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 March 31, 2015

 

OR

 

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

 

Commission File Number: 0-20293

 

UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

VIRGINIA 54-1598552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

 

(804) 633-5031

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x Accelerated filer ¨
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 May 1, 2015 was 45,113,062.

 

 
 

 

UNION BANKSHARES CORPORATION

FORM 10-Q

INDEX

ITEM     PAGE
       
  PART I - FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
  Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014   2
       
  Consolidated Statements of Income for the three months ended March 31, 2015 and 2014   3
       
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014   4
       
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014   5
       
  Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014   6
       
  Notes to Consolidated Financial Statements   7
       
  Report of Independent Registered Public Accounting Firm   41
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   42
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   63
       
Item 4. Controls and Procedures   65
       
  PART II - OTHER INFORMATION    
       
Item 1. Legal Proceedings   66
       
Item 1A. Risk Factors   66
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   66
       
Item 6. Exhibits   68
       
  Signatures   69

 

ii
 

 

Glossary of Acronyms

 

ALCO Asset Liability Committee
ALL Allowance for loan losses
ASC Accounting Standards Codification
ASU Accounting Standards Update
ATM Automated teller machine
the Bank Union Bank & Trust, formerly known as Union First Market Bank
bps Basis points          
the Company Union Bankshares Corporation
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS Earnings per share
Exchange Act Securities Exchange Act of 1934
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve Board of Governors of the Federal Reserve System
Federal Reserve Bank Federal Reserve Bank of Richmond
FHLB Federal Home Loan Bank of Atlanta
GAAP Accounting principles generally accepted in the United States
HELOC Home equity line of credit
LIBOR London Interbank Offered Rate
NPA Nonperforming assets
OREO Other real estate owned
OTTI Other than temporary impairment
PCI Purchased credit impaired
SEC U.S. Securities and Exchange Commission
StellarOne StellarOne Corporation
TDR Troubled debt restructuring
UMG Union Mortgage Group, Inc.

 

 
 

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

   March 31,   December 31, 
   2015   2014 
ASSETS          
Cash and cash equivalents:          
Cash and due from banks  $112,793   $112,752 
Interest-bearing deposits in other banks   24,256    19,344 
Money market investments   1    1 
Federal funds sold   312    1,163 
Total cash and cash equivalents   137,362    133,260 
           
Securities available for sale, at fair value   1,089,664    1,102,114 
Restricted stock, at cost   53,146    54,854 
           
Loans held for sale   46,048    42,519 
           
Loans held for investment, net of deferred fees and costs   5,387,755    5,345,996 
Less allowance for loan losses   30,977    32,384 
Net loans held for investment   5,356,778    5,313,612 
           
Premises and equipment, net   134,429    135,247 
Other real estate owned, net of valuation allowance   25,434    28,118 
Core deposit intangibles, net   29,533    31,755 
Goodwill   293,522    293,522 
Bank owned life insurance   140,143    139,005 
Other assets   82,500    84,637 
Total assets  $7,388,559   $7,358,643 
           
LIABILITIES          
Noninterest-bearing demand deposits  $1,274,935   $1,199,378 
Interest-bearing deposits   4,395,293    4,439,392 
Total deposits   5,670,228    5,638,770 
           
Securities sold under agreements to repurchase   39,434    44,393 
Other short-term borrowings   335,000    343,000 
Long-term borrowings   299,914    299,542 
Other liabilities   57,067    55,769 
Total liabilities   6,401,643    6,381,474 
           
Commitments and contingencies (Note 7)          
           
STOCKHOLDERS' EQUITY          
Common stock, $1.33 par value, shares authorized 100,000,000; issued and outstanding, 45,155,024 shares and 45,162,853 shares, respectively.   59,721    59,795 
Surplus   641,882    643,443 
Retained earnings   270,618    261,676 
Accumulated other comprehensive income   14,695    12,255 
Total stockholders' equity   986,916    977,169 
           
Total liabilities and stockholders' equity  $7,388,559   $7,358,643 

 

See accompanying notes to consolidated financial statements.

 

- 2 -
 

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

 

   Three Months Ended 
   March 31,   March 31, 
   2015   2014 
         
Interest and dividend income:          
Interest and fees on loans  $60,452   $61,269 
Interest on deposits in other banks   17    12 
Interest and dividends on securities:          
Taxable   3,807    3,648 
Nontaxable   3,324    3,279 
Total interest and dividend income   67,600    68,208 
           
Interest expense:          
Interest on deposits   3,321    2,256 
Interest on federal funds purchased   1    24 
Interest on short-term borrowings   249    119 
Interest on long-term borrowings   2,060    2,051 
Total interest expense   5,631    4,450 
           
Net interest income   61,969    63,758 
Provision for loan losses   1,750    - 
Net interest income after provision for loan losses   60,219    63,758 
           
Noninterest income:          
Service charges on deposit accounts   4,214    4,298 
Other service charges and fees   3,584    3,344 
Fiduciary and asset management fees   2,219    2,303 
Gains on sales of mortgage loans, net of commissions   2,379    2,297 
Gains on securities transactions, net   193    29 
Bank owned life insurance income   1,135    1,089 
Other operating income   1,330    428 
Total noninterest income   15,054    13,788 
           
Noninterest expenses:          
Salaries and benefits   27,492    29,214 
Occupancy expenses   5,133    5,180 
Furniture and equipment expenses   2,813    2,868 
Printing, postage, and supplies   1,370    1,223 
Communications expense   1,179    1,098 
Technology and data processing   3,255    3,074 
Professional services   1,348    1,055 
Marketing and advertising expense   1,687    1,065 
FDIC assessment premiums and other insurance   1,398    1,393 
Other taxes   1,551    1,385 
Loan-related expenses   684    542 
OREO and credit-related expenses   1,186    1,451 
Amortization of intangible assets   2,222    2,616 
Acquisition and conversion costs   -    13,168 
Other expenses   2,522    1,953 
Total noninterest expenses   53,840    67,285 
           
Income before income taxes   21,433    10,261 
Income tax expense   5,732    2,553 
Net income  $15,701   $7,708 
Earnings per common share:          
Basic  $0.35   $0.16 
Diluted  $0.35   $0.16 
Dividends declared per common share  $0.15   $0.14 
Weighted average number of common shares outstanding:          
Basic   45,105,969    46,977,416 
Diluted   45,187,516    47,080,661 

 

See accompanying notes to consolidated financial statements.

 

- 3 -
 

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

   Three Months Ended 
   March 31, 
   2015   2014 
         
Net income  $15,701   $7,708 
Other comprehensive income (loss):          
Cash flow hedges:          
Change in fair value of cash flow hedges   (1,490)   575 
Reclassification adjustment for losses included in net income (net of taxes of $146 and $25 for the three months ended March 31, 2015 and 2014, respectively)   272    47 
Unrealized gains (losses) on securities:          
Unrealized holding gains (losses) arising during period (net of taxes of $2,037 and $3,399 for the three months ended March 31, 2015 and 2014, respectively)   3,783    6,313 
Reclassification adjustment for (gains) losses included in net income (net of taxes of $68 and $10 for the three months ended March 31, 2015 and 2014, respectively)   (125)   (19)
Other comprehensive income (loss)   2,440    6,916 
Comprehensive income  $18,141   $14,624 

 

See accompanying notes to consolidated financial statements.

