UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2017
OR
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¨ | 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.
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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).
The number of shares of common stock outstanding as of November 1, 2017 was 43,732,082.
UNION BANKSHARES CORPORATION
FORM 10-Q
INDEX
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ITEM | | | PAGE |
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Item 1. | | | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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Item 1. | | | |
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Item 1A. | | | |
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Item 2. | | | |
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Item 6. | | | |
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Glossary of Acronyms and Defined Terms
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| | |
2016 Form 10-K | – | Annual Report on Form 10-K for the year ended December 31, 2016 |
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 |
BOLI | – | Bank-owned life insurance |
bps | – | Basis points |
the Company | – | Union Bankshares Corporation and its subsidiaries |
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 |
IDC | – | Interactive Data Corporation |
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 |
SEC | – | Securities and Exchange Commission |
StellarOne | – | StellarOne Corporation |
TDR | – | Troubled debt restructuring |
UMG | – | Union Mortgage Group, Inc. |
Xenith | – | Xenith Bankshares, Inc. |
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Unaudited) | | (Audited) |
ASSETS | |
| | |
|
Cash and cash equivalents: | |
| | |
|
Cash and due from banks | $ | 115,776 |
| | $ | 120,758 |
|
Interest-bearing deposits in other banks | 60,294 |
| | 58,030 |
|
Federal funds sold | 891 |
| | 449 |
|
Total cash and cash equivalents | 176,961 |
| | 179,237 |
|
Securities available for sale, at fair value | 968,361 |
| | 946,764 |
|
Securities held to maturity, at carrying value | 204,801 |
| | 201,526 |
|
Restricted stock, at cost | 68,441 |
| | 60,782 |
|
Loans held for sale, at fair value | 30,896 |
| | 36,487 |
|
Loans held for investment, net of deferred fees and costs | 6,898,729 |
| | 6,307,060 |
|
Less allowance for loan losses | 37,162 |
| | 37,192 |
|
Net loans held for investment | 6,861,567 |
| | 6,269,868 |
|
Premises and equipment, net | 120,808 |
| | 122,027 |
|
Other real estate owned, net of valuation allowance | 8,764 |
| | 10,084 |
|
Goodwill | 298,191 |
| | 298,191 |
|
Amortizable intangibles, net | 16,017 |
| | 20,602 |
|
Bank owned life insurance | 181,451 |
| | 179,318 |
|
Other assets | 93,178 |
| | 101,907 |
|
Total assets | $ | 9,029,436 |
| | $ | 8,426,793 |
|
LIABILITIES | |
| | |
|
Noninterest-bearing demand deposits | $ | 1,535,149 |
| | $ | 1,393,625 |
|
Interest-bearing deposits | 5,346,677 |
| | 4,985,864 |
|
Total deposits | 6,881,826 |
| | 6,379,489 |
|
Securities sold under agreements to repurchase | 43,337 |
| | 59,281 |
|
Other short-term borrowings | 574,000 |
| | 517,500 |
|
Long-term borrowings | 434,750 |
| | 413,308 |
|
Other liabilities | 54,152 |
| | 56,183 |
|
Total liabilities | 7,988,065 |
| | 7,425,761 |
|
Commitments and contingencies (Note 6) |
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| |
|
|
STOCKHOLDERS' EQUITY | |
| | |
|
Common stock, $1.33 par value, shares authorized 100,000,000; issued and outstanding, 43,729,229 shares and 43,609,317 shares, respectively. | 57,708 |
| | 57,506 |
|
Additional paid-in capital | 608,884 |
| | 605,397 |
|
Retained earnings | 373,468 |
| | 341,938 |
|
Accumulated other comprehensive income | 1,311 |
| | (3,809 | ) |
Total stockholders' equity | 1,041,371 |
| | 1,001,032 |
|
Total liabilities and stockholders' equity | $ | 9,029,436 |
| | $ | 8,426,793 |
|
See accompanying notes to consolidated financial statements.
