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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2003

 

Commission File No. 0-20293

 

UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1598552

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

212 North Main Street

P.O. Box 446

Bowling Green, Virginia 22427

(Address of principal executive offices)

 

(804) 633-5031

(Registrant’s telephone number)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  COMMON

STOCK, $2 PAR VALUE

          Indicate by checkmark 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

o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b – 2 of the Act).

Yes

x

No

o

          As of April 23, 2003, Union Bankshares Corporation had 7,595,302 shares of Common Stock outstanding.



Table of Contents

UNION BANKSHARES CORPORATION
FORM 10-Q
March 31, 2003

INDEX

 

Page

 


PART 1 – FINANCIAL INFORMATION

 

 

 

Item 1 – Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002 (Audited)

3

 

 

Consolidated Statements of Income (Unaudited) For the three months ended March 31, 2003 and 2002

4

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) For the three months ended March 31, 2003 and 2002

5

 

 

Consolidated Statements of Cash Flows (Unaudited) For the three months ended March 31, 2003 and 2002

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

7 - 12

 

 

Independent Accountants’ Review Report

13
   

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of  Operations

14 - 22

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

23 - 24

 

 

Item 4 – Controls and Procedures

25

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1 – Legal Proceedings

26

 

 

Item 2 – Changes in Securities and Use of Proceeds

26

 

 

Item 3 – Defaults Upon Senior Securities

26

 

 

Item 4 – Submission of Matters to a Vote of Security Holders

26

 

 

Item 5 – Other Information

26

 

 

Item 6 – Exhibits and Reports on Form 8-K

26

 

 

Signatures

27

 

 

Index to Exhibits

30

2


Table of Contents

PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)

 

 

March 31,
2003

 

December 31,
2002

 

 

 



 



 

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Cash and due from banks

 

$

27,488

 

$

29,104

 

Interest-bearing deposits in other banks

 

 

5,007

 

 

909

 

Money market investments

 

 

5,150

 

 

15,142

 

Federal funds sold

 

 

8,975

 

 

1,247

 

 

 



 



 

Total cash and cash equivalents

 

 

46,620

 

 

46,402

 

 

 



 



 

Securities available for sale, at fair value

 

 

267,407

 

 

272,755

 

 

 



 



 

Loans held for sale

 

 

46,425

 

 

39,771

 

 

 



 



 

Loans, net of unearned income

 

 

750,079

 

 

714,764

 

Less allowance for loan  losses

 

 

9,592

 

 

9,179

 

 

 



 



 

Net loans

 

 

740,487

 

 

705,585

 

 

 



 



 

Bank premises and equipment, net

 

 

23,827

 

 

21,577

 

Other real estate owned

 

 

774

 

 

774

 

Other assets

 

 

29,735

 

 

28,861

 

 

 



 



 

Total assets

 

$

1,155,275

 

$

1,115,725

 

 

 



 



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

144,070

 

$

134,172

 

Interest-bearing deposits:

 

 

 

 

 

 

 

NOW accounts

 

 

134,155

 

 

128,764

 

Money market accounts

 

 

96,205

 

 

88,440

 

Savings accounts

 

 

89,361

 

 

84,983

 

Time deposits of $100,000 and over

 

 

160,423

 

 

152,968

 

Other time deposits

 

 

316,812

 

 

308,315

 

 

 



 



 

Total interest-bearing deposits

 

 

796,956

 

 

763,470

 

 

 



 



 

Total deposits

 

 

941,026

 

 

897,642

 

 

 



 



 

Securities sold under agreements to repurchase

 

 

30,270

 

 

43,227

 

Other short-term borrowings

 

 

—  

 

 

1,550

 

Long-term borrowings

 

 

61,954

 

 

62,219

 

Other liabilities

 

 

12,592

 

 

5,595

 

 

 



 



 

Total liabilities

 

 

1,045,842

 

 

1,010,233

 

 

 



 



 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $2 par value.  Authorized 24,000,000 shares; issued and outstanding, 7,592,052, and 7,579,707 shares, respectively

 

 

15,184

 

 

15,159

 

Surplus

 

 

1,531

 

 

1,442

 

Retained earnings

 

 

85,941

 

 

81,997

 

Accumulated other comprehensive income

 

 

6,777

 

 

6,894

 

 

 



 



 

Total stockholders’ equity

 

 

109,433

 

 

105,492

 

 

 



 



 

Total liabilities and stockholders’ equity

 

$

1,155,275

 

$

1,115,725

 

 

 



 



 

See accompanying notes to consolidated financial statements.

3


Table of Contents

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except per share amounts)

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2003

 

2002

 

 

 


 


 

Interest and dividend income :

 

 

 

 

 

 

 

Interest and fees on loans

 

$

13,106

 

$

12,197

 

Interest on Federal funds sold

 

 

44

 

 

56

 

Interest on interest-bearing deposits in  other banks

 

 

4

 

 

3

 

Interest on money market investments

 

 

18

 

 

6

 

Interest and dividends on securities:

 

 

 

 

 

 

 

Taxable

 

 

2,223

 

 

2,441

 

Nontaxable

 

 

1,131

 

 

1,164

 

 

 



 



 

Total interest and dividend income

 

 

16,526

 

 

15,867

 

 

 



 



 

Interest expense:

 

 

 

 

 

 

 

Interest on deposits

 

 

5,087

 

 

5,215

 

