and referral network through their customers for the mortgage loan origination business. The mortgage segment offers a more limited network for the banks, due largely to the minimal degree of overlapping geographic markets.

 

53


Table of Contents

 

The community bank segment provides the mortgage segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the 3 month Libor rate. These transactions are eliminated in the consolidation process. A management fee for back room support services is charged to all subsidiaries and eliminated in the consolidation totals. Information about reportable segments and reconciliation of such information to the consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 follows:

 

    

Community

Banks


  

Mortgage


  

Elimination


    

Consolidated

Totals


    

(dollars in thousands)

2002

                             

Net interest income

  

$

39,404

  

$

1,174

  

$

—  

 

  

$

40,578

Provision for loan losses

  

 

2,878

  

 

—  

  

 

—  

 

  

 

2,878

    

  

  


  

Net interest income after provision for loan losses

  

 

36,526

  

 

1,174

  

 

—  

 

  

 

37,700

Noninterest income

  

 

7,622

  

 

10,091

  

 

(175

)

  

 

17,538

Noninterest expenses

  

 

27,436

  

 

8,661

  

 

(175

)

  

 

35,922

    

  

  


  

Income before income taxes

  

 

16,712

  

 

2,604

  

 

—  

 

  

 

19,316

Income tax expense

  

 

3,845

  

 

966

  

 

—  

 

  

 

4,811

    

  

  


  

Net income

  

$

12,867

  

$

1,638

  

$

—  

 

  

$

14,505

    

  

  


  

Total assets

  

$

1,117,522

  

$

43,256

  

$

(45,053

)

  

$

1,115,725

    

  

  


  

Capitalized expenditures

  

$

3,947

  

$

132

  

$

—  

 

  

$

4,079

    

  

  


  

 

    

Community

Banks


  

Mortgage


  

Elimination


    

Consolidated

Totals


    

(dollars in thousands)

2001

                             

Net interest income

  

$

32,416

  

$

677

  

$

—  

 

  

$

33,093

Provision for loan losses

  

 

2,126

  

 

—  

  

 

—  

 

  

 

2,126

    

  

  


  

Net interest income after provision for loan losses

  

 

30,290

  

 

677

  

 

—  

 

  

 

30,967

Noninterest income

  

 

7,403

  

 

8,859

  

 

(170

)

  

 

16,092

Noninterest expenses

  

 

24,882

  

 

7,735

  

 

(170

)

  

 

32,447

    

  

  


  

Income before income taxes

  

 

12,811

  

 

1,801

  

 

—  

 

  

 

14,612

Income tax expense

  

 

2,321

  

 

612

  

 

—  

 

  

 

2,933

    

  

  


  

Net income

  

$

10,490

  

$

1,189

  

$

—  

 

  

$

11,679

    

  

  


  

Total assets

  

$

984,247

  

$

45,656

  

$

(46,806

)

  

$

983,097

    

  

  


  

Capitalized expenditures

  

$

1,561

  

$

73

  

 

—  

 

  

$

1,634

    

  

  


  

 

    

Community

Banks


  

Mortgage


    

Elimination


    

Consolidated

Totals


    

(dollars in thousands)

2000

                               

Net interest income

  

$

31,196

  

$

141

 

  

$

—  

 

  

$

31,337

Provision for loan losses

  

 

2,101

  

 

—  

 

  

 

—  

 

  

 

2,101

    

  


  


  

Net interest income after provision for loan losses

  

 

29,095

  

 

141

 

  

 

—  

 

  

 

29,236

Noninterest income

  

 

6,656

  

 

5,516

 

  

 

(161

)

  

 

12,011

Noninterest expenses

  

 

24,460

  

 

8,125

 

  

 

(161

)

  

 

32,424

    

  


  


  

Income before income taxes

  

 

11,291

  

 

(2,468

)

  

 

—  

 

  

 

8,823

Income tax expense

  

 

2,072

  

 

(849

)

  

 

—  

 

  

 

1,223

    

  


  


  

Net income

  

$

9,219

  

$

(1,619

)

  

$

—  

 

  

$

7,600

    

  


  


  

Total assets

  

$

885,009

  

$

17,584

 

  

$

(20,632

)

  

$

881,961

    

  


  


  

Capitalized expenditures

  

$

1,342

  

$

101

 

  

 

—  

 

  

$

1,443

    

  


  


  

 

54


Table of Contents

 

Item 9.—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable. During the past two years, there have been no changes in or reportable disagreement with the certifying accountants for the Company or any of its subsidiaries.

 

55


Table of Contents

 

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 Company’s definitive proxy statement to be used in conjunction with the Company’s 2003 Annual Meeting of Shareholders to be held April 15, 2003 (“Proxy Statement”), from the section titled “Election of Directors.” Executive officers of the Company are listed below (All ages and positions are as of December 31, 2002):

 

Name (Age)


    

Title and Principal Occupation

During Past Five Years


G. William Beale (53)

    

President and Chief Executive Officer of the Company since its inception; President of Union Bank since 1991.