 

- 4 -
 

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Dollars in thousands, except share amounts)

 

   Common
Stock
   Surplus   Retained
Earnings (1)
   Accumulated
Other
Comprehensive
Income (Loss)
   Total 
                     
Balance - December 31, 2013  $33,020   $170,770   $236,210   $(2,190)  $437,810 
Net income - 2014             7,708         7,708 
Other comprehensive loss (net of taxes of $3,414)                  6,916    6,916 
Issuance of common stock in regard to acquisition (22,147,874 shares)   29,457    520,066              549,523 
Dividends on common stock ($0.14 per share)             (6,332)        (6,332)
Stock purchased under stock repurchase plan (510,515 shares)   (679)   (12,286)             (12,965)
Issuance of common stock under Dividend Reinvestment Plan (10,843 shares)   14    244    (258)        - 
Issuance of common stock under Equity Compensation Plans (24,465 shares)   33    425              458 
Vesting of restricted stock under Equity Compensation Plans (13,310 shares)   18    (18)             - 
Net settle for taxes on Restricted Stock Awards (61,732 shares)   (83)   (1,432)             (1,515)
Stock-based compensation expense        374              374 
Balance - March 31, 2014  $61,780   $678,143   $237,328   $4,726   $981,977 
                          
Balance - December 31, 2014  $59,795   $643,443   $261,676   $12,255   $977,169 
Net income - 2015             15,701         15,701 
Other comprehensive income (net of taxes of $2,115)                  2,440    2,440 
Dividends on common stock ($0.15 per share)             (6,431)        (6,431)
Stock purchased under stock repurchase plan (102,843 shares)   (137)   (2,250)             (2,387)
Issuance of common stock under Dividend Reinvestment Plan (15,781 shares)   21    307    (328)        - 
Issuance of common stock under Equity Compensation Plans (7,686 shares)   10    137              147 
Issuance of common stock for services rendered (4,576 shares)   6    94              100 
Vesting of restricted stock under Equity Compensation Plans (29,140 shares)   39    (39)             - 
Net settle for taxes on Restricted Stock Awards (9,869 shares)   (13)   (200)             (213)
Stock-based compensation expense        390              390 
Balance - March 31, 2015  $59,721   $641,882   $270,618   $14,695   $986,916 

 

(1) Retained earnings as of December 31, 2013 and 2014 includes the cumulative impact of $429,000 and $856,000, respectively, resulting from the adoption of ASU 2014-01 “Accounting For Investments in Qualified Affordable Housing Projects.” See Note 1 “Accounting Policies” for additional information.

 

See accompanying notes to consolidated financial statements.

 

- 5 -
 

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Dollars in thousands)

 

   2015   2014 
Operating activities:          
Net income  $15,701   $7,708 
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:          
Depreciation of bank premises and equipment   2,705    2,670 
Writedown of OREO   590    256 
Amortization, net   3,625    3,465 
Amortization related to acquisition, net   371    167 
Provision for loan losses   1,750    - 
Gains on securities transactions, net   (193)   (29)
(Increase) decrease in loans held for sale, net   (3,529)   15,809 
Gains on sales of other real estate owned, net   (38)   (23)
Losses on sales of bank premises, net   57    233 
Stock-based compensation expenses   390    374 
Issuance of common stock for services   100    - 
Net (increase) decrease in other assets   (1,031)   23,978 
Net increase (decrease) in other liabilities   80    (3,542)
Net cash and cash equivalents provided by operating activities   20,578    51,066 
Investing activities:          
Purchases of securities available for sale   (29,863)   (241,144)
Proceeds from sales of securities available for sale   12,499    259,077 
Proceeds from maturities, calls and paydowns of securities available for sale   34,133    31,851 
Net (increase) decrease in loans   (44,401)   3,292 
Net increase in bank premises and equipment   (2,346)   (2,221)
Proceeds from sales of other real estate owned   2,714    3,800 
Improvements to other real estate owned   (56)   - 
Cash paid for equity-method investments   (355)   - 
Cash acquired in bank acquisitions   -    49,989 
Net cash and cash equivalents (used in) provided by investing activities   (27,675)   104,644 
Financing activities:          
Net increase (decrease) in noninterest-bearing deposits   75,557    (85,051)
Net (decrease) increase in interest-bearing deposits   (43,024)   57,387 
Net decrease in short-term borrowings   (12,959)   (38,901)
Net increase in long-term borrowings   509    436 
Cash dividends paid - common stock   (6,431)   (6,332)
Repurchase of common stock   (2,387)   (12,965)
Issuance of common stock   147    458 
Taxes paid related to net share settlement of equity awards   (213)   (1,515)
Net cash and cash equivalents provided by (used in) financing activities   11,199    (86,483)
Increase in cash and cash equivalents   4,102    69,227 
Cash and cash equivalents at beginning of the period   133,260    73,023 
Cash and cash equivalents at end of the period  $137,362   $142,250 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for:          
Interest  $6,925   $6,212 
Income taxes   3,000    5,800 
           
Supplemental schedule of noncash investing and financing activities          
Unrealized gain on securities available for sale  $5,627   $9,683 
Changes in fair value of interest rate swap loss   (1,218)   622 
Transfers between loans and other real estate owned   124    1,085 
Transfers from bank premises to other real estate owned   402    - 
Issuance of common stock in exchange for net assets in acquisition   -    549,523 
           
Transactions related to bank acquisition          
Assets acquired   -    2,957,521 
Liabilities assumed   -    2,642,120 

 

See accompanying notes to consolidated financial statements.

- 6 -
 

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

1.ACCOUNTING POLICIES

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.

 

The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

 

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2014 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

 

Adoption of New Accounting Standards

The Company adopted ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” as of January 1, 2015. As permitted by the guidance, the Company adopted the proportional amortization method of accounting for qualified affordable housing projects. The proportional amortization method amortizes the cost of the investment over the period in which the Company will receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were accounted for under the equity method of accounting and the passive losses related to the investments were recognized within noninterest expense. The Company adopted this guidance in the first quarter of 2015 with retrospective application as required by the ASU. Prior period results and related metrics have been recasted to conform to this presentation. The recast of prior period information did not have a material impact on the Company’s financial condition or results of operations.

 

For the three months ended March 31, 2015, the Company recognized amortization of $175,000 and tax credits of $257,000 associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. The carrying value of the Company’s investments in these qualified affordable housing projects was $9.8 million and $10.4 million as of March 31, 2015 and December 31, 2014, respectively. The Company recorded a liability of $5.1 million for the related unfunded commitments as of March 31, 2015, which are expected to be paid from 2015 to 2018.