Interest on Federal funds

 

 

1

 

 

—  

 

Interest on short-term borrowings

 

 

70

 

 

107

 

Interest on long-term borrowings

 

 

906

 

 

913

 

 

 



 



 

Total interest expense

 

 

6,064

 

 

6,235

 

 

 



 



 

Net interest income

 

 

10,462

 

 

9,632

 

Provision for loan losses

 

 

387

 

 

830

 

 

 



 



 

Net interest income after provision for loan losses

 

 

10,075

 

 

8,802

 

 

 



 



 

Noninterest income:

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

1,045

 

 

845

 

Other service charges, commissions and fees

 

 

589

 

 

655

 

Gains (losses) on securities transactions, net

 

 

(15

)

 

1

 

Gains on sales of loans

 

 

2,785

 

 

2,143

 

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

 

 

7

 

 

15

 

Other operating income

 

 

265

 

 

169

 

 

 



 



 

Total noninterest income

 

 

4,676

 

 

3,828

 

 

 



 



 

Noninterest expenses:

 

 

 

 

 

 

 

Salaries and benefits

 

 

5,850

 

 

5,063

 

Occupancy expenses

 

 

663

 

 

554

 

Furniture and equipment expenses

 

 

591

 

 

701

 

Other operating expenses

 

 

2,176

 

 

2,331

 

 

 



 



 

Total noninterest expenses

 

 

9,280

 

 

8,649

 

 

 



 



 

Income before income taxes

 

 

5,471

 

 

3,981

 

Income tax expense

 

 

1,527

 

 

923

 

 

 



 



 

Net income

 

$

3,944

 

$

3,058

 

 

 



 



 

Basic net income per share

 

$

0.52

 

$

0.41

 

Diluted net income per share

 

$

0.52

 

$

0.40

 

See accompanying notes to consolidated financial statements.

4


Table of Contents

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(dollars in thousands)

 

 

Common
Stock

 

Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Comprehensive
Income

 

Total

 

 

 



 



 



 



 



 



 

Balance - December 31, 2001

 

$

15,052

 

$

446

 

$

71,419

 

$

2,062

 

 

 

 

$

88,979

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - for the three months ended March 31, 2002

 

 

 

 

 

 

 

 

3,058

 

 

 

 

$

3,058

 

 

3,058

 

Unrealized holding losses arising during the period (net of tax,  $241)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(466

)

 

 

 

Reclassification adjustment for gains included in net income (net of tax, $0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Other comprehensive income  (net of tax, $241)

 

 

 

 

 

 

 

 

 

 

 

(467

)

 

(467

)

 

(467

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,591

 

 

 

 



 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

1

 

Issuance of common stock under Incentive Stock Option Plan (50 shares)

 

 

—  

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

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

 

 

34

 

 

299

 

 

 

 

 

 

 

 

 

 

 

333

 

 

 



 



 



 



 

 

 

 



 

Balance - March 31, 2002  (Unaudited)

 

$

15,086

 

$

746

 

$

74,478

 

$

1,595

 

 

 

 

$

91,905

 

 

 



 



 



 



 

 

 

 



 

Balance - December 31, 2002

 

$

15,159

 

$

1,442

 

$

81,997

 

$

6,894

 

 

 

 

$

105,492

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - for the three months ended March 31, 2003

 

 

 

 

 

 

 

 

3,944

 

 

 

 

$

3,944

 

 

3,944

 

Unrealized holding losses arising during the period (net of tax,  $65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(127

)

 

 

 

Reclassification adjustment for losses included in net income (net of tax, $5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Other comprehensive income  (net of tax, $60)

 

 

 

 

 

 

 

 

 

 

 

(117

)

 

(117

)

 

(117

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Stock repurchased under Stock Repurchase Plan (1,000 shares)

 

 

(2

)

 

(22

)

 

 

 

 

 

 

 

 

 

 

(24

)

Issuance of common stock under Incentive Stock Option Plan (13,345 shares)

 

 

27

 

 

111

 

 

 

 

 

 

 

 

 

 

 

138

 

 

 



 



 



 



 

 

 

 



 

Balance - March 31, 2003  (Unaudited)

 

$

15,184

 

$

1,531

 

$

85,941

 

$

6,777

 

 

 

 

$

109,433

 

 

 



 



 



 



 

 

 

 



 

See accompanying notes to consolidated financial statements.

5


Table of Contents

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2003 and 2002
(dollars in thousands)

 

 

2003

 

2002

 

 

 



 



 

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

3,944

 

$

3,058

 

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

 

 

 

 

 

 

 

Depreciation of bank premises and equipment

 

 

473

 

 

505

 

Amortization

 

 

374

 

 

488

 

Provision for loan losses

 

 

387

 

 

830

 

(Gains) losses on sales of securities available for sale

 

 

15

 

 

(1

)

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

 

 

(7

)

 

(15

)

(Increase) decrease  in loans held for sale

 

 

(6,654

)

 

16,469

 

Increase (decrease) in other assets

 

 

(910

)

 

476

 

Decrease in other liabilities

 

 

6,997

 

 

365

 





Net cash and cash equivalents provided by operating activities

 

 

4,619

 

 

22,175

 





Investing activities:

 

 

 

 

 

 

 

Purchase of securities available for sale

 

 

(23,254

)

 

(13,297

)

Proceeds from sale of securities available for sale

 

 

