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 June 30, 2004
Commission File No. 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
212 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices) (zipcode)
(804) 633-5031
(Registrant’s telephone number, including area code)
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b–2 of the Exchange Act). YES x NO ¨
As of July 27, 2004, Union Bankshares Corporation had 8,674,778 shares of Common Stock outstanding.
June 30, 2004
INDEX
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
Condensed Consolidated Statements of Income For the three and six months ended June 30, 2004 and 2003
Condensed Consolidated Statements of Changes in Stockholders’ Equity For the six months ended June 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements
Independent Accountants’ Review Report
Item 2 -Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 –Quantitative and Qualitative Disclosures about Market Risk
Item 4 –Controls and Procedures
PART II -OTHER INFORMATION
Item 1 –Legal Proceedings
Item 2 –Changes in Securities and Use of Proceeds
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
June 30,
2004
December 31,
2003
ASSETS
Cash and cash equivalents:
Cash and due from banks
Interest-bearing deposits in other banks
Money market investments
Other interest-bearing deposits
Federal funds sold
Total cash and cash equivalents
Securities available for sale, at fair value
Loans held for sale
Loans, net of unearned income
Less allowance for loan losses
Net loans
Bank premises and equipment, net
Other real estate owned
Core deposit intangibles
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing demand deposits
Interest-bearing deposits:
NOW accounts
Money market accounts
Savings accounts
Time deposits of $100,000 and over
Other time deposits
Total interest-bearing deposits
Total deposits
Securities sold under agreements to repurchase
Other short-term borrowings
Trust preferred capital notes
Long-term borrowings
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 8,674,567 , and 7,627,248 shares, respectively
Surplus
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended
Six Months Ended
Interest and dividend income :
Interest and fees on loans
Interest on Federal funds sold
Interest on interest-bearing deposits in other banks
Interest on money market investments
Interest and dividends on securities:
Taxable
Nontaxable
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on Federal funds purchased
Interest on short-term borrowings
Interest on long-term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Other service charges, commissions and fees
Gains (losses) on securities transactions, net
Gains on sales of loans
Gains on sales of other real estate owned and bank premises, net
Other operating income
Total noninterest income
Noninterest expenses:
Salaries and benefits
Occupancy expenses
Furniture and equipment expenses
Other operating expenses
Total noninterest expenses
Income before income taxes
Income tax expense
Net income
Basic net income per share
Diluted net income per share
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(dollars in thousands)
Common
Stock
Retained
Earnings
Accumulated
OtherComprehensive
Income (Loss)
Comprehensive
Income
Balance - December 31, 2002
Comprehensive income:
Net income - for the six months ended June 30, 2003
Unrealized holding gains arising during the period (net of tax, $1,234)
Reclassification adjustment for losses included in net income (net of tax, $5)
Other comprehensive income (net of tax, $1,239)
Total comprehensive income
Cash dividends - 2003 ($.29 per share)
Issuance of common stock under Dividend Reinvestment Plan (8,600 shares)
Stock repurchased under Stock Repurchase Plan (1,000 shares)
Issuance of common stock under Incentive Stock Option Plan (18,276 shares)
Balance - June 30, 2003 (Unaudited)
Balance - December 31, 2003
Net income - for the six months ended June 30, 2004
Unrealized holding losses arising during the period (net of tax, ($1,986))
Other comprehensive loss (net of tax, ($1,986))
Cash dividends - 2004 ($.33 per share)
Issuance of common stock under Dividend Reinvestment Plan (8,543 shares)
Issuance of common stock under Incentive Stock Option Plan (14,886 shares)
Issuance of common stock for services rendered (1,134 shares)
Issuance of common stock in exchange for net assets in acquisition (1,022,756 shares)
Balance - June 30, 2004 (Unaudited)
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Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2004 and 2003
Operating activities:
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment
Amortization
Loss on sales of securities available for sale
Increase in loans held for sale
Decrease in other assets
Increase in other liabilities
Net cash and cash equivalents provided by (used in) operating activities
Investing activities:
Purchase of securities available for sale
Proceeds from sale of securities available for sale
Proceeds from maturities of securities available for sale
Net increase in loans
Purchases of bank premises and equipment
Proceeds from sales of bank premises and equipment
Cash paid in bank acquisition
Cash acquired in bank acquisition
Proceeds from sales of other real estate owned
Net cash and cash equivalents used in investing activities
Financing activities:
Net increase in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net increase (decrease) in short-term borrowings
Net increase in trust preferred capital notes
Net decrease in long-term borrowings
Issuance of common stock
Purchase of common stock
Cash dividends paid
Net cash and cash equivalents provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest
Income taxes
Transactions related to the acquisition of subsidiary:
Increase in assets and liabilities
Loans
Securities
Other Assets
Non interest bearing deposits
Interest bearing deposits
Borrowings
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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 of the Public Company Accounting Oversight Board (United States)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 2003 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.
