Letter from the Chief Executive Officer

2012 demonstrated the continued success and resilience of the business strategy for Union First Market Bankshares. Our 2012 net income increased to $35.4 million, which is 16.3% higher than 2011. While that is solid growth given the current operating environment, your company took significant and meaningful steps forward in 2012 that should deliver Top Tier financial performance over the next several years.

As you look from the bottom up, you can see that our operating results were the product of solid execution and have built upon the work undertaken over the past several years.

The company saw continued household growth in 2012. This organic growth builds core deposits which enhances our franchise value and leverages our existing expense structure. It also reflects the strength of the Union brand in our footprint as the company is increasingly seen as a preferred destination to bank.

Union didn’t just grow households and core customers; another area of growth was loans. As the macroeconomic climate stabilized and improved in Virginia, the company saw 5.3% loan growth in 2012. The loan growth was even faster in the 4th quarter, which was the strongest quarter of growth in several years, and ran at an annualized rate of 8%. The loan growth was diverse across several categories and as you compare our net interest margin and the yield on our loan portfolio to our peers, you can see that we did not sacrifice rate to generate loan growth.

The company also saw a meaningful reduction in non-performing assets in 2012 which are now at the lowest levels in three years. While the macroeconomic conditions certainly helped, the company’s dedicated effort to reduce Other Real Estate Owned (OREO) and to work with our customers were the keys to the success.

Union Mortgage Group was another bright spot for 2012. The addition of new mortgage originators and the continued low rate environment drove a 58% increase in their net income contribution. We are working to improve the back office operations of Union Mortgage Group that will enable us to increase capacity while becoming more efficient.

In 2012, Union First Market Bankshares turned towards achieving top-tier financial performance defined as delivering top quartile financial results and above average returns for our shareholders. While this corporate pillar is not new, management was previously focused on our other pillars of superior financial products and services, teammate experience and customer experience, as well as credit quality, following the 2010 merger with First Market Bank so that we would have the advantage of making these organizational changes from a position of strength rather than the alternative.

The company developed key financial performance metrics and benchmarked them against national peers and set internal targets designed to measure our progress towards our financial return objectives. The company believes that it will take time to return to our historical levels of financial performance. Over the short term, the company is focused on delivering a return on average assets greater than 1.0%, a return on shareholder equity greater than 10% and a consolidated efficiency ratio of less than 65%. Management and the Board believe that those results can be achieved through a combination of expense reductions and increased non-interest income. After analyzing our branch footprint in 2012, we consolidated 8 branches. With 90 branches and more than 150 ATMs, Union still offers the widest footprint and most banking locations of any Virginia-based community bank.

In addition to making changes to our branch footprint, we looked at additional ways to deliver service more efficiently by renegotiating vendor contracts and combining our customer account statement mailings so that we were not sending several pieces of mail to the same customer. We also looked at our organization to make sure that it was efficiently structured. Our focus was not solely limited to expenses as we examined our fee structures to make sure that we were competitive with the market and adjusted some fees accordingly. Many of those changes were made in late 2012, but we expect to see their full impact in 2013 and beyond.

Union has been committed to returning capital to our shareholders and creating long term shareholder value. The Board raised the quarterly dividend each quarter of 2012 and is currently at 13 cents per share. This is an 86% increase from the same time as last year. Union also repurchased and retired approximately 970,000 shares or 3.5% of outstanding shares over the last twelve months.

As a community bank Union believes that our success is a reflection of the vitality of the communities we serve. In 2012, Union continued to live up to its purpose of ‘Enriching the Lives of the People and Communities We Serve.’ Union donated more than $1 million to non-profits and other charitable organizations in 2012. One of the programs that Union supports is the EverFi financial literacy program. Union sponsors the program in more than 70 high schools across Virginia and to date more than 8,600 students have completed the curriculum. By building financial acumen at the high school level, we are enabling the students to make better decisions when they go to college or enter the workforce. Even as the company grows to be one of the largest financial institutions headquartered in Virginia, we never want to forget our heritage as a community bank.

I have written in the past about management’s and the Board’s commitment to succession planning and building a great team. In 2012, we made several changes to our management team and to the Board. Starting with Board, in April we added two new members – Linda Schreiner and Ray Slaughter. During that month, Tony Peay moved from the chief financial officer role to become our chief banking officer while Dave Fairchild started to focus on strategic initiatives. In July, Rob Gorman was named as our chief financial officer joining us from SunTrust. In October, Rob Eastep joined as President of Union Mortgage Group. We also built depth throughout the organization and hired additional senior lenders with strong ties to the business community.

These management changes are important to the long term outlook for our company while helping drive our current operating results. As you can see, Union achieved a lot over the past year. I consider 2012 to be a breakout year for the company as we strive to become Virginia’s next great bank.

G. William Beale
Chief Executive Officer