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except share and per share data) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Interest and dividend income: | | | | | | | |
Interest and fees on loans | $ | 75,948 |
| | $ | 66,190 |
| | $ | 216,644 |
| | $ | 193,884 |
|
Interest on deposits in other banks | 181 |
| | 65 |
| | 367 |
| | 178 |
|
Interest and dividends on securities: | | | | | | | |
Taxable | 5,175 |
| | 4,732 |
| | 15,081 |
| | 13,558 |
|
Nontaxable | 3,546 |
| | 3,446 |
| | 10,620 |
| | 10,344 |
|
Total interest and dividend income | 84,850 |
| | 74,433 |
| | 242,712 |
| | 217,964 |
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| | | | | | | |
Interest expense: | | | | | | | |
Interest on deposits | 7,234 |
| | 4,552 |
| | 18,410 |
| | 12,945 |
|
Interest on short-term borrowings | 1,871 |
| | 765 |
| | 4,221 |
| | 2,098 |
|
Interest on long-term borrowings | 4,547 |
| | 2,088 |
| | 13,316 |
| | 6,386 |
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Total interest expense | 13,652 |
| | 7,405 |
| | 35,947 |
| | 21,429 |
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| | | | | | | |
Net interest income | 71,198 |
| | 67,028 |
| | 206,765 |
| | 196,535 |
|
Provision for credit losses | 3,050 |
| | 2,472 |
| | 7,345 |
| | 7,376 |
|
Net interest income after provision for credit losses | 68,148 |
| | 64,556 |
| | 199,420 |
| | 189,159 |
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| | | | | | | |
Noninterest income: | | | | | |
| | |
|
Service charges on deposit accounts | 5,153 |
| | 4,965 |
| | 14,945 |
| | 14,454 |
|
Other service charges and fees | 4,529 |
| | 4,397 |
| | 13,575 |
| | 12,971 |
|
Fiduciary and asset management fees | 2,794 |
| | 2,844 |
| | 8,313 |
| | 7,315 |
|
Mortgage banking income, net | 2,305 |
| | 3,207 |
| | 7,123 |
| | 8,324 |
|
Gains on securities transactions, net | 184 |
| | — |
| | 782 |
| | 145 |
|
Bank owned life insurance income | 1,377 |
| | 1,389 |
| | 4,837 |
| | 4,122 |
|
Loan-related interest rate swap fees | 416 |
| | 1,303 |
| | 2,627 |
| | 3,056 |
|
Other operating income | 778 |
| | 845 |
| | 2,228 |
| | 2,470 |
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Total noninterest income | 17,536 |
| | 18,950 |
| | 54,430 |
| | 52,857 |
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Noninterest expenses: | | | | | |
| | |
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Salaries and benefits | 29,769 |
| | 30,493 |
| | 92,499 |
| | 87,061 |
|
Occupancy expenses | 4,939 |
| | 4,841 |
| | 14,560 |
| | 14,627 |
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Furniture and equipment expenses | 2,559 |
| | 2,635 |
| | 7,882 |
| | 7,867 |
|
Printing, postage, and supplies | 1,154 |
| | 1,147 |
| | 3,710 |
| | 3,566 |
|
Communications expense | 798 |
| | 948 |
| | 2,580 |
| | 2,964 |
|
Technology and data processing | 4,232 |
| | 3,917 |
| | 12,059 |
| | 11,340 |
|
Professional services | 1,985 |
| | 1,895 |
| | 5,734 |
| | 6,432 |
|
Marketing and advertising expense | 1,944 |
| | 1,975 |
| | 5,963 |
| | 5,838 |
|
FDIC assessment premiums and other insurance | 1,141 |
| | 1,262 |
| | 2,793 |
| | 4,003 |
|
Other taxes | 2,022 |