 

Recent Accounting Pronouncements

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

 

- 7 -
 

 

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” The amendments in this ASU amend the consolidation requirements in ASC 810, Consolidation, and significantly change the consolidation analysis required under U.S. GAAP. Under this guidance, limited partnerships will be considered variable interest entities (“VIEs”) unless the limited partners have either substantive kick-out or participating rights; this amendment will result in more partnerships being considered VIEs, but it will be less likely that a general partner will consolidate a limited partnership. The amendments also change the effect that fees paid to a decision maker or service provider have on the consolidation analysis; it is less likely that the fees themselves will be considered a variable interest, that an entity will be a VIE, or that consolidation will result. The changes modify how a reporting entity considers how its variable interests affect its consolidation process; the related party tiebreaker test and mandatory consolidation by one of the related parties will have to be performed less frequently than under current U.S. GAAP. For entities other than limited partnerships, the amendments clarify how to determine whether the equity holders have power over the entity and could affect whether the entity is a VIE. The amendments are expected to result in the deconsolidation of many entities. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company is currently assessing the impact that ASU 2015-02 will have on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The ASU does not change the existing recognition and measurement guidance for debt issuance costs but requires that debt issuance costs related to a debt liability recorded on the balance sheet be present in the balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments should be disclosed consistent with the disclosure requirement of a change in accounting principle and applied on a retrospective basis. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

 

2.ACQUISITIONS

 

The Company’s merger and acquisition strategy focuses on high-growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance, and good asset quality, among other factors. On January 1, 2014, the Company completed the acquisition of StellarOne, a bank holding company based in Charlottesville, Virginia, in an all-stock transaction. StellarOne’s common shareholders received 0.9739 shares of the Company’s common stock in exchange for each share of StellarOne’s common stock, resulting in the Company issuing 22,147,874 shares of common stock at a fair value of $549.5 million. The fair value of assets acquired equaled $2.96 billion and liabilities assumed equaled $2.64 billion. As a result of the transaction, StellarOne’s former bank subsidiary, StellarOne Bank, became a wholly owned bank subsidiary of the Company. On May 9, 2014, StellarOne Bank was merged with and into the Bank. Information regarding this acquisition is included in the Company’s 2014 Annual Report on Form 10-K. The Company did not complete any acquisitions of businesses in the first quarter of 2015.

 

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments had the following impact on the Consolidated Statements of Income during the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

   For the Three Months Ended
March 31,
 
   2015   2014 
Loans  $639   $(546)
Core deposit intangible   (2,222)   (2,616)
Borrowings   137    75 
Time deposits   1,075    2,920 
Net impact to income before taxes  $(371)  $(167)

 

- 8 -
 

 

3.SECURITIES

 

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of March 31, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):

 

   Amortized   Gross Unrealized   Estimated 
   Cost   Gains   (Losses)   Fair Value 
March 31, 2015                    
U.S. government and agency securities  $8,236   $359   $-   $8,595 
Obligations of states and political subdivisions   431,355    21,594    (511)   452,438 
Corporate bonds   78,400    169    (428)   78,141 
Mortgage-backed securities   529,188    11,729    (454)   540,463 
Other securities   9,980    47    -    10,027 
Total securities  $1,057,159   $33,898   $(1,393)  $1,089,664 
                     
December 31, 2014                    
U.S. government and agency securities  $8,313   $166   $(25)  $8,454 
Obligations of states and political subdivisions   427,483    18,885    (721)   445,647 
Corporate bonds   78,744    244    (308)   78,680 
Mortgage-backed securities   550,716    9,411    (798)   559,329 
Other securities   9,979    31    (6)   10,004 
Total securities  $1,075,235   $28,737   $(1,858)  $1,102,114 

 

Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets. At March 31, 2015, the FHLB required the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank’s total assets. At December 31, 2014, the FHLB required 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 required the Bank to maintain stock with a par value equal to 6% of its outstanding capital at both March 31, 2015 and December 31, 2014. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $23.8 million for both March 31, 2015 and December 31, 2014 and FHLB stock in the amount of $29.3 million and $31.0 million as of March 31, 2015 and December 31, 2014, respectively.

 

- 9 -
 

 

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.

 

   Less than 12 months   More than 12 months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
March 31, 2015                              
Obligations of states and political subdivisions  $18,293   $(265)  $12,469   $(246)  $30,762   $(511)
Mortgage-backed securities   41,164    (130)   37,794    (324)   78,958    (454)
Corporate bonds and other securities   18,617    (178)   18,758    (250)   37,375    (428)
Totals  $78,074   $(573)  $69,021   $(820)  $147,095   $(1,393)
                               
December 31, 2014                              
U.S. government and agency securities  $7,055   $(25)  $-   $-   $7,055   $(25)
Obligations of states and political subdivisions   13,602    (93)   42,514    (628)   56,116    (721)
Mortgage-backed securities   60,151    (362)   49,581    (436)   109,732    (798)
Corporate bonds and other securities   43,923    (244)   4,309    (70)   48,232    (314)
Totals  $124,731   $(724)  $96,404   $(1,134)  $221,135   $(1,858)

 

As of March 31, 2015, there were $69.0 million, or 30 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 $820,000 and consisted of municipal obligations, mortgage-backed securities, and corporate bonds. As of December 31, 2014, there were $96.4 million, or 60 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 $1.1 million and consisted of municipal obligations, mortgage-backed securities, corporate bonds, and other securities. The Company has determined that these securities are temporarily impaired as of March 31, 2015 and December 31, 2014 for the reasons set out below:

 

U.S. Government agencies and corporations. The unrealized losses in this category of investments were caused by interest rate fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of these investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

 

Mortgage-backed securities. This category’s unrealized losses are primarily the result of interest rate fluctuations. Since the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also, the majority of the Company’s mortgage-backed securities are agency securities, which have a government guarantee.

 

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

 

Corporate debt securities. The Company’s unrealized losses in corporate debt securities are related to both interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of the securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

 

- 10 -
 

 

During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the quarter ended March 31, 2015, and in accordance with the guidance, no OTTI was recognized.

 

The following table presents the amortized cost and estimated fair value of securities as of March 31, 2015 and December 31, 2014, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   March 31, 2015   December 31, 2014 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
Due in one year or less  $20,599   $20,763   $19,345   $19,434 
Due after one year through five years   49,747    51,522    41,545    43,070 
Due after five years through ten years   295,577    304,936    306,900    314,044 
Due after ten years   691,236    712,443    707,445    725,566 
Total securities available for sale  $1,057,159   $1,089,664   $1,075,235   $1,102,114 

 

Securities with a market value of $402.3 million and $397.0 million as of March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes.

