UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2013

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-20293

 

UNION FIRST MARKET 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨ Accelerated filer                     x
Non-accelerated filer      ¨ Smaller reporting company     ¨

 

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 August 1, 2013 was 24,885,653.

 

 
 

 

UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-Q

INDEX

 

ITEM     PAGE
       
  PART I - FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
  Condensed Consolidated Balance Sheets as of June 30, 2013, December 31, 2012, and June 30, 2012   1
       
  Condensed Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012   2
       
  Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012   3
       
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012   4
       
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012   5
       
  Notes to Condensed Consolidated Financial Statements   6
       
  Report of Independent Registered Public Accounting Firm   39
       
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations   40
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   68
       
Item 4 Controls and Procedures   69
       
  PART II - OTHER INFORMATION    
       
Item 1. Legal Proceedings   70
       
Item 1A. Risk Factors   70
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   73
       
Item 6 Exhibits   74
       
  Signatures   75

 

ii
 

 

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

   June 30,   December 31,   June 30, 
   2013   2012   2012 
   (Unaudited)   (Audited)   (Unaudited) 
ASSETS               
Cash and cash equivalents:               
Cash and due from banks  $59,867   $71,426   $57,245 
Interest-bearing deposits in other banks   11,526    11,320    14,975 
Money market investments   1    1    1 
Federal funds sold   153    155    163 
Total cash and cash equivalents   71,547    82,902    72,384 
                
Securities available for sale, at fair value   582,312    585,382    627,543 
Restricted stock, at cost   17,956    20,687    19,291 
                
Loans held for sale   109,395    167,698    100,066 
                
Loans, net of unearned income   3,000,855    2,966,847    2,887,790 
Less allowance for loan losses   34,333    34,916    40,985 
Net loans   2,966,522    2,931,931    2,846,805 
                
Bank premises and equipment, net   82,857    85,409    91,122 
Other real estate owned, net of valuation allowance   35,153    32,834    35,802 
Core deposit intangibles, net   13,821    15,778    18,178 
Goodwill   59,400    59,400    59,400 
Other assets   117,594    113,844    111,697 
Total assets  $4,056,557   $4,095,865   $3,982,288 
                
LIABILITIES               
Noninterest-bearing demand deposits   668,303    645,901    591,757 
Interest-bearing deposits:               
NOW accounts   456,459    454,150    425,188 
Money market accounts   953,978    957,130    905,739 
Savings accounts   225,821    207,846    198,728 
Time deposits of $100,000 and over   468,263    508,630    534,682 
Other time deposits   493,139    524,110    562,892 
Total interest-bearing deposits   2,597,660    2,651,866    2,627,229 
Total deposits   3,265,963    3,297,767    3,218,986 
                
Securities sold under agreements to repurchase   101,418    54,270    75,394 
Other short-term borrowings   28,000    78,000    - 
Trust preferred capital notes   60,310    60,310    60,310 
Long-term borrowings   137,919    136,815    155,625 
Other liabilities   34,518    32,840    38,537 
Total liabilities   3,628,128    3,660,002    3,548,852 
                
Commitments and contingencies               
                
STOCKHOLDERS' EQUITY               
Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 24,880,403 shares, 25,270,970 shares, and 25,952,035 shares, respectively.   32,901    33,510    34,415 
Surplus   168,600    176,635    185,733 
Retained earnings   227,563    215,634    202,278 
Accumulated other comprehensive (loss) income   (635)   10,084    11,010 
Total stockholders' equity   428,429    435,863    433,436 
                
Total liabilities and stockholders' equity  $4,056,557   $4,095,865   $3,982,288 

 

See accompanying notes to condensed consolidated financial statements.

 

- 1 -
 

  

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2013   2012   2013   2012 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Interest and dividend income:                    
Interest and fees on loans  $38,687   $40,299   $77,912   $80,907 
Interest on Federal funds sold   -    -    1    - 
Interest on deposits in other banks   6    32    11    54 
Interest and dividends on securities:                    
Taxable   1,939    3,184    4,008    6,640 
Nontaxable   2,054    1,787    4,041    3,577 
Total interest and dividend income   42,686    45,302    85,973    91,178 
                     
Interest expense:                    
Interest on deposits   3,701    5,023    7,663    10,358 
Interest on federal funds purchased   21    1    36    1 
Interest on short-term borrowings   54    47    108    91 
Interest on long-term borrowings   1,507    2,144    3,009    4,294 
Total interest expense   5,283    7,215    10,816    14,744 
                     
Net interest income   37,403    38,087    75,157    76,434 
Provision for loan losses   1,000    3,000    3,050    6,500 
Net interest income after provision for loan losses   36,403    35,087    72,107    69,934 
                     
Noninterest income:                    
Service charges on deposit accounts   2,346    2,291    4,618    4,421 
Other service charges, commissions and fees   3,222    2,774    6,029    5,346 
Gains on securities transactions, net   53    10    42    5 
Gains on sales of mortgage loans, net of commissions   4,668    3,832    8,520    6,597 
Gains (losses) on sales of bank premises   (34)   373    (330)   343 
Other operating income   1,044    973    2,254    2,017 
Total noninterest income   11,299    10,253    21,133    18,729 
                     
Noninterest expenses:                    
Salaries and benefits   17,912    16,935    35,878    33,911 
Occupancy expenses   2,764    3,092    5,619    5,739 
Furniture and equipment expenses   1,741    1,868    3,585    3,631 
Other operating expenses   11,866    11,712    22,701    22,593 
Total noninterest expenses   34,283    33,607    67,783    65,874 
                     
Income before income taxes   13,419    11,733    25,457    22,789 
Income tax expense   3,956    3,313    7,011    6,446 
Net income  $9,463   $8,420   $18,446   $16,343 
Earnings per common share, basic  $0.38   $0.32   $0.74   $0.63 
Earnings per common share, diluted  $0.38   $0.32   $0.74   $0.63 

 

See accompanying notes to condensed consolidated financial statements.

 

- 2 -
 

 

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2013   2012   2013   2012 
Net income  $9,463   $8,420   $18,446   $16,343 
Other comprehensive income (loss):                    
Change in fair value of interest rate swap (cash flow hedge)   849    (487)   1,135    (290)
Unrealized holding (losses) gains arising during period (net of tax, $5,233 and $6,368 and $535 and $890 for three and six months ended June 30, 2013 and 2012)   (9,720)   992    (11,827)   1,653 
Reclassification adjustment for losses included in net income (net of tax, $19 and $15 and $4 and $2 for three and six months ended June 30, 2013 and 2012)   (34)   (6)   (27)   (3)
Other comprehensive income (loss)   (8,905)   499    (10,719)   1,360 
Comprehensive income  $558   $8,919   $7,727   $17,703 

 

See accompanying notes to consolidated financial statements.

 

- 3 -
 

 

UNION FIRST MARKET BANKSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(Dollars in thousands, except share amounts)

(Unaudited)

 

   Common
Stock
   Surplus   Retained
Earnings
   Accumulated
Other
Comprehensive
Income (Loss)
   Total 
                     
Balance - December 31, 2011  $34,672   $187,493   $189,824   $9,650   $421,639 
Net income - 2012             16,343         16,343 
Other comprehensive income (net of tax, $888 )                  1,360    1,360 
Dividends on Common Stock ( $.15 per share)             (3,632)        (3,632)
Stock purchased under stock repurchase plan ( 220,265 shares)   (293)   (2,570)             (2,863)
Issuance of common stock under Dividend Reinvestment Plan ( 19,028 shares)   25    232    (257)        - 
Vesting of restricted stock under Stock Incentive Plan ( 9,647 shares)   13    (13)             - 
Net settle for taxes on Restricted Stock Awards ( 1,818 shares)   (2)   (24)             (26)
Stock-based compensation expense        615              615 
Balance - June 30, 2012  $34,415   $185,733   $202,278   $11,010   $433,436 
                          
Balance - December 31, 2012  $33,510   $176,635   $215,634   $10,084   $435,863 
Net income - 2013             18,446         18,446 
Other comprehensive loss (net of tax, $6,383)                  (10,719)   (10,719)
Dividends on Common Stock ( $.26 per share)             (6,063)        (6,063)
Stock purchased under stock repurchase plan ( 500,000 shares)   (664)   (8,835)             (9,499)
Issuance of common stock under Dividend Reinvestment Plan ( 25,177 shares)   33    421    (454)        - 
Issuance of common stock under Stock Incentive Plan ( 13,365 shares)   17    79              96 
Vesting of restricted stock under Stock Incentive Plan ( 6,177 shares)   8    (8)             - 
Net settle for taxes on Restricted Stock Awards ( 2,563 shares)   (3)   (17)             (20)
Stock-based compensation expense        325              325 
Balance - June 30, 2013  $32,901   $168,600   $227,563   $(635)  $428,429 

 

See accompanying notes to condensed consolidated financial statements.