| | 639 |
| | 6,065 |
| | 3,864 |
|
Loan-related expenses | 1,349 |
| | 1,531 |
| | 3,959 |
| | 3,638 |
|
OREO and credit-related expenses | 1,139 |
| | 503 |
| | 2,023 |
| | 1,965 |
|
Amortization of intangible assets | 1,480 |
| | 1,843 |
| | 4,661 |
| | 5,468 |
|
Training and other personnel costs | 887 |
| | 863 |
| | 2,900 |
| | 2,512 |
|
Merger-related costs | 732 |
| | — |
| | 3,476 |
| | — |
|
Other expenses | 1,366 |
| | 2,421 |
| | 3,957 |
| | 5,291 |
|
Total noninterest expenses | 57,496 |
| | 56,913 |
| | 174,821 |
| | 166,436 |
|
| | | | | | | |
Income before income taxes | 28,188 |
| | 26,593 |
| | 79,029 |
| | 75,580 |
|
Income tax expense | 7,530 |
| | 6,192 |
| | 21,292 |
| | 18,881 |
|
Net income | $ | 20,658 |
| | $ | 20,401 |
| | $ | 57,737 |
| | $ | 56,699 |
|
Basic earnings per common share | $ | 0.47 |
| | $ | 0.47 |
| | $ | 1.32 |
| | $ | 1.29 |
|
Diluted earnings per common share | $ | 0.47 |
| | $ | 0.47 |
| | $ | 1.32 |
| | $ | 1.29 |
|
Dividends declared per common share | $ | 0.20 |
| | $ | 0.19 |
| | $ | 0.60 |
| | $ | 0.57 |
|
Basic weighted average number of common shares outstanding | 43,706,635 |
| | 43,565,937 |
| | 43,685,045 |
| | 43,853,548 |
|
Diluted weighted average number of common shares outstanding | 43,792,058 |
| | 43,754,915 |
| | 43,767,502 |
| | 43,967,725 |
|
See accompanying notes to consolidated financial statements.
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net income | $ | 20,658 |
| | $ | 20,401 |
| | $ | 57,737 |
| | $ | 56,699 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
|
Cash flow hedges: | |
| | |
| | |
| | |
|
Change in fair value of cash flow hedges | 41 |
| | (78 | ) | | (766 | ) | | (3,766 | ) |
Reclassification adjustment for losses (gains) included in net income (net of tax, $102 and $83 for the three months and $370 and $233 for the nine months ended September 30, 2017 and 2016, respectively) | 189 |
| | 154 |
| | 688 |
| | 433 |
|
AFS securities: | |
| | |
| | |
| | |
|
Unrealized holding gains (losses) arising during period (net of tax, $1,470 and $604 for the three months and $3,195 and $4,227 for the nine months ended September 30, 2017 and 2016, respectively) | (2,729 | ) | | 1,121 |
| | 5,935 |
| | 7,851 |
|
Reclassification adjustment for losses (gains) included in net income (net of tax, $64 and $0 for the three months and $274 and $51 for the nine months ended September 30, 2017 and 2016, respectively) | (119 | ) | | — |
| | (508 | ) | | (95 | ) |
HTM securities: | |
| | |
| | |
| | |
|
Reclassification adjustment for accretion of unrealized gain on AFS securities transferred to HTM (net of tax, $88 and $128 for the three months and $273 and $439 for the nine months ended September 30, 2017 and 2016, respectively) | (163 | ) | | (237 | ) | | (507 | ) | | (816 | ) |
Bank owned life insurance: | | | | | | | |
Reclassification adjustment for losses included in net income | 84 |
| | — |
| | 278 |
| | — |
|
Other comprehensive income (loss) | (2,697 | ) | | 960 |
| | 5,120 |
| | 3,607 |
|
Comprehensive income | $ | 17,961 |
| | $ | 21,361 |
| | $ | 62,857 |
| | $ | 60,306 |
|
See accompanying notes to consolidated financial statements.