 

4.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans are stated at their face amount, net of deferred fees and costs, and consist of the following at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

   March 31,   December 31, 
   2015   2014 
Commercial:          
Commercial Construction  $358,436   $341,280 
Commercial Real Estate - Owner Occupied   898,222    875,443 
Commercial Real Estate - Non-Owner Occupied   1,518,590    1,509,159 
Raw Land and Lots   197,759    211,225 
Single Family Investment Real Estate   416,984    412,494 
Commercial and Industrial   426,490    393,776 
Other Commercial   80,416    81,106 
Consumer:          
Mortgage   466,804    478,151 
Consumer Construction   65,898    74,168 
Indirect Auto   203,369    199,411 
Indirect Marine   43,643    43,190 
HELOCs   491,116    500,579 
Credit Card   24,691    24,225 
Other Consumer   195,337    201,789 
Total  $5,387,755   $5,345,996 

 

- 11 -
 

 

The following table shows the aging of the Company’s loan portfolio, by class, at March 31, 2015 (dollars in thousands):

 

   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
90 Days and
still Accruing
   PCI   Nonaccrual   Current   Total Loans 
Commercial:                                   
Commercial Construction  $374   $-   $-   $3,090   $1,953   $353,019   $358,436 
Commercial Real Estate - Owner Occupied   1,606    174    1,357    31,004    4,954    859,127    898,222 
Commercial Real Estate - Non-Owner Occupied   1,344    656    328    19,575    2,655    1,494,032    1,518,590 
Raw Land and Lots   235    58    109    6,055    1,059    190,243    197,759 
Single Family Investment Real Estate   1,206    158    251    16,299    1,302    397,768    416,984 
Commercial and Industrial   1,453    271    468    3,338    2,540    418,420    426,490 
Other Commercial   281    71    65    1,794    69    78,136    80,416 
Consumer:                                   
Mortgage   13,710    1,862    3,313    6,381    2,397    439,141    466,804 
Consumer Construction   717    700    469    504    -    63,508    65,898 
Indirect Auto   1,345    181    272    -    -    201,571    203,369 
Indirect Marine   52    -    -    -    48    43,543    43,643 
HELOCs   3,014    1,119    685    1,889    205    484,204    491,116 
Credit Card   114    64    265    -    -    24,248    24,691 
Other Consumer   2,138    1,907    350    1,417    203    189,322    195,337 
Total  $27,589   $7,221   $7,932   $91,346   $17,385   $5,236,282   $5,387,755 
                                    

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2014 (dollars in thousands):

 

   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
90 Days and
still Accruing
   PCI   Nonaccrual   Current   Total Loans 
Commercial:                                   
Commercial Construction  $815   $-   $-   $3,782   $968   $335,715   $341,280 
Commercial Real Estate - Owner Occupied   621    1,542    1,683    31,167    1,060    839,370    875,443 
Commercial Real Estate - Non-Owner Occupied   3,984    237    91    28,869    5,902    1,470,076    1,509,159 
Raw Land and Lots   145    44    194    7,427    2,359    201,056    211,225 
Single Family Investment Real Estate   2,825    338    734    16,879    2,070    389,648    412,494 
Commercial and Industrial   1,250    529    549    3,855    3,286    384,307    393,776 
Other Commercial   42    2    -    2,256    74    78,732    81,106 
Consumer:                                   
Mortgage   12,851    4,300    4,095    7,394    2,485    447,026    478,151 
Consumer Construction   120    -    844    516    -    72,688    74,168 
Indirect Auto   1,593    263    317    -    -    197,238    199,411 
Indirect Marine   150    -    -    -    201    42,839    43,190 
HELOCs   3,082    955    820    2,000    258    493,464    500,579 
Credit Card   232    108    219    -    -    23,666    24,225 
Other Consumer   1,587    412    501    1,643    592    197,054    201,789 
Total  $29,297   $8,730   $10,047   $105,788   $19,255   $5,172,879   $5,345,996 

 

Nonaccrual loans totaled $17.4 million and $19.3 million at March 31, 2015 and December 31, 2014, respectively. All nonaccrual loans were included in the impaired loan disclosures in 2015 and 2014. Loans past due 90 days or more and accruing interest totaled $7.9 million and $10.0 million at March 31, 2015 and December 31, 2014, respectively.

 

- 12 -
 

 

The following table shows the PCI commercial and consumer loan portfolios, by class and their delinquency status, at March 31, 2015 (dollars in thousands):

 

   30-89 Days
Past Due
   Greater than
90 Days
   Current   Total 
Commercial:                    
Commercial Construction  $-   $599   $2,491   $3,090 
Commercial Real Estate - Owner Occupied   1,357    1,966    27,681    31,004 
Commercial Real Estate - Non-Owner Occupied   747    321    18,507    19,575 
Raw Land and Lots   155    259    5,641    6,055 
Single Family Investment Real Estate   1,721    697    13,881    16,299 
Commercial and Industrial   214    174    2,950    3,338 
Other Commercial   66    803    925    1,794 
Consumer:                    
Mortgage   1,123    2,574    2,684    6,381 
Consumer Construction   -    504    -    504 
HELOCs   146    527    1,216    1,889 
Other Consumer   87    37    1,293    1,417 
Total  $5,616   $8,461   $77,269   $91,346 

 

The following table shows the PCI commercial and consumer loan portfolios, by class and their delinquency status, at December 31, 2014 (dollars in thousands):

 

   30-89 Days
Past Due
   Greater than
90 Days
   Current   Total 
Commercial:                    
Commercial Construction  $-   $652   $3,130   $3,782 
Commercial Real Estate - Owner Occupied   1,138    843    29,186    31,167 
Commercial Real Estate - Non-Owner Occupied   523    1,255    27,091    28,869 
Raw Land and Lots   522    -    6,905    7,427 
Single Family Investment Real Estate   1,327    1,311    14,241    16,879 
Commercial and Industrial   144    538    3,173    3,855 
Other Commercial   107    1,133    1,016    2,256 
Consumer:                    
Mortgage   1,975    2,866    2,553    7,394 
Consumer Construction   -    516    -    516 
HELOCs   356    728    916    2,000 
Other Consumer   89    171    1,383    1,643 
Total  $6,181   $10,013   $89,594   $105,788 

 

- 13 -
 

 

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s impaired loans, excluding PCI loans related to the StellarOne acquisition, by class at March 31, 2015 (dollars in thousands):

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   YTD
Average
Investment
   Interest
Income
Recognized
 
Loans without a specific allowance                         
Commercial:                         
Commercial Construction  $6,242   $6,517   $-   $6,320   $52 
Commercial Real Estate - Owner Occupied   17,435    17,590    -    16,580    199 
Commercial Real Estate - Non-Owner Occupied   13,488    15,638    -    16,086    124 
Raw Land and Lots   41,245    41,513    -    41,561    490 
Single Family Investment Real Estate   3,874    4,574    -    4,271    36 
Commercial and Industrial   2,889    3,427    -    3,204    26 
Other Commercial   949    955    -    957    14 
Consumer:                         
Mortgage   3,234    3,342    -    3,312    15 
Indirect Auto   -    6    -    3    - 
HELOCs   465    598    -    543    1 
Other Consumer   86    206    -    153    - 
Total impaired loans without a specific allowance  $89,907   $94,366   $-   $92,990   $957 
                          