On May 1, 2004, Union Bankshares completed its acquisition of Guaranty Financial Corporation (Guaranty) headquartered in Charlottesville, Virginia. This acquisition was accounted for using the purchase method of accounting. The total consideration paid to Guaranty stockholders in connection with the acquisition was approximately $54.9 million with approximately $22.7 million in cash and 1,023,000 shares of Union’s common stock. Guaranty transactions have been included in Union’s financial results since May 1, 2004. Acquired assets on May 1, 2004 totaled $248 million, including $167 million in loans and $184 million in deposits. As part of the purchase price allocation at May 1, 2004, Union recorded $5.8 million in core deposit intangible, and goodwill totaled approximately $30.4 million. Operating results for 2004 include net income from Guaranty of $334,000, which reflects approximately $110,000 in amortization of core deposit intangibles. In addition, Union’s interest expense for the quarter and six months included $216,000 and $249,000, respectively, in interest expense on the Trust Preferred Capital Notes used to fund a portion of the Guaranty acquisition.
Guaranty Financial Corporation, newly acquired in a business combination, falls under the guidance of the Emerging Issues Task Force (“EITF”) in EITF Issue No 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Under EITF Issue No. 94-3, an entity recognizes a liability for an exit cost on the date that the entity commits itself to an exit plan. “Exit costs” are defined to include those costs recorded by Guaranty prior to the merger date and therefore are not included in Union’s Bankshares results of operations. Guaranty has recorded exit costs of $1.3 million relating to severance and costs associated with terminating contracts.
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Union’s exit costs, referred to herein as “merger-related” costs, are defined to include those costs for combining operations such as systems conversions, integration planning consultant fees and marketing consultant fees incurred by Union prior to and after the merger date and are included in Union’s results of operations. Union expensed merger-related costs which totaled approximately $25,000 for the six and three-month periods ended June 30, 2004. The costs associated with these activities are included in noninterest expenses. Merger-related expenses incurred year to date consisted largely of expenses associated with systems conversions and integration of operations.
The shareholders approved at the 2003 Annual Meeting the adoption of the Union Bankshares Corporation 2003 Incentive Stock Plan (the“Plan”). The Plan authorizes the issuance of 350,000 shares of common stock to be used in the awarding of incentive stock options to employees by the Compensation Committee of the Board of Directors. The Plan replaced a similar plan adopted by the shareholders in 1993 which terminated under its provisions in 2003. Options awarded under the previous plan are still exercisable, in some instances as late as 2012. Under both Plans, 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.
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.
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Net income, as reported
Total stock-based compensation expense determined under fair value based method for all awards
Pro forma net income
Earning per share:
Basic - as reported
Basic - pro forma
Diluted - as reported
Diluted - pro forma
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:
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
The following summarizes activity in the allowance for loan losses for the six months ended June 30, 2004 and 2003 (in thousands):
Balance, January 1
Allowance of acquired bank
Provisions charged to operations
Recoveries credited to allowance
Loans charged off
Balance, June 30
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In addition to commitments to extend credit and issue standby letters of credit, the Company’s subsidiary, the Bank of Williamsburg is a guarantor on the warehousing line used for short term funding of loans held for sale by Johnson Mortgage Company. The total amount of potential liability is $2.4 million. This is a requirement of the lender and generates only de minimis risk for the Company since the collateral loans have commitments from investors before they are made.
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 June 30, 2004 and 2003, there were 52,300 and 64,950 options respectively that were anti-dilutive. The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2004 and 2003.