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 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 | |
| | |
| | 56,699 |
| | |
| | 56,699 |
|
Other comprehensive income (net of taxes of $3,970) | |
| | |
| | |
| | 3,607 |
| | 3,607 |
|
Issuance of common stock in regard to acquisition (17,232 shares) | 23 |
| | 430 |
| | | | | | 453 |
|
Dividends on common stock ($0.57 per share) | |
| | |
| | (24,957 | ) | | |
| | (24,957 | ) |
Stock purchased under stock repurchase plan (1,411,131 shares) | (1,876 | ) | | (31,300 | ) | | |
| | |
| | (33,176 | ) |
Issuance of common stock under Equity Compensation Plans (54,044 shares) | 72 |
| | 681 |
| | |
| | |
| | 753 |
|
Issuance of common stock for services rendered (14,576 shares) | 19 |
| | 360 |
| | |
| | |
| | 379 |
|
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (35,515 shares) | 47 |
| | (492 | ) | | |
| | |
| | (445 | ) |
Stock-based compensation expense | |
| | 2,284 |
| | |
| | |
| | 2,284 |
|
Balance - September 30, 2016 | $ | 57,444 |
| | $ | 603,785 |
| | $ | 329,876 |
| | $ | 9,859 |
| | $ | 1,000,964 |
|
| | | | | | | | | |
Balance - December 31, 2016 | $ | 57,506 |
| | $ | 605,397 |
| | $ | 341,938 |
| | $ | (3,809 | ) | | $ | 1,001,032 |
|
Net income - 2017 | |
| | |
| | 57,737 |
| | |
| | 57,737 |
|
Other comprehensive income (net of taxes of $3,018) | |
| | |
| | |
| | 5,120 |
| | 5,120 |
|
Dividends on common stock ($0.60 per share) | |
| | |
| | (26,207 | ) | | |
| | (26,207 | ) |
Issuance of common stock under Equity Compensation Plans (58,421 shares) | 78 |
| | 891 |
| | |
| | |
| | 969 |
|
Issuance of common stock for services rendered (16,529 shares) | 22 |
| | 539 |
| | |
| | |
| | 561 |
|
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (76,505 shares) | 102 |
| | (1,415 | ) | | |
| | |
| | (1,313 | ) |
Stock-based compensation expense | |
| | 3,472 |
| | |
| | |
| | 3,472 |
|
Balance - September 30, 2017 | $ | 57,708 |
| | $ | 608,884 |
| | $ | 373,468 |
| | $ | 1,311 |
| | $ | 1,041,371 |
|
See accompanying notes to consolidated financial statements.
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Dollars in thousands)
|
| | | | | | | |
| 2017 | | 2016 |
Operating activities: | |
| | |
|
Net income | $ | 57,737 |
| | $ | 56,699 |
|
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: | |
| | |
|
Depreciation of premises and equipment | 8,307 |
| | 7,617 |
|
Writedown of OREO | 845 |
| | 879 |
|
Amortization, net | 10,500 |
| | 10,241 |
|
Amortization (accretion) related to acquisition, net | (158 | ) | | 1,400 |
|
Provision for credit losses | 7,345 |
| | 7,376 |
|
Gains on securities transactions, net | (782 | ) | | (145 | ) |
BOLI income | (3,999 | ) | | (4,122 | ) |
Decrease (increase) in loans held for sale, net | 5,591 |
| | (10,784 | ) |
Losses (gains) on sales of other real estate owned, net | 32 |
| | (278 | ) |
Losses on sales of premises, net | 51 |
| | 97 |
|
Stock-based compensation expenses | 3,472 |
| | 2,284 |
|
Issuance of common stock for services | 561 |
| | 379 |
|
Net decrease (increase) in other assets | 4,952 |
| | (11,169 | ) |
Net increase in other liabilities | 909 |
| | 11,192 |
|
Net cash and cash equivalents provided by (used in) operating activities | 95,363 |
| | 71,666 |
|
Investing activities: | |
| | |
|
Purchases of securities available for sale and restricted stock | (205,965 | ) | | (159,863 | ) |
Purchases of securities held to maturity | (7,836 | ) | | — |
|
Proceeds from sales of securities available for sale and restricted stock | 91,911 |
| | 18,272 |
|
Proceeds from maturities, calls and paydowns of securities available for sale | 88,675 |
| | 83,942 |
|
Proceeds from maturities, calls and paydowns of securities held to maturity | 818 |
| | 1,841 |
|
Net increase in loans held for investment | (594,967 | ) | | (479,346 | ) |
Net increase in premises and equipment | (7,139 | ) | | (5,102 | ) |
Proceeds from BOLI settlements | 2,497 |
| | — |
|
Proceeds from sales of other real estate owned | 1,028 |
| | 4,982 |
|
Cash paid in acquisition | — |
| | (4,077 | ) |
Cash acquired in acquisitions | — |
| | 207 |
|
Net cash and cash equivalents provided by (used in) investing activities | (630,978 | ) | | (539,144 | ) |
Financing activities: | |
| | |
|
Net increase in noninterest-bearing deposits | 141,524 |
| | 69,331 |
|
Net increase in interest-bearing deposits | 360,813 |
| | 225,239 |
|
Net increase in short-term borrowings | 40,556 |
| | 276,748 |
|
Cash paid for contingent consideration | (3,003 | ) | | — |
|
Proceeds from issuance of long-term debt | 20,000 |
| | — |
|
Repayments of long-term debt | — |
| | (32,500 | ) |
Cash dividends paid - common stock | (26,207 | ) | | (24,957 | ) |