Loans with a specific allowance                         
Commercial:                         
Commercial Construction  $40   $40   $4   $37   $- 
Commercial Real Estate - Owner Occupied   7,142    7,257    526    7,177    67 
Commercial Real Estate - Non-Owner Occupied   6,284    6,284    146    7,408    96 
Raw Land and Lots   628    628    11    700    8 
Single Family Investment Real Estate   3,537    3,562    281    3,552    38 
Commercial and Industrial   4,340    7,610    459    4,443    37 
Other Commercial   336    356    31    348    5 
Consumer:                         
Mortgage   1,390    1,428    105    1,398    3 
Consumer Construction   378    378    35    378    5 
Indirect Marine   48    149    4    59    - 
HELOCs   436    436    4    436    4 
Other Consumer   290    409    98    390    1 
Total impaired loans with a specific allowance  $24,849   $28,537   $1,704   $26,326   $264 
Total impaired loans  $114,756   $122,903   $1,704   $119,316   $1,221 

 

- 14 -
 

 

The following table shows the Company’s impaired loans, by class, at December 31, 2014 (dollars in thousands):

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   YTD
Average
Investment
   Interest
Income
Recognized
 
Loans without a specific allowance                         
Commercial:                         
Commercial Construction  $5,281   $5,367   $-   $5,755   $165 
Commercial Real Estate - Owner Occupied   15,722    16,430    -    16,774    737 
Commercial Real Estate - Non-Owner Occupied   22,917    22,917    -    23,209    1,116 
Raw Land and Lots   44,790    47,662    -    47,988    2,124 
Single Family Investment Real Estate   4,197    4,881    -    6,534    170 
Commercial and Industrial   4,453    7,933    -    5,070    121 
Other Commercial   1,536    1,538    -    1,624    90 
Consumer:                         
Mortgage   1,571    1,582    -    1,583    58 
Indirect Auto   -    6    -    4    - 
Indirect Marine   201    505    -    281    - 
HELOCs   559    699    -    573    8 
Other Consumer   89    208    -    107    - 
Total impaired loans without a specific allowance  $101,316   $109,728   $-   $109,502   $4,589 
                          
Loans with a specific allowance                         
Commercial:                         
Commercial Construction  $570   $570   $51   $506   $13 
Commercial Real Estate - Owner Occupied   5,951    5,999    355    5,946    280 
Commercial Real Estate - Non-Owner Occupied   10,575    10,572    2,017    10,823    474 
Raw Land and Lots   1,343    1,373    98    1,472    59 
Single Family Investment Real Estate   4,125    4,144    562    4,293    159 
Commercial and Industrial   2,938    3,009    582    3,125    138 
Other Commercial   359    378    32    442    29 
Consumer:                         
Mortgage   3,323    3,375    481    3,381    60 
Consumer Construction   375    375    34    373    19 
Indirect Marine   192    192    5    199    15 
HELOCs   434    434    4    436    17 
Other Consumer   679    706    310    686    19 
Total impaired loans with a specific allowance  $30,864   $31,127   $4,531   $31,682   $1,282 
Total impaired loans  $132,180   $140,855   $4,531   $141,184   $5,871 

 

The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. TDRs totaled $24.1 million and $26.8 million as of March 31, 2015 and December 31, 2014, respectively. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology and are included in the preceding impaired loan tables. For the quarter ended March 31, 2015, the recorded investment in restructured loans prior to modifications was not materially impacted by the modification.

- 15 -
 

 

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 on nonaccrual status, which are considered to be nonperforming, as of March 31, 2015 and December 31, 2014 (dollars in thousands):

 

   March 31, 2015   December 31, 2014 
   No. of
Loans
   Recorded
Investment
   Outstanding
Commitment
   No. of
Loans
   Recorded
Investment
   Outstanding
Commitment
 
Performing                              
Commercial:                              
Commercial Construction   1   $296   $-    1   $707   $- 
Commercial Real Estate - Owner Occupied   3    674    -    3    682    - 
Commercial Real Estate - Non-Owner Occupied   3    3,352    -    3    3,362    - 
Raw Land and Lots   6    14,377    -    9    14,777    - 
Single Family Investment Real Estate   5    934    -    6    1,046    - 
Commercial and Industrial   10    683    -    9    722    - 
Other Commercial   1    172    -    1    191    - 
Consumer:                              
Mortgage   6    753    -    7    1,244    - 
Other Consumer   3    95    -    3    98    - 
Total performing   38   $21,336   $-    42   $22,829   $- 
                               
Nonperforming                              
Commercial:                              
Commercial Construction   1   $253   $-    1   $253   $- 
Commercial Real Estate - Owner Occupied   2    149    -    2    153    - 
Commercial Real Estate - Non-Owner Occupied   1    539    -    1    539    - 
Raw Land and Lots   1    116    -    2    1,053    - 
Single Family Investment Real Estate   1    211    -    1    433    - 
Commercial and Industrial   5    603    -    5    616    - 
Other Commercial   1    69    -    1    74    - 
Consumer:                              
Mortgage   2    763    -    2    770    - 
Other Consumer   1    37    -    1    57    - 
Total nonperforming   15   $2,740   $-    16   $3,948   $- 
                               
Total performing and nonperforming   53   $24,076   $-    58   $26,777   $- 

 

The Company considers a default of a restructured loan to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three months ended March 31, 2015 and 2014, the Company did not identify any restructured loans that went into default that had been restructured in the twelve-month period prior to default.

 

- 16 -
 

 

The following table shows, by class and modification type, TDRs that occurred during the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

   Three months ended   Three months ended 
   March 31, 2015   March 31, 2014 
   No. of
Loans
   Recorded
Investment at
Period End
   No. of
Loans
   Recorded
Investment at
Period End
 
Term modification, at a market rate                    
Commercial:                    
Commercial Real Estate - Owner Occupied   -   $-    1   $2,732 
Single Family Investment Real Estate   -    -    1    113 
Commercial and Industrial   1    19    -    - 
Other Commercial   -    -    2    296 
Total loan term extended at a market rate   1   $19    4   $3,141 
                     
Total   1   $19    4   $3,141 

 

The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by portfolio segment for the three months ended and as of March 31, 2015. 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   Total 
Allowance for loan losses:               
Balance, beginning of the year  $22,352   $10,032   $32,384 
Recoveries credited to allowance   292    380    672 
Loans charged off   (2,962)   (867)   (3,829)
Provision charged to operations   2,106    (356)   1,750 
Balance, end of period  $21,788   $9,189   $30,977 
                
