UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-20293
UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA
54-1598552
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 1051 East Cary Street
Suite 1200
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
 
(804) 633-5031
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
 
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨ No x

The number of shares of common stock outstanding as of May 3, 2017 was 43,677,935.



UNION BANKSHARES CORPORATION
FORM 10-Q
INDEX
 
ITEM
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 







Glossary of Acronyms and Defined Terms
 
AFS
Available for sale
ALCO
Asset Liability Committee
ALL
Allowance for loan losses
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM
Automated teller machine
the Bank
Union Bank & Trust
bps
Basis points
the Company
Union Bankshares Corporation
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS
Earnings per share
Exchange Act
Securities Exchange Act of 1934
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
Federal Reserve
Board of Governors of the Federal Reserve System
Federal Reserve Bank
Federal Reserve Bank of Richmond
FHLB
Federal Home Loan Bank of Atlanta
U.S. GAAP or GAAP
Accounting principles generally accepted in the United States
HELOC
Home equity line of credit
HTM
Held to maturity
LIBOR
London Interbank Offered Rate
NPA
Nonperforming assets
ODCM
Old Dominion Capital Management, Inc.
OREO
Other real estate owned
OTTI
Other than temporary impairment
PCI
Purchased credit impaired
ROA
Return on average assets
ROE
Return on average common equity
ROTCE
Return on average tangible common equity
StellarOne
StellarOne Corporation
TDR
Troubled debt restructuring
UMG
Union Mortgage Group, Inc.




PART I – FINANCIAL INFORMATION
 
ITEM 1 – FINANCIAL STATEMENTS
 
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
(Audited)
ASSETS
 

 
 

Cash and cash equivalents:
 

 
 

Cash and due from banks
$
120,216

 
$
120,758

Interest-bearing deposits in other banks
62,656

 
58,030

Federal funds sold
947

 
449

Total cash and cash equivalents
183,819

 
179,237

Securities available for sale, at fair value
953,058

 
946,764

Securities held to maturity, at carrying value
203,478

 
201,526

Restricted stock, at cost
65,402

 
60,782

Loans held for sale, at fair value
19,976

 
36,487

Loans held for investment, net of deferred fees and costs
6,554,046

 
6,307,060

Less allowance for loan losses
38,414

 
37,192

Net loans held for investment
6,515,632

 
6,269,868

Premises and equipment, net
122,512

 
122,027

Other real estate owned, net of valuation allowance
9,605

 
10,084

Goodwill
298,191

 
298,191

Amortizable intangibles, net
18,965

 
20,602

Bank owned life insurance
178,774

 
179,318

Other assets
100,508

 
101,907

Total assets
$
8,669,920

 
$
8,426,793

LIABILITIES
 

 
 

Noninterest-bearing demand deposits
$
1,490,799

 
$
1,393,625

Interest-bearing deposits
5,123,396

 
4,985,864

Total deposits
6,614,195

 
6,379,489

Securities sold under agreements to repurchase
44,587

 
59,281

Other short-term borrowings
522,500

 
517,500

Long-term borrowings
413,779

 
413,308

Other liabilities
59,228

 
56,183

Total liabilities
7,654,289

 
7,425,761

Commitments and contingencies (Note 6)


 


STOCKHOLDERS' EQUITY
 

 
 

Common stock, $1.33 par value, shares authorized 100,000,000; issued and outstanding, 43,679,947 shares and 43,609,317 shares, respectively.
57,629

 
57,506

Additional paid-in capital
606,078

 
605,397

Retained earnings
352,335

 
341,938

Accumulated other comprehensive income
(411
)
 
(3,809
)
Total stockholders' equity
1,015,631

 
1,001,032

Total liabilities and stockholders' equity
$
8,669,920

 
$
8,426,793

See accompanying notes to consolidated financial statements.

-2-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
Three Months Ended
 
March 31,
2017
 
March 31,
2016
Interest and dividend income:
 
 
 
Interest and fees on loans
$
68,084

 
$
62,947

Interest on deposits in other banks
71

 
47

Interest and dividends on securities:
 
 
 
Taxable
4,923

 
4,316

Nontaxable
3,562

 
3,439

Total interest and dividend income
76,640

 
70,749

 
 
 
 
Interest expense:
 
 
 
Interest on deposits
5,077

 
4,195

Interest on short-term borrowings
950

 
623

Interest on long-term borrowings
4,046

 
2,200

Total interest expense
10,073

 
7,018

 
 
 
 
Net interest income
66,567

 
63,731

Provision for credit losses
2,122

 
2,604

Net interest income after provision for credit losses
64,445

 
61,127

 
 
 
 
Noninterest income:
 
 
 
Service charges on deposit accounts
4,829

 
4,734

Other service charges and fees
4,408

 
4,156

Fiduciary and asset management fees
2,794

 
2,138

Mortgage banking income, net
2,025

 
2,146

Gains on securities transactions, net
481

 
143

Bank owned life insurance income
2,125

 
1,372

Loan-related interest rate swap fees
1,180

 
662

Other operating income
997

 
563

Total noninterest income
18,839

 
15,914

 
 
 
 
Noninterest expenses:
 
 
 
Salaries and benefits
32,168

 
28,048

Occupancy expenses
4,903

 
4,976

Furniture and equipment expenses
2,603

 
2,636

Printing, postage, and supplies
1,150

 
1,139

Communications expense
910

 
1,089

Technology and data processing
3,900

 
3,814

Professional services
1,658

 
1,989

Marketing and advertising expense
1,740

 
1,938

FDIC assessment premiums and other insurance
706

 
1,362

Other taxes
2,022

 
1,618

Loan-related expenses
1,329

 
878

OREO and credit-related expenses
541

 
569

Amortization of intangible assets
1,637

 
1,880

Training and other personnel costs
969

 
744

Other expenses
1,159

 
1,592

Total noninterest expenses
57,395

 
54,272

 
 
 
 
Income before income taxes
25,889

 
22,769

Income tax expense
6,765

 
5,808

Net income
$
19,124

 
$
16,961

Basic earnings per common share
$
0.44

 
$
0.38

Diluted earnings per common share
$
0.44

 
$
0.38

Dividends declared per common share
$
0.20

 
$
0.19

Basic weighted average number of common shares outstanding
43,654,498

 
44,251,276

Diluted weighted average number of common shares outstanding
43,725,923

 
44,327,229

See accompanying notes to consolidated financial statements.

-3-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
 
 
Three Months Ended
March 31,
 
2017
 
2016
 
 
 
 
Net income
$
19,124

 
$
16,961

Other comprehensive income (loss):
 

 
 

Cash flow hedges:
 

 
 

Change in fair value of cash flow hedges
(31
)
 
(2,681
)
Reclassification adjustment for losses (gains) included in net income (net of tax, $97 and $76 for the three months ended March 31, 2017 and 2016, respectively)
180

 
141

AFS securities:
 

 
 

Unrealized holding gains (losses) arising during period (net of tax, $1,958 and $1,633 for the three months ended March 31, 2017 and 2016, respectively)
3,637

 
3,032

Reclassification adjustment for losses (gains) included in net income (net of tax, $168 and $50 for the three months ended March 31, 2017 and 2016, respectively)
(313
)
 
(93
)
HTM securities:
 

 
 

Reclassification adjustment for accretion of unrealized gain on AFS securities transferred to HTM (net of tax, $99 and $157 for the three months ended March 31, 2017 and 2016, respectively)
(184
)
 
(292
)
Bank owned life insurance:
 
 
 
  Reclassification adjustment for losses included in net income
109

 

Other comprehensive income (loss)
3,398

 
107

Comprehensive income
$
22,522

 
$
17,068

See accompanying notes to consolidated financial statements.

-4-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(Dollars in thousands, except share and per share amounts)
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2015
$
59,159

 
$
631,822

 
$
298,134

 
$
6,252

 
$
995,367

Net income - 2016
 

 
 

 
16,961

 
 

 
16,961

Other comprehensive income (net of taxes of $1,502)
 

 
 

 
 

 
107

 
107

Dividends on common stock ($0.19 per share)
 

 
 

 
(8,410
)
 
 

 
(8,410
)
Stock purchased under stock repurchase plan (1,040,612 shares)
(1,384
)
 
(22,344
)
 
 

 
 

 
(23,728
)
Issuance of common stock under Equity Compensation Plans (21,804 shares)
29

 
288

 
 

 
 

 
317

Issuance of common stock for services rendered (4,400 shares)
6

 
94

 
 

 
 

 
100

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (30,299 shares)
40

 
(417
)
 
 

 
 

 
(377
)
Stock-based compensation expense
 

 
641

 
 

 
 

 
641

Balance - March 31, 2016
$
57,850

 
$
610,084

 
$
306,685

 
$
6,359

 
$
980,978

 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2016
$
57,506

 
$
605,397

 
$
341,938

 
$
(3,809
)
 
$
1,001,032

Net income - 2017
 

 
 

 
19,124

 
 

 
19,124

Other comprehensive income (net of taxes of $1,788)
 

 
 

 
 

 
3,398

 
3,398

Dividends on common stock ($0.20 per share)
 

 
 

 
(8,727
)
 
 

 
(8,727
)
Issuance of common stock under Equity Compensation Plans (29,008 shares)
39

 
489

 
 

 
 

 
528

Issuance of common stock for services rendered (4,856 shares)
6

 
170

 
 

 
 

 
176

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (58,679 shares)
78

 
(1,126
)
 
 

 
 

 
(1,048
)
Stock-based compensation expense
 

 
1,148

 
 

 
 

 
1,148

Balance - March 31, 2017
$
57,629

 
$
606,078

 
$
352,335

 
$
(411
)
 
$
1,015,631

See accompanying notes to consolidated financial statements.

-5-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(Dollars in thousands)
 
2017
 
2016
Operating activities:
 

 
 

Net income
$
19,124

 
$
16,961

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

 
 

Depreciation of premises and equipment
2,645

 
2,511

Writedown of OREO
238

 
126

Amortization, net
3,396

 
3,421

Amortization related to acquisition, net
144

 
734

Provision for credit losses
2,122

 
2,604

Gains on securities transactions, net
(481
)
 
(143
)
Bank owned life insurance income
(2,125
)
 
(1,372
)
Decrease (increase) in loans held for sale, net
16,511

 
10,921

Gains on sales of other real estate owned, net
(36
)
 
(7
)
Losses on sales of premises, net
26

 
45

Stock-based compensation expenses
1,148

 
641

Issuance of common stock for services
176

 
100

Net decrease (increase) in other assets
2,241

 
(14,594
)
Net increase in other liabilities
5,347

 
994

Net cash and cash equivalents provided by (used in) operating activities
50,476

 
22,942

Investing activities:
 

 
 

Purchases of securities available for sale and restricted stock
(53,782
)
 
(83,735
)
Purchases of securities held to maturity
(4,878
)
 

Proceeds from sales of securities available for sale and restricted stock
21,306

 
14,532

Proceeds from maturities, calls and paydowns of securities available for sale
26,167

 
29,151

Proceeds from maturities, calls and paydowns of securities held to maturity
1,001

 

Net increase in loans held for investment
(246,258
)
 
(110,513
)
Net increase in premises and equipment
(3,156
)
 
(1,885
)
Proceeds from sales of other real estate owned
206

 
1,339

Net cash and cash equivalents provided by (used in) investing activities
(259,394
)
 
(151,111
)
Financing activities:
 

 
 

Net increase (decrease) in noninterest-bearing deposits
97,174

 
(9,694
)
Net increase (decrease) in interest-bearing deposits
137,532

 
(8,260
)
Net increase (decrease) in short-term borrowings
(9,694
)
 
169,000

Cash paid for contingent consideration
(2,265
)
 

Cash dividends paid - common stock
(8,727
)
 
(8,410
)
Repurchase of common stock

 
(23,728
)
Issuance of common stock
528

 
317

Vesting of restricted stock, net of shares held for taxes
(1,048
)
 
(377
)
Net cash and cash equivalents provided by (used in) financing activities
213,500

 
118,848

Increase (decrease) in cash and cash equivalents
4,582

 
(9,321
)
Cash and cash equivalents at beginning of the period
179,237

 
142,660

Cash and cash equivalents at end of the period
$
183,819

 
$
133,339

Supplemental Disclosure of Cash Flow Information
 

 
 

Cash payments for:
 

 
 

Interest
$
8,141

 
$
6,998

Income taxes

 
10,500

Supplemental schedule of noncash investing and financing activities
 

 
 

Transfers between loans and other real estate owned
$
(71
)
 
$
405

See accompanying notes to consolidated financial statements.

-6-


UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. ACCOUNTING POLICIES

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.
 
The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP 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 2016 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.

Business Combinations
On May 31, 2016, the Bank completed its acquisition of ODCM, a Charlottesville, Virginia-based registered investment advisor with nearly $300.0 million in assets under management at the time of the acquisition. The acquisition date fair value of consideration transferred totaled $9.1 million, which consisted of $4.1 million in cash, $453,000 in stock, and the remainder being contingent on achieving certain performance metrics. The contingent consideration is carried at fair value and is reported as a component of “Other Liabilities” in the Consolidated Balance Sheet. The fair value of this liability will be assessed at each reporting period. 

In connection with the transaction, the Company recorded $4.7 million in goodwill and $4.5 million of amortizable assets, which primarily relate to the value of customer relationships. The Company is amortizing these intangibles assets over the period of expected benefit, which ranges from 5 to 10 years using a straight-line method. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. In the third quarter of 2016, the Company finalized the valuation of certain amortizable intangible assets which increased the fair value and also impacted the recognized goodwill. The fair values are subject to refinement for up to one year after the closing date of the acquisition.
 
Loans
The Company originates commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial and residential real estate loans (including acquisition and development loans and residential construction loans) throughout its market area. The ability of the Company’s debtors to honor their contracts on such loans is dependent upon the real estate and general economic conditions in those markets, as well as other factors.
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
 
Construction and Land Development – construction loans generally made to commercial and residential builders for specific construction projects. The successful repayment of these types of loans is generally dependent upon (a) a commitment for permanent financing from the Company, or (b) from the sale of the constructed property. These loans carry more risk than both types of commercial real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. As in commercial real estate term lending, the Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations to any one business or industry.
 
Also, included in this category are loans generally made to residential home builders to support their lot and home inventory needs. Repayment relies upon the successful performance of the underlying residential real estate project. This type of lending carries a higher level of risk as compared to other commercial lending. This class of lending manages risks related to residential real estate market conditions, a functioning first and secondary market in which to sell residential properties, and the borrower’s

-7-


ability to manage inventory and run projects. The Company manages this risk by lending to experienced builders and developers by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations with any particular customer or geographic region.
 
Commercial Real Estate – Owner Occupied - term loans made to support owner occupied real estate properties that rely upon the successful operation of the business occupying the property for repayment. General market conditions and economic activity may affect these types of loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry.
 
Commercial Real Estate – Non-Owner Occupied - term loans typically made to borrowers to support income producing properties that rely upon the successful operation of the property for repayment. General market conditions and economic activity may impact the performance of these types of loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, and hotel as well as avoiding concentrations to any one business or industry.
 
Residential 1-4 Family – loans generally made to both commercial and residential borrowers. Residential 1-4 Family loan portfolios carry risks associated with the creditworthiness of the borrower or the tenant and changes in loan-to-value ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, experienced underwriting, requiring standards for appraisers, and not making subprime loans.
 
Multifamily Real Estate – loans made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other non-owner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer.
 
Commercial & Industrial – loans generally made to support the Company’s borrowers’ need for equipment/vehicle purchases and short-term or seasonal cash flow needs. Repayment relies upon the successful operation of the business. This type of lending carries a lower level of commercial credit risk as compared to other commercial lending. The Company manages this risk by using general underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry.
 
HELOC – the consumer HELOC portfolio carries risks associated with the creditworthiness of the borrower and changes in loan-to-value ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, using experienced underwriting, requiring standards for appraisers, and not making subprime loans.
 
Auto – the consumer indirect auto lending portfolio generally carries certain risks associated with the values of the collateral that management must mitigate. The Company focuses its indirect auto lending on one to two year old used vehicles where substantial depreciation has already occurred thereby minimizing the risk of significant loss of collateral values in the future. This type of lending places reliance on computer-based loan approval systems to supplement other underwriting standards.
 
Consumer and all other - portfolios carry risks associated with the creditworthiness of the borrower and changes in the economic environment. The Company manages these risks through policies and procedures such as experienced underwriting, maximum debt to income ratios, and minimum borrower credit scores. Also included in this category are loans that generally support small business lines of credit and agricultural lending, neither of which are a material source of business for the Company.
 
Affordable Housing Entities
The Company invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For the three months ended March 31, 2017 and March 31, 2016, the Company recognized amortization $223,000 and $130,000, respectively, and tax credits of $309,000 and $210,000, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. The carrying value of the Company’s investments in these qualified affordable housing projects was $9.7 million and $9.9 million as of March 31, 2017 and December 31, 2016, respectively. At March 31, 2017 and December 31, 2016, the Company's recorded liability totaled $7.1 million for the related unfunded commitments, respectively, which are expected to be paid from 2017 to 2019.
 


-8-


Adoption of New Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for employee share based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted this standard in the first quarter of 2017. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This ASU clarifies the definition of a business that appears in ASC 805, Business Combinations. Amendments narrow the definition and provide a framework for making judgments whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company has concluded the adoption of ASU 2017-01 will not have a material impact on its consolidated financial statements.
 
In January 2017, the FASB issued ASU No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings  (SEC Update).” This ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. ASU 2017-03 is effective upon issuance. The Company has concluded the adoption of ASU 2017-03 will not have a material impact on its consolidated financial statements.
 
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU simplifies accounting for goodwill impairments by eliminating step two (the implied fair value to carrying value of goodwill) from the existing goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has concluded the adoption of ASU 2017-04 will not have a material impact on its consolidated financial statements.
 
In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” This ASU conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. The Company is currently assessing the impact ASU 2017-05 will have on its consolidated financial statements.
 