3,993

 

 

8,954

 

Proceeds from maturities of securities available for sale

 

 

24,163

 

 

8,552

 

Net increase in loans

 

 

(35,289

)

 

(33,050

)

Purchases of bank premises and equipment

 

 

(2,747

)

 

(687

)

Proceeds from sales of bank premises and equipment

 

 

7

 

 

8

 

Proceeds from sales of other real estate owned

 

 

—  

 

 

110

 





Net cash and cash equivalents used in investing activities

 

 

(33,127

)

 

(29,410

)





Financing activities:

 

 

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

 

9,898

 

 

6,456

 

Net increase in interest-bearing deposits

 

 

33,486

 

 

14,855

 

Net decrease in short-term borrowings

 

 

(14,507

)

 

(6,862

)

Net decrease in long-term borrowings

 

 

(265

)

 

(265

)

Issuance of common stock

 

 

138

 

 

1

 

Purchase of common stock

 

 

(24

)

 

—  

 

Cash dividends paid

 

 

—  

 

 

1

 





Net cash and cash equivalents provided by financing activities

 

 

28,726

 

 

14,186

 





Increase  in cash and cash equivalents

 

 

218

 

 

6,951

 

Cash and cash equivalents at beginning of period

 

 

46,402

 

 

38,915

 





 

$

46,620

 

$

45,866

 

 

 



 



 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest

 

$

6,032

 

$

6,394

 

Income taxes

 

$

196

 

$

—  

 

See accompanying notes to consolidated financial statements.

6


Table of Contents

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2003

1.

ACCOUNTING POLICIES

 

 

 

The consolidated financial statements include the accounts of Union Bankshares Corporation and its subsidiaries (the “Company”).  Significant intercompany accounts and transactions have been eliminated in consolidation.

 

 

 

The information contained in the financial statements is unaudited and does not include all of the information and footnotes required by auditing standards generally accepted in the United States of America for complete financial statements.  However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

 

 

 

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2002 Annual Report on Form 10-K.  If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

 

 

2.

STOCK COMPENSATION

 

 

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.

7

 


Table of Contents

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2003

 

2002

 

 

 



 



 

Net income, as reported

 

$

3,944,000

 

$

3,058,000

 

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

 

 

(84,766

)

 

(50,316

)

 

 



 



 

Pro forma net income

 

$

3,859,234

 

$

3,007,684

 

 

 



 



 

Earning per share:

 

 

 

 

 

 

 

Basic - as reported

 

$

0.52

 

$

0.41

 

 

 



 



 

Basic - pro forma

 

$

0.51

 

$

0.40

 

 

 



 



 

Diluted - as reported

 

$

0.52

 

$

0.40

 

 

 



 



 

Diluated - pro forma

 

$

0.50

 

$

0.40

 

 

 



 



 

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:

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2003

 

2002

 

 

 


 


 

Dividend yield

 

 

2.37

%

 

2.51

%

Expected life

 

 

10 years

 

 

10 years

 

Expected volatility

 

 

35.54

%

 

36.91

%

Risk-free interest rate

 

 

4.03

%

 

5.13

%

 

3.

ALLOWANCE FOR LOAN LOSSES

 

 

 

The following summarizes activity in the allowance for loan losses for the three months ended March 31, (in thousands):

 

 

 

 

2003

 

 

2002

 

 

 



 



 

Balance, January 1

 

$

9,179

 

$

7,336

 

Provisions charged to operations

 

 

387

 

 

830

 

Recoveries credited to allowance

 

 

252

 

 

91

 

Loans charged off

 

 

(226

)

 

(430

)





 

$

9,592

 

$

7,827

 

 

 



 



 

8


Table of Contents

4.

EARNINGS PER SHARE

 

 

 

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock options. At March 31, 2003 there were 50,876 stock options that were anti-dilutive, while no options were anti-dilutive at March 31, 2002.  The following is a reconcilement of the denominators of the basic and diluted EPS computations for the quarter  ended March 31, 2003 and 2002.

 

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2003

 

2002

 

 

 


 


 

 

 

(In thousands except per share data)

 

Earnings per common share computation:

 

 

 

 

 

 

 

Numerator:  Net Income

 

$

3,944

 

$

3,058

 

Denominator:  Average common shares outstanding

 

 

7,590

 

 

7,536

 

Earnings per common share

 

 

0.52

 

 

0.41

 

Diluted earnings per common share computation:

 

 

 

 

 

 

 

Numerator:  Net Income

 

 

3,944

 

 

3,058

 

Denominator:  Average common shares outstanding

 

 

7,590

 

 

7,536

 

Effect of dilutive stock options

 

 

61

 

 

77

 

 

 



 



 

Average diluted common shares outstanding

 

 

7,651

 

 

7,613

 

Diluted earnings per common share

 

 

0.52

 

 

0.40

 

 

5.