D. Anthony Peay (43)

    

Senior Vice President of the Company since 2000 and Chief Financial Officer of the Company since December 1994.

John C. Neal (53)

    

Executive Vice President and Chief Operating Officer of Union Bank since 1997.

N. Byrd Newton (59)

    

President and Chief Executive Officer of Northern Neck State Bank since 2000 and Senior Vice President and Secretary since 1992.

 

Information on Section 16(a) beneficial ownership reporting compliance for the directors and executive officers of the Company is incorporated herein by reference from page 15 of the Proxy Statement from the section titled “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

Item 11.—Executive Compensation

 

This information is incorporated herein by reference from page 4 and pages 6 through 10 of the Proxy Statement from the sections titled “Election of Directors—Directors’ Fees” and “Executive Compensation.”

 

Item 12.—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

This information is incorporated herein by reference from pages 5 and 6 of the Proxy Statement from section titled “Ownership of Company Common Stock” and page 14 of the Proxy Statement from the section titled “Equity Compensation Plans”.

 

56


Table of Contents

 

Item 13.—Certain Relationships and Related Transactions

 

This information is incorporated herein by reference from page 14 of the Proxy Statement from the section titled “Interest of Directors and Officers in Certain Transactions.”

 

Item 14.—Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this Annual Report on Form 10-K. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

57


Table of Contents

 

PART IV

 

Item 15.—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 consolidated financial statements and reports of independent auditors of the Company are in Part II, Item 8 on the following pages:

      
    

Consolidated Balance Sheets—December 31, 2002 and 2001

    

Consolidated Statements of Income—Years ended December 31, 2002, 2001 and 2000

    

Consolidated Statements of Changes in Stockholders’ Equity

    

Consolidated Statements of Cash Flows

    

Notes to Consolidated Financial Statements

    

Independent Auditor’s Report

      

(a)(2)

  

Financial Statement Schedules

      
    

All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

 

 

 

 

 

58


Table of Contents

 

(a)(3) Exhibits

 

Exhibit No.


  

Description


  3.1

  

Articles of Incorporation (incorporate by reference to Form S-4 Registration Statement; SEC file no. 33-60458)

  3.2

  

By-Laws (incorporated by reference to Form S-4 Registration Statement; SEC file no. 33-60458)

10.1

  

Change in Control Employment Agreement of G. William Beale (incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 31, 1996)

10.2

  

Employment Agreement of G. William Beale (incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 31, 1999)

10.3

  

Change in Control Employment Agreement of D. Anthony Peay (incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 21, 2001)

11.0

  

Statement re: Computation of Per Share Earnings (incorporated by reference to note 12 of the notes to consolidated financial statements included in this report)

21.0

  

Subsidiaries of the Registrant

23.1

  

Consent of Yount, Hyde & Barbour, P.C.

99.1

  

2002 management presentation for shareholders

 

(b) Reports on Form 8-K

 

No reports on Form 8-K were required to be filed during the last quarter of 2002.

 

59


Table of Contents

 

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 7, 2003

   

G. William Beale

President and Chief Executive Officer

           

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 7, 2003.

 

Signature


  

Title


/s/    G. William Beale


G. William Beale

  

President, Chief Executive Officer and

Director (principal executive officer)

/s/    Frank B. Bradley, III


Frank B. Bradley, III

  

Director

/s/    Ronald L. Hicks


Ronald L. Hicks

  

Chairman of the Board of Directors

/s/    W. Tayloe Murphy, Jr.


W. Tayloe Murphy, Jr.

  

Vice Chairman of the Board of Directors

/s/    Walton Mahon


Walton Mahon

  

Director

/s/    D. Anthony Peay


D. Anthony Peay

  

Senior Vice President and Chief

Financial Officer (principal financial officer)

/s/    M. Raymond Piland, III


M. Raymond Piland, III

  

Director

/s/    A.D. Whittaker


A.D. Whittaker

  

Director

/s/    William M. Wright


William M. Wright

  

Director

 

60


Table of Contents

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 10-K for the year ended December 31, 2002 of Union Bankshares Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

 

/s/    G. William Beale


G. William Beale, Chief Executive Officer

 

/s/    D. Anthony Peay


D. Anthony Peay, Chief Financial Officer

 

March 7, 2003


Table of Contents

 

CERTIFICATIONS

 

I, G. William Beale, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Union Bankshares Corporation;

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 7, 2003

 

/s/    G. William Beale


G. William Beale

President and Chief Executive Officer


Table of Contents

 

CERTIFICATIONS

 

I, D. Anthony Peay, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Union Bankshares Corporation;

 

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 7, 2003

 

/s/    D. Anthony Peay


D. Anthony Peay

Senior Vice President and Chief Financial Officer