 

- 4 -
 

 

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(Dollars in thousands)

(Unaudited)

 

   2013   2012 
Operating activities:          
Net income  $18,446   $16,343 
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:          
Depreciation of bank premises and equipment   3,046    3,412 
Amortization, net   2,598    7,370 
Provision for loan losses   3,050    6,500 
Gains on the sale of investment securities   (42)   (5)
Decrease (increase) in loans held for sale, net   58,303    (25,243)
(Gains) losses on sales of other real estate owned, net   (142)   206 
Losses (gains) on bank premises, net   330    (343)
Stock-based compensation expenses   325    615 
Decrease (increase) in other assets   2,151    (231)
Increase in other liabilities   2,813    6,590 
Net cash and cash equivalents provided by operating activities   90,878    15,214 
Investing activities:          
Purchases of securities available for sale   (106,188)   (95,191)
Proceeds from sales of securities available for sale   15,585    3,583 
Proceeds from maturities, calls and paydowns of securities available for sale   78,050    83,656 
Net increase in loans   (42,027)   (84,671)
Net increase in bank premises and equipment   (1,812)   (3,603)
Proceeds from sales of other real estate owned   3,391    7,077 
Improvements to other real estate owned   (194)   (343)
Net cash and cash equivalents used in investing activities   (53,195)   (89,492)
Financing activities:          
Net increase in noninterest-bearing deposits   22,402    57,222 
Net increase in NOW accounts   2,309    12,583 
Net (decrease) increase in money market accounts   (3,152)   846 
Net increase in savings accounts   17,975    19,571 
Net (decrease) increase in time deposits of $100,000 and over   (40,367)   (16,873)
Net decrease in other time deposits   (30,971)   (29,468)
Net (decrease) increase in short-term borrowings   (2,852)   12,399 
Net increase in long-term borrowings (1)   1,104    244 
Cash dividends paid - common stock   (6,063)   (3,632)
Repurchase of common stock   (9,499)   (2,863)
Issuance of common stock   96    - 
Taxes paid related to net share settlement of equity awards   (20)   (26)
Net cash and cash equivalents (used in) provided by financing activities   (49,038)   50,003 
(Decrease) increase in cash and cash equivalents   (11,355)   (24,275)
Cash and cash equivalents at beginning of the period   82,902    96,659 
Cash and cash equivalents at end of the period  $71,547   $72,384 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for:          
Interest  $11,166   $15,699 
Income taxes   4,600    7,500 
           
Supplemental schedule of noncash investing and financing activities          
Unrealized (loss) gain on securities available for sale  $(18,237)  $2,538 
Changes in fair value of interest rate swap loss   1,135    (290)
Transfers from loans to other real estate owned   4,386    10,479 
Transfers from bank premises to other real estate owned   988    - 

 

(1) See Note 5 "Borrowings" related to 2013 activity.

See accompanying notes to consolidated financial statements.

 

- 5 -
 

 

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

 

1.ACCOUNTING POLICIES

 

The condensed consolidated financial statements include the accounts of Union First Market Bankshares Corporation and its subsidiaries (collectively, the “Company”). Significant inter-company accounts and transactions have been eliminated in consolidation.

 

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited condensed consolidated financial statements do not include all the information and footnotes required by 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 2012 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

 

Recent Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.

 

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.

 

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Public companies were required to apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the Company’s consolidated financial statements.

 

- 6 -
 

 

2.SECURITIES

 

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of June 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):

 

   Amortized   Gross Unrealized   Estimated 
   Cost   Gains   (Losses)   Fair Value 
June 30, 2013                    
U.S. government and agency securities  $1,995   $803   $-   $2,798 
Obligations of states and political subdivisions   235,497    7,280    (6,061)   236,716 
Corporate and other bonds   5,671    96    (141)   5,626 
Mortgage-backed securities   331,512    4,911    (2,653)   333,770 
Other securities   3,413    15    (26)   3,402 
Total securities  $578,088   $13,105   $(8,881)  $582,312 
                     
December 31, 2012                    
U.S. government and agency securities  $2,581   $268   $-   $2,849 
Obligations of states and political subdivisions   214,980    15,123    (325)   229,778 
Corporate and other bonds   7,353    173    (314)   7,212 
Mortgage-backed securities   335,327    7,383    (536)   342,174 
Other securities   3,277    92    -    3,369 
Total securities  $563,518   $23,039   $(1,175)  $585,382 

 

Due to restrictions placed upon the Company’s common stock investment in the Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta (“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. The FHLB requires the Union First Market Bank (the “Bank”) to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 6% of its outstanding capital. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $6.8 million for both June 30, 2013 and December 31, 2012 and FHLB stock in the amount of $11.2 million and $13.9 million as of June 30, 2013 and December 31, 2012, respectively.

 

- 7 -
 

 

The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position and are as follows:

 

   Less than 12 months   More than 12 months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
June 30, 2013                              
Obligations of states and political subdivisions  $70,559   $(5,988)  $618   $(73)  $71,177   $(6,061)
Mortgage-backed securities   147,741    (2,608)   5,255    (45)   152,996    (2,653)
Corporate bonds and other securities   2,888    (26)   1,730    (141)   4,618    (167)
Totals  $221,188   $(8,622)  $7,603   $(259)  $228,791   $(8,881)
                               
December 31, 2012                              
Obligations of states and political subdivisions  $22,397   $(283)  $649   $(42)  $23,046   $(325)
Mortgage-backed securities   86,183    (536)   -    -    86,183    (536)
Corporate bonds and other securities   -    -    1,555    (314)   1,555    (314)
Totals  $108,580   $(819)  $2,204   $(356)  $110,784   $(1,175)

 

As of June 30, 2013, there were $7.6 million, or 5 issues, of individual securities that had been in a continuous loss position for more than 12 months. Additionally, these securities had an unrealized loss of $259,000 and consisted of municipal obligations, mortgage-backed securities, and corporate bonds.

 

The following table presents the amortized cost and estimated fair value of securities as of June 30, 2013 and December 31, 2012, 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.

 

   June 30, 2013   December 31, 2012 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
Due in one year or less  $9,082   $9,178   $5,623   $5,741 
Due after one year through five years   15,322    15,926    16,413    17,016 
Due after five years through ten years   73,607    76,923    69,164    73,501 
Due after ten years   480,077    480,285    472,318    489,124 
Total securities available for sale  $578,088   $582,312   $563,518   $585,382 

 

Securities with an amortized cost of $192.0 million and $183.7 million as of June 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes.

 

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“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 quarter ended June 30, 2013, and in accordance with the guidance, no OTTI was recognized.

 

- 8 -
 

 

Based on the assessment for the quarter ended September 30, 2011 and in accordance with the guidance, the Company determined that a single issuer Trust Preferred security incurred credit-related OTTI of $400,000, which was recognized in earnings for the quarter ended September 30, 2011. There is a possibility that the Company will sell the security before recovering all unamortized costs. The significant inputs the Company considered in determining the amount of the credit loss are as follows:

 

·The assessment of security credit rating agencies and research performed by third parties;
·The continued interest payment deferral by the issuer;
·The lack of improving asset quality of the issuer and worsening economic conditions; and
·The security is thinly traded and trading at its historical low, below par.