In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This ASU focuses on the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. The Company has concluded the adoption of ASU 2017-08 will not have a material impact on its consolidated financial statements.
 

-9-


2. SECURITIES 

Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of March 31, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
 
 
Amortized
 
Gross Unrealized
 
Estimated
 
Cost
 
Gains
 
(Losses)
 
Fair Value
March 31, 2017
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
274,003

 
$
5,910

 
$
(2,064
)
 
$
277,849

Corporate bonds
112,432

 
775

 
(1,161
)
 
112,046

Mortgage-backed securities
548,457

 
4,690

 
(3,792
)
 
549,355

Other securities
13,885

 

 
(77
)
 
13,808

Total available for sale securities
$
948,777

 
$
11,375

 
$
(7,094
)
 
$
953,058

 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
274,007

 
$
4,962

 
$
(3,079
)
 
$
275,890

Corporate bonds
123,674

 
892

 
(2,786
)
 
121,780

Mortgage-backed securities
536,031

 
4,626

 
(5,371
)
 
535,286

Other securities
13,885

 

 
(77
)
 
13,808

Total available for sale securities
$
947,597

 
$
10,480

 
$
(11,313
)
 
$
946,764

 
The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s available for sale securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of March 31, 2017 and December 31, 2016. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
More than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
63,155

 
$
(2,001
)
 
$
596

 
$
(63
)
 
$
63,751

 
$
(2,064
)
Mortgage-backed securities
277,308

 
(3,414
)
 
38,209

 
(378
)
 
315,517

 
(3,792
)
Corporate bonds and other securities
28,341

 
(581
)
 
40,237

 
(657
)
 
68,578

 
(1,238
)
Total available for sale securities
$
368,804

 
$
(5,996
)
 
$
79,042

 
$
(1,098
)
 
$
447,846

 
$
(7,094
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
108,440

 
$
(3,007
)
 
$
588

 
$
(72
)
 
$
109,028

 
$
(3,079
)
Mortgage-backed securities
316,469

 
(4,979
)
 
42,096

 
(392
)
 
358,565

 
(5,371
)
Corporate bonds and other securities
47,388

 
(1,537
)
 
40,468

 
(1,326
)
 
87,856

 
(2,863
)
Total available for sale securities
$
472,297

 
$
(9,523
)
 
$
83,152

 
$
(1,790
)
 
$
555,449

 
$
(11,313
)
 
As of March 31, 2017, there were $79.0 million, or 30 issues, of individual available for sale securities that had been in a continuous loss position for more than 12 months. These securities had an unrealized loss of $1.1 million and consisted of municipal obligations, mortgage-backed securities, and corporate bonds. As of December 31, 2016, there were $83.2 million, or 30 issues, of individual securities that had been in a continuous loss position for more than 12 months. These securities had an unrealized loss of $1.8 million and consisted of municipal obligations, mortgage-backed securities, and corporate bonds. The Company has determined that these securities are temporarily impaired as of March 31, 2017 and December 31, 2016 for the reasons set out below:
 

-10-


Mortgage-backed securities. This category’s unrealized losses are primarily the result of interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also, the majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee.
 
Obligations of state and political subdivisions. This category’s unrealized losses are primarily the result of interest rate fluctuations and also a certain few ratings downgrades brought about by the impact of the credit crisis on states and political subdivisions. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
 
Corporate bonds. The Company’s unrealized losses in corporate debt securities are related to both interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of the securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
 
The following table presents the amortized cost and estimated fair value of available for sale securities as of March 31, 2017 and December 31, 2016, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
March 31, 2017
 
December 31, 2016
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
24,906

 
$
24,989

 
$
21,403

 
$
21,517

Due after one year through five years
113,890

 
115,757

 
108,198

 
109,778

Due after five years through ten years
284,017

 
286,918

 
300,552

 
301,888

Due after ten years
525,964

 
525,394

 
517,444

 
513,581

Total securities available for sale
$
948,777

 
$
953,058

 
$
947,597

 
$
946,764

 

For information regarding the estimated fair value of available for sale securities which were pledged to secure public deposits, repurchase agreements, and for other purposes as permitted or required by law as of March 31, 2017 and December 31, 2016, see Note 6 "Commitments and Contingencies".

Held to Maturity
The Company reports securities held to maturity on the Consolidated Balance Sheets at carrying value. Carrying value is amortized cost which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from securities available for sale to securities held to maturity. Investment securities transferred into the held to maturity category from the available for sale category are recorded at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the securities held to maturity. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.
 

-11-


The carrying value, gross unrealized gains and losses, and estimated fair values of securities held to maturity as of March 31, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
 
 
Carrying
 
Gross Unrealized
 
Estimated
 
Value (1)
 
Gains
 
(Losses)
 
Fair Value
March 31, 2017
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
203,478

 
$
2,409

 
$
(276
)
 
$
205,611

 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
201,526

 
$
1,617

 
$
(828
)
 
$
202,315

 
(1) The carrying value includes $4.8 million as of March 31, 2017 and $5.2 million as of December 31, 2016 of net unrealized gains present at the time of transfer from available for sale securities, net of any accretion.
 
The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s held to maturity securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of March 31, 2017 and December 31, 2016. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
More than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
34,558

 
$
(244
)
 
$
648

 
$
(32
)
 
$
35,206

 
$
(276
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
92,841

 
$
(747
)
 
$
648

 
$
(81
)
 
$
93,489

 
$
(828
)
 
As of March 31, 2017, there was $648,000, or 1 issue, of an individual held to maturity security that had been in a continuous loss position for more than 12 months. This security had an unrealized loss of $32,000, respectively. As of December 31, 2016, there was $648,000, or 1 issue, of an individual held to maturity security that had been in a continuous loss position for more than 12 months. This security had an unrealized loss of $81,000. The Company has determined that these securities in a loss position are temporarily impaired as of March 31, 2017 and December 31, 2016 for the reasons set out below:

Obligations of states and political subdivisions. This category’s unrealized losses are primarily the result of interest rate fluctuations and also a certain few ratings downgrades brought about by the impact of the credit crisis on states and political subdivisions. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.


-12-


The following table presents the amortized cost and estimated fair value of held to maturity securities as of March 31, 2017 and December 31, 2016, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
March 31, 2017
 
December 31, 2016
 
Carrying
Value (1)
 
Estimated
Fair Value
 
Carrying
Value
(1)
 
Estimated
Fair Value
Due in one year or less
$
4,108

 
$
4,140

 
$
4,403

 
$
4,440

Due after one year through five years
30,050

 
30,503

 
28,383

 
28,763

Due after five years through ten years
62,127

 
62,485

 
51,730

 
51,522

Due after ten years
107,193

 
108,483

 
117,010

 
117,590

Total securities held to maturity
$
203,478

 
$
205,611

 
$
201,526

 
$
202,315

 
(1) The carrying value includes $4.8 million as of March 31, 2017 and $5.2 million as of December 31, 2016 of net unrealized gains present at the time of transfer from available for sale securities, net of any accretion.
 
For information regarding the estimated fair value of held to maturity securities which were pledged to secure public deposits as permitted or required by law as of March 31, 2017 and December 31, 2016, see Note 6 "Commitments and Contingencies".
 
Restricted Stock, at cost
Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets. At March 31, 2017 and December 31, 2016, the FHLB required the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank required the Bank to maintain stock with a par value equal to 6% of its outstanding capital at both March 31, 2017 and December 31, 2016. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $27.6 million and $23.8 million for March 31, 2017 and December 31, 2016 and FHLB stock in the amount of $37.8 million and $37.0 million as of March 31, 2017 and December 31, 2016, respectively.
 
Other-Than-Temporary-Impairment
During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the three months ended March 31, 2017, and in accordance with the guidance, no OTTI was recognized.

For the year ended December 31, 2015, the Company determined that a municipal security in the available for sale portfolio incurred credit-related OTTI of $300,000.  During the quarter ended March 31, 2016, the municipal security was sold.  As a result, the Company recognized an additional loss on sale of the previously written down security.
 

-13-


Realized Gains and Losses
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three months ended March 31, 2017 and 2016 (dollars in thousands).
 
 
Three Months Ended
March 31, 2017
 
Three Months Ended March 31, 2016
Realized gains (losses):
 

 
 

Gross realized gains
$
481

 
$
239

Gross realized losses

 
(96
)
Net realized gains
$
481

 
$
143

 
 
 
 
Proceeds from sales of securities
$
21,306

 
$
14,532

 
3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of deferred fees and costs, and consist of the following at March 31, 2017 and December 31, 2016 (dollars in thousands):

 
March 31, 2017
 
December 31, 2016
Construction and Land Development
$
770,287

 
$
751,131

Commercial Real Estate - Owner Occupied
870,559

 
857,805

Commercial Real Estate - Non-Owner Occupied
1,631,767

 
1,564,295

Multifamily Real Estate
353,769

 
334,276

Commercial & Industrial
576,567

 
551,526

Residential 1-4 Family
1,057,439

 
1,029,547

Auto
271,466

 
262,071

HELOC
527,863

 
526,884

Consumer and all other
494,329

 
429,525

Total loans held for investment, net(1)
$
6,554,046

 
$
6,307,060

 
(1) Loans, as presented, are net of deferred fees and costs totaling $768,000 and $1.8 million as of March 31, 2017 and December 31, 2016, respectively.
 

-14-


The following table shows the aging of the Company’s loan portfolio, by segment, at March 31, 2017 (dollars in thousands):
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater than 90
Days and still
Accruing
 
PCI
 
Nonaccrual
 
Current
 
Total Loans
Construction and Land Development
$
630

 
$
376

 
$
16

 
$
2,776

 
$
6,545

 
$
759,944

 
$
770,287

Commercial Real Estate - Owner Occupied
878

 

 
93

 
18,199

 
1,298

 
850,091

 
870,559

Commercial Real Estate - Non-Owner Occupied
1,487

 

 
711

 
16,725

 
2,798

 
1,610,046

 
1,631,767

Multifamily Real Estate

 

 

 
2,058

 

 
351,711

 
353,769

Commercial & Industrial
453

 
126

 

 
733

 
3,245

 
572,010

 
576,567

Residential 1-4 Family
11,615

 
2,104

 
686

 
15,910

 
5,856

 
1,021,268

 
1,057,439

Auto
1,534

 
250

 
11

 

 
393

 
269,278

 
271,466

HELOC
1,490

 
365

 
680

 
1,156

 
1,902

 
522,270

 
527,863

Consumer and all other
1,766

 
1,460

 
126

 
213

 
301

 
490,463

 
494,329

Total loans held for investment
$
19,853

 
$
4,681

 
$
2,323

 
$
57,770

 
$
22,338

 
$
6,447,081

 
$
6,554,046

 
The following table shows the aging of the Company’s loan portfolio, by segment, at December 31, 2016 (dollars in thousands):

 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater than 90
Days and still
Accruing
 
PCI
 
Nonaccrual
 
Current
 
Total Loans
Construction and Land Development
$
1,162

 
$
232

 
$
76

 
$
2,922

 
$
2,037

 
$
744,702

 
$
751,131

Commercial Real Estate - Owner Occupied
1,842

 
109

 
35

 
18,343

 
794

 
836,682

 
857,805

Commercial Real Estate - Non-Owner Occupied
2,369

 

 

 
17,303

 

 
1,544,623

 
1,564,295

Multifamily Real Estate
147

 

 

 
2,066

 

 
332,063

 
334,276

Commercial & Industrial
759

 
858

 
9

 
1,074

 
124

 
548,702

 
551,526

Residential 1-4 Family
7,038

 
534

 
2,048

 
16,200

 
5,279

 
998,448

 
1,029,547

Auto
2,570

 
317

 
111

 

 
169

 
258,904

 
262,071

HELOC
1,836

 
1,140

 
635

 
1,161

 
1,279

 
520,833

 
526,884

Consumer and all other
2,522

 
1,431

 
91

 
223

 
291

 
424,967

 
429,525

Total loans held for investment
$
20,245

 
$
4,621

 
$
3,005

 
$
59,292

 
$
9,973

 
$
6,209,924

 
$
6,307,060

 

-15-


The following table shows the PCI loan portfolios, by segment and their delinquency status, at March 31, 2017 (dollars in thousands):
 
 
30-89 Days Past
Due
 
Greater than 90
Days
 
Current
 
Total
Construction and Land Development
$
72

 
$

 
$
2,704

 
$
2,776

Commercial Real Estate - Owner Occupied
902

 
317

 
16,980

 
18,199

Commercial Real Estate - Non-Owner Occupied
303

 
1,025

 
15,397

 
16,725

Multifamily Real Estate

 

 
2,058

 
2,058

Commercial & Industrial

 
12

 
721

 
733

Residential 1-4 Family
1,491

 
1,057

 
13,362

 
15,910

HELOC
120

 
114

 
922

 
1,156

Consumer and all other

 

 
213

 
213

Total
$
2,888

 
$
2,525

 
$
52,357

 
$
57,770

 
The following table shows the PCI loan portfolios, by segment and their delinquency status, at December 31, 2016 (dollars in thousands):
 
 
30-89 Days Past
Due
 
Greater than 90
Days
 
Current
 
Total
Construction and Land Development
$

 
$
84

 
$
2,838

 
$
2,922

Commercial Real Estate - Owner Occupied
271

 
519

 
17,553

 
18,343

Commercial Real Estate - Non-Owner Occupied
409

 
126

 
16,768

 
17,303

Multifamily Real Estate

 

 
2,066

 
2,066

Commercial & Industrial
44

 
56

 
974

 
1,074

Residential 1-4 Family
1,298

 
945

 
13,957

 
16,200

HELOC
175

 
121

 
865

 
1,161

Consumer and all other

 

 
223

 
223

Total
$
2,197

 
$
1,851

 
$
55,244

 
$
59,292

 

-16-


The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s impaired loans, excluding PCI loans related to the StellarOne acquisition, by segment at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Loans without a specific allowance
 

 
 

 
 

 
 

 
 

 
 

Construction and Land Development
$
11,290

 
$
11,775

 
$

 
$
13,877

 
$
14,353

 
$

Commercial Real Estate - Owner Occupied
6,120

 
6,285

 

 
5,886

 
6,042

 

Commercial Real Estate - Non-Owner Occupied
2,825

 
2,825

 

 
1,399

 
1,399

 

Commercial & Industrial
949

 
949

 

 
648

 
890

 

Residential 1-4 Family
9,541

 
10,515

 

 
8,496

 
9,518

 

HELOC
1,443

 
1,535

 

 
1,017

 
1,094

 

Consumer and all other
113

 
223

 

 
230

 
427

 

Total impaired loans without a specific allowance
$
32,281

 
$
34,107

 
$

 
$
31,553

 
$
33,723

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Loans with a specific allowance
 

 
 

 
 

 
 

 
 

 
 

Construction and Land Development
$
6,011

 
$
6,018

 
$
729

 
$
1,395

 
$
1,404

 
$
107

Commercial Real Estate - Owner Occupied
639

 
639

 
3

 
646

 
646

 
4

Commercial Real Estate - Non-Owner Occupied
8,691

 
8,739

 
745

 
2,809

 
2,809

 
474

Commercial & Industrial
5,151

 
5,442

 
617

 
857

 
880

 
14

Residential 1-4 Family
3,243

 
3,414

 
393

 
3,335

 
3,535

 
200

Auto
393

 
506

 
1

 
169

 
235

 
1

HELOC
757

 
881

 
20

 
323

 
433

 
15

Consumer and all other
189

 
516

 
7

 
62

 
298

 
1

Total impaired loans with a specific allowance
$
25,074

 
$
26,155

 
$
2,515

 
$
9,596

 
$
10,240

 
$
816

Total impaired loans
$
57,355

 
$
60,262

 
$
2,515

 
$
41,149

 
$
43,963

 
$
816


The following table shows the average recorded investment and interest income recognized for the Company’s impaired loans, excluding PCI loans related to the StellarOne acquisition, by segment for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
 
Average
Investment
 
Interest Income
Recognized
 
Average
Investment
 
Interest Income
Recognized
Construction and Land Development
$
17,179

 
$
139

 
$
30,569

 
$
484

Commercial Real Estate - Owner Occupied
6,793

 
64

 
16,510

 
157

Commercial Real Estate - Non-Owner Occupied
11,540

 
108

 
4,214

 
41

Multifamily Real Estate

 

 
3,817

 
60

Commercial & Industrial
6,830

 
36

 
3,663

 
37

Residential 1-4 Family
13,047

 
73

 
15,301

 
106

Auto
477

 
1

 
218

 

HELOC
2,366

 
4

 
2,933

 
21

Consumer and all other
303

 

 
982

 
6

Total impaired loans
$
58,535

 
$
425

 
$
78,207

 
$
912



-17-


The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology and are included in the preceding impaired loan tables. For the three months ended March 31, 2017, the recorded investment in restructured loans prior to modifications was not materially impacted by the modification.

The following table provides a summary, by segment, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed on nonaccrual status, which are considered to be nonperforming, as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
No. of
Loans
 
Recorded
Investment
 
Outstanding
Commitment
 
No. of
Loans
 
Recorded
Investment
 
Outstanding
Commitment
Performing
 

 
 

 
 

 
 

 
 

 
 

Construction and Land Development
6

 
$
3,422

 
$

 
8

 
$
3,793

 
$

Commercial Real Estate - Owner Occupied
6

 
2,605

 

 
7

 
3,106

 

Commercial Real Estate - Non-Owner Occupied
2

 
1,637

 

 
2

 
2,390

 

Commercial & Industrial
10

 
1,993

 

 
3

 
533

 

Residential 1-4 Family
31

 
4,668

 

 
28

 
4,145

 

Total performing
55

 
$
14,325

 
$

 
48

 
$
13,967

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Nonperforming
 

 
 

 
 

 
 

 
 

 
 

Construction and Land Development
4

 
$
540

 
$

 
2

 
$
215

 
$

Commercial Real Estate - Owner Occupied
3

 
624

 

 
2

 
156

 

Commercial Real Estate - Non-Owner Occupied
2

 
2,390

 

 

 

 

Commercial & Industrial
1

 
104

 

 
1

 
116

 

Residential 1-4 Family
10

 
741

 

 
8

 
948

 

Total nonperforming
20

 
$
4,399

 
$

 
13

 
$
1,435

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Total performing and nonperforming
75

 
$
18,724

 
$

 
61

 
$
15,402

 
$


The Company considers a default of a TDR to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three months ended March 31, 2017 and 2016, the Company did not identify any TDRs that went into default that had been restructured in the twelve-month period prior to default.