Earnings per common share computation:
Numerator: Net Income
Denominator: Average common shares outstanding
Earnings per common share
Diluted earnings per common share computation:
Effect of dilutive stock options
Average diluted common shares outstanding
Diluted earnings per common share
During the first quarter of 2004, Union Bankshares Corporation Statutory Trust I, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing redeemable Capital Securities. On March 18, 2004, $22.5 million of Trust Preferred Capital Notes were issued through a pooled underwriting totaling approximately $858.8 million. The securities have a LIBOR-indexed floating rate of interest which adjusts, and is payable, quarterly. The interest rate at June 30, 2004 was 3.86%. The securities may be redeemed at par beginning on June 17, 2009 and each quarterly anniversary of such date until the securities mature on June 17, 2034. The principal asset of the Trust is $22.5 million of the Union Bankshares Corporation’s junior subordinated debt securities with the like maturities and like interest rates to the Capital Securities.
The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier I capital after its inclusion. The portion of the Trust Preferred not considered as Tier I capital may be included in Tier II capital.
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The obligations of the Corporation with respect to the issuance of the Capital Securities constitute a full and unconditional guarantee by the Corporation of the Trust’s obligations with respect to the Capital Securities. Subject to certain exceptions and limitations, the Corporation may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Capital Securities and require a deferral of common dividends.
Union Bankshares Corporation has two reportable segments: traditional full service community banking and mortgage loan origination. The community bank segment includes five banks which provide loan, deposit and investment 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.
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.
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Information about reportable segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2004 and 2003 follows:
Union Bankshares Corporation
Segment Report
(in thousands)
Three Months ended June 30, 2004
Noninterest income
Noninterest expenses
Assets
Three Months ended June 30, 2003
Six Months ended June 30, 2004
Six Months ended June 30, 2003
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On June 24, 2004, the Board of Directors authorized the Company to buy up to 150,000 shares of the Company’s outstanding common stock in the open market at prices that management and the Board of Directors determine to be prudent. This authorization expires May 31, 2005. 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.
No shares have been purchased under this authorization to date. Under prior authorization from the Board of Directors which expired in November 2003, the Company repurchased 1,000 shares of its common stock during the first six months of 2003 in the open market at an average cost of $24.07. No shares were repurchased in the first six months of 2004.
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INDEPENDENT ACCOUNTANT’S REPORT
To the Board of Directors
Bowling Green, Virginia
We have reviewed the accompanying condensed consolidated balance sheet of Union Bankshares Corporation and Subsidiaries (the “Company”) as of June 30, 2004 and the related condensed consolidated statements of income, shareholders’ equity and cash flows for the three-month and six-month periods ended June 30, 2004 and 2003. These condensed financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 accompanying condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Union Bankshares Corporation as of December 31, 2003, 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 14, 2004, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
Winchester, Virginia
August 3, 2004
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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 Union Bankshares Corporation and its subsidiaries (“the Company”, “Union” or “UBSH”). This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report, as well as the Annual Report of UBSH on Form 10-K for the year ended December 31, 2003. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three- and six-month periods ended June 30, 2004 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes, while the percentages presented are computed based on unrounded amounts.
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 by or on behalf of the Company.
Critical Accounting Policies
The accounting and reporting policies of Union Bankshares Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.
The more critical accounting and reporting policies include Union’s accounting for the allowance for loan losses, business combinations and income taxes. Union’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report of Form 10-K for the year ended December 31, 2003.
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The following is a summary of the Company’s significant accounting policies that are highly dependent on estimates, assumptions and judgments.
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 is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either SFAS No. 5 or SFAS No. 114. Management’s estimate of each SFAS No. 5 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.
Reserves for commercial loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the commercial loan portfolio. Reserves are provided for noncommercial loan categories using estimated loss factors applied to the total outstanding loan balance of each loan category. Specific reserves are typically provided on all impaired commercial loans in excess of a defined threshold that are classified in the Special Mention, Substandard or Doubtful risk grades. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.
While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.
Business Combinations
Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. For purchase acquisitions, Union is required to record assets acquired, including identifiable intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal
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valuations based on discounted cash flow analysis or other valuation techniques. Effective January 1, 2001, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which 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 but require at least an annual impairment review and more frequently if certain impairment indicators are in evidence.