 

OTTI recognized for the periods presented is summarized as follow (dollars in thousands):

 

   OTTI Losses 
Cumulative credit losses on investment securities, through December 31, 2012  $400 
Cumulative credit losses on investment securities   - 
Additions for credit losses not previously recognized   - 
Cumulative credit losses on investment securities, through June 30, 2013  $400 

 

3.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans are stated at their face amount, net of unearned income, and consist of the following at June 30, 2013 and December 31, 2012 (dollars in thousands):

 

   June 30,   December 31, 
   2013   2012 
Commercial:          
Commercial Construction  $206,994   $202,344 
Commercial Real Estate - Owner Occupied   516,303    513,671 
Commercial Real Estate - Non-Owner Occupied   732,596    682,760 
Raw Land and Lots   182,629    205,726 
Single Family Investment Real Estate   238,075    233,395 
Commercial and Industrial   200,314    217,661 
Other Commercial   54,603    47,551 
Consumer:          
Mortgage   225,848    220,567 
Consumer Construction   41,160    33,969 
Indirect Auto   168,885    157,518 
Indirect Marine   39,010    36,586 
HELOCs   280,448    288,092 
Credit Card   21,878    21,968 
Other Consumer   92,112    105,039 
Total  $3,000,855   $2,966,847 

 

- 9 -
 

 

The following table shows the aging of the Company’s loan portfolio, by class, at June 30, 2013 (dollars in thousands):

 

   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
90 Days and
still Accruing
   Purchased
Impaired (net
of credit mark)
   Nonaccrual   Current   Total Loans 
Commercial:                                   
Commercial Construction  $709   $-   $-   $-   $5,103   $201,182   $206,994 
Commercial Real Estate - Owner Occupied   1,202    244    719    211    2,102    511,825    516,303 
Commercial Real Estate - Non-Owner Occupied   3,735    184    -    -    614    728,063    732,596 
Raw Land and Lots   285    -    43    2,529    4,573    175,199    182,629 
Single Family Investment Real Estate   1,220    489    212    299    2,859    232,996    238,075 
Commercial and Industrial   225    176    379    -    7,291    192,243    200,314 
Other Commercial   16    -    -    -    471    54,116    54,603 
Consumer:                                   
Mortgage   5,182    2,593    2,091    -    1,485    214,497    225,848 
Consumer Construction   208    -    -    -    228    40,724    41,160 
Indirect Auto   1,482    302    327    14    -    166,760    168,885 
Indirect Marine   586    -    114    -    158    38,152    39,010 
HELOCs   1,560    333    1,062    818    1,665    275,010    280,448 
Credit Card   134    207    183    -    -    21,354    21,878 
Other Consumer   2,063    294    1,161    102    473    88,019    92,112 
Total  $18,607   $4,822   $6,291   $3,973   $27,022   $2,940,140   $3,000,855 
                                    

 

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2012 (dollars in thousands):

 

   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
90 Days and
still Accruing
   Purchased
Impaired (net
of credit mark)
   Nonaccrual   Current   Total Loans 
Commercial:                                   
Commercial Construction  $-   $-   $-   $-   $5,781   $196,563   $202,344 
Commercial Real Estate - Owner Occupied   2,105    153    1,711    247    2,206    507,249    513,671 
Commercial Real Estate - Non-Owner Occupied   866    63    207    -    812    680,812    682,760 
Raw Land and Lots   277    -    75    2,942    8,760    193,672    205,726 
Single Family Investment Real Estate   1,819    261    756    326    3,420    226,813    233,395 
Commercial and Industrial   506    270    441    79    2,036    214,329    217,661 
Other Commercial   70    182    1    -    193    47,105    47,551 
Consumer:                                   
Mortgage   5,610    2,244    3,017    -    747    208,949    220,567 
Consumer Construction   157    -    -    -    235    33,577    33,969 
Indirect Auto   2,504    276    329    21    -    154,388    157,518 
Indirect Marine   67    -    114    -    158    36,247    36,586 
HELOCs   3,063    640    1,239    845    1,325    280,980    288,092 
Credit Card   269    101    397    -    -    21,201    21,968 
Other Consumer   1,525    487    556    105    533    101,833    105,039 
Total  $18,838   $4,677   $8,843   $4,565   $26,206   $2,903,718   $2,966,847 

 

Nonaccrual loans totaled $27.0 million, $26.2 million, and $39.2 million at June 30, 2013, December 31, 2012, and June 30, 2012, respectively. There were no nonaccrual loans excluded from impaired loan disclosure in 2013 or 2012. Loans past due 90 days or more and accruing interest totaled $6.3 million, $8.8 million, and $10.8 million at June 30, 2013, December 31,2012, and June 30, 2012, respectively.

 

- 10 -
 

 

The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status at June 30, 2013 (dollars in thousands):

 

   30-89 Days
Past Due
   Greater than
90 Days
   Current   Total 
Commercial:                    
Commercial Real Estate - Owner Occupied  $-   $166   $45   $211 
Raw Land and Lots   -    -    2,529    2,529 
Single Family Investment Real Estate   -    11    288    299 
Consumer:                    
Indirect Auto   3    2    9    14 
HELOCs   -    32    786    818 
Other Consumer   42    -    60    102 
Total  $45   $211   $3,717   $3,973 

 

The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status at December 31, 2012 (dollars in thousands):

 

   30-89 Days
Past Due
   Greater than
90 Days
   Current   Total 
Commercial:                    
Commercial Real Estate - Owner Occupied  $-   $193   $54   $247 
Raw Land and Lots   -    81    2,861    2,942 
Single Family Investment Real Estate   -    14    312    326 
Commercial and Industrial   -    79    -    79 
Consumer:                    
Indirect Auto   3    2    16    21 
HELOCs   -    51    794    845 
Other Consumer   -    -    105    105 
Total  $3   $420   $4,142   $4,565 

 

- 11 -
 

 

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At June 30, 2013, the Company had $133.8 million in loans considered to be impaired of which $11.4 million were collectively evaluated for impairment and $122.4 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at June 30, 2013 (dollars in thousands):

 

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   YTD
Average
Investment
   Interest
Income
Recognized
 
Loans without a specific allowance                         
Commercial:                         
Commercial Construction  $16,900   $16,902   $-   $16,111   $396 
Commercial Real Estate - Owner Occupied   10,951    11,051    -    11,198    300 
Commercial Real Estate - Non-Owner Occupied   14,111    14,195    -    14,308    350 
Raw Land and Lots   36,273    36,528    -    36,556    627 
Single Family Investment Real Estate   6,854    7,232    -    7,900    111 
Commercial and Industrial   3,194    3,326    -    3,604    64 
Other Commercial   616    616    -    616    15 
Consumer:                         
Mortgage   1,382    1,382    -    1,383    27 
HELOCs   2,018    2,137    -    2,392    - 
Other Consumer   12    13    -    13    - 
Total impaired loans without a specific allowance  $92,311   $93,382   $-   $94,081   $1,890 
                          
Loans with a specific allowance                         
Commercial:                         
Commercial Construction  $11,790   $12,274   $795   $18,517   $19 
Commercial Real Estate - Owner Occupied   2,675    2,829    466    2,912    16 
Commercial Real Estate - Non-Owner Occupied   430    476    88    538    - 
Raw Land and Lots   2,199    2,221    347    2,282    23 
Single Family Investment Real Estate   2,414    2,796    40    2,888    - 
Commercial and Industrial   6,698    6,807    3,323    6,919    117 
Other Commercial   418    418    1    418    3 
Consumer:                         
Mortgage   1,283    1,291    72    1,293    - 
Consumer Construction   228    262    38    268    - 
Indirect Marine   158    283    28    283    - 
HELOCs   1,333    1,401    717    1,655    12 
Other Consumer   461    496    194    496    - 
Total impaired loans with a specific allowance  $30,087   $31,554   $6,109   $38,469   $190 
Total loans individually evaluated for impairment  $122,398   $124,936   $6,109   $132,550   $2,080 

 

- 12 -
 

 