-18-


The following table shows, by segment and modification type, TDRs that occurred during the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
 
No. of
Loans
 
Recorded 
Investment at
Period End
 
No. of
Loans
 
Recorded 
Investment at
Period End
Modified to interest only, at a market rate
 
 
 
 
 
 
 
Commercial & Industrial
5

 
$
661

 

 
$

Total interest only at market rate of interest
5

 
$
661

 

 
$

 
 
 
 
 
 
 
 
Term modification, at a market rate
 

 
 

 
 

 
 

Commercial Real Estate - Owner Occupied

 
$

 
1

 
$
709

Commercial Real Estate - Non-Owner Occupied
2

 
1,637

 

 

Commercial & Industrial
2

 
836

 

 

Residential 1-4 Family
3

 
380

 
1

 
378

Total loan term extended at a market rate
7

 
$
2,853

 
2

 
$
1,087

 
 
 
 
 
 
 
 
Term modification, below market rate
 
 
 
 
 
 
 
Commercial & Industrial
2

 
$
128

 

 
$

Residential 1-4 Family
4

 
865

 

 

Total loan term extended at a below market rate
6

 
$
993

 

 
$

 
 
 
 
 
 
 
 
Total
18

 
$
4,507

 
2

 
$
1,087



The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by segment for the three months ended and as of March 31, 2017. The table below includes the provision for loan losses. In addition, a $112,000 provision was recognized during the three months ended March 31, 2017 for unfunded loan commitments for which the reserves are recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

 
Allowance for loan losses
 
Balance,
beginning of the
year
 
Recoveries
credited to
allowance
 
Loans charged
off
 
Provision
charged to
operations
 
Balance, end of
period
Construction and Land Development
$
10,055

 
$
37

 
$
(45
)
 
$
(496
)
 
$
9,551

Commercial Real Estate - Owner Occupied
3,801

 
20

 

 
(600
)
 
3,221

Commercial Real Estate - Non-Owner Occupied
6,622

 

 

 
640

 
7,262

Multifamily Real Estate
1,236

 

 

 
198

 
1,434

Commercial & Industrial
4,627

 
139

 
(241
)
 
754

 
5,279

Residential 1-4 Family
6,399

 
128

 
(135
)
 
227

 
6,619

Auto
946

 
108

 
(248
)
 
139

 
945

HELOC
1,328

 
88

 
(194
)
 
47

 
1,269

Consumer and all other
2,178

 
325

 
(770
)
 
1,101

 
2,834

Total
$
37,192

 
$
845

 
$
(1,633
)
 
$
2,010

 
$
38,414

 

-19-


 
Loans individually evaluated
for impairment
 
Loans collectively evaluated for
impairment
 
Loans acquired with
deteriorated credit quality
 
Total
 
Loans
 
ALL
 
Loans
 
ALL
 
Loans
 
ALL
 
Loans
 
ALL
Construction and Land Development
$
17,301

 
$
729

 
$
750,210

 
$
8,822

 
$
2,776

 
$

 
$
770,287

 
$
9,551

Commercial Real Estate - Owner Occupied
6,759

 
3

 
845,601

 
3,218

 
18,199

 

 
870,559

 
3,221

Commercial Real Estate - Non-Owner Occupied
11,516

 
745

 
1,603,526

 
6,517

 
16,725

 

 
1,631,767

 
7,262

Multifamily Real Estate

 

 
351,711

 
1,434

 
2,058

 

 
353,769

 
1,434

Commercial & Industrial
6,100

 
617

 
569,734

 
4,662

 
733

 

 
576,567

 
5,279

Residential 1-4 Family
12,784

 
393

 
1,028,745

 
6,226

 
15,910

 

 
1,057,439

 
6,619

Auto
393

 
1

 
271,073

 
944

 

 

 
271,466

 
945

HELOC
2,200

 
20

 
524,507

 
1,249

 
1,156

 

 
527,863

 
1,269

Consumer and all other
302

 
7

 
493,814

 
2,827

 
213

 

 
494,329

 
2,834

Total loans held for investment, net
$
57,355

 
$
2,515

 
$
6,438,921

 
$
35,899

 
$
57,770

 
$

 
$
6,554,046

 
$
38,414

 
The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by segment for the three months ended and as of March 31, 2016. In addition, a $100,000 provision was recognized during the three months ended March 31, 2016 for unfunded loan commitments for which the reserves are recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

 
Allowance for loan losses
 
Balance,
beginning of the
year
 
Recoveries
credited to
allowance
 
Loans charged
off
 
Provision
charged to
operations
 
Balance, end of
period
Construction and Land Development
$
6,040

 
$
19

 
$
(93
)
 
$
5,055

 
$
11,021

Commercial Real Estate - Owner Occupied
4,614

 
46

 
(772
)
 
(477
)
 
3,411

Commercial Real Estate - Non-Owner Occupied
6,929

 

 

 
(2,445
)
 
4,484

Multifamily Real Estate
1,606

 

 

 
(204
)
 
1,402

Commercial & Industrial
3,163

 
238

 
(617
)
 
1,441

 
4,225

Residential 1-4 Family
5,414

 
243

 
(153
)
 
471

 
5,975

Auto
1,703

 
84

 
(365
)
 
(615
)
 
807

HELOC
2,934

 
83

 
(409
)
 
(1,325
)
 
1,283

Consumer and all other
1,644

 
115

 
(571
)
 
603

 
1,791

Total
$
34,047

 
$
828

 
$
(2,980
)
 
$
2,504

 
$
34,399

 
 
Loans individually evaluated
for impairment
 
Loans collectively evaluated for
impairment
 
Loans acquired with
deteriorated credit quality
 
Total
 
Loans
 
ALL
 
Loans
 
ALL
 
Loans
 
ALL
 
Loans
 
ALL
Construction and Land Development
$
30,779

 
$
500

 
$
740,782

 
$
10,521

 
$
5,137

 
$

 
$
776,698

 
$
11,021

Commercial Real Estate - Owner Occupied
16,026

 
81

 
805,916

 
3,330

 
27,260

 

 
849,202

 
3,411

Commercial Real Estate - Non-Owner Occupied
4,203

 
1

 
1,278,412

 
4,483

 
13,636

 

 
1,296,251

 
4,484

Multifamily Real Estate
3,803

 

 
317,335

 
1,402

 
2,132

 

 
323,270

 
1,402

Commercial & Industrial
3,301

 
467

 
448,336

 
3,758

 
1,571

 

 
453,208

 
4,225

Residential 1-4 Family
14,558

 
414

 
945,615

 
5,561

 
18,305

 

 
978,478

 
5,975

Auto
162

 
1

 
241,575

 
806

 

 

 
241,737

 
807

HELOC
2,833

 
28

 
512,754

 
1,255

 
1,535

 

 
517,122

 
1,283

Consumer and all other
769

 
1

 
343,238

 
1,790

 
529

 

 
344,536

 
1,791

Total loans held for investment, net
$
76,434

 
$
1,493

 
$
5,633,963

 
$
32,906

 
$
70,105

 
$

 
$
5,780,502

 
$
34,399

 

-20-


The Company uses a risk rating system and past due status as the primary credit quality indicators for the loan categories. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the allowance for loan losses; on those loans without a risk rating, the Company uses past due status to determine risk level. The risk levels, as described below, do not necessarily follow the regulatory definitions of risk levels with the same name. A general description of the characteristics of the risk levels follows:
 
Pass is determined by the following criteria:
Risk rated 0 loans have little or no risk and are generally secured by General Obligation Municipal Credits;
Risk rated 1 loans have little or no risk and are generally secured by cash or cash equivalents;
Risk rated 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;
Risk rated 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;
Risk rated 4 loans are satisfactory loans with borrowers not as strong as risk rated 3 loans and may exhibit a greater
degree of financial risk based on the type of business supporting the loan; or
Loans that are not risk rated but that are 0 to 29 days past due.

Special Mention is determined by the following criteria:
Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an
event occurring that may weaken the borrower’s ability to repay;
Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if
not addressed could lead to inadequately protecting the Company’s credit position; or
Loans that are not risk rated but that are 30 to 89 days past due.

Substandard is determined by the following criteria:
Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity
of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt
with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected; or
Loans that are not risk rated but that are 90 to 149 days past due.

Doubtful is determined by the following criteria:
Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for
recovery, its classification as a loss is deferred until its more exact status is determined;
Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as
    bankable assets is not warranted; or
Loans that are not risk rated but that are over 149 days past due.

The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of March 31, 2017 (dollars in thousands):
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Construction and Land Development
$
684,967

 
$
68,650

 
$
13,803

 
$
91

 
$
767,511

Commercial Real Estate - Owner Occupied
816,462

 
30,379

 
5,519

 

 
852,360

Commercial Real Estate - Non-Owner Occupied
1,571,645

 
32,064

 
11,333

 

 
1,615,042

Multifamily Real Estate
330,970

 
20,741

 

 

 
351,711

Commercial & Industrial
560,889

 
10,158

 
4,787

 

 
575,834

Residential 1-4 Family
1,012,281

 
22,382

 
4,323

 
2,543

 
1,041,529

Auto
269,081

 
2,016

 
217

 
152

 
271,466

HELOC
521,624

 
2,996

 
1,257

 
830

 
526,707

Consumer and all other
491,625

 
2,209

 
16

 
266

 
494,116

Total
$
6,259,544

 
$
191,595

 
$
41,255

 
$
3,882

 
$
6,496,276

 

-21-


The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of December 31, 2016 (dollars in thousands):
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Construction and Land Development
$
667,018

 
$
69,311

 
$
11,857

 
$
23

 
$
748,209

Commercial Real Estate - Owner Occupied
801,565

 
32,364

 
5,533

 

 
839,462

Commercial Real Estate - Non-Owner Occupied
1,505,153

 
37,631

 
4,208

 

 
1,546,992

Multifamily Real Estate
312,711

 
19,499

 

 

 
332,210

Commercial & Industrial
539,999

 
9,391

 
1,062

 

 
550,452

Residential 1-4 Family
986,973

 
18,518

 
4,813

 
3,043

 
1,013,347

Auto
258,188

 
3,648

 
135

 
100

 
262,071

HELOC
519,928

 
4,225

 
969

 
601

 
525,723

Consumer and all other
425,520

 
3,491

 
40

 
251

 
429,302

Total
$
6,017,055

 
$
198,078

 
$
28,617

 
$
4,018

 
$
6,247,768

 
The following table shows the recorded investment in only PCI loans by segment with their related risk level as of March 31, 2017 (dollars in thousands):
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Construction and Land Development
$
1,096

 
$
1,394

 
$
286

 
$

 
$
2,776

Commercial Real Estate - Owner Occupied
5,417

 
8,902

 
3,880

 

 
18,199

Commercial Real Estate - Non-Owner Occupied
11,014

 
4,323

 
1,388

 

 
16,725

Multifamily Real Estate
342

 
1,716

 

 

 
2,058

Commercial & Industrial
98

 
360

 
275

 

 
733

Residential 1-4 Family
8,079

 
4,740

 
2,301

 
790

 
15,910

HELOC
915

 
128

 

 
113

 
1,156

Consumer and all other
161

 
52

 

 

 
213

Total
$
27,122

 
$
21,615

 
$
8,130

 
$
903

 
$
57,770

 
The following table shows the recorded investment in only PCI loans by segment with their related risk level as of December 31, 2016 (dollars in thousands):
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Construction and Land Development
$
1,092

 
$
1,432

 
$
398

 
$

 
$
2,922

Commercial Real Estate - Owner Occupied
5,520

 
8,889

 
3,934

 

 
18,343

Commercial Real Estate - Non-Owner Occupied
10,927

 
4,638

 
1,738

 

 
17,303

Multifamily Real Estate
343

 
1,723

 

 

 
2,066

Commercial & Industrial
107

 
480

 
487

 

 
1,074

Residential 1-4 Family
8,557

 
4,455

 
2,672

 
516

 
16,200

HELOC
857

 
183

 
7

 
114

 
1,161

Consumer and all other
166

 
37

 
20

 

 
223

Total
$
27,569

 
$
21,837

 
$
9,256

 
$
630

 
$
59,292

 
Loans acquired are originally recorded at fair value, with certain loans being identified as impaired at the date of purchase. The fair values were determined based on the credit quality of the portfolio, expected future cash flows, and timing of those expected future cash flows.

-22-


The following shows changes in the accretable yield for loans accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, for the periods presented (dollars in thousands):
 
 
For the Three Months Ended
March 31,
 
2017
 
2016
Balance at beginning of period
$
19,739

 
$
22,139

Accretion
(1,511
)
 
(1,390
)
Reclass of nonaccretable difference due to improvement in expected cash flows
1,680

 
1,266

Other, net (1)
(908
)
 
(1,510
)
Balance at end of period
$
19,000

 
$
20,505

 
(1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate PCI loans, and discounted payoffs that occurred in the quarter.
 
The carrying value of the Company’s PCI loan portfolio, accounted for under ASC 310-30, totaled $57.8 million at March 31, 2017 and $59.3 million at December 31, 2016. The outstanding balance of the Company’s PCI loan portfolio totaled $71.5 million at March 31, 2017 and $73.6 million at December 31, 2016. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, totaled $1.0 billion at March 31, 2017 and $1.1 billion at December 31, 2016; the remaining discount on these loans totaled $16.1 million at March 31, 2017 and $16.9 million at December 31, 2016.
  
4. INTANGIBLE ASSETS

The Company’s intangible assets consist of core deposits, goodwill, and other intangibles arising from acquisitions. The Company has determined that core deposit intangibles have finite lives and amortizes them over their estimated useful lives. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years, using an accelerated method. Other amortizable intangible assets are being amortized over the period of expected benefit, which ranges from 5 to 10 years, using a straight-line method.
 
In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2016 and determined that there was no impairment to its goodwill or intangible assets.

Information concerning intangible assets with a finite life is presented in the following table (dollars in thousands):
 
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
March 31, 2017
 

 
 

 
 

Amortizable core deposit intangibles
$
62,853

 
$
47,990

 
$
14,863

Other amortizable intangibles
4,502

 
400

 
4,102

December 31, 2016
 

 
 

 
 

Amortizable core deposit intangibles
$
68,367

 
$
51,987

 
$
16,380

Other amortizable intangibles
4,502

 
280

 
4,222

March 31, 2016
 

 
 

 
 

Amortizable core deposit intangibles
$
76,185

 
$
54,755

 
$
21,430



Amortization expense of core deposit intangibles for the three months ended March 31, 2017 and 2016 totaled $1.5 million and $1.9 million, respectively. Amortization expense of other intangibles for both the three months ended March 31, 2017 and 2016

-23-


totaled $120,000 and $0, respectively. As of March 31, 2017, the estimated remaining amortization expense of intangibles is as follows (dollars in thousands):
 
For the remaining nine months of 2017
$
4,433

For the year ending December 31, 2018
4,625

For the year ending December 31, 2019
3,573

For the year ending December 31, 2020
2,509

For the year ending December 31, 2021
1,481

Thereafter
2,344

Total estimated amortization expense
$
18,965

 
5. BORROWINGS

Short-term Borrowings
 
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Total short-term borrowings consist primarily of advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit. Also included in total short-term borrowings are securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Total short-term borrowings consist of the following as of March 31, 2017 and December 31, 2016 (dollars in thousands):

 
March 31,
2017
 
December 31,
2016
Securities sold under agreements to repurchase
$
44,587

 
$
59,281

Other short-term borrowings
522,500

 
517,500

Total short-term borrowings
$
567,087

 
$
576,781

 
 
 
 
Maximum month-end outstanding balance
$
634,750

 
$
678,262

Average outstanding balance during the period
573,116

 
590,074

Average interest rate (year-to-date)
0.67
%
 
0.49
%
Average interest rate at end of period
0.71
%
 
0.60
%
 
 
 
 
Other short-term borrowings:
 

 
 

FHLB
522,500

 
517,500

Other lines of credit

 

 
The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $175.0 million at both March 31, 2017 and December 31, 2016. The Company maintains an alternate line of credit at a correspondent bank, the available balance was $25.0 million at both March 31, 2017 and December 31, 2016. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is considered to be in compliance with these covenants. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $2.5 billion and $2.4 billion at March 31, 2017 and December 31, 2016, respectively.


-24-


Long-term Borrowings
 
In connection with two bank acquisitions prior to 2006, the Company issued trust preferred capital notes to fund the cash portion of those acquisitions, collectively totaling $58.5 million. In connection with the acquisition of StellarOne, the Company acquired trust preferred capital notes totaling $32.0 million with a remaining fair value discount of $6.7 million at March 31, 2017. The trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.

 
Trust
Preferred
Capital
Securities(1)
 
Investment(1)
 
Spread to 
3-Month LIBOR
 
Rate
 
Maturity
Trust Preferred Capital Note - Statutory Trust I
$
22,500,000

 
$
696,000

 
2.75
%
 
3.90
%
 
6/17/2034
Trust Preferred Capital Note - Statutory Trust II
36,000,000

 
1,114,000

 
1.40
%
 
2.55
%
 
6/15/2036
VFG Limited Liability Trust I Indenture
20,000,000

 
619,000

 
2.73
%
 
3.88
%
 
3/18/2034
FNB Statutory Trust II Indenture
12,000,000

 
372,000

 
3.10
%
 
4.25
%
 
6/26/2033
Total
$
90,500,000

 
$
2,801,000

 
 

 
 

 
 
 
(1)The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company's junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company's investment in the trusts is reported in "Other Assets" within the Consolidated Balance Sheets.
 