Repurchase of common stock | — |
| | (33,176 | ) |
Issuance of common stock | 969 |
| | 753 |
|
Vesting of restricted stock, net of shares held for taxes | (1,313 | ) | | (445 | ) |
Net cash and cash equivalents provided by (used in) financing activities | 533,339 |
| | 480,993 |
|
Increase (decrease) in cash and cash equivalents | (2,276 | ) | | 13,515 |
|
Cash and cash equivalents at beginning of the period | 179,237 |
| | 142,660 |
|
Cash and cash equivalents at end of the period | $ | 176,961 |
| | $ | 156,175 |
|
Supplemental Disclosure of Cash Flow Information | |
| | |
|
Cash payments for: | |
| | |
|
Interest | $ | 33,947 |
| | $ | 21,812 |
|
Income taxes | 19,600 |
| | 19,800 |
|
Supplemental schedule of noncash investing and financing activities | |
| | |
|
Transfers between loans and other real estate owned | $ | 585 |
| | $ | 865 |
|
Issuance of common stock in exchange for net assets in acquisition | — |
| | 453 |
|
See accompanying notes to consolidated financial statements.
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 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.
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.
Below is a summary of the Company's loan segments:
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 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 and nine months ended September 30, 2017, the Company recognized amortization of $229,000 and $643,000, respectively, and tax credits of $240,000 and $724,000, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. For the three and nine months ended September 30, 2016, the Company recognized amortization of $185,000 and $445,000, respectively, and tax credits of $265,000 and $685,000, respectively. The carrying value of the Company’s investments in these qualified affordable housing projects was $9.1 million and $9.9 million as of September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, the Company's recorded liability totaled $4.0 million and $7.1 million, respectively, for the related unfunded commitments, which are expected to be paid from the second half of 2017 through 2019.
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 May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The original guidance has been amended through subsequent accounting standard updates that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended, is applicable to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-
based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The Company plans to adopt this guidance on the effective date, January 1, 2018 via the modified retrospective approach. The Company performed its assessment of the adoption of this ASU and the related subsequent technical corrections issued. Based on the completed contracts reviewed thus far, the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires lessees to put most leases on their balance sheets, but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates the real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs, and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently working to identify the complete lease population, including potential embedded leases. The adoption of this standard is expected to result in additional assets and liabilities, as the Company will be required to recognize operating leases on the Consolidated Balance Sheet. Other implementation matters to be addressed include, but are not limited to, the determination of effects on the financial and capital ratios and the quantification of the impacts that this accounting guidance will have on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU updates the existing guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and required consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for fiscal years beginning after December 15, 2019. The Company is currently assessing the impact ASU No. 2016-13 will have on its consolidated financial statements.
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 concluded that ASU 2017-05 will not have a material impact 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.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU relates to changes in the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company has concluded the adoption of ASU 2017-09 will not have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU relates to any entity that elects to apply hedge accounting in accordance with current GAAP. The amendment simplifies the application of the hedge accounting guidance and improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact ASU 2017-12 will have on its consolidated financial statements.