SEGMENT REPORTING DISCLOSURES

 

 

 

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

 

 

 

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

9


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. These transactions are eliminated in the consolidation process.  A management fee for support services (including data processing, item processing, accounting, human resources and other 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 three months ended March 31, 2003 and 2002 follows:

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Table of Contents

Union Bankshares Corporation
Segment Report

 

 

Community
Banks

 

Mortgage

 

Elimination

 

Consolidated
Totals

 

 

 



 



 



 



 

 

 

(in thousands )

 

Three Months ended March 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

10,052

 

$

410

 

$

—  

 

$

10,462

 

Provision for loan losses

 

 

387

 

 

—  

 

 

—  

 

 

387

 

 

 



 



 



 



 

Net interest income after provision for loan losses

 

 

9,665

 

 

410

 

 

—  

 

 

10,075

 

Noninterest income

 

 

1,938

 

 

2,786

 

 

(48

)

 

4,676

 

Noninterest expenses

 

 

7,002

 

 

2,326

 

 

(48

)

 

9,280

 

 

 



 



 



 



 

Income before income taxes

 

 

4,601

 

 

870

 

 

—  

 

 

5,471

 

Income tax expense

 

 

1,203

 

 

324

 

 

—  

 

 

1,527

 

 

 



 



 



 



 

Net income

 

$

3,398

 

$

546

 

$

—  

 

$

3,944

 

 

 



 



 



 



 

Assets

 

$

1,150,850

 

$

49,580

 

$

(45,155

)

$

1,155,275

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months ended March 31, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

9,272

 

$

360

 

$

—  

 

$

9,632

 

Provision for loan losses

 

 

830

 

 

—  

 

 

—  

 

 

830

 

 

 



 



 



 



 

Net interest income after provision for loan losses

 

 

8,442

 

 

360

 

 

 

 

 

8,802

 

Noninterest income

 

 

1,728

 

 

2,143

 

 

(43

)

 

3,828

 

Noninterest expenses

 

 

6,679

 

 

2,013

 

 

(43

)

 

8,649

 

 

 



 



 



 



 

Income before income taxes

 

 

3,491

 

 

490

 

 

—  

 

 

3,981

 

Income tax expense

 

 

757

 

 

166

 

 

—  

 

 

923

 

 

 



 



 



 



 

Net income

 

$

2,734

 

$

324

 

$

—  

 

$

3,058

 

 

 



 



 



 



 

Assets

 

$

998,748

 

$

29,210

 

$

(27,386

)

$

1,000,572

 

 

 



 



 



 



 

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6.

EXPANSION ACTIVITY

 

 

 

The Company is in the process of opening a loan production office (LPO) in Henrico County in the Richmond market as part of Union Bank & Trust Company. This location will expand loan growth opportunities and our presence in the market.

 

 

7.

STOCK REPURCHASE

 

 

 

The Company received authorization from the Board of Directors of Union Bankshares in November 2002 to buy up to 100,000 shares of the Company’s outstanding common stock in the open market at prices that management and the Board of Directors determine are prudent. The Company considers current market conditions and the Company’s current capital level, in addition to other factors, when deciding whether to repurchase stock.  It is anticipated that any repurchased shares will be used primarily for general corporate purposes, including the dividend reinvestment plan, incentive stock option plan and other employee benefit plans.

 

 

 

During the first three months of 2003 the Company  repurchased one thousand shares of its common stock in the open market at an average cost of $24.07.  In 2002, for the same time period, the Company repurchased no shares of its common stock.

 

 

8.

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. The Company does not update any forward-looking statements that may be made from time to time.

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Table of Contents

INDEPENDENT ACCOUNTANT’S REVIEW REPORT

To the Board of Directors
Union Bankshares Corporation
Bowling Green, Virginia

We have reviewed the condensed consolidated balance sheet of Union Bankshares Corporation and Subsidiaries as of March 31, 2003 and the related condensed consolidated statements of income, shareholders’ equity and cash flows for the three-month periods ended March 31, 2003 and 2002.  These condensed financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants.  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Union Bankshares Corporation as of December 31, 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for the year ended (not presented herein); and in our report dated January 15, 2003, we expressed an unqualified opinion on those financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. 

/s/ YOUNT, HYDE & BARBOUR, P.C.

 


 

Winchester, Virginia

 

May 13, 2003

 

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Table of Contents

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of the Company.  The analysis focuses on the consolidated financial statements, the footnotes thereto, and the other financial data herein.  Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company.  Amounts are rounded for presentation purposes, while the percentages presented may be computed based on unrounded amounts.

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

14


Table of Contents

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 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.

Overview

Net income for the first quarter of 2003 was $3.9 million, up 29.0% from $3.1 million for the same period in 2002. This increase was the result of significant improvement in both business segments.  The community banking segment earnings increased by $664,000 or 24.3% over the prior year’s first quarter driven by growth in loans. The mortgage segment’s performance also improved with net income of $546,000 for the quarter ended March 31, 2003 compared to $324,000 in the comparable quarter of last year. First quarter 2003 diluted earnings per share for the Company amounted to $.52, as compared to $.40 in the same quarter of 2002.  The Company’s annualized return on average assets for the three months ended March 31, 2003 was 1.43% as compared to 1.27% a year ago. The Company’s annualized return on average equity totaled 14.97% and 13.69% for the three months ended March 31, 2003 and 2002, respectively.

Net income from the Company’s community bank segment increased from $2.7 million in the first quarter of 2002 to $3.4 million in the first quarter of 2003.  Much of this increase was attributable to improvements in net interest income and was driven largely by increases in loans and reductions in interest expense.  Loan growth between year end 2002 and March 31, 2003 amounted to $35.3 million while deposits grew $43.4 million over the same period.  This growth in loans helped to offset the impact of declining rates on interest income. In addition, interest expense continued  to decline in a low interest rate environment. Noninterest-bearing deposits grew more than any other deposit category while 36.8% or $15.9 million of the growth was time deposits, primarily certificates of deposit, which locked in lower rates over a longer period of time.