At December 31, 2012, the Company had $155.4 million in loans considered to be impaired of which $13.0 million were collectively evaluated for impairment and $142.4 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 31, 2012 (dollars in thousands):

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   YTD
Average
Investment
   Interest
Income
Recognized
 
Loans without a specific allowance                         
Commercial:                         
Commercial Construction  $28,212   $28,695   $-   $28,925   $1,237 
Commercial Real Estate - Owner Occupied   13,356    13,449    -    14,362    773 
Commercial Real Estate - Non-Owner Occupied   13,997    14,076    -    15,153    768 
Raw Land and Lots   40,421    40,485    -    43,162    1,537 
Single Family Investment Real Estate   5,348    6,046    -    6,887    242 
Commercial and Industrial   1,582    1,610    -    1,926    105 
Consumer:                         
Mortgage   857    857    -    892    43 
Indirect Auto   4    4    -    8    - 
Indirect Marine   158    283    -    283    3 
HELOCs   1,330    1,429    -    1,481    5 
Other Consumer   125    127    -    129    - 
Total impaired loans without a specific allowance  $105,390   $107,061   $-   $113,208   $4,713 
                          
Loans with a specific allowance                         
Commercial:                         
Commercial Construction  $3,786   $3,834   $596   $4,614   $157 
Commercial Real Estate - Owner Occupied   2,699    2,838    698    2,878    30 
Commercial Real Estate - Non-Owner Occupied   13,791    13,828    691    13,896    761 
Raw Land and Lots   9,711    9,919    2,411    10,656    145 
Single Family Investment Real Estate   1,740    1,826    499    1,953    47 
Commercial and Industrial   2,413    2,573    603    2,584    31 
Other Commercial   134    134    28    134    - 
Consumer:                         
Mortgage   545    549    154    550    - 
Consumer Construction   235    262    106    230    - 
HELOCs   1,563    1,630    942    1,840    25 
Other Consumer   408    438    193    438    2 
Total impaired loans with a specific allowance  $37,025   $37,831   $6,921   $39,773   $1,198 
Total loans individually evaluated for impairment  $142,415   $144,892   $6,921   $152,981   $5,911 

 

The Company considers troubled debt restructurings (“TDRs”) to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Included in the impaired loan disclosures above are $53.0 million and $63.5 million of loans considered to be troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively. All loans that are considered to be TDRs are specifically evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

 

- 13 -
 

 

The following table provides a summary, by class, of modified loans that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and modified loans that have been placed in nonaccrual status, which are considered to be nonperforming, as of June 30, 2013 and December 31, 2012 (dollars in thousands):

 

   June 30, 2013   December 31, 2012 
   No. of
Loans
   Recorded
Investment
   Outstanding
Commitment
   No. of
Loans
   Recorded
Investment
   Outstanding
Commitment
 
Performing                              
Commercial:                              
Commercial Construction   1   $653   $-    5   $4,549   $73 
Commercial Real Estate - Owner Occupied   8    5,671    -    11    6,009    - 
Commercial Real Estate - Non-Owner Occupied   8    4,850    130    10    13,103    - 
Raw Land and Lots   14    20,868    -    13    22,886    - 
Single Family Investment Real Estate   10    2,602    -    6    928    - 
Commercial and Industrial   7    1,918    -    5    1,041    - 
Other Commercial   -    -    -    1    236    - 
Consumer:                              
Mortgage   15    3,005    -    12    2,256    - 
Other Consumer   3    259    -    4    460    - 
Total performing   66   $39,826   $130    67   $51,468   $73 
                               
Nonperforming                              
Commercial:                              
Commercial Construction   5   $4,175   $-    4    4,260    - 
Commercial Real Estate - Owner Occupied   5    1,366    -    3    1,079    - 
Commercial Real Estate - Non-Owner Occupied   2    430    -    2    514    - 
Raw Land and Lots   3    4,041    -    2    4,032    - 
Single Family Investment Real Estate   4    873    -    2    427    - 
Commercial and Industrial   10    1,297    -    7    1,251    - 
Consumer:                              
Mortgage   2    805    -    1    202    - 
Indirect Marine   1    158    -    1    158    - 
Other Consumer   1    65    -    1    68    - 
Total nonperforming   33   $13,210   $-    23   $11,991   $- 
                               
Total performing and nonperforming   99   $53,036   $130    90   $63,459   $73 

 

The Company considers a default of a restructured loan to occur when subsequent to the restructure, the borrower is 90 days past due or results in foreclosure and repossession of the applicable collateral. During the three and six months ended June 30, 2013, the Company identified one loan, totaling approximately $43,000, that went into default that had been restructured in the twelve-month period prior to the time of default.  This loan was a raw land and lot loan which was modified to an interest only loan with a market rate of interest. During the three months ended June 30, 2012, the Company identified two restructured loans, totaling approximately $928,000, that went into default in that quarter that had been restructured during the previous twelve months. During the six months ended June 30, 2012, the Company identified three restructured loans, totaling approximately $1.4 million, that went into default that had been restructured in the twelve-month period prior to the time of default. All three loans had a term extension at a market rate.

 

- 14 -
 

 

The following table shows, by class and modification type, TDRs that occurred during the three and six month periods ended June 30, 2013 (dollars in thousands):

 

   Three months ended   Six months ended 
   June 30, 2013   June 30, 2013 
   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:                    
Raw Land and Lots   1   $43    1   $43 
Single Family Investment Real Estate   -    -    1    210 
Consumer:                    
Mortgage   -    -    1    603 
Total interest only at market rate of interest   1   $43    3   $856 
                     
Term modification, at a market rate                    
Commercial:                    
Commercial Construction   2   $704    2   $704 
Commercial Real Estate - Owner Occupied   1    933    1   $933 
Commercial Real Estate - Non-Owner Occupied   1    753    1    753 
Raw Land and Lots   3    386    3    386 
Single Family Investment Real Estate   5    1,326    6    1,953 
Commercial and Industrial   4    1,125    5    1,180 
Consumer:                    
Mortgage   1    525    2    690 
Total loan term extended at a market rate   17   $5,752    20   $6,599 
                     
Term modification, below market rate                    
Commercial:                    
Commercial Real Estate - Owner Occupied   -   $-    1   $206 
Commercial and Industrial   -    -    1    9 
Consumer:                    
Mortgage   1    155    1    155 
Total loan term extended at a below market rate   1   $155    3   $370 
Total   19   $5,950    26   $7,825 

 

- 15 -
 

 

The following table shows, by class and modification type, TDRs that occurred during the three month and six month periods ended June 30, 2012 (dollars in thousands):

 

   Three months ended   Six months ended 
   June 30, 2012   June 30, 2012 
   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:                    
Raw Land and Lots   -   $-    3   $327 
Single Family Investment Real Estate   -    -    2    179 
Consumer:                    
Indirect Marine   1    283    1    283 
Total interest only at market rate of interest   1   $283    6   $789 
                     
Term modification, at a market rate                    
Commercial:                    
Commercial Real Estate - Owner Occupied   1   $132    3   $1,822 
Raw Land and Lots   -    -    1    604 
Commercial and Industrial   5    329    6    430 
Consumer:                    
Mortgage   1    202    2    474 
Other Consumer   2    85    3    287 
Total loan term extended at a market rate   9   $748    15   $3,617 
                     
Term modification, below market rate                    
Commercial:                    
Commercial Real Estate - Owner Occupied   3   $649    4   $658 
Total loan term extended at a below market rate   3   $649    4   $658 
                     
Interest rate modification, below market rate                    
Commercial:                    
Commercial Real Estate - Non-Owner Occupied   2   $2,390    2   $2,390 
Total interest only at below market rate of interest   2   $2,390    2   $2,390 
Total   15   $4,070    27   $7,454 

 

- 16 -
 

 

The following table shows the allowance for loan loss (“ALL”) activity, by portfolio segment, balances for allowance for credit losses, and loans based on impairment methodology for the six months ended June 30, 2013. 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):

 