Ending Balance, ALL:               
Loans individually evaluated for impairment  $1,458   $246   $1,704 
Loans collectively evaluated for impairment   20,330    8,943    29,273 
Loans acquired with deteriorated credit quality   -    -    - 
Total  $21,788   $9,189   $30,977 
                
Ending Balance, Loans:               
Loans individually evaluated for impairment  $107,956   $6,149   $114,105 
Loans collectively evaluated for impairment   3,707,786    1,474,518    5,182,304 
Loans acquired with deteriorated credit quality   81,155    10,191    91,346 
Total  $3,896,897   $1,490,858   $5,387,755 

 

- 17 -
 

 

The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by portfolio segment for the three months ended and as of March 31, 2014. 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   Total 
Allowance for loan losses:               
Balance, beginning of the year  $19,908   $10,227   $30,135 
Recoveries credited to allowance   1,408    251    1,659 
Loans charged off   (307)   (580)   (887)
Provision charged to operations   (843)   843    - 
Balance, end of period  $20,166   $10,741   $30,907 
                
Ending Balance, ALL:               
Loans individually evaluated for impairment  $1,266   $468   $1,734 
Loans collectively evaluated for impairment   18,900    10,273    29,173 
Loans acquired with deteriorated credit quality   -    -    - 
Total  $20,166   $10,741   $30,907 
                
Ending Balance, Loans:               
Loans individually evaluated for impairment  $109,756   $6,972   $116,728 
Loans collectively evaluated for impairment   3,533,488    1,485,551    5,019,039 
Loans acquired with deteriorated credit quality   120,291    18,140    138,431 
Total  $3,763,535   $1,510,663   $5,274,198 

 

The Company uses the past due status and delinquency 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 the recorded investment in all loans, excluding PCI loans, in the commercial portfolios by class with their related risk rating current as of March 31, 2015 (dollars in thousands):

 

    1-3    4    5    6    7    8    Total 
Commercial Construction  $32,325   $295,831   $12,537   $10,730   $3,923   $-   $355,346 
Commercial Real Estate - Owner Occupied   185,029    644,950    12,608    6,289    18,342    -    867,218 
Commercial Real Estate - Non-Owner Occupied   368,352    1,059,097    21,457    31,916    18,193    -    1,499,015 
Raw Land and Lots   9,550    126,001    11,870    4,577    39,706    -    191,704 
Single Family Investment Real Estate   62,254    316,576    8,693    6,311    6,851    -    400,685 
Commercial and Industrial   165,924    236,174    10,375    4,133    6,535    11    423,152 
Other Commercial   31,446    40,764    3,379    1,748    1,285    -    78,622 
Total  $854,880   $2,719,393   $80,919   $65,704   $94,835   $11   $3,815,742 

 

The following table shows the recorded investment in all loans, excluding PCI loans, in the commercial portfolios by class with their related risk rating current as of December 31, 2014 (dollars in thousands):

 

    1-3    4    5    6    7    8    Total 
Commercial Construction  $22,512   $289,064   $11,932   $10,906   $3,084   $-   $337,498 
Commercial Real Estate - Owner Occupied   185,789    620,587    15,003    7,688    15,209    -    844,276 
Commercial Real Estate - Non-Owner Occupied   356,263    1,041,515    22,358    28,388    31,766    -    1,480,290 
Raw Land and Lots   11,162    128,281    16,803    4,783    42,769    -    203,798 
Single Family Investment Real Estate   59,638    311,900    9,750    6,680    7,647    -    395,615 
Commercial and Industrial   138,973    230,084    9,392    4,383    7,089    -    389,921 
Other Commercial   31,571    40,913    3,818    844    1,704    -    78,850 
Total  $805,908   $2,662,344   $89,056   $63,672   $109,268   $-   $3,730,248 

 

The following table shows the recorded investment in only PCI loans in the commercial portfolios by class with their related risk rating and credit quality indicator information current as of March 31, 2015 (dollars in thousands):

 

    4    5    6    7    8    Total 
Commercial Construction  $-   $-   $2,491   $146   $453   $3,090 
Commercial Real Estate - Owner Occupied   2,758    3,647    9,042    15,557    -    31,004 
Commercial Real Estate - Non-Owner Occupied   3,855    3,597    9,171    2,952    -    19,575 
Raw Land and Lots   1,580    585    2,595    1,295    -    6,055 
Single Family Investment Real Estate   3,783    2,083    4,661    5,772    -    16,299 
Commercial and Industrial   492    13    436    2,371    26    3,338 
Other Commercial   69    -    530    1,195    -    1,794 
Total  $12,537   $9,925   $28,926   $29,288   $479   $81,155 

 

The following table shows the recorded investment in only PCI loans in the commercial portfolios by class with their related risk rating and credit quality indicator information current as of December 31, 2014 (dollars in thousands):

 

    4    5    6    7    8    Total 
Commercial Construction  $-   $-   $3,130   $194   $458   $3,782 
Commercial Real Estate - Owner Occupied   1,525    3,546    10,880    15,216    -    31,167 
Commercial Real Estate - Non-Owner Occupied   2,837    934    18,736    6,362    -    28,869 
Raw Land and Lots   1,564    189    3,148    2,526    -    7,427 
Single Family Investment Real Estate   2,807    1,253    6,462    6,357    -    16,879 
Commercial and Industrial   437    -    913    2,477    28    3,855 
Other Commercial   -    -    510    1,746    -    2,256 
Total  $9,170   $5,922   $43,779   $34,878   $486   $94,235 

 

- 19 -
 

 

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.

 

The following shows changes in the accretable yield for loans accounted for under ASC 310-30 for the periods presented (dollars in thousands):

 

   For the Three Months ended
March 31,
 
   2015   2014 
Balance at beginning of period  $28,956   $2,980 
Additions   -    34,653 
Accretion   (1,501)   (1,846)
Reclass of nonaccretable difference due to improvement in expected cash flows   2,695    - 
Other non-credit changes, net (1)   (5,619)   (1,365)
Balance at end of period  $24,531   $34,422 

 

(1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate PCI loans, and discounted payoffs that occurred in the quarter.

 

The carrying value of the Company’s PCI loan portfolio, accounted for under ASC 310-30, totaled $91.3 million at March 31, 2015 and $105.8 million at December 31, 2014. The outstanding balance of the Company’s PCI loan portfolio totaled $111.6 million at March 31, 2015 and $126.3 million at December 31, 2014. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, totaled $1.7 billion at March 31, 2015 and $1.8 billion at December 31, 2014; the remaining discount on these loans totaled $23.8 million and $24.3 million, respectively.

 

5.INTANGIBLE ASSETS

 

The Company’s intangible assets consist of core deposits and goodwill arising from previous acquisitions. The Company has determined that core deposit intangibles 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. On January 1, 2014, the Company completed the acquisition of StellarOne and acquired intangible assets of $29.6 million and recorded $234.1 million of goodwill.