During the fourth quarter of 2016, the Company issued $150.0 million of fixed-to-floating rate subordinated notes with an initial fixed interest rate of 5.00% through December 15, 2021. The interest rate then changes to a floating rate of LIBOR plus 3.175% through its maturity date in December 15, 2026. At March 31, 2017 and December 31, 2016 the carrying value of the subordinated debt was $150.0 million, with a remaining discount of $2.0 million, respectively.

On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances, which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original advances, which is included as a component of long-term borrowings on the Company’s Consolidated Balance Sheets. In accordance with ASC 470-50, Modifications and Extinguishments, the Company is amortizing this prepayment penalty over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings on the Company’s Consolidated Statements of Income. Amortization expense for the three months ended March 31, 2017 and 2016 was $470,000 and $463,000, respectively.
 
In connection with the StellarOne acquisition, the Company assumed $70.0 million in long-term borrowings with the FHLB of which there is $20.0 million remaining at March 31, 2017 that had a remaining fair value premium of $448,000.
 
As of March 31, 2017, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):
 
Long-term Type
 
Spread to
3-Month LIBOR
 
Interest Rate (1)
 
Maturity Date
 
Advance Amount
Adjustable Rate Credit
 
0.44
%
 
1.59
%
 
8/23/2022
 
$
55,000

Adjustable Rate Credit
 
0.45
%
 
1.60
%
 
11/23/2022
 
65,000

Adjustable Rate Credit
 
0.45
%
 
1.60
%
 
11/23/2022
 
10,000

Adjustable Rate Credit
 
0.45
%
 
1.60
%
 
11/23/2022
 
10,000

Fixed Rate
 

 
3.62
%
 
11/28/2017
 
10,000

Fixed Rate
 

 
3.75
%
 
7/30/2018
 
5,000

Fixed Rate
 

 
3.97
%
 
7/30/2018
 
5,000

Fixed Rate Hybrid
 

 
0.99
%
 
10/19/2018
 
30,000

 
 
 

 
 

 
 
 
$
190,000

(1) Interest rates calculated using non-rounded numbers.
 
 
 
 
 
 
 
 
 

-25-


As of December 31, 2016, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):
 
Long-term Type
 
Spread to
3-Month LIBOR
 
Interest Rate (1)
 
Maturity Date
 
Advance Amount
 
 
 
 
 
 
 
 
 
Adjustable Rate Credit
 
0.44
%
 
1.44
%
 
8/23/2022
 
$
55,000

Adjustable Rate Credit
 
0.45
%
 
1.45
%
 
11/23/2022
 
65,000

Adjustable Rate Credit
 
0.45
%
 
1.45
%
 
11/23/2022
 
10,000

Adjustable Rate Credit
 
0.45
%
 
1.45
%
 
11/23/2022
 
10,000

Fixed Rate
 

 
3.62
%
 
11/28/2017
 
10,000

Fixed Rate
 

 
3.75
%
 
7/30/2018
 
5,000

Fixed Rate
 

 
3.97
%
 
7/30/2018
 
5,000

Fixed Rate Hybrid
 

 
0.99
%
 
10/19/2018
 
30,000

 
 
 

 
 

 
 
 
$
190,000

(1) Interest rates calculated using non-rounded numbers.
 
 
 
 
 
 
 
 

For information on the carrying value of loans and securities pledged as collateral on FHLB advances as of March 31, 2017 and December 31, 2016, refer to Note 6 "Commitments and Contingencies".
 
As of March 31, 2017, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):
 
 
Trust
Preferred
Capital
Notes
 
Subordinated
Debt
 
FHLB
Advances
 
Fair Value 
Premium
(Discount)
 
Prepayment
Penalty
 
Total Long-term
Borrowings
For the remaining nine months of 2017
$

 
$

 
$
10,000

 
$
(28
)
 
$
(1,452
)
 
$
8,520

2018

 

 
40,000

 
(343
)
 
(1,970
)
 
37,687

2019

 

 

 
(486
)
 
(2,018
)
 
(2,504
)
2020

 

 

 
(501
)
 
(2,074
)
 
(2,575
)
2021

 

 

 
(516
)
 
(2,119
)
 
(2,635
)
Thereafter
93,301

 
150,000

 
140,000

 
(6,308
)
 
(1,707
)
 
375,286

Total Long-term borrowings
$
93,301

 
$
150,000

 
$
190,000

 
$
(8,182
)
 
$
(11,340
)
 
$
413,779


6. COMMITMENTS AND CONTINGENCIES

Litigation Matters
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, financial condition, or results of operations of the Company.
 
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized on the Company’s Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
 
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet

-26-


instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on the balance sheet. The Company considers historical loss rates, current economic conditions, risk ratings, and past due status among other factors in the consideration of whether credit losses are inherent in the Company’s off-balance sheet commitments to extend credit. As of March 31, 2017 and December 31, 2016, the Company's reserve for off-balance sheet credit risk was $700,000 and $725,000, respectively, and is reported as a component of "Other Liabilities" on the Company's Consolidated Balance Sheets.
 
Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
 
Letters of credit are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

The following table presents the balances of commitments and contingencies (dollars in thousands): 
 
March 31, 2017
 
December 31, 2016
Commitments with off-balance sheet risk:
 

 
 

Commitments to extend credit (1)
$
1,912,830

 
$
1,924,885

Standby letters of credit
110,525

 
84,212

Total commitments with off-balance sheet risk
$
2,023,355

 
$
2,009,097

 
(1) Includes unfunded overdraft protection.
 
The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the periods ended March 31, 2017 and December 31, 2016, the aggregate amount of daily average required reserves was approximately $59.0 million and $54.5 million, respectively, and were satisfied by vault cash holdings and deposits maintained with the Federal Reserve Bank.
 
As of March 31, 2017, the Company had approximately $32.6 million in deposits in other financial institutions, of which $14.6 million serves as collateral for cash flow and loan swap derivatives. The Company had approximately $16.7 million in deposits in other financial institutions that were uninsured at March 31, 2017. At least annually, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.
 
For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify the interest rate characteristics of various balance sheet accounts. See Note 7 “Derivatives” for additional information.
 
The Company records an indemnification reserve that includes balances relating to the previously sold credit card portfolio and to mortgage loans previously sold based on historical statistics and loss rates; as of March 31, 2017 and December 31, 2016, the Company’s indemnification reserve was approximately $503,000 and $379,000, respectively.


-27-


As part of the Company's liquidity management strategy, it pledges collateral to secure various financing and other activities that occur during the normal course of business. The following tables present the types of collateral pledged, at March 31, 2017 and December 31, 2016 (dollars in thousands):

 
Pledged Assets as of March 31, 2017
 
 
Cash
 
AFS Securities(1)
 
HTM Securities(1)
 
Loans(2)
 
Total
Public deposits
$

 
$
211,737

 
$
199,208

 
$

 
$
410,945

Repurchase agreements

 
103,721

 

 

 
103,721

FHLB advances

 
1,316

 

 
2,033,085

 
2,034,401

Derivatives
14,608

 
4,237

 

 

 
18,845

Other purposes

 
16,567

 

 

 
16,567

     Total pledged assets
$
14,608

 
$
337,578

 
$
199,208

 
$
2,033,085

 
$
2,584,479




 
Pledged Assets as of December 31, 2016
 
 
Cash
 
AFS Securities(1)
 
HTM Securities(1)
 
Loans(2)
 
Total
Public deposits
$

 
$
210,546

 
$
197,889

 
$

 
$
408,435

Repurchase agreements

 
108,208

 

 

 
108,208

FHLB advances

 
1,475

 

 
1,959,929

 
1,961,404

Derivatives
33,595

 
4,376

 

 

 
37,971

Other purposes

 
17,499

 

 

 
17,499

     Total pledged assets
$
33,595

 
$
342,104

 
$
197,889

 
$
1,959,929

 
$
2,533,517


(1) Balance represents market value.
(2) Balance represents book value.





-28-


7. DERIVATIVES
The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge). The remaining are classified as free standing derivatives consisting of customer accommodation loan swaps and interest rate lock commitments that do not qualify for hedge accounting.
Cash Flow Hedges
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as trust preferred capital notes, FHLB borrowings, and prime commercial loans. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging a notional amount, equal to the principal amount of the borrowings, for fixed-rate interest based on benchmarked interest rates. The original terms and conditions of the interest rate swaps vary and range in length with a maximum hedging time through November 2022. Amounts receivable or payable are recognized as accrued under the terms of the agreements.
All swaps entered into with counterparties met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.
The Company assesses the effectiveness of each hedging relationship on a periodic basis using statistical regression analysis. The Company also measures the ineffectiveness of each hedging relationship using the change in variable cash flows method which compares the cumulative changes in cash flows of the hedging instrument relative to cumulative changes in the hedged item’s cash flows. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives’ unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company’s assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in interest income or interest expense on the Company’s Consolidated Statements of Income.
On June 13, 2016, the Company terminated three interest rate swaps designated as cash flow hedges prior to their respective maturity dates. The unrealized gain of $1.3 million within Accumulated Other Comprehensive Income will be re-classified into earnings over a three year period using the effective interest method. The estimated net amount of gains expected to be reclassified into earnings by March 31, 2018 is $386,000.
Fair Value Hedge
Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates. During the normal course of business, the Company enters into interest rate swaps to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company pays a fixed interest rate to the counterparty and receives a floating rate from the same counterparty calculated on the aggregate notional amount. At March 31, 2017 and December 31, 2016, the aggregate notional amount of the related hedged items totaled $78.7 million and $65.9 million, respectively, and the fair value of the related hedged items was an unrealized loss of $1.1 million and $890,000, respectively.
The Company applies hedge accounting in accordance with ASC 815, Derivatives and Hedging, and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded on the Company’s Consolidated Statements of Income. Statistical regression analysis is used to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset being hedged due to changes in the hedged risk. The Company’s fair value hedges continue to be highly effective and had no material impact on the Consolidated Statements of Income, but if any ineffectiveness exists, portions of the unrealized gains or losses would be recorded in interest income or interest expense on the Company’s Consolidated Statements of Income.
Loan Swaps
During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” on the Company’s Consolidated Balance Sheets.
Interest Rate Lock Commitments
During the normal course of business, the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”).  Rate lock commitments on mortgage loans that are intended to be sold in the secondary market are considered to be derivatives.  The period of time between issuance of a loan

-29-


commitment, closing, and sale of the loan generally ranges from 30 to 120 days.  The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan.  The correlation between the rate lock commitments and the best efforts contracts is high due to their similarity.
 
The market values of rate lock commitments and best efforts forward delivery commitments is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset, while taking into consideration the probability that the rate lock commitments will close. The fair value of the rate lock commitments is reported as a component of “Other Assets” on the Company’s Consolidated Balance Sheets; the fair value of the Company’s best efforts forward delivery commitments is recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets. Any impact to income is recorded in current period earnings as a component of “Mortgage banking income, net” on the Company’s Consolidated Statements of Income.
 
The following table summarizes key elements of the Company’s derivative instruments as of March 31, 2017 and December 31, 2016, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):
 
 
March 31, 2017
 
December 31, 2016
 
 

Derivative (2)
 
 
Derivative (2)
 
Notional or
Contractual
Amount (1)
 
Assets
 
Liabilities
 
 
Notional or
Contractual
Amount (1)
 
Assets
 
Liabilities
 
Derivatives designated as accounting hedges:
 

 
 

 
 

 
 
 

 
 

 
 

 
Interest rate contracts:
 

 
 

 
 

 
 
 

 
 

 
 

 
Cash flow hedges
$
188,500

 
$
167

 
$
9,354

 
 
$
188,500

 
$
211

 
$
9,619

 
Fair value hedges
78,701

 
1,549

 
138

 
 
65,920

 
1,437

 
296

 
Derivatives not designated as accounting hedges:
 

 
 

 
 

 
 
 

 
 

 
 

 
Loan Swaps 
 

 
 

 
 

 
 
 

 
 

 
 

 
Pay fixed - receive floating interest rate swaps
429,485

 

 
897

 
 
373,355

 

 
1,005

 
Pay floating - receive fixed interest rate swaps
429,485

 
897

 

 
 
373,355

 
1,005

 

 
Other contracts:
 

 
 

 
 

 
 
 

 
 

 
 

 
Interest rate lock commitments
67,825

 
1,251

 

 
 
48,743

 
610

 

 
Best efforts forward delivery commitments
87,283

 

 
111

 
 
85,400

 
1,469

 

 
 
(1) Notional amounts are not recorded on the balance sheet and are generally used only as a basis on which interest and other payments are determined.
(2) Balances represent fair value of derivative financial instruments.

For information regarding collateral pledged on derivative instruments, see Note 6 "Commitments and Contingencies".

-30-


8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2017 is summarized as follows, net of tax (dollars in thousands):

 
Unrealized
Gains (Losses)
on AFS
Securities
 
Unrealized Gain
for AFS
Securities
Transferred to
HTM
 
Change in Fair
Value of Cash
Flow Hedge
 
Unrealized Gains (Losses) on BOLI
 
Total
Balance - December 31, 2016
$
(542
)
 
$
3,377

 
$
(5,179
)
 
$
(1,465
)
 
$
(3,809
)
Other comprehensive income (loss)
3,637

 

 
(31
)
 

 
3,606

Amounts reclassified from accumulated other comprehensive income
(313
)
 
(184
)
 
180

 
109

 
(208
)
Net current period other comprehensive income (loss)
3,324

 
(184
)
 
149

 
109

 
3,398

Balance - March 31, 2017
$
2,782

 
$
3,193

 
$
(5,030
)
 
$
(1,356
)
 
$
(411
)
 

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2016 is summarized as follows, net of tax (dollars in thousands):

 
 
Unrealized Gains
(Losses) on AFS
Securities
 
Unrealized Gain
for AFS
Securities
Transferred to
HTM
 
Change in Fair
Value of Cash
Flow Hedge
 
Total
Balance - December 31, 2015
$
7,777

 
$
4,432

 
$
(5,957
)
 
$
6,252

Other comprehensive income (loss)
3,032

 
(292
)
 
(2,681
)
 
59

Amounts reclassified from accumulated other comprehensive income
(93
)
 

 
141

 
48

Net current period other comprehensive income (loss)
2,939

 
(292
)
 
(2,540
)
 
107

Balance - March 31, 2016
$
10,716

 
$
4,140

 
$
(8,497
)
 
$
6,359

 

Reclassifications of unrealized gains (losses) on available for sale securities are reported on the Company’s Consolidated Statements of Income as “Gains on securities transactions, net” with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported gains of $481,000 and $143,000 for the three months ended March 31, 2017 and 2016, respectively, related to the sale of securities. The tax effects of these transactions during the three months ended March 31, 2017 and 2016 were $168,000 and $50,000, respectively, which amounts were included as a component of income tax expense.
 
During the second quarter of 2015, the Company transferred securities, which it intends and has the ability to hold until maturity, with a fair value of $201.8 million on the date of transfer, from securities available for sale to securities held to maturity. The securities included net pre-tax unrealized gains of $8.1 million at the date of transfer. Reclassifications of the unrealized gains on transferred securities are reported over time as accretion within interest income on the Company's Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense. The Company recorded accretion of $283,000 and $449,000 for the three months ended March 31, 2017 and 2016, respectively. The tax effect of these transactions during the three months ended March 31, 2017 and 2016 were $99,000 and $157,000, respectively, which were included as a component of income tax expense.



-31-


Reclassifications of the change in fair value of cash flow hedges are reported in interest income and interest expense on the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported net interest expense of $277,000 and $217,000 for the three months ended March 31, 2017 and 2016, respectively. The tax effects of these transactions during the three months ended March 31, 2017 and 2016 were $97,000 and $76,000, respectively, which were included as a component of income tax expense.

Reclassifications of unrealized losses on BOLI are reported in salaries and benefits expense on the Company's Consolidated Statements of Income. The Company reported expenses of $109,000 and $0 for the three months ended March 31, 2017 and 2016, respectively.

-32-


9. FAIR VALUE MEASUREMENTS

The Company follows ASC 820, Fair Value Measurements and Disclosures, to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.
 
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
 
Level 1  
 
Valuation is based on quoted prices in active markets for identical assets and liabilities.
 
 
 
Level 2
 
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.
 
 
 
Level 3  
 
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.  These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.
 
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
 
Derivative instruments
As discussed in Note 7 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.
 
During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale, as well as best effort forward delivery commitments to mitigate interest rate risk; these instruments are recorded at estimated fair value based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market. This value, however, is adjusted by a pull-through rate, which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data and is adjusted using significant management judgment. The pull-through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments, while a decrease in the pull-through rate will result in a negative fair value adjustment. The Company’s weighted average pull-through rate was approximately 80% as of March 31, 2017 and December 31, 2016. As of March 31, 2017, the interest rate lock commitments are recorded as a component of “Other Assets” on the Company’s Consolidated Balance Sheets.
 
Securities available for sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).
 

-33-


The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is Interactive Data Corporation (“IDC”), which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.

The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of March 31, 2017 and December 31, 2016.
 
The carrying value of restricted Federal Reserve Bank and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.
 
Loans held for sale
Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a separate line item on the Company’s Consolidated Statements of Income.
 