   Commercial   Consumer   Unallocated   Total 
Allowance for loan losses:                    
Balance, beginning of the year  $24,821   $10,107   $(12)  $34,916 
Recoveries credited to allowance   944    611    -    1,555 
Loans charged off   (2,970)   (2,218)   -    (5,188)
Provision charged to operations   1,713    1,303    34    3,050 
Balance, end of period  $24,508   $9,803   $22   $34,333 
                     
Ending Balance, ALL:                    
Loans individually evaluated for impairment  $5,053   $1,049   $-   $6,102 
Loans collectively evaluated for impairment   19,448    8,754    22    28,224 
Loans acquired with deteriorated credit quality   7    -    -    7 
Total  $24,508   $9,803   $22   $34,333 
                     
Ending Balance, Loans:                    
Loans individually evaluated for impairment  $112,484   $5,941   $-   $118,425 
Loans collectively evaluated for impairment   2,015,991    862,466    -    2,878,457 
Loans acquired with deteriorated credit quality   3,039    934    -    3,973 
Total  $2,131,514   $869,341   $-   $3,000,855 

 

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the year ended December 31, 2012. 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):

 

   Commercial   Consumer   Unallocated   Total 
Allowance for loan losses:                    
Balance, beginning of the year  $27,891   $11,498   $81   $39,470 
Recoveries credited to allowance   589    1,122    -    1,711 
Loans charged off   (12,852)   (5,613)   -    (18,465)
Provision charged to operations   9,193    3,100    (93)   12,200 
Balance, end of period  $24,821   $10,107   $(12)  $34,916 
                     
Ending Balance, ALL:                    
Loans individually evaluated for impairment  $5,404   $1,395   $-   $6,799 
Loans collectively evaluated for impairment   19,295    8,712    (12)   27,995 
Loans acquired with deteriorated credit quality   122    -    -    122 
Total  $24,821   $10,107   $(12)  $34,916 
                     
Ending Balance, Loans:                    
Loans individually evaluated for impairment  $133,596   $4,254   $-   $137,850 
Loans collectively evaluated for impairment   1,965,918    858,514    -    2,824,432 
Loans acquired with deteriorated credit quality   3,594    971    -    4,565 
Total  $2,103,108   $863,739   $-   $2,966,847 

 

- 17 -
 

 

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the six months ended June 30, 2012. 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):

 

   Commercial   Consumer   Unallocated   Total 
Allowance for loan losses:                    
Balance, beginning of the year  $27,891   $11,498   $81   $39,470 
Recoveries credited to allowance   127    564    -    691 
Loans charged off   (2,950)   (2,726)   -    (5,676)
Provision charged to operations   5,485    988    27    6,500 
Balance, end of period  $30,553   $10,324   $108   $40,985 
                     
Ending Balance, ALL:                    
Loans individually evaluated for impairment  $10,429   $850   $-   $11,279 
Loans collectively evaluated for impairment   19,903    9,474    108    29,485 
Loans acquired with deteriorated credit quality   221    -    -    221 
Total  $30,553   $10,324   $108   $40,985 
                     
Ending Balance, Loans:                    
Loans individually evaluated for impairment  $176,919   $5,705   $-   $182,624 
Loans collectively evaluated for impairment   1,852,887    845,504    -    2,698,391 
Loans acquired with deteriorated credit quality   5,741    1,034    -    6,775 
Total  $2,035,547   $852,243   $-   $2,887,790 

 

The Company uses the past due status and trends as the primary credit quality indicator for the consumer loan portfolio segment while a risk rating system is utilized for commercial loans. Commercial loans are graded on a scale of 1 through 9. A general description of the characteristics of the risk grades follows:

 

·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;
·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;
·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;
·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; and
·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.

 

- 18 -
 

 

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of June 30, 2013. The risk rating information has been updated through June 30, 2013 (dollars in thousands):

 

   1-3   4   5   6   7   8   Total 
Commercial Construction  $13,957   $117,950   $22,513   $29,902   $22,672   $-   $206,994 
Commercial Real Estate - Owner Occupied   145,138    336,808    9,546    14,248    10,352    -    516,092 
Commercial Real Estate - Non-Owner Occupied   215,600    434,530    32,575    36,889    13,002    -    732,596 
Raw Land and Lots   4,492    103,770    12,554    26,985    32,299    -    180,100 
Single Family Investment Real Estate   42,524    158,190    13,111    14,320    9,631    -    237,776 
Commercial and Industrial   59,196    114,619    8,644    6,687    5,640    5,528    200,314 
Other Commercial   19,160    21,904    9,519    2,932    1,035    53    54,603 
Total  $500,067   $1,287,771   $108,462   $131,963   $94,631   $5,581   $2,128,475 

 

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of December 31, 2012. The risk rating information has been updated through December 31, 2012 (dollars in thousands):

 

   1-3   4   5   6   7   8   Total 
Commercial Construction  $5,504   $117,769   $14,637   $33,815   $30,619   $-   $202,344 
Commercial Real Estate - Owner Occupied   145,977    321,486    15,197    19,051    11,713    -    513,424 
Commercial Real Estate - Non-Owner Occupied   161,343    417,412    48,840    34,646    20,519    -    682,760 
Raw Land and Lots   3,943    114,053    13,260    29,194    42,148    186    202,784 
Single Family Investment Real Estate   43,705    156,636    12,111    13,150    7,467    -    233,069 
Commercial and Industrial   68,308    120,442    10,584    12,064    6,045    139    217,582 
Other Commercial   14,189    18,260    10,710    3,489    844    59    47,551 
Total  $442,969   $1,266,058   $125,339   $145,409   $119,355   $384   $2,099,514 

 

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of June 30, 2013. The credit quality indicator information has been updated through June 30, 2013 (dollars in thousands):

 

   4   5   6   7   8   Total 
Commercial Real Estate - Owner Occupied  $-   $-   $-   $211   $-   $211 
Raw Land and Lots   -    -    672    1,857    -    2,529 
Single Family Investment Real Estate   288    -    -    11    -    299 
Total  $288   $-   $672   $2,079   $-   $3,039 

 

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of December 31, 2012. The credit quality indicator information has been updated through December 31, 2012 (dollars in thousands):

 

   5   6   7   8   Total 
Commercial Real Estate - Owner Occupied  $-   $-   $247   $-   $247 
Raw Land and Lots   -    -    2,942    -    2,942 
Single Family Investment Real Estate   312    -    14    -    326 
Commercial and Industrial   -    -    79    -    79 
Total  $312   $-   $3,282   $-   $3,594 

 

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.

 

- 19 -
 

 

The following shows changes in the Company’s acquired loan portfolio and accretable yield for the following periods (dollars in thousands):

 

   For the Six Months Ended   For the Six Months Ended 
   June 30, 2013   June 30, 2012 
   Purchased Impaired   Purchased Nonimpaired   Purchased Impaired   Purchased Nonimpaired 
   Accretable
Yield
   Carrying
Amount of
Loans
   Accretable
Yield
   Carrying
Amount of
Loans
   Accretable
Yield
   Carrying
Amount of
Loans
   Accretable
Yield
   Carrying
Amount of
Loans
 
Balance at beginning of period  $3,147   $4,565   $5,350   $473,283   $5,140   $9,897   $9,010   $663,510 
Additions   -    -    -    -    -    -    -    - 
Accretion   -    -    (1,099)   -    (38)   -    (2,166)   - 
Charge-offs   (54)   (96)   -    (920)   (1,373)   (212)   -    (1,032)
Transfers to OREO   -    (201)   -    (207)   -    (2,371)   -    (2,766)
Payments received, net   -    (295)   -    (50,374)   -    (539)   -    (127,264)
Balance at end of period  $3,093   $3,973   $4,251   $421,782   $3,729   $6,775   $6,844   $532,448 

  

4.INTANGIBLE ASSETS

 

The Company’s intangible assets consist of core deposits, trademarks, and goodwill arising from previous acquisitions. The Company has determined that core deposit intangibles and trademarks have a finite life and amortizes them over their estimated useful life. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years, using an accelerated method. The trademark intangible acquired through previous acquisitions was amortized over three years using the straight-line method. In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other (“ASC 350”), the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. Based on the annual testing during the second quarter of each year and the absence of impairment indicators subsequent to the evaluation date, the Company has recorded no impairment charges to date for 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
 