The mortgage segment reported net income of $546,000, an increase of $222,000 or 68.5% in the first quarter of 2003, reflecting continued high levels of mortgage originations in a low mortgage rate environment. The low interest rate environment with strong home sales has led to strong demand for loans to refinance existing loans, as well as mortgages for new and resale home purchases.  MCI’s strategy continues to focus its efforts toward the home purchase market, working with home buyers, builders, realtors and other referral sources to provide a more stable loan production platform. During the first quarter of 2003 mortgage refinancings represented 59% of total originations, up from 39% for the same quarter a year ago.  It is anticipated that

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Table of Contents

rising mortgage rates will significantly reduce mortgage refinancing activity and, to a lesser extent, new and resale home financings. The Company will continue to closely monitor production volumes so adjustments in staffing and other areas can be made in an appropriate and timely manner.

Total assets as of March 31, 2003 were $1.155 billion, an increase of 3.5% from $1.116 billion at December 31, 2002.  Loans totaled $750.1 million at March 31, 2003, an increase of  $35.3 million or 4.9% from $714.8 million at December 31, 2002.  The securities portfolio decreased to $267.4 million at the end of the first quarter of 2003 versus $272.8 at year end 2002 as a result of calls, maturities and prepayments of mortgage backed securities. Loans held for sale increased $6.6 million to $46.4 million compared to the December 31, 2002 balance of $39.8 million. Stockholders’ equity totaled $109.4 million at March 31, 2003, which represents a book value of $14.41 per share.

Total deposits at March 31, 2003 were $941.0 million, up 4.8% from $897.6 million at December 31, 2002.  Other borrowings totaled $92.2 million at March 31, 2003, a 13.8% decrease from $107.0 million at year end 2002.  The other borrowings change is the result of a $13.0 million decrease in securities sold under agreements to repurchase (principally with customers). These changes continue to reflect the lower interest rates for overnight funds.

Competition for deposits, particularly as it impacts certificate of deposit (CD) rates, is rate sensitive. Management continues to focus on increasing and retaining lower cost deposit products (including noninterest-bearing demand deposits and savings accounts) and locking in current lower rates with longer term (3-5 year) CD rates in an effort to maintain a lower cost of funds and a strong interest margin.  Increased competition for both loans and deposits is expected to contribute to some narrowing of the net interest margin until rates start to rise.

On a year-to-year basis, deposits at March 31, 2003 are up 16.8% at $941.0 million compared to $805.4 million at the end of March 2002. Loans are up 18.6% at $750.1 million compared to $632.6 million in March 2002. Of the $135.6 million growth in deposits, $68.9 million or 50.8% was in longer term certificates of deposits providing protection for the net interest margin in a rising rate environment.  The growth in loans allows the Company to maintain a good earnings margin in spite of the lower yield on loans.  As investors gain confidence, some of the lower cost deposits, such as demand and NOW accounts, may move back into the stock market and may cause further compression in the net interest margin.

Net Interest Income

Net interest income on a tax-equivalent basis for the first quarter of 2003 increased by 7.7% to $11.1 million from $10.3 million for the same period a year ago.  Over that time, average interest earning assets grew by $143.5 million or 15.7% and average interest-bearing deposits increased by 15.5%. Of the $105.0 million increase in average interest bearing deposits, 59%, or $61.9 million was in certificate of deposits. Total interest-bearing liabilities on a year to year basis were up 13.3% which reflects the Company’s ability to fund growth through its deposit growth.  The net interest margin was 4.26% in March 2003 down 32 basis points from 4.58% in March of 2002.  For this period, the yield on earning assets was 6.59%, down 75 basis points from 7.34% in March of 2002 and the yield on interest-bearing liabilities was 2.80% down 46 basis points from 3.26% for the same period. The net interest margin of 4.26% at March 31, 2003 is down slightly from 4.34% at the end of December 2002. This decline in the net interest margin was the

16


Table of Contents

result of loans repricing  faster than the deposits over this time period. It is expected that this trend will produce some pressure on the margin until interest rates rise.

In addition, the subsidiary banks have periodically engaged in wholesale leverage transactions to better leverage their capital position by borrowing funds to invest in securities at margins of 150 to 200 basis points. Although such transactions increase net income and return on equity, they negatively impact the net interest margin. As of March 31, 2003 such transactions accounted for $10 million of the Company’s total borrowings.

Included in the average earning assets is $36.8 million in loans held for sale.  These loans are mortgage loans originated by the mortgage segment and held for the short period between closing with the customer and funding by the investor. The loans have their final rates locked and are presold to an investor. While the spread on these short term loans provides a positive contribution to interest income and net income, it negatively impacts the net interest margin as these loans are funded at more narrow, short-term spreads. These loans ultimately generate most of their earnings in the noninterest income category through gains on sales of loans.