-34-


The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
 
Fair Value Measurements at March 31, 2017 using
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Level 1
 
Level 2
 
Level 3
 
Balance
ASSETS
 

 
 

 
 

 
 

Securities available for sale:
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$

 
$
277,849

 
$

 
$
277,849

Corporate and other bonds

 
112,046

 

 
112,046

Mortgage-backed securities

 
549,355

 

 
549,355

Other securities

 
13,808

 

 
13,808

Loans held for sale

 
19,976

 

 
19,976

Derivatives:
 

 
 

 
 

 
 

Interest rate swap

 
897

 

 
897

Cash flow hedges

 
167

 

 
167

Fair value hedges

 
1,549

 

 
1,549

Interest rate lock commitments

 

 
1,251

 
1,251

 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

Derivatives:
 

 
 

 
 

 
 

Interest rate swap
$

 
$
897

 
$

 
$
897

Cash flow hedges

 
9,354

 

 
9,354

Fair value hedges

 
138

 

 
138

Best efforts forward delivery commitments

 

 
111

 
111

 

-35-


 
Fair Value Measurements at December 31, 2016 using
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Level 1
 
Level 2
 
Level 3
 
Balance
ASSETS
 

 
 

 
 

 
 
Securities available for sale:
 

 
 

 
 

 
 
Obligations of states and political subdivisions
$

 
$
275,890

 
$

 
$
275,890

Corporate and other bonds

 
121,780

 

 
121,780

Mortgage-backed securities

 
535,286

 

 
535,286

Other securities

 
13,808

 

 
13,808

Loans held for sale

 
36,487

 

 
36,487

Derivatives:
 

 
 

 
 

 
 

Interest rate swap

 
1,005

 

 
1,005

Cash flow hedges

 
211

 

 
211

Fair value hedges

 
1,437

 

 
1,437

Interest rate lock commitments

 

 
610

 
610

Best efforts forward delivery commitments

 

 
1,469

 
1,469

 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

Derivatives:
 

 
 

 
 

 
 

Interest rate swap
$

 
$
1,005

 
$

 
$
1,005

Cash flow hedges

 
9,619

 

 
9,619

Fair value hedges

 
296

 

 
296

 
Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Impaired loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). For the three and twelve month periods ending March 31, 2017 and December 31, 2016, the Level 3 weighted average adjustments related to impaired loans were 1.2% and 1.5%, respectively. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Company’s Consolidated Statements of Income.
 
Other real estate owned
OREO is evaluated for impairment at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment and included as a component of noninterest expense. Fair values of OREO are carried at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the

-36-


fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. For the three and twelve month periods ending March 31, 2017 and December 31, 2016, the Level 3 weighted average adjustments related to OREO were approximately 25.6% and 25.1%, respectively.
 
Total valuation expenses related to OREO properties for the three months ended March 31, 2017 and 2016 totaled $238,000 and $126,000, respectively.

The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
Fair Value Measurements at March 31, 2017 using
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Level 1
 
Level 2
 
Level 3
 
Balance
ASSETS
 

 
 

 
 

 
 

Impaired loans
$

 
$

 
$
18,097

 
$
18,097

Other real estate owned

 

 
9,605

 
9,605

 
 
Fair Value Measurements at December 31, 2016 using
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Level 1
 
Level 2
 
Level 3
 
Balance
ASSETS
 

 
 

 
 

 
 

Impaired loans
$

 
$

 
$
4,344

 
$
4,344

Other real estate owned

 

 
10,084

 
10,084

 
ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
 
Cash and cash equivalents
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
 
Held to Maturity Securities
The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is IDC, which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.
 
The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.
 
The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of March 31, 2017 and December 31, 2016.

-37-



Loans
The fair value of performing loans is estimated by discounting expected future cash flows using a yield curve that is constructed by adding a loan spread to a market yield curve. Loan spreads are based on spreads currently observed in the market for loans of similar type and structure. Fair value for impaired loans and their respective level within the fair value hierarchy, are described in the previous disclosure related to fair value measurements of assets that are measured on a nonrecurring basis.
 
Bank owned life insurance
The carrying value of bank owned life insurance approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.
 
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
 
Borrowings
The carrying value of the Company’s repurchase agreements is a reasonable estimate of fair value. Other borrowings are discounted using the current yield curve for the same type of borrowing. For borrowings with embedded optionality, a third party source is used to value the instrument. The Company validates all third party valuations for borrowings with optionality using Bloomberg Valuation Service’s derivative pricing functions.
 
Accrued interest
The carrying amounts of accrued interest approximate fair value.
 

-38-


The carrying values and estimated fair values of the Company’s financial instruments at March 31, 2017 and December 31, 2016 are as follows (dollars in thousands):
 
 
 
 
Fair Value Measurements at March 31, 2017 using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total Fair
Value
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Balance
ASSETS
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
183,819

 
$
183,819

 
$

 
$

 
$
183,819

Securities available for sale
953,058

 

 
953,058

 

 
953,058

Held to maturity securities
203,478

 

 
205,611

 

 
205,611

Restricted stock
65,402

 

 
65,402

 

 
65,402

Loans held for sale
19,976

 

 
19,976

 

 
19,976

Net loans
6,515,632

 

 

 
6,518,399

 
6,518,399

Derivatives:
 

 
 

 
 

 
 

 
 

Interest rate swap
897

 

 
897

 

 
897

Cash flow hedge
167

 

 
167

 

 
167

Fair value hedge
1,549

 

 
1,549

 

 
1,549

Interest rate lock commitments
1,251

 

 

 
1,251

 
1,251

Accrued interest receivable
23,458

 

 
23,458

 

 
23,458

Bank owned life insurance
178,774

 

 
178,774

 

 
178,774

 
 
 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

 
 

Deposits
$
6,614,195

 
$

 
$
6,605,551

 
$

 
$
6,605,551

Borrowings
980,866

 

 
960,830

 

 
960,830

Accrued interest payable
4,209

 

 
4,209

 

 
4,209

Derivatives:
 

 
 

 
 

 
 

 
 

Interest rate swap
897

 

 
897

 

 
897

Cash flow hedges
9,354

 

 
9,354

 

 
9,354

Fair value hedges
138

 

 
138

 

 
138

Best efforts forward delivery commitments
111

 

 

 
111

 
111

 

-39-


 
 
 
Fair Value Measurements at December 31, 2016 using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total Fair
Value
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Balance
ASSETS
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
179,237

 
$
179,237

 
$

 
$

 
$
179,237

Securities available for sale
946,764

 

 
946,764

 

 
946,764

Held to maturity securities
201,526

 

 
202,315

 

 
202,315

Restricted stock
60,782

 

 
60,782

 

 
60,782

Loans held for sale
36,487

 

 
36,487

 

 
36,487

Net loans
6,269,868

 

 

 
6,265,443

 
6,265,443

Derivatives:
 

 
 

 
 

 
 

 
 

Interest rate swap
1,005

 

 
1,005

 

 
1,005

Cash flow hedges
211

 

 
211

 

 
211

Fair value hedges
1,437

 

 
1,437



 
1,437

Interest rate lock commitments
610

 

 

 
610

 
610

Best efforts forward delivery commitments
1,469

 

 

 
1,469

 
1,469

Accrued interest receivable
23,448

 

 
23,448

 

 
23,448

Bank owned life insurance
179,318

 

 
179,318

 

 
179,318

 
 
 
 
 
 
 
 
 
 
LIABILITIES
 

 
 

 
 

 
 

 
 

Deposits
$
6,379,489

 
$

 
$
6,370,457

 
$

 
$
6,370,457

Borrowings
990,089

 

 
970,195

 

 
970,195

Accrued interest payable
2,320

 

 
2,230

 

 
2,230

Derivatives:
 

 
 

 
 

 
 

 
 

Interest rate swap
1,005

 

 
1,005

 

 
1,005

Cash flow hedges
9,619

 

 
9,619

 

 
9,619

Fair value hedges
296

 

 
296

 

 
296

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


-40-


10. EARNINGS PER SHARE

Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common 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 awards.
 
There were approximately 42,643 and 76,583 shares underlying anti-dilutive awards for the three months ended March 31, 2017 and 2016, respectively. Anti-dilutive awards were excluded from the calculation of diluted EPS.
 
The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three months ended March 31, 2017 and 2016 (in thousands except per share data):
 
 
Net Income Available to
Common Shareholders
(Numerator)
 
Weighted
Average
Common Shares
(Denominator)
 
Per Share
Amount
Three months ended March 31, 2017
 

 
 

 
 

Net income, basic
$
19,124

 
43,654

 
$
0.44

Add: potentially dilutive common shares - stock awards

 
72

 

Diluted
$
19,124

 
43,726

 
$
0.44

Three months ended March 31, 2016
 

 
 

 
 

Net income, basic
$
16,961

 
44,251

 
$
0.38

Add: potentially dilutive common shares - stock awards

 
76

 

Diluted
$
16,961

 
44,327

 
$
0.38


-41-


11. SEGMENT REPORTING DISCLOSURES 

The Company has two reportable segments: a traditional full service community bank segment and a mortgage loan origination business segment. The community bank segment includes one subsidiary bank, the Bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 113 retail locations in Virginia as of March 31, 2017. The mortgage segment includes UMG, which provides a variety of mortgage loan products principally in Virginia, North Carolina, Maryland, and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which serves to mitigate the Company’s exposure to interest rate 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. Inter-segment 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 segment's business is a primarily fee-based business, while the community bank segment is driven principally by net interest income. The community bank segment provides a distribution and referral network through its customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank segment.
 
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. The interest rate on the warehouse line of credit for the three months ended March 31, 2017 and 2016 was the three month LIBOR rate plus 0.15% with no floor. These transactions are eliminated in the consolidation process.
 
A management fee for operations and administrative support services is charged to all subsidiaries and eliminated in the consolidated totals.

Information about reportable segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31, 2017 and 2016 is as follows (dollars in thousands):

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
SEGMENT FINANCIAL INFORMATION
 
Community Bank
 
Mortgage
 
Eliminations
 
Consolidated
Three Months Ended March 31, 2017
 

 
 

 
 

 
 

Net interest income
$
66,234

 
$
333

 
$

 
$
66,567

Provision for credit losses
2,104

 
18

 

 
2,122

Net interest income after provision for credit losses
64,130

 
315

 

 
64,445

Noninterest income
16,757

 
2,223

 
(141
)
 
18,839

Noninterest expenses
55,014

 
2,522

 
(141
)
 
57,395

Income before income taxes
25,873

 
16

 

 
25,889

Income tax expense
6,753

 
12

 

 
6,765

Net income
$
19,120

 
$
4

 
$

 
$
19,124

Total assets
$
8,660,987

 
$
76,818

 
$
(67,885
)
 
$
8,669,920

 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 

 
 

 
 

 
 

Net interest income
$
63,425

 
$
306

 
$

 
$
63,731

Provision for credit losses
2,500

 
104

 

 
2,604

Net interest income after provision for credit losses
60,925

 
202

 

 
61,127

Noninterest income
13,608

 
2,477

 
(171
)
 
15,914

Noninterest expenses
51,844

 
2,599

 
(171
)
 
54,272

Income before income taxes
22,689

 
80

 

 
22,769

Income tax expense
5,782

 
26

 

 
5,808

Net income
$
16,907

 
$
54

 
$

 
$
16,961

Total assets
$
7,825,652

 
$
55,069

 
$
(48,110
)
 
$
7,832,611




-42-


Review Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors of Union Bankshares Corporation

We have reviewed the consolidated balance sheet of Union Bankshares Corporation (the “Company”) as of March 31, 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2017 and 2016. These financial statements are the responsibility of the Company's management.

We conducted our review 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 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 (United States), 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 review, we are not aware of any material modifications that should be made to the 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 (United States), the consolidated balance sheet of the Company as of December 31, 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, not presented herein, and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 28, 2017. In our opinion, the accompanying consolidated balance sheet of the Company as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ Ernst & Young LLP

Richmond, Virginia
May 9, 2017
 


-43-


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 (collectively, the “Company”). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2016. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three months ended March 31, 2017 and 2016 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of 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, are based on certain assumptions as of the time they are made, and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.  Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning 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 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 projected 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 or changes in:

changes in interest rates,
general economic and financial market conditions,
the Company’s ability to manage its growth or implement its growth strategy,
the incremental cost and/or decreased revenues associated with exceeding $10 billion in assets,
levels of unemployment in the Bank’s lending area,
real estate values in the Bank’s lending area,
an insufficient ALL,
the quality or composition of the loan or investment portfolios,
concentrations of loans secured by real estate, particularly commercial real estate,
the effectiveness of the Company’s credit processes and management of the Company’s credit risk,
demand for loan products and financial services in the Company’s market area,
the Company’s ability to compete in the market for financial services,
technological risks and developments, and cyber attacks or events,
performance by the Company’s counterparties or vendors,
deposit flows,
the availability of financing and the terms thereof,
the level of prepayments on loans and mortgage-backed securities,
legislative or regulatory changes and requirements,
monetary and fiscal policies of the U.S. government including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, and
accounting principles and guidelines.

More information on risk factors that could affect the Company’s forward-looking statements is available on the Company’s website, http://investors.bankatunion.com, or the Company's Annual Report on Form 10-K for the year ended December 31, 2016 and other reports filed with the SEC. The information on the Company’s website is not a part of this Form 10-Q. All risk factors and uncertainties described in those documents should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not intend or assume any obligation to update or revise any forward-looking statements that may be made from time to time by or on behalf of the Company.

 

-44-


CRITICAL ACCOUNTING POLICIES
 
The accounting and reporting policies of the Company are in accordance with U.S. 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 Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors.
 
The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses, acquired loans, and goodwill and intangible assets. The Company’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 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
 
The Company provides additional information on its critical accounting policies and estimates listed above under “MD&A—Critical Accounting Policies” in its 2016 Form 10-K.
 
ABOUT UNION BANKSHARES CORPORATION
 
Headquartered in Richmond, Union Bankshares Corporation is the largest community banking organization headquartered in Virginia and operates in all major banking markets of the Commonwealth. Union Bankshares Corporation is the holding company for Union Bank & Trust, which provides banking, trust, and wealth management services and has a statewide presence of 113 bank branches and approximately 184 ATMs. Non-bank affiliates of the holding company include: Union Mortgage Group, Inc., which provides a full line of mortgage products; Union Insurance Group, LLC, which offers various lines of insurance products; and Old Dominion Capital Management, Inc., which provides investment advisory services.
 
Shares of the Company’s common stock are traded on the NASDAQ Global Select Market under the symbol UBSH. Additional information is available on the Company’s website at http://investors.bankatunion.com. The information contained on the Company’s website is not a part of or incorporated into this report.
 
RESULTS OF OPERATIONS
 
Executive Overview
For the quarter ended March 31, 2017, the Company reported net income of $19.1 million and earnings per share of $0.44. These results represent an increase of $2.1 million, or 12.8%, from $17.0 million in earnings from the first quarter of 2016. Earnings per share of $0.44 for the quarter ended March 31, 2017 represent an increase of $0.06, or 15.8%, in earnings per share from the first quarter of 2016. This increase is primarily attributable to increases in net interest income, driven by increased loan production and higher average loan balances, and higher overall noninterest income.

Net income for the first quarter of 2017 for the community bank segment was $19.1 million, or $0.44 per share, compared to $16.9 million, or $0.38 per share, in the first quarter of 2016.
The mortgage segment reported net income of $4,000 for the first quarter of 2017, compared to net income of $54,000 in the first quarter of 2016.
ROA was 0.92% for the quarter ended March 31, 2017 compared to 0.88% for the first quarter of 2016.
ROE was 7.68% for the quarter ended March 31, 2017 compared to 6.89% for the first quarter of 2016. ROTCE was 11.20% for the quarter ended March 31, 2017 compared to 10.13% for the first quarter of 2016.
Loans held for investment grew $247.0 million, or 15.7% (annualized), from December 31, 2016 and increased $773.5 million, or 13.4%, from March 31, 2016. Average loans held for investment increased $169.8 million, or 10.9% (annualized), from December 31, 2016 and increased $673.9 million, or 11.8%, from March 31, 2016.
Deposits grew $234.7 million, or 14.7% (annualized), from December 31, 2016 and grew $668.2 million, or 11.2%, from March 31, 2016. Average deposits increased $97.3 million, or 6.2% (annualized), from the prior quarter and increased $507.9 million, or 8.6%, from the same quarter in the prior year.


-45-



Net Interest Income
 
 
For the Three Months Ended
March 31,
 
 
 
 
 
2017
 
2016
 
Change
 
 
 
(Dollars in thousands)
 
 
Average interest-earning assets
$
7,660,937

 
$
6,968,988

 
$
691,949

 
 
Interest income
$
76,640

 
$
70,749

 
$
5,891

 
 
Interest income (FTE) (1)
$
79,180

 
$
73,238

 
$
5,942

 
 
Yield on interest-earning assets
4.05
%
 
4.09
%
 
(4
)
 
bps
Yield on interest-earning assets (FTE) (1)
4.19
%
 
4.23
%
 
(4
)
 
bps
Average interest-bearing liabilities
$
5,999,960

 
$
5,379,799

 
$
620,161

 
 
Interest expense
$
10,073

 
$
7,018

 
$
3,055

 
 
Cost of interest-bearing liabilities
0.68
%
 
0.52
%
 
16

 
bps
Cost of funds
0.53
%
 
0.41
%
 
12

 
bps
Net interest income
$
66,567

 
$
63,731

 
$
2,836

 
 
Net interest income (FTE) (1)
$
69,107

 
$
66,220

 
$
2,887

 
 
Net interest margin
3.52
%
 
3.68
%
 
(16
)
 
bps
Net interest margin (FTE) (1)
3.66
%
 
3.82
%
 
(16
)
 
bps
Core net interest margin (FTE) (1)(2)
3.58
%
 
3.76
%
 
(18
)
 
bps
(1) Refer to the “Non-GAAP Measures” section in this Item 2 of this Form 10-Q for more information about this non-GAAP financial measure.
(2) Core net interest margin (non-GAAP) excludes the impact of acquisition accounting accretion and amortization adjustments in net interest income.
 