On May 1, 2004, Union Bankshares completed its acquisition of Guaranty Financial Corporation (Guaranty) headquartered in Charlottesville, Virginia. This acquisition was accounted for using the purchase method of accounting (see Note 2). As part of the purchase price allocation, Union recorded $5.8 million in core deposit intangible, and goodwill which totaled approximately $30.4 million. Union’s goodwill totaled $31.2 million and $864,000 at June 30, 2004 and 2003, respectively. Core deposit intangibles are being amortized over the period of expected benefit, which ranges from 8.75 to 15 years. Core deposit intangibles, net of amortization, amounted to $10.3 million and $5.2 million at June 30, 2004 and 2003, respectively. The Company adopted SFAS 147, Acquisitions of Certain Financial Institutions, on January 1, 2002 and determined that core deposit intangibles will continue to be amortized over the estimated useful life.
Income Taxes
The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are not likely to be recovered, a valuation allowance must be recognized. The Corporation has determined that a valuation allowance is not required for deferred tax assets as of June 30, 2004. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Corporation’s financial statements.
Overview
UBSH is a multi-bank holding company which uses a super-community bank strategy to serve small and middle market business and retail consumers throughout the high-growth Central Virginia region. The Company offers a broad range of financial services through the 42 branches of its five community banks and through its investment and mortgage companies. The five banks are well established with a long history of serving their communities: Union Bank & Trust Company (founded in 1902), Rappahannock National Bank (1902), Northern Neck State Bank (1907), Guaranty Bank (1985), and the Bank of Williamsburg (1999). Union Investment Services (1993) operates out of four locations and Mortgage Capital Investors (1986) serves customers through eight mortgage company locations in Virginia, Maryland and South Carolina. Virtually all non-retail, or backoffice, operations are consolidated within the holding company to create economies of scale, achieve efficiencies and allow the financial service subsidiaries to focus on customer service and delivery. At June 30, 2004 UBSH had $1.6 billion in total assets.
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Results for the second quarter and the first six months of 2004 were impacted by both internal growth initiatives and market opportunities. Union Bank & Trust Company has opened four branches since March 2003 and will open an additional branch in both the third and fourth quarter of 2004.
More significantly, effective May 1, 2004, Union Bankshares completed its acquisition of Guaranty Financial Corporation (Guaranty) headquartered in Charlottesville, Virginia. This acquisition was accounted for using the purchase method of accounting. The total consideration paid to Guaranty stockholders in connection with the acquisition was approximately $54.9 million with approximately $22.7 million in cash and 1,023,000 shares of Union’s common stock. Guaranty transactions have been included in Union’s financial results since May 1, 2004. Acquired assets on May 1, 2004, recorded at fair value, totaled $248 million, including $167 million in loans and $184 million in deposits. As part of the purchase price allocation, Union recorded $5.8 million in core deposit intangibles, and goodwill of approximately $30.4 million which are reflected in the aforementioned asset totals. Operating results for the three- and six- month periods ended June 30, 2004 include net income from Guaranty of $334,000, which includes approximately $110,000 in amortization of core deposit intangibles.
Results of Operations
Net Income
For the second quarter of 2004, Union’s net income was $4.6 million, up 5.2% from $4.3 million for the same period in 2003. Over this same period, earnings per share on a diluted basis decreased from $.57 to $.53. Annualized return on average equity for the quarter ended June 30, 2004 was 12.13%, while annualized return on average assets for the same period was 1.23%, compared to 15.60% and 1.50% respectively, for the quarter ended June 30, 2003. Newly acquired Guaranty Bank contributed $334,000 to both the quarterly and six month net income totals.
On a linked quarter basis (current quarter to most recent quarter), net income improved 26.3% from $3.6 million in the first quarter of 2004 to $4.6 million in the second quarter. The Company’s annualized return on average equity and annualized return on average assets improved to 12.13% and 1.23% from 11.95% and 1.16%, respectively, in the first quarter of 2004. Excluding Guaranty’s net income of $334,000 recorded in the second quarter totals, net income improved 17.1%, or $617,000 on a linked quarter basis.
For the six months ended June 30, 2004, net income decreased slightly to $8.2 million from $8.3 million for the same period a year ago. Over this same period, earnings per share on a diluted basis decreased 7% from $1.08 to $1.00. Annualized return on average equity for the six months ended June 30, 2004 was 12.05%, while annualized return on average assets for the same period was 1.20%, compared to 15.29% and 1.47% respectively, for the six months ended June 30, 2003. This decrease over the first six months is due principally to the reduction in net income from the mortgage segment which decreased $802,000 from the first six months of 2003.