2. SECURITIES
Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of September 30, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Amortized | | Gross Unrealized | | Estimated |
| Cost | | Gains | | (Losses) | | Fair Value |
September 30, 2017 | |
| | |
| | |
| | |
|
Obligations of states and political subdivisions | $ | 285,921 |
| | $ | 7,582 |
| | $ | (1,304 | ) | | $ | 292,199 |
|
Corporate bonds | 114,997 |
| | 1,241 |
| | (816 | ) | | 115,422 |
|
Mortgage-backed securities | 546,038 |
| | 4,119 |
| | (3,253 | ) | | 546,904 |
|
Other securities | 13,890 |
| | — |
| | (54 | ) | | 13,836 |
|
Total available for sale securities | $ | 960,846 |
| | $ | 12,942 |
| | $ | (5,427 | ) | | $ | 968,361 |
|
| | | | | | | |
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 (dollars 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 September 30, 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 |
September 30, 2017 | |
| | |
| | |
| | |
| | |
| | |
|
Obligations of states and political subdivisions | $ | 55,319 |
| | $ | (700 | ) | | $ | 9,338 |
| | $ | (604 | ) | | $ | 64,657 |
| | $ | (1,304 | ) |
Mortgage-backed securities | 283,466 |
| | (2,708 | ) | | 42,481 |
| | (545 | ) | | 325,947 |
| | (3,253 | ) |
Corporate bonds and other securities | 21,128 |
| | (353 | ) | | 32,674 |
| | (517 | ) | | 53,802 |
| | (870 | ) |
Total available for sale securities | $ | 359,913 |
| | $ | (3,761 | ) | | $ | 84,493 |
| | $ | (1,666 | ) | | $ | 444,406 |
| | $ | (5,427 | ) |
| | | | | | | | | | | |
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 September 30, 2017, there were $84.5 million, or 36 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 $1.7 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 September 30, 2017 and December 31, 2016 for the reasons set out below:
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 September 30, 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.
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 23,387 |
| | $ | 23,510 |
| | $ | 21,403 |
| | $ | 21,517 |
|
Due after one year through five years | 128,261 |
| | 130,107 |
| | 108,198 |
| | 109,778 |
|
Due after five years through ten years | 267,492 |
| | 271,830 |
| | 300,552 |
| | 301,888 |
|
Due after ten years | 541,706 |
| | 542,914 |
| | 517,444 |
| | 513,581 |
|
Total securities available for sale | $ | 960,846 |
| | $ | 968,361 |
| | $ | 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 September 30, 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.
The carrying value, gross unrealized gains and losses, and estimated fair values of securities held to maturity as of September 30, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Carrying | | Gross Unrealized | | Estimated |
| Value (1) | | Gains | | (Losses) | | Fair Value |
September 30, 2017 | |
| | |
| | |
| | |
|
Obligations of states and political subdivisions | $ | 204,801 |
| | $ | 5,111 |
| | $ | (77 | ) | | $ | 209,835 |
|
| | | | | | | |
December 31, 2016 | |
| | |
| | |
| | |
|
Obligations of states and political subdivisions | $ | 201,526 |
| | $ | 1,617 |
| | $ | (828 | ) | | $ | 202,315 |
|
(1) The carrying value includes $4.0 million as of September 30, 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 (dollars 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 September 30, 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 |
September 30, 2017 | |
| | |
| | |
| | |
| | |
| | |
|
Obligations of states and political subdivisions | $ | 5,130 |
| | $ | (53 | ) | | $ | 638 |
| | $ | (24 | ) | | $ | 5,768 |
| | $ | (77 | ) |
| | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 92,841 |
| | $ | (747 | ) | | $ | 648 |
| | $ | (81 | ) | | $ | 93,489 |
| | $ | (828 | ) |
As of September 30, 2017, there was $638,000, or one issue, of an individual held to maturity security that had been in a continuous loss position for more than 12 months and had an unrealized loss of $24,000. As of December 31, 2016, there was $648,000, or one issue, of an individual held to maturity security that had been in a continuous loss position for more than 12 months and had an unrealized loss of $81,000. This security is a municipal bond with minimal credit exposure and is credit enhanced with a guarantee from the local school board. For this reason, the Company has determined that this security in a loss position is temporarily impaired as of September 30, 2017 and December 31, 2016. Because the Company does not intend to sell this investment and the accounting standard of “more likely than not” has not been met for the Company to be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired.
The following table presents the amortized cost and estimated fair value of held to maturity securities as of September 30, 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.