 

In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2014 and determined that there was no impairment to its goodwill or intangible assets. Subsequently, the Company determined that an additional evaluation was necessary at year-end due to potential indicators based on the net losses recorded at the mortgage company during 2014. Based on this additional testing, the Company confirmed that no impairment charges to date for goodwill or intangible assets were necessary.

 

Information concerning intangible assets with a finite life is presented in the following table (dollars in thousands):

 

   Gross Carrying
Value
   Accumulated
Amortization
   Net Carrying
 Value
 
March 31, 2015               
Amortizable core deposit intangibles  $76,185   $46,652   $29,533 
                
December 31, 2014               
Amortizable core deposit intangibles  $76,185   $44,430   $31,755 
                
March 31, 2014               
Amortizable core deposit intangibles  $76,185   $37,250   $38,935 

 

- 20 -
 

 

Amortization expense of core deposit intangibles for the three months ended March 31, 2015 and 2014, and for the year ended December 31, 2014 totaled $2.2 million, $2.6 million, and $9.8 million, respectively. As of March 31, 2015, the estimated remaining amortization expense of core deposit intangibles is as follows (dollars in thousands):

 

For the remaining nine months of 2015  $6,221 
For the year ending December 31, 2016   6,932 
For the year ending December 31, 2017   5,590 
For the year ending December 31, 2018   4,144 
For the year ending December 31, 2019   3,093 
For the year ending December 31, 2020   2,028 
Thereafter   1,525 
Total estimated amortization expense  $29,533 

 

6.BORROWINGS

 

Short-term Borrowings

 

The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Total short-term borrowings consist primarily of advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit. Also included in total short-term borrowings are securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. The market value of securities pledged as collateral for customer repurchase agreements totaled $53.7 million and $51.8 million as of March 31, 2015 and December 31, 2014, respectively. Total short-term borrowings consist of the following as of March 31, 2015 and December 31, 2014 (dollars in thousands):

 

   March 31,   December 31, 
   2015   2014 
Securities sold under agreements to repurchase  $39,434   $44,393 
Other short-term borrowings   335,000    343,000 
Total short-term borrowings  $374,434   $387,393 
           
Maximum month-end outstanding balance  $374,434   $387,393 
Average outstanding balance during the period   379,604    237,896 
Average interest rate during the period   0.27%   0.24%
Average interest rate at end of period   0.26%   0.31%
           
Other short-term borrowings:          
Federal funds purchased  $-   $- 
FHLB   325,000    335,000 
Other lines of credit   10,000    8,000 

 

The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $175.0 million and $150.0 million at March 31, 2015 and December 31, 2014, 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 $1.5 billion and $1.4 billion at March 31, 2015 and December 31, 2014, 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. In connection with the acquisition of StellarOne, the Company acquired trust preferred capital notes totaling $32.0 million with a remaining fair value discount of $7.2 million at March 31, 2015. 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
VFG Limited Liability Trust I Indenture   20,000,000    619,000    2.73%   3.00%  3/18/2034
FNB Statutory Trust II Indenture   12,000,000    372,000    3.10%   3.37%  6/26/2033
Total  $90,500,000   $2,801,000              

 

(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 March 31, 2015, the carrying value of the subordinated debt was $17.5 million, with a remaining fair value discount of $530,000.

 

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 Sheets. 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 Statements of Income. Amortization expense for the three months ended March 31, 2015 and 2014 was $447,000 and $436,000, respectively.

 

In connection with the StellarOne acquisition, the Company assumed $70.0 million in long-term borrowings with the FHLB that had a remaining fair value premium of $1.9 million at March 31, 2015.

 

As of March 31, 2015, the Company had advances from the FHLB consisting of the following (dollars in thousands):

 

Long-term Type  Spread to
3-Month LIBOR
   Interest Rate   Maturity Date  Advance Amount 
                
Adjustable Rate Credit   0.44%   0.71%  8/23/2022  $55,000 
Adjustable Rate Credit   0.45%   0.72%  11/23/2022   65,000 
Adjustable Rate Credit   0.45%   0.72%  11/23/2022   10,000 
Adjustable Rate Credit   0.45%   0.72%  11/23/2022   10,000 
Fixed Rate   -    3.62%  11/28/2017   10,000 
Fixed Rate   -    3.44%  7/28/2015   10,000 
Fixed Rate   -    3.75%  7/30/2018   5,000 
Fixed Rate   -    3.97%  7/30/2018   5,000 
Fixed Rate Hybrid   -    2.11%  10/5/2016   25,000 
Fixed Rate Hybrid   -    0.91%  7/25/2016   15,000 
                $210,000 

 

- 22 -
 

 

As of December 31, 2014, the Company had advances from the FHLB consisting of the following (dollars in thousands):

 

Long-term Type  Spread to
3-Month LIBOR
   Interest Rate   Maturity Date  Advance Amount 
                   
Adjustable Rate Credit   0.44%   0.70%  8/23/2022  $55,000 
Adjustable Rate Credit   0.45%   0.71%  11/23/2022   65,000 
Adjustable Rate Credit   0.45%   0.71%  11/23/2022   10,000 
Adjustable Rate Credit   0.45%   0.71%  11/23/2022   10,000 
Fixed Rate   -    3.62%  11/28/2017   10,000 
Fixed Rate   -    3.44%  7/28/2015   10,000 
Fixed Rate   -    3.75%  7/30/2018   5,000 
Fixed Rate   -    3.97%  7/30/2018   5,000 
Fixed Rate Hybrid   -    2.11%  10/5/2016   25,000 
Fixed Rate Hybrid   -    0.91%  7/25/2016   15,000 
                $210,000 

 

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.7 billion and $1.6 billion as of March 31, 2015 and December 31, 2014, respectively.

 

As of March 31, 2015, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):

 

   Trust
Preferred
Capital Notes
   Subordinated
Debt
   FHLB
Advances
   Fair Value
Premium
(Discount)
   Prepayment
Penalty
   Total Long-term
Borrowings
 
Remaining nine months in 2015  $-   $-   $10,000   $100   $(1,384)  $8,716 
2016   -    17,500    40,000    271    (1,882)   55,889 
2017   -    -    10,000    170    (1,922)   8,248 
2018   -    -    10,000    (143)   (1,970)   7,887 
2019   -    -    -    (286)   (2,018)   (2,304)
2020   -    -    -    (301)   (2,074)   (2,375)
Thereafter   93,301    -    140,000    (5,622)   (3,826)   223,853 
Total Long-term borrowings  $93,301   $17,500   $210,000   $(5,811)  $(15,076)  $299,914 

 

7.COMMITMENTS AND CONTINGENCIES

 

Litigation Matters

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

 

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Company’s Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on balance sheet. The Company considers historical loss rates, current economic conditions, risk ratings, and past due status amongst other factors in the consideration of whether credit losses are inherent in the Company’s off-balance sheet commitments to extend credit. The Company does not expect that credit losses arising from off-balance sheet commitments to have a material adverse impact on the Company’s consolidated financial statements.