For the first quarter of 2017, net interest income was $66.6 million, an increase of $2.8 million from the first quarter of 2016. For the first quarter of 2017, tax-equivalent net interest income was $69.1 million, an increase of $2.9 million from the first quarter of 2016. The increases in both net interest income and tax-equivalent net interest income were primarily driven by higher average loan balances and higher acquisition-related accretion. Net accretion related to acquisition accounting increased $347,000 from the first quarter of 2016 to $1.5 million in the first quarter of 2017. In the first quarter of 2017, net interest margin decreased 16 basis points to 3.52% from 3.68% in the first quarter of 2016, while tax-equivalent net interest margin decreased by 16 basis points to 3.66% compared to 3.82% for the same periods. Core tax-equivalent net interest margin (which excludes the 8 basis point impact of acquisition accounting accretion in the first quarter of 2017 and 6 basis points the first quarter of 2016) decreased by 18 basis points to 3.58% in the first quarter of 2017 from 3.76% in the first quarter of 2016. The net decreases in net interest margin and tax-equivalent net interest margin measures were driven by the 4 basis point decline in interest-earning asset yields and the 12 basis point increase in cost of funds. The decline in interest-earning asset yields was primarily driven by lower loan yields, as new and renewed loans were originated and re-priced at lower rates, as well as lower levels of fees on loans. The increase in the cost of funds was primarily attributable to subordinated debt that the Company issued at the end of 2016.

-46-


The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands):
 
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
 
For the Three Months Ended March 31,
 
2017
 
2016
 
Average
Balance
 
Interest 
Income /
Expense (1)
 
Yield / 
Rate (1)(2)
 
Average
Balance
 
Interest 
Income /
Expense
 (1)
 
Yield / 
Rate
(1)(2)
 
(Dollars in thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

Securities:
 

 
 

 
 

 
 

 
 

 
 

Taxable
$
746,359

 
$
4,923

 
2.68
%
 
$
743,724

 
$
4,316

 
2.33
%
Tax-exempt
461,409

 
5,480

 
4.82
%
 
443,426

 
5,291

 
4.80
%
Total securities
1,207,768

 
10,403

 
3.49
%
 
1,187,150

 
9,607

 
3.25
%
Loans, net (3) (4)
6,383,905

 
68,503

 
4.35
%
 
5,709,998

 
63,326

 
4.46
%
Other earning assets
69,264

 
274

 
4.60
%
 
71,840

 
305

 
1.71
%
Total earning assets
7,660,937

 
$
79,180

 
4.19
%
 
6,968,988

 
$
73,238

 
4.23
%
Allowance for loan losses
(37,898
)
 
 

 
 

 
(35,034
)
 
 

 
 

Total non-earning assets
842,478

 
 

 
 

 
830,876

 
 

 
 

Total assets
$
8,465,517

 
 

 
 

 
$
7,764,830

 
 

 
 

Liabilities and Stockholders' Equity:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 

 
 

 
 

 
 
 
 

 
 

Transaction and money market accounts
$
3,205,692

 
$
1,969

 
0.25
%
 
$
2,809,961

 
$
1,393

 
0.20
%
Regular savings
596,559

 
191

 
0.13
%
 
580,923

 
217

 
0.15
%
Time deposits
1,211,064

 
2,917

 
0.98
%
 
1,171,972

 
2,585

 
0.89
%
Total interest-bearing deposits
5,013,315

 
5,077

 
0.41
%
 
4,562,856

 
4,195

 
0.37
%
Other borrowings (5)
986,645

 
4,996

 
2.05
%
 
816,943

 
2,823

 
1.39
%
Total interest-bearing liabilities
5,999,960

 
$
10,073

 
0.68
%
 
5,379,799

 
$
7,018

 
0.52
%
Noninterest-bearing liabilities:
 
 
 
 
 

 
 
 
 

 
 

Demand deposits
1,393,966

 
 
 
 

 
1,336,548

 
 

 
 

Other liabilities
61,273

 
 
 
 

 
59,069

 
 

 
 

Total liabilities
7,455,199

 
 
 
 

 
6,775,416

 
 

 
 

Stockholders' equity
1,010,318

 
 
 
 

 
989,414

 
 

 
 

Total liabilities and stockholders' equity
$
8,465,517

 
 
 
 

 
$
7,764,830

 
 

 
 

Net interest income
 

 
$
69,107

 
 

 
 
 
$
66,220

 
 

Interest rate spread
 

 
 

 
3.51
%
 
 

 
 

 
3.71
%
Cost of funds
 

 
 

 
0.53
%
 
 

 
 

 
0.41
%
Net interest margin (6)
 

 
 

 
3.66
%
 
 

 
 

 
3.82
%
(1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%.
(2) Rates and yields are annualized and calculated from actual, not rounded, amounts in thousands, which appear above.
(3) Nonaccrual loans are included in average loans outstanding.
(4) Interest income on loans includes $1.4 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively, in accretion of the fair market value adjustments related to acquisitions.
(5) Interest expense on borrowings includes $48,000 and $62,000 for the three months ended March 31, 2017 and 2016, respectively, in accretion of the fair market value adjustments related to acquisitions.
(6) Core net interest margin excludes purchase accounting adjustments and was 3.58% and 3.76% for the three months ended March 31, 2017 and 2016, respectively.
 

-47-


The Volume Rate Analysis table below presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionally. Results, on a taxable equivalent basis, are as follows (dollars in thousands):
 
Three Months Ended
March 31, 2017 vs. March 31, 2016
Increase (Decrease) Due to Change in:
 
Volume
 
Rate
 
Total
Earning Assets:
 

 
 

 
 

Securities:
 

 
 

 
 

Taxable
$
15

 
$
592

 
$
607

Tax-exempt
213

 
(24
)
 
189

Total securities
228

 
568

 
796

Loans, net (1)
7,284

 
(2,107
)
 
5,177

Other earning assets
(10
)
 
(21
)
 
(31
)
Total earning assets
$
7,502

 
$
(1,560
)
 
$
5,942

Interest-Bearing Liabilities:
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Transaction and money market accounts
$
214

 
$
362

 
$
576

Regular savings
6

 
(32
)
 
(26
)
Time Deposits
88

 
244

 
332

Total interest-bearing deposits
308

 
574

 
882

Other borrowings (2)
670

 
1,503

 
2,173

Total interest-bearing liabilities
978

 
2,077

 
3,055

Change in net interest income
$
6,524

 
$
(3,637
)
 
$
2,887


(1) The rate-related change in interest income on loans includes the impact of higher accretion of the acquisition-related fair market value adjustments of $361,000.
(2) The rate-related change in interest expense on other borrowings includes the impact of lower accretion of the acquisition-related fair market value adjustments of $14,000.
 
The Company’s fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The impact of net accretion for the quarters ended March 31, 2016 and 2017 as well as the remaining estimated net accretion are reflected in the following table (dollars in thousands):
 
Loan Accretion
 
Borrowings Accretion (Amortization)
 
Total
For the quarter ended March 31, 2016
$
1,084

 
$
62

 
$
1,146

For the quarter ended March 31, 2017
1,445

 
48

 
1,493

For the remaining nine months of 2017
4,100

 
122

 
4,222

For the years ending:
 

 
 

 
 

2018
4,835

 
(143
)
 
4,692

2019
3,566

 
(286
)
 
3,280

2020
2,707

 
(301
)
 
2,406

2021
2,127

 
(316
)
 
1,811

2022
1,732

 
(332
)
 
1,400

Thereafter
6,589

 
(4,974
)
 
1,615



-48-


Noninterest Income
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2017
 
2016
 
$
 
%
 
(Dollars in thousands)
Noninterest income:
 

 
 

 
 

 
 

Service charges on deposit accounts
$
4,829

 
$
4,734

 
$
95

 
2.0
 %
Other service charges and fees
4,408

 
4,156

 
252

 
6.1
 %
Fiduciary and asset management fees
2,794

 
2,138

 
656

 
30.7
 %
Mortgage banking income, net
2,025

 
2,146

 
(121
)
 
(5.6
)%
Gains on securities transactions, net
481

 
143

 
338

 
236.4
 %
Bank owned life insurance income
2,125

 
1,372

 
753

 
54.9
 %
Loan-related interest rate swap fees
1,180

 
662

 
518

 
78.2
 %
Other operating income
997

 
563

 
434

 
77.1
 %
Total noninterest income
$
18,839

 
$
15,914

 
$
2,925

 
18.4
 %
 
 
 
 
 
 
 
 
Community bank segment
$
16,757

 
13,608

 
$
3,149

 
23.1
 %
Mortgage segment
2,223

 
2,477

 
(254
)
 
(10.3
)%
Intercompany eliminations
(141
)
 
(171
)
 
30

 
17.5
 %
Total noninterest income
$
18,839

 
$
15,914

 
$
2,925

 
18.4
 %

Noninterest income increased $2.9 million, or 18.4%, to $18.8 million for the quarter ended March 31, 2017 from $15.9 million for the first quarter of 2016. For the first quarter of 2017, bank owned life insurance income increased $753,000 primarily related to death benefit proceeds received; fiduciary and asset management fees were $656,000 higher due to the acquisition of ODCM in the second quarter of 2016; loan-related swap fees increased $518,000; customer-related fee income increased $347,000 primarily related to increases in debit card interchange fees; and gains on sales of securities were $338,000 higher, in each case as compared to the first quarter of 2016.


-49-


Noninterest expense
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change
 
2017
 
2016
 
$
 
%
 
(Dollars in thousands)
Noninterest expense:
 

 
 

 
 

 
 

Salaries and benefits
$
32,168

 
$
28,048

 
$
4,120

 
14.7
 %
Occupancy expenses
4,903

 
4,976

 
(73
)
 
(1.5
)%
Furniture and equipment expenses
2,603

 
2,636

 
(33
)
 
(1.3
)%
Printing, postage, and supplies
1,150

 
1,139

 
11

 
1.0
 %
Communications expense
910

 
1,089

 
(179
)
 
(16.4
)%
Technology and data processing
3,900

 
3,814

 
86

 
2.3
 %
Professional services
1,658

 
1,989

 
(331
)
 
(16.6
)%
Marketing and advertising expense
1,740

 
1,938

 
(198
)
 
(10.2
)%
FDIC assessment premiums and other insurance
706

 
1,362

 
(656
)
 
(48.2
)%
Other taxes
2,022

 
1,618

 
404

 
25.0
 %
Loan-related expenses
1,329

 
878

 
451

 
51.4
 %
OREO and credit-related expenses
541

 
569

 
(28
)
 
(4.9
)%
Amortization of intangible assets
1,637

 
1,880

 
(243
)
 
(12.9
)%
Training and other personnel costs
969

 
744

 
225

 
30.2
 %
Other expenses
1,159

 
1,592

 
(433
)
 
(27.2
)%
Total noninterest expense
$
57,395

 
$
54,272

 
$
3,123

 
5.8
 %
 
 
 
 
 
 
 
 
Community bank segment
$
55,014

 
$
51,844

 
$
3,170

 
6.1
 %
Mortgage segment
2,522

 
2,599

 
(77
)
 
(3.0
)%
Intercompany eliminations
(141
)
 
(171
)
 
30

 
17.5
 %
Total noninterest expense
$
57,395

 
$
54,272

 
$
3,123

 
5.8
 %
(1) OREO related costs include foreclosure related expenses, gains/losses on the sale of OREO, valuation reserves, and asset resolution related legal expenses.
 
Noninterest expense increased $3.1 million, or 5.8%, to $57.4 million for the quarter ended March 31, 2017 from $54.3 million in the first quarter of 2016. Salaries and benefits expenses increased by $4.1 million primarily related to annual merit adjustments; increases in group insurance and incentive compensation; and increases related to investments in the Company's growth with the Bank's ODCM acquisition and the opening of a loan production office, or LPO, in North Carolina. This increase was partially offset by lower FDIC and other insurance expenses of $656,000 and declines in professional fees of $331,000 due to lower legal and consulting fees.

SEGMENT INFORMATION
 
Community Bank Segment
 
For the three months ended March 31, 2017, the community bank segment reported net income of $19.1 million, which was an increase of $2.2 million from the first quarter of 2016. Net interest income increased $2.8 million year-over-year to $66.2 million for the quarter ended March 31, 2017, primarily driven by higher average loan balances and higher acquisition-related accretion. The provision for credit losses for the quarter ended March 31, 2017 was $2.1 million, a decrease of $396,000 compared to the quarter ended March 31, 2016, primarily driven by lower charge-off levels.

Noninterest income increased $3.2 million, or 23.1%, from $13.6 million in the first quarter of 2016 to $16.8 million in the first quarter of 2017. Customer-related fee income increased $347,000 primarily due to higher debit card interchange fees. Fiduciary and asset management fees also increased by $656,000 related to the acquisition of ODCM. Other increases in noninterest income were related to higher bank owned life insurance income of $753,000 primarily related to death benefit proceeds

-50-


received and higher loan-related interest-rate swap fees of $518,000 in the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016.

Noninterest expense increased $3.2 million, or 6.1%, from $51.8 million in the first quarter of 2016 to $55.0 million in the quarter ended March 31, 2017. The increase in noninterest expense is driven by increases in salaries and benefits expense of $4.2 million primarily related to annual merit adjustments; increases in group insurance and incentive compensation; and increases related to investments in the Company's growth with the Bank's ODCM acquisition and the opening of a North Carolina LPO. This increase in noninterest expense was partially offset by lower FDIC and other insurance expenses and professional fees related to lower legal and consulting fees.

Mortgage Segment
 
The mortgage segment reported net income of $4,000 for the first quarter of 2017, compared to net income of $54,000 in the first quarter of 2016. Mortgage banking income, net of commissions, decreased $121,000, due to lower gain on sale margins. Mortgage loan originations increased $2.0 million, or 2.0%, from $98.2 million for the quarter ended March 31, 2016 to $100.2 million for the quarter ended March 31, 2017. Noninterest expense decreased $77,000, largely a result of declines in personnel costs.

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.

In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of temporary differences, projected future taxable income, and tax planning strategies. Management continues to believe that it is not likely that the Company will realize its deferred tax asset related to net operating losses generated at the state level and accordingly has established a valuation allowance. The Company’s bank subsidiary is not subject to a state income tax in its primary place of business (Virginia). The Company’s other subsidiaries are subject to state income taxes and have generated losses on a consolidated basis for state income tax purposes which the Company is currently unable to utilize. State net operating loss carryovers will begin to expire after 2026.

The effective tax rate for the three months ended March 31, 2017 and 2016 was 26.1% and 25.5%, respectively. The increase in the effective tax rate is primarily related to tax-exempt interest and bank owned life insurance income being a smaller percentage of pre-tax income in 2017 compared to 2016.

BALANCE SHEET
 
Assets
At March 31, 2017, total assets were $8.7 billion, an increase of $243.1 million, or 11.6% (annualized), from $8.4 billion at December 31, 2016. The increase in assets was mostly related to loan growth.
 
Loans held for investment, net of deferred fees and costs, were $6.6 billion at March 31, 2017, an increase of $247.0 million, or 15.7% (annualized), from December 31, 2016. Loan growth occurred across all categories. Quarterly average loans increased $169.8 million, or 10.9% (annualized), for the quarter ended March 31, 2017 compared to the quarter ended December 31, 2016. For additional information on the Company’s loan activity, please refer to “Loan Portfolio” below or Note 3 “Loans and Allowance for Loan Losses” in Part I, Item 1 – Financial Statements, of this report.
 
Liabilities and Stockholders’ Equity
At March 31, 2017, total liabilities were $7.7 billion, an increase of $228.5 million from December 31, 2016.
 
Total deposits were $6.6 billion at March 31, 2017, an increase of $234.7 million, or 14.7% (annualized), from December 31, 2016. Deposits increased in all categories when compared to year-end 2016, but was primarily driven by increases in demand and interest-bearing deposits consisting of NOW and money market accounts. Quarterly average deposits increased $97.3 million, or 6.2% (annualized), for the quarter ended March 31, 2017 compared to the quarter ended December 31, 2016. For further discussion on this topic, see “Deposits” below.

-51-


At March 31, 2017, stockholders’ equity was $1.0 billion, an increase of $14.6 million from December 31, 2016. The Company’s capital ratios continue to exceed the minimum capital requirements for regulatory purposes but have decreased from prior periods primarily due to share repurchases and asset growth. The total risk-based capital ratios at March 31, 2017 and December 31, 2016 were 13.30% and 13.56%, respectively. The Tier 1 risk-based capital ratios were 10.77% and 10.97% at March 31, 2017 and December 31, 2016, respectively. The common equity Tier 1 risk-based capital ratios were 9.55% and 9.72% at March 31, 2017 and December 31, 2016, respectively. The Company’s common equity to total asset ratios at March 31, 2017 and December 31, 2016 were 11.71% and 11.88%, respectively, while its tangible common equity to tangible assets ratios were 8.36% and 8.41%, respectively, at the same dates.
  
Also, the Company declared and paid a cash dividend of $0.20 per share during the first quarter of 2017, consistent with the dividend paid in the prior quarter, and an increase of $0.01 per share, or 5.3%, compared to the dividend paid during the same quarter in the prior year.

Securities
At March 31, 2017, the Company had total investments in the amount of $1.2 billion, or 14.1 % of total assets, as compared to $1.2 billion, or 14.3% of total assets, at December 31, 2016. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of the Company’s mortgage-backed securities are investment grade. The investment portfolio has a high percentage of municipals and mortgage-backed securities; therefore a higher taxable equivalent yield exists on the portfolio compared to many of its peers. The Company does not engage in structured derivative or hedging activities within the investment portfolio.
 