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Carrying Value (1) | | Estimated Fair Value | | Carrying Value (1) | | Estimated Fair Value |
Due in one year or less | $ | 5,879 |
| | $ | 5,902 |
| | $ | 4,403 |
| | $ | 4,440 |
|
Due after one year through five years | 41,196 |
| | 41,959 |
| | 28,383 |
| | 28,763 |
|
Due after five years through ten years | 65,893 |
| | 67,444 |
| | 51,730 |
| | 51,522 |
|
Due after ten years | 91,833 |
| | 94,530 |
| | 117,010 |
| | 117,590 |
|
Total securities held to maturity | $ | 204,801 |
| | $ | 209,835 |
| | $ | 201,526 |
| | $ | 202,315 |
|
(1) The carrying value includes $4.0 million as of September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2017 and December 31, 2016 and FHLB stock in the amount of $40.9 million and $37.0 million as of September 30, 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 and nine months ended September 30, 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.
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 and nine months ended September 30, 2017 and 2016 (dollars in thousands).
|
| | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Realized gains (losses): | |
| | |
|
Gross realized gains | $ | 296 |
| | $ | 958 |
|
Gross realized losses | (112 | ) | | (176 | ) |
Net realized gains | $ | 184 |
| | $ | 782 |
|
| | | |
Proceeds from sales of securities | $ | 39,284 |
| | $ | 91,911 |
|
|
| | | | | | | |
| Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
Realized gains (losses): | |
| | |
|
Gross realized gains | $ | — |
| | $ | 242 |
|
Gross realized losses | — |
| | (97 | ) |
Net realized gains | $ | — |
| | $ | 145 |
|
| | | |
Proceeds from sales of securities | $ | 2,848 |
| | $ | 18,272 |
|
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 September 30, 2017 and December 31, 2016 (dollars in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Construction and Land Development | $ | 841,738 |
| | $ | 751,131 |
|
Commercial Real Estate - Owner Occupied | 903,523 |
| | 857,805 |
|
Commercial Real Estate - Non-Owner Occupied | 1,748,039 |
| | 1,564,295 |
|
Multifamily Real Estate | 368,686 |
| | 334,276 |
|
Commercial & Industrial | 554,522 |
| | 551,526 |
|
Residential 1-4 Family | 1,083,112 |
| | 1,029,547 |
|
Auto | 276,572 |
| | 262,071 |
|
HELOC | 535,446 |
| | 526,884 |
|
Consumer and all other | 587,091 |
| | 429,525 |
|
Total loans held for investment, net (1) | $ | 6,898,729 |
| | $ | 6,307,060 |
|
(1) Loans, as presented, are net of deferred fees and costs totaling $335,000 and $1.8 million as of September 30, 2017 and December 31, 2016, respectively.
The following table shows the aging of the Company’s loan portfolio, by segment, at September 30, 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 | $ | 7,221 |
| | $ | 100 |
| | $ | 54 |
| | $ | 3,026 |
| | $ | 5,671 |
| | $ | 825,666 |
| | $ | 841,738 |
|
Commercial Real Estate - Owner Occupied | 1,707 |
| | 689 |
| | 679 |
| | 17,668 |
| | 2,205 |
| | 880,575 |
| | 903,523 |
|
Commercial Real Estate - Non-Owner Occupied | 909 |
| | 571 |
| | 298 |
| | 14,376 |
| | 2,701 |
| | 1,729,184 |
| | 1,748,039 |
|
Multifamily Real Estate | — |
| | — |
| | — |
| | 77 |
| | — |
| | 368,609 |
| | 368,686 |
|
Commercial & Industrial | 1,558 |
| | 255 |
| | 101 |
| | 625 |
| | 1,252 |
| | 550,731 |
| | 554,522 |
|
Residential 1-4 Family | 5,633 |
| | 1,439 |
| | 2,360 |
| | 14,077 |
| | 6,163 |
