About Union
About Union

Letter from the Chief Executive Officer

2013 was a year of significant progress and change for Union First Market Bankshares. Union started the year posting solid financial results and right after the end of the year, on January 1, 2014, closed the acquisition of StellarOne Corporation - making Union, far and away, the largest community banking organization headquartered in the Commonwealth of Virginia.

The combination of two of Virginia's premier community banks provides Union with the asset base and footprint, coupled with opportunity for growth, to continue to deliver a best-in-class customer experience, offer superior financial services and solutions, provide a rewarding experience for our teammates and generate top-tier financial performance for our shareholders.

Before I get to what's on tap for 2014, let me recap 2013. Excluding after-tax acquisition related expenses of $2.0 million, our 2013 net operating income increased to $36.5 million from $35.4 million in 2012. Excluding after-tax acquisition expenses, the community banking segment had operating earnings of $39.2 million, up 19.3% from 2012, while the mortgage segment lost $2.7 million in 2013 - a $5.2 million decline from the prior year.

The community banking segment showed solid growth in 2013. Net core households grew by 4,200 or about 4% for the second consecutive year, which shows the power and strength of our bank's value proposition to our retail customers. The bank also produced loan growth in a soft economic environment with average loans growing by 3.8% from the prior year. The loan growth was diverse and as you compare our core net interest margin and the yield on our loan portfolio to our peers, you can see that we did not sacrifice earnings to generate loan growth.

The Company also continued to see a meaningful reduction in non-performing assets during 2013 which are now at the lowest levels in four years. While the macroeconomic conditions certainly helped, the Company's dedicated effort to reduce nonperforming loans and to work with our problem credits were the keys to the success.

Union Mortgage Group (UMG) had a challenging 2013. The industry saw a sharp increase in market rates over the summer which caused a rapid and significant decline in both refinance and purchase money originations. While that was occurring, UMG was undertaking two strategic initiatives: UMG was in the process of moving its headquarters from Annandale to Richmond to reduce costs and was implementing a new state of the art loan origination system. Those were necessary changes, but also brought additional expenses and distraction at a time of declining revenues. With the headquarters move completed and the new loan origination system in place, the expense level should normalize as we adjust to the lower volume of originations.

Now let me turn to the acquisition of StellarOne Corporation. With assets of more than $7 billion and an estimated Virginia deposit market share of 3.4%, our new size puts a lot of distance between us and our community bank competitors. It has been nearly 15 years since Virginia has had a bank that large to call its own.

The acquisition of StellarOne was a win from a strategic and a financial point of view. Strategically, no other Virginia bank has a statewide presence and it will be difficult for any other Virginia bank to replicate our footprint. Union also will be able to serve a broader range of Virginia businesses with our higher lending limits and expanded services. We want to become "the" bank for Virginia businesses as well as Virginia consumers and now Union has the capabilities to make that a reality.

Financially, the acquisition of StellarOne will accelerate our return to top tier financial performance. As you may recall, the Company developed key financial performance metrics and benchmarked them against national peers and set internal targets designed to measure progress toward the goal. With the expense savings from the StellarOne acquisition occurring during the second half of 2014, the Company believes that the 2015 results should deliver a return on average assets above 1.1%, return on shareholder equity of more than 10% and a return of tangible common equity of more than 12% with a consolidated efficiency ratio of less than 60%. Achieving those targets would put Union solidly in the top tier of financial performance relative to our national peers.

There is a great opportunity before Union with the acquisition of StellarOne, but we know that it all depends on a successful integration of the two banks. We have been hard at work since the summer of 2013 planning for the conversion in May. Our primary focus for the first half of 2014 will be to seamlessly integrate StellarOne into Union and then leverage our new capabilities in the second half of the year. The teammates at Union and StellarOne are working well together. None of us want to lose the momentum that the merger has created. Through the acquisition we have been able to retain two top drawer executives from the StellarOne team. David Bilko will serve as Chief Risk Officer. Jeff Farrar has taken the challenge to build our non margin business lines of mortgage, wealth management, and insurance. I am pleased to have them on the team.

Finally, you will note that the shareholders will have the opportunity to vote on changing our name back to Union Bankshares Corporation. We found that besides being a mouthful, the Union First Market combination created brand confusion among consumers. Following what we believe will be an affirmative vote and subject to obtaining approval from our directors, Union will begin the process of changing the name of Union First Market Bank as well.

As you can see, Union achieved a lot over the past year and we are poised to deliver strong results in 2014 and beyond. I consider 2013 to be a landmark year for the Company that has positioned us for success as we strive to become Virginia's next great bank.

 

G. William Beale
Chief Executive Officer

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Union First Market Bank
P.O. Box 940
Ruther Glen, VA 22546

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