June 30, 2013               
Amortizable core deposit intangibles  $46,615   $32,794   $13,821 
Trademark intangible   1,200    1,200    - 
                
December 31, 2012               
Amortizable core deposit intangibles  $46,615   $30,837   $15,778 
Trademark intangible   1,200    1,167    33 
                
June 30, 2012               
Amortizable core deposit intangibles  $46,615   $28,437   $18,178 
Trademark intangible   1,200    967    233 

 

- 20 -
 

 

Amortization expense of core deposit intangibles for the three and six months ended June 30, 2013 and 2012 totaled $921,000 and $2.0 million and $1.2 million and $2.5 million, respectively, and for the year ended December 31, 2012 was $4.9 million. Amortization expense of the trademark intangibles for the three and six months ended June 30, 2013 and 2012 was $0 and $33,000 and $100,000 and $200,000, respectively, and for the year ended December 31, 2012 was $400,000. As of June 30, 2013, the estimated remaining amortization expense of core deposit intangibles for the remainder of 2013 and for each of the five succeeding fiscal years is as follows for the years ending (dollars in thousands):

 

For the remaining six months of 2013  $1,840 
For the year ending December 31, 2014   2,898 
For the year ending December 31, 2015   2,463 
For the year ending December 31, 2016   1,862 
For the year ending December 31, 2017   1,437 
For the year ending December 31, 2018   906 
Thereafter   2,415 
   $13,821 

 

5.BORROWINGS

 

Short-term Borrowings

 

Total short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Also included in total short-term borrowings are federal funds purchased, which are secured overnight borrowings from other financial institutions, and short-term FHLB advances. Total short-term borrowings consist of the following as of June 30, 2013 and December 31, 2012 (dollars in thousands):

 

   June 30,   December 31, 
   2013   2012 
Securities sold under agreements to repurchase  $101,418   $54,270 
Other short-term borrowings   28,000    78,000 
Total short-term borrowings  $129,418   $132,270 
           
Maximum month-end outstanding balance  $129,418   $154,116 
Average outstanding balance during the period   96,750    91,993 
Average interest rate during the period   0.30%   0.31%
Average interest rate at end of period   0.29%   0.28%
           
Other short-term borrowings:          
Federal Funds purchased  $28,000   $38,000 
FHLB  $-   $40,000 

 

The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $97.0 million and $87.0 million at June 30, 2013 and December 31, 2012, respectively. 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 $807.4 million and $802.2 million at June 30, 2013 and December 31, 2012, respectively.

 

- 21 -
 

 

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. The trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.

 

   Principal   Investment(1)   Spread to
3-Month LIBOR
   Rate   Maturity 
Trust Preferred Capital Note - Statutory Trust I  $22,500,000   $696,000    2.75%   3.02%   6/17/2034 
Trust Preferred Capital Note - Statutory Trust II   36,000,000    1,114,000    1.40%   1.67%   6/15/2036 
Total  $58,500,000                     

 

(1) reported as 'Other Assets' within the consolidated Balance Sheets

 

As part of a prior acquisition, the Company assumed subordinated debt with terms of LIBOR plus 1.45% and a maturity date of April 2016. At June 30, 2013, the carrying value of the subordinated debt, net of the purchase accounting discount, was $16.1 million.

 

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 in the Company’s consolidated balance sheet. In accordance with ASC 470-50, Modifications and Extinguishments, the Company will amortize 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 in the Company’s consolidated income statement. Amortization expense for the three and six months ended June 30, 2013 was $433,000 and $859,000, respectively, and $0 for both three and six months ended June 30, 2012.

 

As of June 30, 2013, the advances from the FHLB consist of the following (dollars in thousands):

 

Long Term Type  Spread to 
3-Month LIBOR
   Interest
Rate
   Maturity
Date
  Conversion
Date
  Option
Frequency
  Advance
Amount
 
Adjustable Rate Credit   0.44%   0.71%  8/23/2022  n/a  n/a  $55,000 
Adjustable Rate Credit   0.45%   0.73%  11/23/2022  n/a  n/a   65,000 
Adjustable Rate Credit   0.45%   0.73%  11/23/2022  n/a  n/a   10,000 
Adjustable Rate Credit   0.45%   0.73%  11/23/2022  n/a  n/a   10,000 
                      $140,000 

 

As of December 31, 2012, the advances from the FHLB consisted of the following (dollars in thousands):

 

Long Term Type  Spread to 
3-Month LIBOR
   Interest
Rate
   Maturity
Date
  Conversion
Date
  Option
Frequency
  Advance
Amount
 
Adjustable Rate Credit   0.44%   0.75%  8/23/2022  n/a  n/a  $55,000 
Adjustable Rate Credit   0.45%   0.76%  11/23/2022  n/a  n/a   65,000 
Adjustable Rate Credit   0.45%   0.76%  11/23/2022  n/a  n/a   10,000 
Adjustable Rate Credit   0.45%   0.76%  11/23/2022  n/a  n/a   10,000 
                      $140,000 

 

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.1 billion and $1.0 billion as of June 30, 2013 and December 31, 2012, respectively.

 

- 22 -
 

 

As of June 30, 2013, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):

 

   Subordinated
Debt
   FHLB
Advances
   Prepayment
Penalty
   Total Long-term
Borrowings
 
Remaining six months in 2013  $-   $-   $(885)  $(885)
2014   -    -    (1,787)   (1,787)
2015   -    -    (1,831)   (1,831)
2016   16,114    -    (1,882)   14,232 
2017   -    -    (1,923)   (1,923)
2018   -    -    (1,969)   (1,969)
Thereafter   -    140,000    (7,918)   132,082 
Total long-term borrowings  $16,114   $140,000   $(18,195)  $137,919 

 

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 or the financial condition or results of operations of the Company.

 

Litigation Relating to the StellarOne Acquisition

 

In a joint press release issued on June 10, 2013, the Company announced the signing of a definitive merger agreement for the acquisition of StellarOne Corporation (“StellarOne”), creating the largest community banking institution in Virginia. The Company expects to close the merger on or around January 1, 2014, subject to customary closing conditions, including regulary and shareholder approvals. On June 14, 2013, Jaclyn Crescente, individually and on behalf of all other StellarOne shareholders, filed a class action complaint against StellarOne, its current directors, StellarOne Bank and the Company, in the U.S. District Court for the Western District of Virginia, Charlottesville Division (Case No. 3:13-cv-00021-NKM). The complaint alleges that the StellarOne directors breached their fiduciary duties by approving the merger with the Company, and that the Company aided and abetted in such breaches of duty. The complaint seeks, among other things, an order enjoining the defendants from proceeding with or consummating the merger, as well as other equitable relief and/or money damages in the event that the transaction is completed. StellarOne and the Company believe that the claims are without merit.

 

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 in the 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 instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk.

 

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 written 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.

 

- 23 -
 

 

Union Mortgage Group, Inc., a wholly owned subsidiary of Union First Market Bank, uses rate lock commitments during the origination process and for loans held for sale. These commitments to sell loans are designed to mitigate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale. At June 30, 2013, the Company held approximately $3.0 million of the loans available for sale in which the related rate lock commitment had expired; accordingly, a valuation adjustment of $186,000 was recorded to properly reflect the lower cost or market of these loans. This valuation adjustment was recorded within the mortgage segment; there was no valuation adjustment recorded in the prior year.

 

The following table presents the balances of commitments and contingencies (dollars in thousands):

 

   June 30,   December 31, 
   2013   2012 
Commitments with off-balance sheet risk:          
Commitments to extend credit (1)  $931,133   $844,766 
Standby letters of credit   54,396    45,536 
Mortgage loan rate lock commitments   119,244    133,326 
Total commitments with off-balance sheet risk  $1,104,773   $1,023,628 
Commitments with balance sheet risk:          
Loans held for sale  $109,395   $167,698 
Total other commitments  $1,214,168   $1,191,326 

 

(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 June 30, 2013 and December 31, 2012, the aggregate amount of daily average required reserves was approximately $15.0 million and $14.2 million, respectively.