The table below sets forth a summary of the securities available for sale, securities held to maturity, and restricted stock for the following periods (dollars in thousands): 
 
March 31,
2017
 
December 31,
2016
Available for Sale:
 

 
 

Obligations of states and political subdivisions
$
277,849

 
$
275,890

Corporate and other bonds
112,046

 
121,780

Mortgage-backed securities
549,355

 
535,286

Other securities
13,808

 
13,808

Total securities available for sale, at fair value
953,058

 
946,764

 
 
 
 
Held to Maturity:
 

 
 

Obligations of states and political subdivisions, at carrying value
203,478

 
201,526

 
 
 
 
Federal Reserve Bank stock
27,558

 
23,808

Federal Home Loan Bank stock
37,844

 
36,974

Total restricted stock, at cost
65,402

 
60,782

Total investments
$
1,221,938

 
$
1,209,072

 
During each quarter and at year end, the Company conducts an assessment of the securities portfolio for OTTI consideration. No OTTI was recognized for the quarter ended March 31, 2017. For the year ended December 31, 2015, the Company determined that a municipal security in the available for sale portfolio incurred credit-related OTTI of $300,000. During the quarter ended March 31, 2016, the municipal security was sold.  As a result, the Company recognized an additional loss on sale of the previously written down security. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to determine whether adjustments are needed. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 

-52-


The following table summarizes the contractual maturity of securities available for sale at fair value and their weighted average yields as of March 31, 2017 (dollars in thousands): 
 
1 Year or Less
 
1 - 5 Years
 
5 - 10 Years
 
Over 10 Years
 
Total
Mortgage backed securities:
 

 
 

 
 

 
 

 
 

Amortized cost
$
208

 
$
57,232

 
$
152,643

 
$
338,374

 
$
548,457

Fair value
211

 
57,119

 
152,565

 
339,460

 
549,355

Weighted average yield (1)
3.75

 
1.99

 
2.21

 
2.48

 
2.35

 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions:
 

 
 

 
 

 
 

 
 

Amortized cost
13,313

 
56,140

 
78,844

 
125,706

 
274,003

Fair value
13,470

 
58,120

 
81,172

 
125,087

 
277,849

Weighted average yield (1)
6.05

 
4.70

 
4.50

 
3.90

 
4.34

 
 
 
 
 
 
 
 
 
 
Corporate bonds and other securities:
 

 
 

 
 

 
 

 
 

Amortized cost
11,385

 
518

 
52,530

 
61,884

 
126,317

Fair value
11,308

 
518

 
53,181

 
60,847

 
125,854

Weighted average yield (1)
0.30

 
0.47

 
4.44

 
2.10

 
2.91

 
 
 
 
 
 
 
 
 
 
Total securities available for sale:
 

 
 

 
 

 
 

 
 

Amortized cost
24,906

 
113,890

 
284,017

 
525,964

 
948,777

Fair value
24,989

 
115,757

 
286,918

 
525,394

 
953,058

Weighted average yield (1)
3.40

 
3.32

 
3.26

 
2.78

 
3.00

 
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
 
The following table summarizes the contractual maturity of securities held to maturity at carrying value and their weighted average yields as of March 31, 2017 (dollars in thousands):
 
 
1 Year or Less
 
1 - 5 Years
 
5 - 10 Years
 
Over 10 Years
 
Total
Obligations of states and political subdivisions:
 

 
 

 
 

 
 

 
 

Carrying Value
$
4,108

 
$
30,050

 
$
62,127

 
$
107,193

 
$
203,478

Fair value
4,140

 
30,503

 
62,485

 
108,483

 
205,611

Weighted average yield (1)
2.80

 
2.65

 
3.11

 
3.74

 
3.37

 
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
 
As of March 31, 2017, the Company maintained a diversified municipal bond portfolio with approximately 75% of its holdings in general obligation issues and the remainder backed by revenue bonds. Issuances within the Commonwealth of Virginia and the State of Texas both represented 12% and issuances within the State of Washington represented 11% of the municipal portfolio; no other state had a concentration above 10%. Substantially all municipal holdings are considered investment grade. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.

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 or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, the purchase of brokered certificates of deposit, and a corporate line of credit with a large correspondent bank. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.
 

-53-


As of March 31, 2017, liquid assets totaled $2.2 billion, or 28.3%, of total earning assets. As of March 31, 2017, approximately $2.0 billion, or 30.6%, of total loans are scheduled to mature within one year based on contractual maturity, adjusted for expected prepayments.

Loan Portfolio
 
Loans held for investment, net of deferred fees and costs, were $6.6 billion at March 31, 2017, $6.3 billion at December 31, 2016, and $5.8 billion at March 31, 2016, respectively. Commercial real estate - non-owner occupied loans continue to represent the Company’s largest category, comprising 24.9% of the total loan portfolio at March 31, 2017.

The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of the quarter ended (dollars in thousands): 
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
Construction and Land Development
$
770,287

 
11.8
%
 
$
751,131

 
11.9
%
 
$
776,430

 
12.6
%
 
$
765,997

 
12.9
%
 
$
776,698

 
13.4
%
Commercial Real Estate - Owner Occupied
870,559

 
13.3
%
 
857,805

 
13.6
%
 
857,142

 
13.9
%
 
831,880

 
14.0
%
 
849,202

 
14.7
%
Commercial Real Estate - Non-Owner Occupied
1,631,767

 
24.9
%
 
1,564,295

 
24.8
%
 
1,454,828

 
23.7
%
 
1,370,745

 
23.1
%
 
1,296,251

 
22.5
%
Multifamily Real Estate
353,769

 
5.4
%
 
334,276

 
5.3
%
 
339,313

 
5.5
%
 
337,723

 
5.7
%
 
323,270

 
5.6
%
Commercial & Industrial
576,567

 
8.8
%
 
551,526

 
8.7
%
 
509,857

 
8.3
%
 
469,054

 
7.9
%
 
453,208

 
7.8
%
Residential 1-4 Family
1,057,439

 
16.1
%
 
1,029,547

 
16.3
%
 
999,361

 
16.3
%
 
992,457

 
16.7
%
 
978,478

 
16.9
%
Auto
271,466

 
4.1
%
 
262,071

 
4.2
%
 
255,188

 
4.2
%
 
244,575

 
4.1
%
 
241,737

 
4.2
%
HELOC
527,863

 
8.1
%
 
526,884

 
8.4
%
 
524,097

 
8.5
%
 
519,196

 
8.7
%
 
517,122

 
8.9
%
Consumer and all other
494,329

 
7.5
%
 
429,525

 
6.8
%
 
432,702

 
7.0
%
 
409,471

 
6.9
%
 
344,536

 
6.0
%
        Total loans held for investment
$
6,554,046

 
100.0
%
 
$
6,307,060

 
100.0
%
 
$
6,148,918

 
100.0
%
 
$
5,941,098

 
100.0
%
 
$
5,780,502

 
100.0
%
 
The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of March 31, 2017 (dollars in thousands):
 
 
 
 
 
Variable Rate
 
Fixed Rate
 
Total
Maturities
 
Less than 1
year
 
Total
 
1-5 years
 
More than 5
years
 
Total
 
1-5 years
 
More than 5
years
Construction and Land Development
$
770,287

 
$
460,265

 
$
186,425

 
$
153,335

 
$
33,090

 
$
123,597

 
$
99,641

 
$
23,956

Commercial Real Estate - Owner Occupied
870,559

 
94,692

 
252,681

 
43,370

 
209,311

 
523,186

 
361,939

 
161,247

Commercial Real Estate - Non-Owner Occupied
1,631,767

 
137,264

 
559,793

 
197,067

 
362,726

 
934,710

 
657,825

 
276,885

Multifamily Real Estate
353,769

 
23,611

 
140,023

 
28,120

 
111,903

 
190,135

 
164,435

 
25,700

Commercial & Industrial
576,567

 
184,634

 
172,026

 
129,123

 
42,903

 
219,907

 
146,816

 
73,091

Residential 1-4 Family
1,057,439

 
71,129

 
345,253

 
12,568

 
332,685

 
641,057

 
359,330

 
281,727

Auto
271,466

 
2,094

 

 

 

 
269,372

 
129,560

 
139,812

HELOC
527,863

 
34,215

 
491,179

 
41,263

 
449,916

 
2,469

 
2,019

 
450

Consumer and all other
494,329

 
44,135

 
47,640

 
10,972

 
36,668

 
402,554

 
164,457

 
238,097

        Total loans held for investment
$
6,554,046

 
$
1,052,039

 
$
2,195,020

 
$
615,818

 
$
1,579,202

 
$
3,306,987

 
$
2,086,022

 
$
1,220,965


The Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade areas. As reflected in the loan table, at March 31, 2017, the largest component of the Company’s loan portfolio consisted of commercial real estate loans, residential 1-4 family loans, and construction and land development loans. The risks attributable to these concentrations are mitigated by the Company’s credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as seasoned bankers focusing their lending to borrowers with proven track records in markets with which the Company is familiar. UMG primarily serves as a secondary mortgage banking operation, selling the majority of its loan production in the secondary market or selling loans to meet the Bank’s current asset/liability management needs.

-54-



Asset Quality
 
Overview
During the first quarter of 2017, the Company experienced declines in past due loan levels as well as in net charge-off levels from the prior quarter and the first quarter of 2016. Nonaccrual loan levels increased in the first quarter of 2017, primarily related to two credit relationships. The loan loss provision and allowance for loan loss increased from December 31, 2016 due to loan growth and increased specific reserves related to increases in nonaccrual loans.

All nonaccrual and past due loan metrics discussed below exclude purchased credit impaired (“PCI”) loans totaling $57.8 million (net of fair value mark of $13.7 million) at March 31, 2017.
 
Troubled Debt Restructurings
The total recorded investment in TDRs as of March 31, 2017 was $18.7 million, an increase of $3.3 million, or 21.6%, from $15.4 million at December 31, 2016 and an increase of $5.8 million, or 44.5%, from $13.0 million at March 31, 2016. Of the $18.7 million of TDRs at March 31, 2017, $14.3 million, or 76.5%, were considered performing while the remaining $4.4 million were considered nonperforming.

Loans removed from TDR status represent restructured loans with a market rate of interest at the time of the restructuring. These loans have performed in accordance with their modified terms for twelve consecutive months and were no longer considered impaired. Loans removed from TDR status are collectively evaluated for impairment; due to the significant improvement in the expected future cash flows, these loans are grouped based on their primary risk characteristics, which is included in the Company's general reserve. Impairment is measured based on historical loss experience taking into consideration environmental factors. The significant majority of these loans have been subject to new credit decisions due to the improvement in the expected future cash flows, the financial condition of the borrower, and other factors considered during re-underwriting. The TDR activity during the quarter did not have a material impact on the Company’s allowance for loan losses, financial condition, or results of operations.
 
Nonperforming Assets ("NPAs")
At March 31, 2017, NPAs totaled $31.9 million, an increase of $11.9 million, or 59.3%, from December 31, 2016 and an increase of $4.6 million, or 16.8%, from a year ago. In addition, NPAs as a percentage of total outstanding loans increased 17 basis points to 0.49% at March 31, 2017 from 0.32% as of December 31, 2016 and increased 2 basis points from 0.47% a year earlier.
 

-55-


The following table shows a summary of asset quality balances and related ratios as of and for the quarters ended (dollars in thousands):
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
Nonaccrual loans, excluding PCI loans
$
22,338

 
$
9,973

 
$
12,677

 
$
10,861

 
$
13,092

Foreclosed properties
6,951

 
7,430

 
7,927

 
10,076

 
10,941

Former bank premises
2,654

 
2,654

 
2,654

 
3,305

 
3,305

Total nonperforming assets
31,943

 
20,057

 
23,258

 
24,242

 
27,338

Loans past due 90 days and accruing interest
2,323

 
3,005

 
3,529

 
3,533

 
5,723

Total nonperforming assets and loans past due 90 days and accruing interest
$
34,266

 
$
23,062

 
$
26,787

 
$
27,775

 
$
33,061

 
 
 
 
 
 
 
 
 
 
Performing TDRs
$
14,325

 
$
13,967

 
$
11,824

 
$
11,885

 
$
11,486

PCI loans
57,770

 
59,292

 
62,346

 
67,170

 
70,105

 
 
 
 
 
 
 
 
 
 
Balances
 
 
 
 
 
 
 
 
 
Allowance for loan losses
$
38,414

 
$
37,192

 
$
36,542

 
$
35,074

 
$
34,399

Average loans, net of deferred fees and costs
6,383,905

 
6,214,084

 
6,033,723

 
5,863,007

 
5,709,998

Loans, net of deferred fees and costs
6,554,046

 
6,307,060

 
6,148,918

 
5,941,098

 
5,780,502

 
 
 
 
 
 
 
 
 
 
Ratios
 
 
 
 
 
 
 
 
 
NPAs to total loans
0.49
%
 
0.32
%
 
0.38
%
 
0.41
%
 
0.47
%
NPAs & loans 90 days past due to total loans
0.52
%
 
0.37
%
 
0.44
%
 
0.47
%
 
0.57
%
NPAs to total loans & OREO
0.49
%
 
0.32
%
 
0.38
%
 
0.41
%
 
0.47
%
NPAs & loans 90 days past due and accruing to total loans & OREO
0.52
%
 
0.37
%
 
0.43
%
 
0.47
%
 
0.57
%
ALL to nonaccrual loans
171.97
%
 
372.93
%
 
288.25
%
 
322.94
%
 
262.75
%
ALL to nonaccrual loans & loans 90 days past due and accruing
155.77
%
 
286.58
%
 
225.48
%
 
243.67
%
 
182.83
%
 
Nonperforming assets at March 31, 2017 included $22.3 million in nonaccrual loans, a net increase of $12.4 million, or 124.0%, from December 31, 2016 and a net increase of $9.2 million, or 70.6%, from March 31, 2016. The following table shows the activity in nonaccrual loans for the quarter ended (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
Beginning Balance
$
9,973

 
$
12,677

 
$
10,861

 
$
13,092

 
$
11,936

Net customer payments
(1,068
)
 
(1,451
)
 
(1,645
)
 
(2,859
)
 
(1,204
)
Additions
13,557

 
1,094

 
4,359

 
2,568

 
5,150

Charge-offs
(97
)
 
(1,216
)
 
(660
)
 
(1,096
)
 
(1,446
)
Loans returning to accruing status
(27
)
 
(1,039
)
 
(23
)
 
(396
)
 
(932
)
Transfers to OREO

 
(92
)
 
(215
)
 
(448
)
 
(412
)
Ending Balance
$
22,338

 
$
9,973

 
$
12,677

 
$
10,861

 
$
13,092

 
The nonaccrual additions in the first quarter of 2017 primarily relate to two unrelated credit relationships; one relationship was comprised of commercial and industrial and construction loans, while the other was comprised of commercial real estate - non-owner occupied loans.

 

-56-


The following table presents the composition of nonaccrual loans and the coverage ratio, which is the allowance for loan losses expressed as a percentage of nonaccrual loans, at the quarters ended (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
Construction and Land Development
$
6,545

 
$
2,037

 
$
2,301

 
$
1,604

 
$
2,156

Commercial Real Estate - Owner Occupied
1,298

 
794

 
1,609

 
1,661

 
2,816

Commercial Real Estate - Non-owner Occupied
2,798

 

 

 

 

Commercial & Industrial
3,245

 
124

 
1,344

 
263

 
810

Residential 1-4 Family
5,856

 
5,279

 
5,279

 
5,448

 
5,696

Auto
393

 
169

 
231

 
140

 
162

HELOC
1,902

 
1,279

 
1,464

 
1,495

 
973

Consumer and All Other
301

 
291

 
449

 
250

 
479

Total
$
22,338

 
$
9,973

 
$
12,677

 
$
10,861

 
$
13,092

 
 
 
 
 
 
 
 
 
 
Coverage Ratio
171.97
%
 
372.93
%
 
288.25
%
 
322.94
%
 
262.75
%
 
Nonperforming assets at March 31, 2017 also included $9.6 million in OREO, a decrease of $479,000, or 4.8%, from December 31, 2016 and a decrease of $4.6 million, or 32.6%, from the prior year. The following table shows the activity in OREO for the quarters ended (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
Beginning Balance
$
10,084

 
$
10,581

 
$
13,381

 
$
14,246

 
$
15,299

Additions of foreclosed property

 
859

 
246

 
501

 
456

Valuation adjustments
(238
)
 
(138
)
 
(479
)
 
(274
)
 
(126
)
Proceeds from sales
(277
)
 
(1,282
)
 
(2,844
)
 
(1,086
)
 
(1,390
)
Gains (losses) from sales
36

 
64

 
277

 
(6
)
 
7

Ending Balance
$
9,605

 
$
10,084

 
$
10,581

 
$
13,381

 
$
14,246

 
The following table presents the composition of the OREO portfolio at the quarter ended (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
Land
$
3,328

 
$
3,328

 
$
3,440

 
$
4,759

 
$
4,874

Land Development
2,111

 
2,379

 
2,320

 
2,416

 
2,616

Residential Real Estate
1,338

 
1,549

 
1,806

 
2,412

 
2,707

Commercial Real Estate
174

 
174

 
361

 
489

 
744

Former Bank Premises (1)
2,654

 
2,654

 
2,654

 
3,305

 
3,305

Total
$
9,605

 
$
10,084

 
$
10,581

 
$
13,381

 
$
14,246

 
(1) Includes closed branch property and land previously held for branch sites.
 
Past Due Loans
At March 31, 2017, total accruing past due loans were $26.9 million, or 0.41% of total loans, compared to $27.9 million, or 0.44%, at December 31, 2016 and $35.1 million, or 0.61%, a year ago. At March 31, 2017, loans past due 90 days or more and accruing interest totaled $2.3 million, or 0.04% of total loans, compared to $3.0 million, or 0.05%, at December 31, 2016 and $5.7 million, or 0.10%, a year ago.
 
Charge-offs and delinquencies
For the quarter ended March 31, 2017, net charge-offs were $788,000, or 0.05% of average loans on an annualized basis, compared to $2.2 million, or 0.15%, for the same quarter last year.


-57-


Provision for Credit Losses
The provision for loan losses for the quarter ended March 31, 2017 was $2.0 million, a decline of $494,000 compared to the same quarter a year ago. Despite the loan growth that has occurred during the year, the provision for loan losses declined in the first three months of 2017 compared to the same period in the prior year, primarily due to lower charge-off levels. Additionally, a $112,000 provision was recorded during the quarter ending March 31, 2017 related to off-balance sheet credit exposures, resulting in a total of $2.1 million in provision for credit losses for the quarter, compared to $2.6 million in the first quarter of 2016.
 