| | 1,053,440 |
| | 1,083,112 |
|
Auto | 2,415 |
| | 293 |
| | 143 |
| | — |
| | 174 |
| | 273,547 |
| | 276,572 |
|
HELOC | 1,400 |
| | 628 |
| | 709 |
| | 982 |
| | 1,791 |
| | 529,936 |
| | 535,446 |
|
Consumer and all other | 3,469 |
| | 1,445 |
| | 188 |
| | 210 |
| | 165 |
| | 581,614 |
| | 587,091 |
|
Total loans held for investment | $ | 24,312 |
| | $ | 5,420 |
| | $ | 4,532 |
| | $ | 51,041 |
| | $ | 20,122 |
| | $ | 6,793,302 |
| | $ | 6,898,729 |
|
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 |
|
The following table shows the PCI loan portfolios, by segment and their delinquency status, at September 30, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| 30-89 Days Past Due | | Greater than 90 Days | | Current | | Total |
Construction and Land Development | $ | 62 |
| | $ | — |
| | $ | 2,964 |
| | $ | 3,026 |
|
Commercial Real Estate - Owner Occupied | 463 |
| | 643 |
| | 16,562 |
| | 17,668 |
|
Commercial Real Estate - Non-Owner Occupied | 318 |
| | 1,032 |
| | 13,026 |
| | 14,376 |
|
Multifamily Real Estate | — |
| | — |
| | 77 |
| | 77 |
|
Commercial & Industrial | — |
| | — |
| | 625 |
| | 625 |
|
Residential 1-4 Family | 949 |
| | 1,125 |
| | 12,003 |
| | 14,077 |
|
HELOC | 132 |
| | 128 |
| | 722 |
| | 982 |
|
Consumer and all other | 34 |
| | — |
| | 176 |
| | 210 |
|
Total | $ | 1,958 |
| | $ | 2,928 |
| | $ | 46,155 |
| | $ | 51,041 |
|
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 |
|
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, by segment at September 30, 2017 and December 31, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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 | $ | 13,889 |
| | $ | 13,981 |
| | $ | — |
| | $ | 13,877 |
| | $ | 14,353 |
| | $ | — |
|
Commercial Real Estate - Owner Occupied | 5,238 |
| | 5,378 |
| | — |
| | 5,886 |
| | 6,042 |
| | — |
|
Commercial Real Estate - Non-Owner Occupied | 5,548 |
| | 5,636 |
| | — |
| | 1,399 |
| | 1,399 |
| | — |
|
Commercial & Industrial | 1,632 |
| | 1,880 |
| | — |
| | 648 |
| | 890 |
| | — |
|
Residential 1-4 Family | 9,510 |
| | 10,523 |
| | — |
| | 8,496 |
| | 9,518 |
| | — |
|
HELOC | 1,651 |
| | 1,741 |
| | — |
| | 1,017 |
| | 1,094 |
| | — |
|
Consumer and all other | 521 |
| | 631 |
| | — |
| | 230 |
| | 427 |
| | — |
|
Total impaired loans without a specific allowance | $ | 37,989 |
| | $ | 39,770 |
| | $ | — |
| | $ | 31,553 |
| | $ | 33,723 |
| | $ | — |
|
| | | | | | | | | | | |
Loans with a specific allowance | |
| | |
| | |
| | |
| | |
| | |
|
Construction and Land Development | $ | 1,347 |
| | $ | 1,444 |
| | $ | 113 |
| | $ | 1,395 |
| | $ | 1,404 |
| | $ | 107 |
|
Commercial Real Estate - Owner Occupied | 2,118 |
| | 2,132 |
| | 157 |
| | 646 |
| | 646 |
| | 4 |
|
Commercial Real Estate - Non-Owner Occupied | 2,032 |
| | 2,032 |
| | 42 |
| | 2,809 |
| | 2,809 |
| | 474 |
|
Commercial & Industrial | 2,511 |
| | 2,562 |
| | 909 |
| | 857 |
| | 880 |
| | 14 |
|
Residential 1-4 Family | 4,421 |
| | 4,543 |
| | 249 |
| | 3,335 |
| | 3,535 |
| | 200 |
|
Auto | 174 |
| | 235 |
| | 1 |
| | 169 |
| | 235 |
| | 1 |
|
HELOC | 766 |
| | 800 |
| | 56 |
| | 323 |
| | 433 |
| | 15 |
|
Consumer and all other | 242 |
| | 310 |
| | 43 |
| | 62 |
| | 298 |
| | 1 |
|
Total impaired loans with a specific allowance | $ | 13,611 |
| | $ | 14,058 |
| | $ | 1,570 |
| | $ | 9,596 |
| | $ | 10,240 |
| | $ | 816 |
|
Total impaired loans | $ | |