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Table of Contents

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

 

 

For the three months ended March 31,

 

 

 


 

 

 

2003

 

2002

 

2001

 

 

 


 

 

 

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

 

$

177,848

 

$

2,223

 

 

5.07

%

$

166,289

 

$

2,441

 

 

5.95

%

$

125,103

 

$

2,196

 

 

7.12

%

Tax-exempt(1)

 

 

89,517

 

 

1,713

 

 

7.76

%

 

91,038

 

 

1,763

 

 

7.85

%

 

93,533

 

 

1,790

 

 

7.76

%

 

 





 

 

 

 





 

 

 

 





 

 

 

 

Total securities

 

 

267,365

 

 

3,936

 

 

5.97

%

 

257,327

 

 

4,204

 

 

6.63

%

 

218,636

 

 

3,986

 

 

7.39

%

Loans, net

 

 

727,975

 

 

12,664

 

 

7.06

%

 

612,215

 

 

11,813

 

 

7.83

%

 

582,845

 

 

13,161

 

 

9.16

%

Loans held for sale

 

 

36,761

 

 

521

 

 

5.75

%

 

27,026

 

 

484

 

 

7.26

%

 

17,579

 

 

90

 

 

2.08

%

Federal funds sold

 

 

18,529

 

 

44

 

 

0.96

%

 

15,626

 

 

56

 

 

1.45

%

 

5,450

 

 

72

 

 

5.36

%

Money market investments

 

 

6,114

 

 

18

 

 

1.19

%

 

1,869

 

 

6

 

 

1.30

%

 

—  

 

 

—  

 

 

 

 

Interest-bearing deposits in other banks

 

 

1,551

 

 

4

 

 

1.05

%

 

745

 

 

3

 

 

1.63

%

 

734

 

 

8

 

 

4.42

%

 

 





 

 

 

 





 

 

 

 





 

 

 

 

Total earning assets

 

 

1,058,295

 

 

17,187

 

 

6.59

%

 

914,808

 

 

16,566

 

 

7.34

%

 

825,244

 

 

17,317

 

 

8.51

%

Allowance for loan losses

 

 

(9,473

)

 

 

 

 

 

 

 

(7,558

)

 

 

 

 

 

 

 

(7,592

)

 

 

 

 

 

 

Total non-earning assets

 

 

72,277

 

 

 

 

 

 

 

 

69,649

 

 

 

 

 

 

 

 

69,177

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total assets

 

$

1,121,099

 

 

 

 

 

 

 

$

976,899

 

 

 

 

 

 

 

$

886,829

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Liabilities & Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

$

129,022

 

 

174

 

 

0.55

%

$

113,796

 

 

276

 

 

0.98

%

$

95,882

 

 

451

 

 

1.91

%

Money market savings

 

 

95,920

 

 

269

 

 

1.14

%

 

81,525

 

 

302

 

 

1.50

%

 

62,024

 

 

474

 

 

3.10

%

Regular savings

 

 

87,207

 

 

216

 

 

1.00

%

 

73,761

 

 

246

 

 

1.35

%

 

57,884

 

 

321

 

 

2.25

%

Certificates of deposit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100,000 and over

 

 

156,517

 

 

1,544

 

 

4.00

%

 

132,028

 

 

1,421

 

 

4.36

%

 

126,926

 

 

1,891

 

 

6.04

%

Under $100,000

 

 

312,914

 

 

2,884

 

 

3.74

%

 

275,467

 

 

2,970

 

 

4.37

%

 

265,221

 

 

4,000

 

 

6.12

%

 

 





 

 

 

 





 

 

 

 





 

 

 

 

Total interest-bearing deposits

 

 

781,580

 

 

5,087

 

 

2.64

%

 

676,577

 

 

5,215

 

 

3.13

%

 

607,937

 

 

7,137

 

 

4.76

%

Other borrowings

 

 

97,363

 

 

974

 

 

4.06

%

 

99,135

 

 

1,020

 

 

4.17

%

 

105,527

 

 

1,529

 

 

5.88

%

 

 





 

 

 

 





 

 

 

 





 

 

 

 

Total interest-bearing liabilities

 

 

878,943

 

 

6,061

 

 

2.80

%

 

775,712

 

 

6,235

 

 

3.26

%

 

713,464

 

 

8,666

 

 

4.93

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

124,837

 

 

 

 

 

 

 

 

104,841

 

 

 

 

 

 

 

 

87,819

 

 

 

 

 

 

 

Other liabilities

 

 

10,486

 

 

 

 

 

 

 

 

5,732

 

 

 

 

 

 

 

 

5,998

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total liabilities

 

 

1,014,266

 

 

 

 

 

 

 

 

886,285

 

 

 

 

 

 

 

 

807,281

 

 

 

 

 

 

 

Stockholders’ equity

 

 

106,833

 

 

 

 

 

 

 

 

90,613

 

 

 

 

 

 

 

 

79,548

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,121,099

 

 

 

 

 

 

 

$

976,898

 

 

 

 

 

 

 

$

886,829

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Net interest income .

 

 

 

 

$

11,126

 

 

 

 

 

 

 

$

10,331

 

 

 

 

 

 

 

$

8,651

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Interest rate spread .