Allowance for Loan Losses
The allowance for loan losses of $38.4 million at March 31, 2017, is an increase of $1.2 million compared to the allowance for loan losses at December 31, 2016, primarily related to loan growth and increases in specific reserves related to nonaccrual loans. The current level of the allowance for loan losses reflects specific reserves related to nonperforming loans, current risk ratings on loans, net charge-off activity, loan growth, delinquency trends, and other credit risk factors that the Company considers important in assessing the adequacy of the allowance for loan losses.
 
The following table summarizes activity in the allowance for loan losses during the quarters ended (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
Balance, beginning of period
$
37,192

 
$
36,542

 
$
35,074

 
$
34,399

 
$
34,047

Loans charged-off:
 
 
 
 
 
 
 
 
 
Commercial
241

 
620

 
16

 
668

 
617

Real estate
374

 
469

 
929

 
1,299

 
1,427

Consumer
1,018

 
738

 
518

 
318

 
936

Total loans charged-off
1,633

 
1,827

 
1,463

 
2,285

 
2,980

Recoveries:
 
 
 
 
 
 
 
 
 
Commercial
139

 
61

 
67

 
117

 
238

Real estate
273

 
806

 
303

 
281

 
391

Consumer
433

 
136

 
164

 
262

 
199

Total recoveries
845

 
1,003

 
534

 
660

 
828

Net charge-offs
788

 
824

 
929

 
1,625

 
2,152

Provision for loan losses
2,010

 
1,474

 
2,397

 
2,300

 
2,504

Balance, end of period
$
38,414

 
$
37,192

 
$
36,542

 
$
35,074

 
$
34,399

 
 
 
 
 
 
 
 
 
 
ALL to loans
0.59
%
 
0.59
%
 
0.59
%
 
0.59
%
 
0.60
%
ALL to loans, adjusted for acquisition accounting (Non-GAAP)
0.84
%
 
0.86
%
 
0.90
%
 
0.92
%
 
0.95
%
Net charge-offs to average loans
0.05
%
 
0.05
%
 
0.06
%
 
0.11
%
 
0.15
%
Provision to average loans
0.13
%
 
0.09
%
 
0.16
%
 
0.16
%
 
0.18
%
 
The following table shows both an allocation of the allowance for loan losses among loan categories based upon the loan portfolio’s composition and the ratio of the related outstanding loan balances to total loans as of the quarters ended (dollars in thousands):
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
$
 
% (1)
 
$
 
% (1)
 
$
 
% (1)
 
$
 
% (1)
 
$
 
% (1)
Commercial
$
5,279

 
8.8
%
 
$
4,627

 
8.7
%
 
$
5,403

 
8.3
%
 
$
4,026

 
7.9
%
 
$
4,225

 
7.8
%
Real estate
29,356

 
79.6
%
 
29,441

 
80.3
%
 
28,064

 
81.0
%
 
28,061

 
81.6
%
 
27,576

 
82.6
%
Consumer
3,779

 
11.6
%
 
3,124

 
11.0
%
 
3,075

 
10.7
%
 
2,987

 
10.5
%
 
2,598

 
9.6
%
Total
$
38,414

 
100.0
%
 
$
37,192

 
100.0
%
 
$
36,542

 
100.0
%
 
$
35,074

 
100.0
%
 
$
34,399

 
100.0
%
 (1) The percent represents the loan balance divided by total loans.


-58-


Deposits
As of March 31, 2017, total deposits were $6.6 billion, an increase of $234.7 million, or 14.7% (annualized), from December 31, 2016. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of $1.2 billion accounted for 24.0% of total interest-bearing deposits at March 31, 2017.
 
The following table presents the deposit balances by major categories as of the quarters ended (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
Deposits:
Amount
 
% of total
deposits
 
Amount
 
% of total
deposits
Non-interest bearing
$
1,490,799

 
22.5
%
 
$
1,393,625

 
21.8
%
NOW accounts
1,792,531

 
27.1
%
 
1,765,956

 
27.7
%
Money market accounts
1,499,585

 
22.7
%
 
1,435,591

 
22.5
%
Savings accounts
602,851

 
9.1
%
 
591,742

 
9.3
%
Time deposits of $100,000 and over
555,431

 
8.4
%
 
530,275

 
8.3
%
Other time deposits
672,998

 
10.2
%
 
662,300

 
10.4
%
Total Deposits
$
6,614,195

 
100.0
%
 
$
6,379,489

 
100.0
%
 
The Company may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. The Company utilizes this funding source when rates are more favorable than other funding sources. As of March 31, 2017 and December 31, 2016, there were $2.3 million and $0, respectively, purchased certificates of deposit included in certificates of deposit on the Company’s Consolidated Balance Sheets. Maturities of time deposits as of March 31, 2017 were as follows (dollars in thousands):
 
Within 3
Months
 
3 - 12
Months
 
Over 12
Months
 
Total
Maturities of time deposits of $100,000 and over
$
55,686

 
$
141,939

 
$
357,806

 
$
555,431

Maturities of other time deposits
85,461

 
210,769

 
376,768


672,998

Total time deposits
$
141,147

 
$
352,708

 
$
734,574

 
$
1,228,429


Capital Resources
 
Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.
 
In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). These capital requirements will be phased in over a four-year period. When fully phased in on January 1, 2019, the rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
 

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Beginning January 1, 2016, the capital conservation buffer requirement began to be phased in at 0.625% of risk-weighted assets, and will increase by the same amount each year until fully implemented at 2.5% on January 1, 2019. As of March 31, 2017, the capital conservation buffer was 1.25% of risk-weighted assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The table summarizes the Company’s regulatory capital and related ratios for the periods presented (dollars in thousands):
 
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
Common equity Tier 1 capital
$
708,985

 
$
699,728

 
$
674,498

Tier 1 capital
799,485

 
790,228

 
764,998

Tier 2 capital
187,295

 
185,917

 
34,811

Total risk-based capital
986,780

 
976,145

 
799,809

Risk-weighted assets
7,420,280

 
7,200,778

 
6,577,394

 
 
 
 
 
 
Capital ratios:
 

 
 

 
 

Common equity Tier 1 capital ratio
9.55
%
 
9.72
%
 
10.25
%
Tier 1 capital ratio
10.77
%
 
10.97
%
 
11.63
%
Total capital ratio
13.30
%
 
13.56
%
 
12.16
%
Leverage ratio (Tier 1 capital to average assets)
9.79
%
 
9.87
%
 
10.25
%
Capital conservation buffer ratio (1)
4.77
%
 
4.97
%
 
4.16
%
Common equity to total assets
11.71
%
 
11.88
%
 
12.52
%
Tangible common equity to tangible assets
8.36
%
 
8.41
%
 
8.86
%
(1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company's actual ratio results for Common equity, Tier 1, and Total risk based capital. The lowest of the three measures represents the Company's capital conservation buffer ratio.

NON-GAAP MEASURES

In reporting the results of March 31, 2017, the Company has provided supplemental performance measures on a tax-equivalent, core, or tangible basis. These measures are a supplement to GAAP used to prepare the Company's financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company's non-GAAP measures may not be comparable to non-GAAP measures of other companies.

Net interest income (FTE), which is used in computing net interest margin (FTE), provides valuable additional insight into the net interest margin by adjusting for differences in tax treatment of interest income sources.

Core net interest income (FTE), which is used in computing core net interest margin (FTE), provides valuable additional insight into the net interest margin by adjusting for differences in tax treatment of interest income sources as well as the net accretion of acquisition-related fair value marks.

The Company believes tangible common equity is an important indication of its ability to grow organically and through business combinations as well as its ability to pay dividends and to engage in various capital management strategies. Tangible common equity is used in the calculation of certain profitability, capital, and per share ratios. These ratios are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which the Company believes will assist investors in assessing the capital of the Company and its ability to absorb potential losses.


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The following table reconciles these non-GAAP measures from their respective U.S. GAAP basis measures for each of the periods presented (dollars in thousands, except per share amounts):
 
Three Months Ended
March 31,
 
2017
 
2016
Interest Income (FTE)
 
 
 
Interest Income (GAAP)
$
76,640

 
$
70,749

FTE adjustment
2,540

 
2,489

Interest Income FTE (non-GAAP)
79,180

 
73,238

 
 
 
 
Average earning assets
$
7,660,937

 
$
6,968,988

 
 
 
 
Yield on interest-earning assets (GAAP)
4.05
%
 
4.09
%
Yield on interest-earning assets (FTE) (non-GAAP)
4.19
%
 
4.23
%
Net Interest Income (FTE) & Core Net Interest Income (FTE)
 
 
 
Net Interest Income (GAAP)
$
66,567

 
$
63,731

FTE adjustment
2,540

 
2,489

Net Interest Income FTE (non-GAAP)
69,107

 
66,220

Less: Net accretion of acquisition fair value marks
1,493

 
1,146

Core Net Interest Income FTE (non-GAAP)
$
67,614

 
$
65,074

 
 
 
 
Average earning assets
$
7,660,937

 
$
6,968,988

 
 
 
 
Net interest margin (GAAP)
3.52
%
 
3.68
%
Net interest margin (FTE) (non-GAAP)
3.66
%
 
3.82
%
Core net interest margin (FTE) (non-GAAP)
3.58
%
 
3.76
%
Tangible Assets
 
 
 
Ending Assets (GAAP)
$
8,669,920

 
$
7,832,611

Less: Ending goodwill
298,191

 
293,522

Less: Ending amortizable intangibles
18,965

 
21,430

Ending tangible assets (non-GAAP)
$
8,352,764

 
$
7,517,659

Tangible Common Equity
 

 
 

Ending Equity (GAAP)
$
1,015,631

 
$
980,978

Less: Ending goodwill
298,191

 
293,522

Less: Ending amortizable intangibles
18,965

 
21,430

Ending tangible common equity (non-GAAP)
$
698,475

 
$
666,026

 
 
 
 
Average equity (GAAP)
$
1,010,318

 
$
989,414

Less: Average goodwill
298,191

 
293,522

Less: Average amortizable intangibles
19,743

 
22,330

Average tangible common equity (non-GAAP)
$
692,384

 
$
673,562

 
 
 
 
ROE (GAAP)
7.68
%
 
6.89
%
ROTCE (non-GAAP)
11.20
%
 
10.13
%
The allowance for loan losses ratio, adjusted for acquisition accounting (non-GAAP), includes an adjustment for the fair value mark on acquired performing loans. The acquired performing loans are reported net of the related fair value mark in loans, net of deferred fees and costs, on the Company’s Consolidated Balance Sheets; therefore, the fair value mark is added back to the balance to represent the total loan portfolio. The adjusted allowance for loan losses, including the fair value mark, represents the total reserve on the Company’s loan portfolio. The PCI loans, net of the respective fair value mark, are removed from the loans, net of deferred fees and costs, as these PCI loans are not covered by the allowance established by the Company unless changes in expected cash flows indicate that one of the PCI loan pools is impaired, at which time an allowance for PCI loans will be established. U.S. GAAP requires the acquired allowance for loan losses not be carried over in an acquisition or merger. The Company believes the presentation of the allowance for loan losses ratio, adjusted for acquisition accounting, is useful to

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investors because the acquired loans were purchased at a market discount with no allowance for loan losses carried over to the Company, and the fair value mark on the purchased performing loans represents the allowance associated with those purchased loans. The Company believes that this measure is a better reflection of the reserves on the Company’s loan portfolio.
The following table shows the allowance for loan losses as a percentage of the total loan portfolio, adjusted for acquisition accounting, as of the quarters ended (dollars in thousands):
 
March 31,
2017
 
December 31,
2016
 
March 31,
2016
Allowance for loan losses
$
38,414

 
$
37,192

 
$
34,399

Remaining fair value mark on acquired performing loans
16,121

 
16,939

 
19,994

Adjusted allowance for loan losses
$
54,535

 
$
54,131

 
$
54,393

Loans, net of deferred fees and costs
$
6,554,046

 
$
6,307,060

 
$
5,780,502

Remaining fair value mark on acquired performing loans
16,121

 
16,939

 
19,994

Less: PCI loans, net of fair value mark
57,770

 
59,292

 
70,105

Adjusted loans, net of deferred fees and costs
$
6,512,397

 
$
6,264,707

 
$
5,730,391

Allowance for loan losses ratio
0.59
%
 
0.59
%
 
0.60
%
Allowance for loan losses ratio, adjusted for acquisition accounting
0.84
%
 
0.86
%
 
0.95
%

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 ALCO of the Company is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk models 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 re-pricing values, is less utilized because it does not effectively measure the options risk impact on the Company and is not addressed here. 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.
 
The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional, and local economies, and other financial and business risk factors. The Company uses simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.
 
EARNINGS SIMULATION ANALYSIS

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.
 
Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. These assumptions may not materialize and unanticipated events and circumstances may occur. The model also does not take into account any future actions of management to mitigate the impact of interest rate changes. Such assumptions are monitored by management and periodically adjusted as appropriate. 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

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changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.
 
The Company uses its simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates. The analysis assesses the impact on net interest income over a 12 month time horizon after an immediate increase or “shock” in rates, of 100 basis points up to 300 basis points. The shock down 200 or 300 basis points analysis is not as meaningful as interest rates across most of the yield curve are near historic lows and cannot decrease another 200 or 300 basis points. The model, under all scenarios, does not drop the index below zero.
 
The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled for balances as of March 31, 2017 and 2016 (dollars in thousands):

 
Change In Net Interest Income
March 31,
 
2017
 
2016
 
%
 
$
 
%
 
$
Change in Yield Curve:
 

 
 

 
 

 
 

+300 basis points
14.68

 
44,658

 
5.14

 
14,241

+200 basis points
10.05

 
30,566

 
3.72

 
10,304

+100 basis points
5.21

 
15,861

 
2.05

 
5,683

Most likely rate scenario

 

 

 

-100 basis points
(5.95
)
 
(18,094
)
 
(1.77
)
 
(4,912
)
-200 basis points
(10.18
)
 
(30,968
)
 
(3.59
)
 
(9,934
)
-300 basis points
(10.78
)
 
(32,785
)
 
(3.71
)
 
(10,267
)
 
Asset sensitivity indicates that in a rising interest rate environment the Company’s net interest income would increase and in a decreasing interest rate environment the Company’s net interest income would decrease. Liability sensitivity indicates that in a rising interest rate environment the Company’s net interest income would decrease and in a decreasing interest rate environment the Company’s net interest income would increase.
 
As of March 31, 2017, the Company was more asset sensitive in a rising interest rate environment scenario when compared to March 31, 2016 in part due to the composition of the balance sheet and in part due to the market characteristics of certain deposit products. The Company would expect net interest income to increase with an immediate increase or shock in market rates. In the decreasing interest rate environments, the Company would expect a decline in net interest income as interest-earning assets re-price at lower rates and interest-bearing deposits remain at or near their floors. It should be noted that although net interest income simulation results are presented through the down 300 basis points interest rate environments, the Company does not believe the down 200 and 300 basis point scenarios are plausible given the current level of interest rates.
 
ECONOMIC VALUE SIMULATION
 
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.
 

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The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly periods ended March 31, 2017 and 2016 (dollars in thousands):
 
 
Change In Economic Value of Equity
March 31,
 
2017
 
2016
 
%
 
$
 
%
 
$
Change in Yield Curve:
 

 
 

 
 

 
 

+300 basis points
3.39

 
49,683

 
(1.23
)
 
(16,345
)
+200 basis points
2.97

 
43,563

 
0.06

 
757

+100 basis points
1.98

 
28,998

 
0.55

 
7,341

Most likely rate scenario

 

 

 

-100 basis points
(4.29
)
 
(62,850
)
 
(3.31
)
 
(43,817
)
-200 basis points
(11.31
)
 
(165,668
)
 
(7.21
)
 
(95,510
)
-300 basis points
(14.70
)
 
(215,437
)
 
(6.19
)
 
(82,106
)
 
As of March 31, 2017, the Company was more sensitive to market interest rate fluctuations when compared to March 31, 2016. The Company believes that the shock down 200 or 300 basis points analysis is not as meaningful since interest rates across most of the yield curve are near historic lows and are not likely to decrease another 200 or 300 basis points. While management considers this scenario highly unlikely, the natural floor increases the Company's sensitivity in rates down scenarios. 

ITEM 4 – CONTROLS AND PROCEDURES
 
The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

There was no change in the internal control over financial reporting that occurred during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
 
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 1A – RISK FACTORS
 
There have been no material changes with respect to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
 

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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(a) Sales of Unregistered Securities – None.
 
(b) Use of Proceeds – Not Applicable.
 
(c) Issuer Purchases of Securities - None.
 


 
 



-65-


ITEM 6 – EXHIBITS
 
The following exhibits are filed as part of this Form 10-Q and this list includes the Exhibit Index:
 
Exhibit No.
 
Description
3.01
 
Articles of Incorporation of Union Bankshares Corporation, as amended April 25, 2014 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 29, 2014).
 
 
 
3.02
 
Bylaws of Union Bankshares Corporation, as amended January 21, 2017. (incorporated by reference to Exhibit 3.02 to Annual Report on Form 10-K filed on February 28, 2017).
 
 
 
10.30
 
Management Incentive Plan (incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K filed on February 28, 2017).
 
 
 
15.01
 
Letter regarding unaudited interim financial information.
 
 
 
31.01
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.02
 
Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.01
 
Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.00
 
Interactive data files formatted in eXtensible Business Reporting Language for the quarter ended March 31, 2017 pursuant to Rule 405 of Regulation S-T (1): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Changes in Shareholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to the Consolidated Financial Statements (unaudited).
 


-66-


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)
 
 
 
Date: May 9, 2017
By:
/s/ John C. Asbury
 
 
John C. Asbury,
 
 
President and Chief Executive Officer
 
 
(principal executive officer)
 
 
 
Date: May 9, 2017
By:
/s/ Robert M. Gorman
 
 
Robert M. Gorman,
 
 
Executive Vice President and Chief Financial Officer
 
 
(principal financial and accounting officer)
 


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