Non GAAP Measures
As noted earlier in this report, Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Prior to the issuance of SFAS No. 141, the Company
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accounted for most of its acquisition activity using the pooling method of accounting. The recent acquisition of Guaranty Financial Corporation is the Company’s most significant business combination to be accounted for using the purchase method of accounting. At June 30, 2004, core deposit intangibles totaled $10.3 million, up from $5.2 million a year earlier and goodwill totaled $31.2 million, up from $864,000 at June 30, 2003. Amortization of core deposit intangibles increased during the second quarter of 2004 as a result of the core deposit intangibles recorded in the Guaranty transaction.
In reporting the results of the second quarter of 2004, the Company has begun providing supplemental performance measures on an operating or tangible basis. Such measures exclude amortization expense related to intangible assets, such as core deposit intangibles. The Company believes these measures are useful to investors as they exclude non-operating adjustments resulting from acquisition activity and allow investors to see the combined economic results of the organization. Cash basis operating earnings per share was $.55 per share for the quarter ended June 30, 2004 as compared to $.58 per share a year earlier. Cash basis return on tangible equity for the second quarter of 2004 was 15.61% as compared to 16.86% a year earlier.
These measures are a supplement GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures. In addition, UBSH’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. A reconciliation of these non-GAAP measures from their respective GAAP basis measures can be found below.
ALTERNATIVE PERFORMANCE MEASURES
For six months ended
Plus amortization of core deposit intangibles
Cash basis operating earnings
Weighted average shares outstanding
Average equity
Less goodwill (average)
Less core deposit intangibles (average)
Average tangible equity
Average assets
Average tangible assets
Cash basis EPS fully diluted
Cash basis return on average tangible assets
Cash basis return on average tangible equity
Net Interest Income
Net interest income for the second quarter of 2004 was up $2.4 million, or 23%, from the second quarter of 2003. Average earning assets for the quarter grew to $1.37 billion compared to $1.09 billion a year earlier, providing the Company with a higher earnings base. Guaranty Bank contributed $130 million to average earning assets for the quarter. This combination of internal and acquisition growth provided the volume to more than offset a decrease of 17 basis points in the net interest margin (FTE) which decreased to 4.03% in the second quarter of 2004, down from 4.20% in the same quarter of 2003, but up slightly from 4.00% in the first quarter of 2004.
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In addition, Union’s interest expense for the quarter and six months included $216,000 and $249,000, respectively, in interest expense on the Trust Preferred Security Pool used to fund the Guaranty acquisition.
Provision for Loan Losses
The provision for loan losses totaled $308,000 for the second quarter of 2004, down from $645,000 for the second quarter of 2003. For the six months ended June 30, 2004, the provision was $739,000 versus $1,032,000 for the same period in 2003. This is reflective of general improvement in overall asset quality and net recoveries of previously charged off loans totaling $466,000 for the quarter and $512,000 year to date. Recoveries exceeded charge-offs in the second quarter of 2004 due largely to recoveries associated with a large loan charge-off in prior years. Management believes the overall credit quality of the portfolio is good based on the analysis of the portfolio. (See Asset Quality)
Noninterest Income
Noninterest income for the three months ended June 30, 2004 totaled $6.3 million, up 1% from $6.2 million for the same period a year ago. Noninterest income for the six months ended June 30, 2004 totaled $11 million, up $70,000 from $10.9 million for the six months ended June 30, 2003. Guaranty Bank’s contribution to these increases totaled $228,000.
Gains on sales of mortgage loans declined $624,000 for the quarter and $1.2 million for the six months ended June 30, 2004. These declines in the mortgage banking segment were largely offset by increases in service charges on deposit accounts and other service charges and fees in the community banking segment.
Service charges on deposit accounts increased $511,000 for the quarter and $1.0 million year to date, reflecting increases in overdraft and return check charges and DDA activity service charges as the result of the new overdraft privilege service introduced in late second quarter of 2003 and increased transaction account volumes resulting largely from internal growth. Guaranty Bank contributed $123,000 of the increase in service charges on deposit accounts.
Other service charges and fees increased by $150,000 over the prior year’s second quarter and $315,000 for the six months ended June 30, 2004. This is largely as a result of higher brokerage commissions, increased ATM and debit card transactions and $40,000 in other service charges from Guaranty.