 

 

 

 

 

 

 

 

3.79

%

 

 

 

 

 

 

 

4.08

%

 

 

 

 

 

 

 

3.58

%

Interest expense as a percent of average earning assets

 

 

 

 

 

 

 

 

2.32

%

 

 

 

 

 

 

 

2.76

%

 

 

 

 

 

 

 

4.26

%

Net interest margin

 

 

 

 

 

 

 

 

4.26

%

 

 

 

 

 

 

 

4.58

%

 

 

 

 

 

 

 

4.25

%

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

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Table of Contents

Provision for Loan Losses

The provision for loan losses totaled $387,000 for the first quarter of 2003, down from $830,000 for the first quarter of 2002.  This lower expense was the result of several classified loans being paid out and recoveries exceeding charge-offs in the first quarter.  These provisions reflect the increase in the loan portfolio for the three months ended March 31, 2003 and management’s assessment of the credit risk in the portfolio. (See Asset Quality)

Noninterest Income

Noninterest income for the three months ended March 31, 2003 totaled $4.7 million, up $848,000 from $3.8 million for the same period a year ago. A significant portion of the increase came in gains on sales of loans in the mortgage banking segment which increased $642,000 compared to the same quarter last year.  Service charges on deposit accounts increased $200,000 reflecting increases in overdraft and return check charges and DDA activity service charges.  Other service charges and fees decreased $66,000, reflecting a $70,000 decline in brokerage commissions which was only offset slightly by an increase of $29,000 in debit card income. Other operating income increased $96,000 over the prior year, reflecting $11,000 of rental income and $78,000 in income from the Company’s investment in Johnson Mortgage Company by the Bank of Williamsburg subsidiary. Management continues to seek additional sources of noninterest income, including increased emphasis on cross-selling services and better leveraging the financial services available throughout the organization. 

Noninterest Expense

Noninterest expense in the first quarter of 2003 totaled $9.3 million, an increase of $631,000 over the same period in 2002.  Personnel costs were up $787,000 or 15.5% over last year’s first quarter, with salaries and other benefits categories reflecting normal increases, the addition of the Thornburg branch and the Manassas and Richmond loan production offices (LPO), increased group insurance expense and an increase of $311,000 in commission costs as a result of higher mortgage loan production. Occupancy expense was up $109,000 largely as a result of increases in rental costs for the LPO office in Manassas and in depreciation expense for the new branch in Thornburg and transitioning costs related to the move of the Newport News office to a nearby full-service facility.  Furniture & equipment expense was down $110,000 largely from a decline in depreciation expense and amortization of software.  These decreases were the result of software and equipment purchased for the back office consolidation in prior periods becoming fully depreciated.

Other operating expenses were down $155,000 over last year’s first quarter.  While operating expenses and franchise taxes increased from the expansion and growth,  professional fees for consulting and legal services were down $149,000 and marketing expenses were down $95,000.      The broadest expense category, other expenses, was relatively flat compared to the previous year with an increase of $7,000.  Management continues to monitor expenses closely to ensure the increases are in line with the Company’s expectations.  

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Table of Contents

Asset Quality

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. The allowance for loan losses totaled $9.6 million at March 31, 2003 or 1.28% of total loans, as compared to 1.28% at December 31, 2002 and 1.24% at March 31, 2002.

 

 

March 31,
2003

 

December 31,
2002

 

March 31,
2002

 

 

 



 



 



 

 

 

(dollars in thousands)

 

Nonaccrual loans

 

$

583

 

$

136

 

$

818

 

Foreclosed properties

 

 

774

 

 

774

 

 

909

 

 

 



 



 



 

Nonperforming assets

 

$

1,357

 

$

910

 

$

1,727

 

 

 



 



 



 

Allowance for loan losses

 

$

9,592

 

$

9,179

 

$

7,827

 

Allowance as % of total loans

 

 

1.28

%

 

1.28

%

 

1.24

%

Allowance as % of nonperforming assets

 

 

707

%

 

1009

%

 

453

%

Nonperforming assets to loans and foreclosed properties

 

 

.18

%

 

.13

%

 

.27

%

Net charge-offs (Annualized) to average loans outstanding

 

 

-.02

%

 

.16

%

 

.22

%

Capital Resources

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

Since December 31, 2002 stockholders’ equity has increased by $3.9 million, principally as a result of net income of $3.9 million for the first three months of 2003.  Other transactions to  stockholders’ equity netted each other out with a $117,000 decrease in the unrealized gain on the

20


Table of Contents

Company’s securities portfolio, a $24,000 decrease from repurchased stock and a $138,000 increase from the issuance of stock issued under the Incentive Stock Option plan.

The Federal Reserve, along with the Comptroller of the Currency and the Federal Deposit Insurance Corporation, has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards.  Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories.  The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity and retained earnings, less certain goodwill items. 

At March 31, 2003, the Company’s ratio of total capital to risk-weighted assets was 12.32% and its ratio of Tier 1 capital to risk-weighted assets was 11.20%.  Both ratios exceed the minimum capital requirements.  The following summarizes the Company’s regulatory capital and related ratios at March 31, 2003 (dollars in thousands):

Tier 1 capital

 

$

96,457

 

Tier 2 capital

 

 

9,592

 

Total risk-based capital

 

 

106,049

 

Total risk-weighted assets

 

 

861,029

 

Capital Ratios:

 

 

 

 

Tier 1 risk-based capital ratio

 

 

11.20

%

Total risk-based capital ratio

 

 

12.32

%

Leverage ratio (Tier 1 capital to average adjusted total assets)

 

 

8.65

%

Equity to assets ratio

 

 

9.47

%

The Company’s book value per share at March 31, 2003 was $14.41.  Dividends to stockholders are typically paid semi-annually in May and November.

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, money market investments, Federal funds sold, securities available for sale and loans maturing within one year.  The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity.  Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through Federal funds lines with several regional banks and a line of credit with the Federal Home Loan Bank (FHLB).  Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.         