 

The Company has approximately $8.2 million in deposits in other financial institutions of which $3.4 million serves as collateral for the cash flow hedge further discussed in Note 7 “Derivatives.” The Dodd-Frank Act, which was signed into law on July 21, 2010, provided unlimited deposit insurance coverage for transaction accounts expired on December 31, 2012. As of January 1, 2013, the deposit insurance coverage for transaction accounts is insured up to at least $250,000. The Company had approximately $3.9 million in deposits in other financial institutions that were uninsured at June 30, 2013. On an annual basis, the Company’s management evaluates the loss risk of its uninsured deposits in financial counter-parties.

 

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” in these “Notes to the Consolidated Financial Statements” for additional information.

 

- 24 -
 

 

7.DERIVATIVES

 

During the second quarter of 2010, the Company entered into an interest rate swap agreement (the “trust swap”) as part of the management of interest rate risk. The Company designated the trust swap as a cash flow hedge intended to protect against the variability of cash flows associated with the aforementioned Statutory Trust II preferred capital securities. The trust swap hedges the interest rate risk, wherein the Company receives interest of LIBOR from a counterparty and pays a fixed rate of 3.51% to the same counterparty calculated on a notional amount of $36.0 million. The term of the trust swap is six years with a fixed rate that started June 15, 2011. The trust swap was entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

 

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with ASC 815, Derivatives and Hedging, the trust swap is designated as a cash flow hedge, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. There was no hedge ineffectiveness for this trust swap. At June 30, 2013, the fair value of the trust swap agreement was an unrealized loss of $3.4 million, the amount the Company would have expected to pay if the contract was terminated. The below liability is recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

 

Shown below is a summary of the derivative designated as a cash flow hedge at June 30, 2013 and December 31, 2012 (dollars in thousands):

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of June 30, 2013                                   
Pay fixed - receive floating interest rate swaps   1   $36,000   $-   $3,354    0.27%   3.51%   3.96 

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of December 31, 2012                                   
Pay fixed - receive floating interest rate swaps   1   $36,000   $-   $4,489    0.31%   3.51%   4.46 

 

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 counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values reported in other assets and other liabilities. Shown below is a summary regarding loan swap derivative activities at June 30, 2013 and December 31, 2012 (dollars in thousands):

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of June 30, 2013                                   
Receive fixed - pay floating interest rate swaps   1   $730   $21   $-    4.58%   2.94%   9.09 
Pay fixed - receive floating interest rate swaps   1   $730   $-   $21    2.94%   4.58%   9.09 

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of December 31, 2012                                   
Receive fixed - pay floating interest rate swaps   1   $744   $18   $-    4.58%   2.96%   9.59 
Pay fixed - receive floating interest rate swaps   1   $744   $-   $18    2.96%   4.58%   9.59 

 

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8.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The change in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2013 are summarized as follows net of tax (dollars in thousands):

 

   Unrealized
Gains (losses)
on Securities
   Change in
FV of Cash
Flow Hedge
   Total 
Balance - March 31, 2013  $12,473   $(4,203)  $8,270 
Other comprehensive income (loss)   (9,720)   849    (8,871)
Reclassification adjustment for losses included in net income   (34)   -    (34)
Net current period other comprehensive income (loss)   (9,754)   849    (8,905)
Balance - June 30, 2013  $2,719   $(3,354)  $(635)

 

   Unrealized
Gains (losses)
on Securities
   Change in
FV of Cash
Flow Hedge
   Total 
Balance - December 31, 2012  $14,573   $(4,489)  $10,084 
Other comprehensive income (loss)   (11,827)   1,135    (10,692)
Reclassification adjustment for losses included in net income   (27)   -    (27)
Net current period other comprehensive income (loss)   (11,854)   1,135    (10,719)
Balance - June 30, 2013  $2,719   $(3,354)  $(635)

 

The change in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2012 are summarized as follows net of tax (dollars in thousands):

 

   Unrealized
Gains (losses)
on Securities
   Change in
FV of Cash
Flow Hedge
   Total 
Balance - March 31, 2012  $14,607   $(4,096)  $10,511 
Other comprehensive income (loss)   992    (487)   505 
Reclassification adjustment for losses included in net income   (6)   -    (6)
Net current period other comprehensive income (loss)   986    (487)   499 
Balance - June 30, 2012  $15,593   $(4,583)  $11,010 

 

   Unrealized
Gains (losses)
on Securities
   Change in
FV of Cash
Flow Hedge
   Total 
Balance - December 31, 2011  $13,943   $(4,293)  $9,650 
Other comprehensive income (loss)   1,653    (290)   1,363 
Reclassification adjustment for losses included in net income   (3)   -    (3)
Net current period other comprehensive income (loss)   1,650    (290)   1,360 
Balance - June 30, 2012  $15,593   $(4,583)  $11,010 

 

Reclassifications of unrealized gains (losses) on available-for-sale (“AFS”) securities are reported in the income statement 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 $53,000 and $42,000 for the three and six months ended June 30, 3013, respectively, and gains of $10,000 and $5,000 for the three and six months ended June 30, 2012, respectively, related to gains/losses on the sale of securities. The tax effect of these transactions during the three and six months ended for June 30, 2013 and 2012 was $19,000 and $15,000 and $4,000 and $2,000, respectively, which was included as a component of income tax expense.

 

- 26 -
 

 

9.FAIR VALUE MEASUREMENTS

 

The Company follows ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) 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.

 

Interest rate swap agreement used for interest rate risk management

 

Interest rate swaps are recorded at fair value on a recurring basis. The Company utilizes an interest rate swap agreement as part of the management of interest rate risk to modify the repricing 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 interest rate swaps using standard swap 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 interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

 

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).

 

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.

 

- 27 -
 

 

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 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 our validation as of June 30, 2013 and December 31, 2012.

 

The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012 (dollars in thousands):

 

   Fair Value Measurements at June 30, 2013 using 
   Quoted Prices in
Active Markets
for Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Interest rate swap - loans  $-   $21   $-   $21 
Securities available for sale:                    
U.S. government and agency securities   -    2,798    -    2,798 
Obligations of states and political subdivisions   -    236,716    -    236,716 
Corporate and other bonds   -    5,626    -    5,626 
Mortgage-backed securities   -    333,770    -    333,770 
Other securities   -    3,402    -    3,402 
                     
LIABILITIES                    
Interest rate swap - loans  $-   $21   $-   $21 
Cash flow hedge - trust - preferred   -    3,354    -    3,354 

 

   Fair Value Measurements at December 31, 2012 using 
   Quoted Prices in
Active Markets
for Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Interest rate swap - loans  $-   $18   $-   $18 
Securities available for sale:                    
U.S. government and agency securities   -    2,849    -    2,849 
Obligations of states and political subdivisions   -    229,778    -    229,778 
Corporate and other bonds   -    7,212    -    7,212 
Mortgage-backed securities   -    342,174    -    342,174 
Other securities   -    3,369    -    3,369 
                     
LIABILITIES                    
Interest rate swap - loans  $-   $18   $-   $18 
Cash flow hedge - trust preferred   -    4,489    -    4,489 

 

- 28 -
 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with 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.

 

Loans held for sale

 

Loans held for sale are carried at the lower of cost or market 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). As such, the Company records any fair value adjustments on a nonrecurring basis. Nonrecurring fair value adjustments of $186,000 and $0 were recorded on loans held for sale during the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income.

 

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 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). 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). 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 Consolidated Statements of Income.

 

Other real estate owned (“OREO”)

 

Fair values of OREO are carried at the lower of carrying value or 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 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. Total valuation expenses related to OREO properties for both the six months ended June 30, 2013 and June 30, 2012 were $0 and for the year ended December 31, 2012 were $301,000.