Other operating income decreased $30,000 over the prior year’s second quarter, and $110,000 from the prior year’s first six months. A principal component of these declines was a $71,000 decline in income for the quarter and $166,000 year to date from the Company’s investment in Johnson Mortgage Company (“JMC”). Management continues to seek additional sources of noninterest income, including increased emphasis on cross-selling services and better leveraging of the financial services available throughout the organization.
As compared to the first quarter of 2004, noninterest income was up $1.6 million largely as a result of a $1.2 million increase in gains on the sales of mortgage loans. Mortgage loan production for the second quarter of 2004 totaled $148.7 million as compared to $ $87.8 million in the first quarter of 2004.
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Noninterest Expense
Noninterest expense for the second quarter 2004 increased by $2.5 million or 24.3% from a year ago and by $3.7 million or 19.04% from the first half of 2003. These increases are largely attributable to the Company’s expansion efforts and infrastructure costs, including continued investments in new technology. Guaranty Bank represents $1.3 million of both the quarterly and year to date increases in noninterest expense. Expenses were also up due to branch expansion efforts in the Richmond market which added approximately $176,000 in expenses from the same quarter a year ago and $251,000 year to date with minimal offsetting revenue until these locations open and mature.
Personnel costs were up $793,000 or 12.2% over last year’s second quarter and $1.2 million for the first six months of 2004. Guaranty represents $567,000 of these increases. The remaining increase of $226,000 for the quarter and $669,000 year to date reflects the impact of expansion and growth and normal increases. Expansion increases included additional staffing at existing high volume branches, the staffing of two new branches in Henrico County, new hires for the new Chesterfield branches which opened late in the second quarter and additional support staff and in-house legal counsel at the holding company. In addition to normal salary increases, medical group insurance increased $66,000 over last year’s second quarter and $130,000 from the same six months a year ago.
Occupancy expense was up $178,000 for the quarter and $203,000 for the six months ended June 30, 2004, largely as a result of the Guaranty acquisition which increased occupancy costs by $97,000. The remaining increase is largely attributable to the opening of four branches in the Richmond area. Furniture & equipment expense was up $260,000 for the quarter and $396,000 for the first six months, with Guaranty Bank representing $132,000 of these increases. The remaining increase is related to depreciation expense, amortization of new software, equipment rental expense, and equipment maintenance contracts.
Other operating expense was up $1.3 million for the second quarter and $1.9 million for the first six months of 2004. Guaranty Bank represents $517,000 of these increases. Expenses related to the new overdraft privilege service contributed $254,000 of the quarterly increase and $517,000 of the year to date increase. In November of 2003 the Company opted to outsource its data processing service. While this move accounted for approximately $215,000 of the quarter’s increase and $429,000 of the first six months’ increase in operating expenses, it represented a significant savings over the alternate in-house option. Director expense also increased by $86,000 and $158,000, respectively, for the quarter and six months ended June 30, 2004 as the Company enhanced its director compensation structure and responded to the additional requirements and costs of Sarbanes-Oxley and provided additional consulting services to the directors to assist in their compliance with the new requirements for directors of publicly traded companies. Management continues to monitor expenses closely to ensure increases are in line with the Company’s expectations, but sufficient to maintain the appropriate operating foundation for future growth.
Segment Information
For the second quarter net income for the community banking segment was $4.0 million, an increase of $605,000 or 18% from $3.4 million for the second quarter of 2003. Second quarter net income for the mortgage banking segment was $537,000, a decline of $380,000 or 41.4% from $917,000 in the same quarter of 2003. For the six months ended June 30, 2004, net income for the community bank segment increased to $7.5 million from $6.8 million at June 30, 2003, while the mortgage segment decreased to $662,000 from $1.5 million for the same period of 2003.
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The majority of the fluctuation in the net income of the community banking segment is reflected in the discussion preceding this section. In the mortgage banking segment the decrease in both second quarter and year to date net income from the same periods a year earlier were attributable to a return to more typical loan production levels from those experienced during the recent declining interest rate environment. Loan production volume for the second quarter of 2004 totaled $148.7 million, down from $158.9 million during the second quarter of 2003. For the first six months of 2004, loan production was $236.5 million versus $272.7 million for the same period in 2003. During this time horizon, there has been a shift from refinance activity to purchase activity, with refinance loans representing only 35.4% of volumes during the first six months of 2004 versus 56.5% a year earlier. A greater percentage of brokered loans and a reduced percentage of government loans combined to reduce profit margins per loan in the first six months. It is anticipated that this mix will return to typical levels over the next few months.