At March 31, 2003 cash, interest-bearing deposits in other banks, money market investments, Federal funds sold, securities available for sale, loans available for sale and loans that mature or reprice in one year were 51.9% of total earning assets.  At March 31, 2003 approximately $462.6 million or 58.5% of total loans are scheduled to mature or reprice within the next year.  In addition to deposits, the Company utilizes Federal funds purchased, FHLB advances, securities sold under agreements to repurchase and customer repurchase agreements, to fund the growth in its loan portfolio, securities purchases, and periodically, wholesale leverage transactions.

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Table of Contents

Recent Accounting Pronouncements

The Financial Accounting Standards Board has issued no accounting pronouncements during the first quarter of 2003 that are pertinent to the Company’s lines of business.

22


Table of Contents

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices.  The Company’s market risk is composed primarily of interest rate risk.  The Company’s Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk.  The Board of Directors reviews the guidelines established by ALCO.

Interest rate risk is monitored through the use of three complimentary modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measure changes in a variety of interest rate scenarios.  While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.  Static gap which measures aggregate repricing values is less utilized since it does not effectively measure the earnings impact on the Company and is not addressed here.  But earnings simulation and economic value models which more effectively measure the earnings impact are utilized by management on a regular basis and are explained below.

Earnings Simulation Analysis  

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

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

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Table of Contents

The following table represents the interest rate sensitivity on (fully tax equivalent basis) net income for the Company using different rate scenarios as of March 31, 2003:

Change in Prime Rate

 

% Change in
Net  Income

 


 


 

+200 basis points

 

 

+28%

 

+100 basis points

 

 

+14%

 

Most likely

 

 

  0

 

-100 basis points

 

 

-13%

 

-200 basis points

 

 

-19%

 

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 economic value of equity is the economic value of all assets minus the economic value of all liabilities.  The change in economic value of equity over different rate environments is an indication of the longer 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 market value over different rate environments as of March 31, 2003:

 

 

 

Change in Economic Value of Equity

 

Change in Prime Rate

 

 

(dollars in thousands)

 


 



 

+200 basis points

 

$

10,524

 

+100 basis points

 

 

  6,463

 

Most likely

 

 

         0

 

-100 basis points

 

 

-6,456

 

-200 basis points

 

 

- 18,907   

 

24


Table of Contents

ITEM 4 – CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our chief executive officer and chief 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 Quarterly Report on Form 10-Q.  Based on that evaluation, our chief executive officer and chief 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.

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Table of Contents

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

Item 2 – Changes in Securities and Use of Proceeds

Item 3 – Defaults Upon Senior Securities

Item 4 – Submission of Matters to a Vote of Security Holders

Item 5 – Other Information

Item 6 - Exhibits and Reports on Form 8-K

               (a)     See attached list of exhibits
               (b)     Form 8-K - None

26


Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNION BANKSHARES CORPORATION

 

(Registrant)

 

 

May 14, 2003

/s/ G. WILLIAM BEALE

(Date)


 

G. William Beale,
President, Chief Executive Officer and Director

 

 

 

 

May 14, 2003

/s/ D. ANTHONY PEAY

(Date)


 

D. Anthony Peay,
Senior Vice President and Chief Financial Officer

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Table of Contents

CERTIFICATIONS

I, G. William Beale, certify that:

          1.  I have reviewed this quarterly report on Form 10-Q of Union Bankshares Corporation;

          2.  Based on my knowledge, this quarterly 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 quarterly report;

          3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and

               (c)  presented in this quarterly 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 quarterly 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: May 14, 2003

 

 

 

/s/    G. WILLIAM BEALE

 

 


 

 

G. William Beale
President and Chief Executive Officer

 

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Table of Contents

CERTIFICATIONS

I, D. Anthony Peay, certify that:

          1.  I have reviewed this quarterly report on Form 10-Q of Union Bankshares Corporation;

          2.  Based on my knowledge, this quarterly 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 quarterly report;

          3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and

               (c)  presented in this quarterly 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 quarterly 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: May 14, 2003

 

/s/    D. ANTHONY PEAY

 

 


 

 

D. Anthony Peay
Senior Vice President and Chief Financial Officer

 

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Table of Contents

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Index to Exhibits
 Form 10-Q /March 31, 2003

Exhibit No.

 

Description

 

 


 


 

 

2

 

Plan of acquisition, reorganization, arrangement, liquidation or succession

 

Not Applicable

 

 

 

 

 

4

 

Instruments defining the rights of security holders, including indentures

 

Not Applicable

 

 

 

 

 

10

 

Material contracts

 

Not Applicable

 

 

 

 

 

11

 

Statement re: computation of per share earnings

 

Not Applicable

 

 

 

 

 

15

 

Letter re: unaudited interim financial information

 

Not Applicable

 

 

 

 

 

18

 

Letter re: change in accounting principles

 

Not Applicable

 

 

 

 

 

19

 

Previously unfiled documents

 

Not Applicable

 

 

 

 

 

20

 

Report furnished to security holders

 

Not Applicable

 

 

 

 

 

22

 

Published report re: matters submitted to vote of security holders

 

None

 

 

 

 

 

23

 

Consents of experts and counsel

 

Not Applicable

 

 

 

 

 

24

 

Power of Attorney

 

Not Applicable

 

 

 

 

 

99

 

Additional Exhibits

 

99.1

30