 

- 29 -
 

 

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012 (dollars in thousands):

 

   Fair Value Measurements at June 30, 2013 using 
   Quoted Prices in
Active Markets
for Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Loans held for sale  $-   $109,395   $-   $109,395 
Impaired loans   -    -    23,978    23,978 
Other real estate owned   -    -    35,153    35,153 

 

   Fair Value Measurements at December 31, 2012 using 
   Quoted Prices in
Active Markets
for Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Loans held for sale  $-   $167,698   $-   $167,698 
Impaired loans   -    -    30,104    30,104 
Other real estate owned   -    -    32,834    32,834 

 

The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2013 (dollars in thousands):

 

   Fair Value Measurements at June 30, 2013 
   Fair Value   Valuation Technique(s)  Unobservable Inputs  Weighted
Average
 
ASSETS                
Commercial Construction  $10,995   Market comparables  Discount applied to market comparables (1)   12%
Commercial Real Estate - Owner Occupied   2,209   Market comparables  Discount applied to market comparables (1)   14%
Commercial Real Estate - Non-Owner Occupied   342   Market comparables  Discount applied to market comparables (1)   0%
Raw Land and Lots   1,852   Market comparables  Discount applied to market comparables (1)   6%
Single Family Investment Real Estate   2,374   Market comparables  Discount applied to market comparables (1)   25%
Commercial and Industrial   3,375   Market comparables  Discount applied to market comparables (1)   43%
Other (2)   2,831   Market comparables  Discount applied to market comparables (1)   19%
Total Impaired Loans   23,978            
                 
Other real estate owned   35,153   Market comparables  Discount applied to market comparables (1)   31%
Total  $59,131            

 

(1) A discount percentage (in addition to expected selling costs) is applied based on age of independent appraisals, current market conditions, and experience within the local market.

(2) The "Other" category of the impaired loans section from the table above consists of Other Commercial, Mortgage, Consumer Construction, HELOCs, and Other Consumer.

 

- 30 -
 

 

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2012 (dollars in thousands):

 

   Fair Value Measurements at December 31, 2012 
   Fair Value   Valuation Technique(s)  Unobservable Inputs  Weighted
Average
 
ASSETS                
Commercial Construction  $3,190   Market comparables  Discount applied to market comparables (1)   6%
Commercial Real Estate - Owner Occupied   2,001   Market comparables  Discount applied to market comparables (1)   13%
Commercial Real Estate - Non-Owner Occupied   13,100   Market comparables  Discount applied to market comparables (1)   9%
Raw Land and Lots   7,300   Market comparables  Discount applied to market comparables (1)   6%
Single Family Investment Real Estate   1,241   Market comparables  Discount applied to market comparables (1)   6%
Commercial and Industrial   1,810   Market comparables  Discount applied to market comparables (1)   23%
Other (2)   1,462   Market comparables  Discount applied to market comparables (1)   27%
Total Impaired Loans   30,104            
                 
Other real estate owned   32,834   Market comparables  Discount applied to market comparables (1)   33%
Total  $62,938            

 

(1) A discount percentage (in addition to expected selling costs) is applied based on age of independent appraisals, current market conditions, and experience within the local market.

(2) The "Other" category of the impaired loans section from the table above consists of Other Commercial, Mortgage, Consumer Construction, HELOCs, and Other Consumer.

 

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.

 

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.

 

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 deposits 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’s derivative pricing functions.

 

Accrued interest

 

The carrying amounts of accrued interest approximate fair value.

 

- 31 -
 

 

Commitments to extend credit and standby letters of credit

 

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At June 30, 2013 and December 31, 2012, the fair value of loan commitments and standby letters of credit was immaterial.

 

The carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2013 and December 31, 2012 are as follows (dollars in thousands):

 

       Fair Value Measurements at June 30, 2013 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  $71,547   $71,547   $-   $-   $71,547 
Securities available for sale   582,312    -    582,312    -    582,312 
Restricted stock   17,956    -    17,956    -    17,956 
Loans held for sale   109,395    -    109,395    -    109,395 
Net loans   2,966,522    -    -    2,998,353    2,998,353 
Interest rate swap - loans   21    -    21    -    21 
Accrued interest receivable   17,013    -    17,013    -    17,013 
                          
LIABILITIES                         
Deposits  $3,265,963   $-   $3,271,083   $-   $3,271,083 
Borrowings   327,647    -    309,859    -    309,859 
Accrued interest payable   1,063    -    1,063    -    1,063 
Cash flow hedge - trust preferred   3,354    -    3,354    -    3,354 
Interest rate swap - loans   21    -    21    -    21 

 

- 32 -
 

 

       Fair Value Measurements at December 31, 2012 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  $82,902   $82,902   $-   $-   $82,902 
Securities available for sale   585,382    -    585,382    -    585,382 
Restricted stock   20,687    -    20,687    -    20,687 
Loans held for sale   167,698    -    167,698    -    167,698 
Net loans   2,931,931    -    -    2,956,339    2,956,339 
Interest rate swap - loans   18    -    18    -    18 
Accrued interest receivable   19,663    -    19,663    -    19,663 
                          
LIABILITIES                         
Deposits  $3,297,767   $-   $3,309,149   $-   $3,309,149 
Borrowings   329,395    -    309,019    -    309,019 
Accrued interest payable   1,414    -    1,414    -    1,414 
Cash flow hedge – trust preferred   4,489    -    4,489    -    4,489 
Interest rate swap - loans   18    -    18    -    18 

 

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. However, borrowers with fixed rate obligations 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.

 

10.STOCK-BASED COMPENSATION

 

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) and the 2003 Stock Incentive Plan (the “2003 Plan”) provide for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The 2011 and 2003 Plans authorize shares, which may be awarded to employees of the Company and its subsidiaries in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”), non-statutory stock options, and nonvested stock. The 2003 Plan expired in June 2013. Under both plans, the option price cannot be less than the fair market value of the stock on the grant date. The Company issues new shares to satisfy stock-based awards. A stock option’s maximum term is ten years from the date of grant and vests in equal annual installments of 20% over a five year vesting schedule. The following table summarizes the shares available in each plan as of June 30, 2013:

 

   2003 Plan (1)   2011 Plan 
Beginning Authorization   525,000    1,000,000 
Granted   (626,425)   (372,999)
Expired, forfeited, or cancelled   101,425    26,857 
Remaining available for grant   0    653,858 

 

(1) The 2003 Plan expired in June 2013.

 

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For the three month and six month periods ended June 30, 2013 and 2012, respectively, the Company recognized stock-based compensation expense of approximately $7,500 and $376,000 ($34,000 and $289,000, net of tax), respectively, and $325,000 and $615,000 ($269,000 and $465,000, net of tax), respectively. These expenses were less than $0.01 per common share for the quarter ended June 30, 2013, and approximately $0.01 for the six months ended June 30, 2013. Stock based compensation expense was $0.01 and $0.02 for the three and six month periods, respectively, ended June 30, 2012.

 

Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2013:

 

   Number of Stock
Options
   Weighted Average
Exercise Price
 
Options outstanding, December 31, 2012   500,578   $16.92 
Exercised   (7,423)   14.04 
Expired   (44,888)   18.80 
Options outstanding, June 30, 2013   448,267    16.78 
Options exercisable, June 30, 2013   237,222    19.25 

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. No options have been granted since February of 2012:

 

   Six Months Ended June 30, 
   2013   2012 
Dividend yield (1)   -    2.47%
Expected life in years (2)   -    7.0 
Expected volatility (3)   -    41.53%
Risk-free interest rate (4)   -    1.24%
           
Weighted average fair value per option granted  $-   $4.76 

 

(1) Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

(2) Based on the average of the contractual life and vesting schedule for the respective option.

(3) Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

(4) Based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant.

 

The following table summarizes information concerning stock options issued to the Company’s employees that are vested or are expected to vest and stock options exercisable as of June 30, 2013:

 

   Stock Options
Vested or
Expected to Vest
   Exercisable 
Stock options   435,371    237,222 
Weighted average remaining contractual life in years   6.30    4.91 
Weighted average exercise price on shares above water  $14.36   $