Balance Sheet Review
Loans at June 30, 2004 increased 49% or $386.6 million from June 30, 2003 and 28% or $257.9 million from March 31, 2004. Guaranty Bank represents $171.2 million of this growth. The remaining growth of $215.4 million year to date and $86.7 million for the quarter was attributed largely to increases in commercial and construction real estate loans, as well as commercial business loans. This loan growth occurred principally within the Richmond, Charlottesville, and Fredericksburg markets. These trends are reflective of the vibrant markets served by the Company and of a strengthening economy. Yields on loans (FTE) decreased from 6.81% in the second quarter of 2003 and from 6.18% in the first quarter 2004 to 6.00% for the second quarter of 2004. The cost of funds also declined, from 2.70% in the second quarter of 2003 and 2.40% for the first quarter of 2004 to 2.18% in the second quarter of 2004. Loan yields declined by 18 basis points during the second quarter of 2004 while deposits and other borrowings declined by 22 basis points resulting in a relatively stable margin. Deposit levels were up $314.9 million, or 32.9%, from the second quarter of 2003 and $239.6 million, or 23.2%, from the first quarter of 2004. The acquisition of Guaranty Bank represents $196 million of this growth in deposits. The remaining growth in deposits of $118.9 million year to date and $43.6 million for the quarter represents a 12.4% increase from a year earlier and 4.2% from first quarter of 2004.
At June 30, 2004 total assets were $1.61 billion, up 35.4% from $1.19 billion at June 30, 2003. Guaranty Bank represents $251.6 million of this growth. Deposits increased to $1.27 billion, up $314.9 million or 32.9% over $958.1 million at the end of the second quarter 2004, while loans totaled $1.2 billion, up $386.6 million or 49% over June 2003 levels. Guaranty Bank contributed $196 million in deposits and $171.2 million in loans. Securities declined to $244.9 million at June 30, 2004 compared to $255.5 million a year earlier. The Company’s capital position remains strong with an equity-to-assets ratio of 9.5%.
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AVERAGE BALANCES (1), INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
Assets:
Securities:
Tax-exempt(2)
Total securities
Loans, net
Total earning assets
Allowance for loan losses
Total non-earning assets
Liabilities & Stockholders’ Equity:
Checking
Money market savings
Regular savings
Certificates of deposit:
$100,000 and over
Under $100,000
Other borrowings
Total interest-bearing liabilities
Noninterest bearing liabilities:
Demand deposits
Stockholders’ equity
Interest rate spread
Interest expense as a percent of average earning assets
Net interest margin
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AVERAGE BALANCES(1), INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
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Loan Portfolio
The following table presents the composition of the Company’s loans (net of unearned income) in dollar amounts and as a percentage of the Company’s total gross loans as of the indicated date:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Multifamily
Agriculture
Total real estate loans
Commercial Loans
Consumer installment loans
Personal
Credit cards
Total consumer installment loans
All other loans and agriculture loans
Gross loans
Less unearned income on loans
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. At June 30, 2004, nonperforming assets totaled $11.1 million, including a single credit relationship totaling $10.3 million. These loans are secured by real estate (two assisted living facilities), but based on the information currently available, a reserve of $1,122,000 has been allocated for possible losses on these loans. Since the end of the first quarter 2004, the Company has entered into a workout agreement with the borrower. Under the terms of the workout, the Company extended further credit of approximately $1.6 million secured by property with significant equity. The borrower has begun the process to seek local approval to sell subdivided portions of the property resulting in payoff of the recently extended credit and curtailment of the assisted living credit facilities. The Company anticipates that this workout will result in a reduction of overall exposure to the borrower. This situation has had a significant negative impact on the asset quality ratios that follow since the loans were put on nonaccrual in June 2003.
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The allowance for loan losses totaled $14.8 million at June 30, 2004 or 1.27% of total loans, as compared to 1.31% at December 31, 2003 and 1.30% at June 30, 2003.
Nonaccrual loans
Foreclosed properties
Nonperforming assets
Allowance as % of total loans
Allowance as % of nonperforming assets
Nonperforming assets to loans and foreclosed properties
Net charge-offs (annualized) to year to date average loans outstanding
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, 2003 stockholders’ equity has increased by $34.2 million, principally as a result of the Guaranty Financial Corporation acquisition. This acquisition resulted in the issuance of 1,022,756 shares of Union’s stock and a $31.7 million increase in equity. Additionally, net income of $8.2 million year to date, less $2.5 million in dividends paid impacted the stockholders equity. The decrease in the unrealized gain on the Company’s securities portfolio reduced equity by $3.7 million, while the balance of $550,000 came from the issuance of stock through the Company’s Dividend Reinvestment Plan and the exercise of options under the Incentive Stock Option Plan.
In order to facilitate the purchase of Guaranty Financial Corporation, the Company issued $22.5 million in trust preferred capital notes in March of 2004. For regulatory reporting purposes, this amount can be included in Tier 1 capital. As expected upon completion of the Guaranty acquisition, these ratios have fallen slightly below the levels maintained prior to the issuance of the trust preferred capital notes and the Guaranty acquisition.
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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 June 30, 2004, the Company’s ratio of total capital to risk-weighted assets was 11.23% and its ratio of Tier 1 capital to risk-weighted assets was 10.09%. Both ratios exceed the minimum capital requirements. The following summarizes the Company’s regulatory capital and related ratios at June 30, 2004 and June 30, 2003 (dollars in thousands):
Tier 1 capital
Tier 2 capital
Total risk-based capital
Total risk-weighted assets
Capital Ratios:
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio (Tier 1 capital to average adjusted total assets)
Equity to assets ratio
The Company’s book value per share at June 30, 2004 was $17.60. Dividends to stockholders are typically paid semi-annually in the first week of May and November. The last dividend of $.33 per share was paid May 1, 2004.
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, loans held 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 June 30, 2004 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 64.1% of total earning assets. At June 30, 2004 approximately $623 million or 53% 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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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 and approves 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 options risk impact on the Company and is not addressed here. But earnings simulation and economic value models which more effectively measure the cash flow and optionality impacts 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 and observed trends, economic forecasts and management’s outlook and plans, as are the assumptions used to project yields and rates for new loans and deposits. Maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans, commercial loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges. 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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The most likely scenario represents the rate environment as management forecasts it to occur. From this base, interest rate shocks in 50 to 100 basis point increments are applied to see the impact on the Company’s earnings. The following table represents the interest rate sensitivity on net interest income (fully tax equivalent basis) for the Company using different rate scenarios as of June 30, 2004:
Change in Yield Curve
+200 basis points
+100 basis points
+ 50 basis points
Most likely
- 50 basis points
-100 basis points
-200 basis points
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 June 30, 2004:
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ITEM 4 – CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s 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 as of the end of the period covered by 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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PART II - OTHER INFORMATION
Item 1 – 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 2 – Changes in Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
Item 4 – Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on April 20, 2004 at which time stockholders were asked to consider three proposals, as follows:
The vote tabulation was as follows:
1. Election of three Class II directors to serve for a term of three years:
Director
Votes For
Votes Withheld
R. Hunter Morin
Robert C. Sledd
Ronald L. Tillett
2. Election of three Class I directors previously appointed by the Board to serve the remaining two-year portion of the Class I term of directors:
Ronald L. Hicks
W. Taylor Murphy, Jr.
A. D. Whittaker
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The following directors’ terms of office continued after the meeting:
G. William Beale
B. Walton Mahon
3. To ratify the appointment of Yount, Hyde and Barbour, P.C. as independent auditors for the Company for 2004
Votes Against
Abstain
6,150,642
Item 5 – Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed as part of this Form 10-Q and this list includes the Exhibit Index:
Description
(b) Reports on Form 8-K.
In a report on Form 8-K filed April 20, 2004, Union Bankshares Corporation issued a press release announcing results for the quarter ended March 31, 2004. The press release, with summary financial information, was filed pursuant to Item 7 and Item 12.
In a report on Form 8-K filed May 4, 2004, Union Bankshares Corporation issued a press release announcing the completion of the Guaranty Financial Corporation acquisition. The press release, with summary financial information, was filed pursuant to Item 5.
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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.
/s/ G. William Beale
/s/ D. Anthony Peay
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