 

- 23 -
 

 

Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Letters of credit are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

 

UMG, a wholly owned subsidiary of the Bank, uses rate lock commitments and best efforts contracts during the origination process and for loans held for sale. These best efforts contracts are designed to mitigate UMG’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale. The Company held approximately $2.7 million and $2.6 million in loans available for sale in which the related rate lock commitment had expired as of March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, the reserves associated with these loans held for sale were $102,000 and $104,000, respectively, and are reflected on the balance sheet of the mortgage segment.

 

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

 

   March 31,   December 31, 
   2015   2014 
Commitments with off-balance sheet risk:          
Commitments to extend credit (1)  $1,674,177   $1,601,287 
Standby letters of credit   113,362    117,988 
Mortgage loan rate lock commitments   80,159    49,552 
Total commitments with off-balance sheet risk  $1,867,698   $1,768,827 
           
Commitments with balance sheet risk:          
Loans held for sale  $46,048   $42,519 
Total other commitments  $1,913,746   $1,811,346 

 

(1) Includes unfunded overdraft protection.

 

The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the periods ended March 31, 2015 and December 31, 2014, the aggregate amount of daily average required reserves was approximately $47.1 million and $48.7 million, respectively.

 

The Company has approximately $18.4 million in deposits in other financial institutions, of which $5.7 million and $3.5 million serve as collateral for the trust swaps and loan swaps, respectively, as discussed in Note 8 “Derivatives”. The Company had approximately $8.3 million in deposits in other financial institutions that were uninsured at March 31, 2015. 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 8 “Derivatives” for additional information.

 

In the ordinary course of business, the Company records an indemnification reserve relating to mortgage loans previously sold based on historical statistics and loss rates; as of March 31, 2015 and December 31, 2014, the Company’s indemnification reserve for such mortgage loans was $687,000 and $662,000, respectively.

 

- 24 -
 

 

8.DERIVATIVES

 

The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates its derivatives either as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge) or as a free standing derivative such as interest rate lock commitments that do not qualify for hedge accounting. The Company uses interest rate derivatives to manage its exposure to interest rate movements and add stability to interest income and expense. The Company also enters into back-to-back loan swaps to assist customers in managing changing interest rates.

 

Cash Flow Hedges

As part of its cash flow hedging strategy, the Company uses interest rate swap agreements to limit the variability of expected future cash flows (primarily associated with the Company’s variable rate borrowings) by exchanging a notional amount, equal to the principal amount of the borrowings, for fixed-rate interest based on benchmarked interest rates. As of March 31, 2015, the Company had 11 interest rate swaps designated as cash flow hedges with an aggregate notional amount of $263.0 million.

 

The Company has entered into three interest rate swap agreements (the “trust swaps”) to mitigate the variable interest rate risk related to the trust preferred capital notes further described in Note 6 “Borrowings.” The Company receives interest of LIBOR from a counterparty and pays a weighted average fixed rate of 2.77% to the same counterparty calculated on a notional amount of $68.0 million. The original terms of the trust swaps range from three to six years.

 

The Company has entered into four interest rate swap agreements (the “prime loan swaps”) to mitigate the variable interest rate risks of certain prime commercial loans. The Company receives a fixed interest rate ranging from 4.71% to 5.20% from the counterparty and pays interest based on the Wall Street Journal prime index, with a spread of up to 0.49%, to the same counterparty calculated on a notional amount of $55.0 million. One of the four prime loan swaps contains a floor rate of 4.00%. The original terms of the four prime loan swaps is six years with a fixed rate that started September 17, 2013.

 

The Company has entered into four interest rate swap agreements (“FHLB advance swaps”) to mitigate variable interest rate risk on certain designated variable rate FHLB borrowings. The Company receives an interest rate based on the three month LIBOR from the counterparty and pays an interest rate ranging from 3.16% to 3.46% to the same counterparty calculated on a notional amount of $140.0 million. The FHLB advance swaps are deferred starting swaps with terms of six years and five years and effective dates of February 23, 2017 and February 23, 2018, respectively.

 

All swaps were entered into with counterparties that met the Company’s credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. As of March 31, 2015, the Company had $5.7 million of cash pledged as collateral for the trust swaps and securities with a market value of $4.7 million pledged as collateral for the prime loan swaps and FHLB advance swaps.

 

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with ASC 815, Derivatives and Hedging, the Company has designated the trust swaps, prime loan swaps, and FHLB advance swaps as cash flow hedges, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in interest income and interest expense in the Company’s Consolidated Statements of Income. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows of the hedging instrument. Based on the Company’s assessment, its cash flow hedges are highly effective. At March 31, 2015, the fair value of the Company’s cash flow hedges was a net unrealized loss of $9.7 million, the amount the Company would have expected to pay if the contracts were terminated.

 

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Shown below is a summary of the derivatives designated as cash flow hedges at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of March 31, 2015                                   
Pay fixed - receive floating interest rate swaps   7   $208,000   $-   $10,854    0.27%(1)   2.77%(1)   1.88(1)
                                    
Receive fixed - pay floating interest rate swaps   4   $55,000   $1,185   $-    4.93%   3.55%   4.47 

 

(1) Due to their deferred nature, the rates and the life exclude the four FHLB advance swaps.

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of December 31, 2014                                   
Pay fixed - receive floating interest rate swaps   7   $208,000   $-   $8,433    0.26%(1)   2.77%(1)   2.12(1)
                                    
Receive fixed - pay floating interest rate swaps   4   $55,000   $580   $-    4.93%   3.55%   4.72 

 

(1) Due to their deferred nature, the rates and the life exclude the four FHLB advance swaps.

 

Fair Value Hedge

During the normal course of business, the Company enters into interest rate swaps to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company applies hedge accounting in accordance with ASC 815, and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded in the Company’s Consolidated Statements of Income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in interest income and interest expense in the Company’s Consolidated Statements of Income. The Company uses statistical regression analysis to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset being hedged due to changes in the hedged risk.

 

On December 30, 2014, the Company entered into a swap, constituting a fair value hedge, whereby the Company pays a fixed interest rate of 3.42% to the counterparty and receives interest of one month LIBOR plus 1.93% from the same counterparty calculated on a notional amount of $38.3 million with a term of 15 years. At March 31, 2015, the fair value of the Company’s fair value hedge was an unrealized loss of $1.3 million, the amount the Company would have expected to pay if the contract was terminated; the liability is reported in “Other Liabilities” in the Company’s Consolidated Balance Sheets. At March 31, 2015, the notional amount of the hedged item was $38.3 million with a fair value of $1.2 million. The fair value hedge had no material impact on the Company’s Consolidated Statements of Income.

  

Loan Swaps

During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” in the Company’s Consolidated Balance Sheets. As of March 31, 2015, the Company had cash and securities with a market value of $6.7 million pledged as collateral for the loan swaps.

 

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Shown below is a summary regarding loan swap derivative activities at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of March 31, 2015                                   
Receive fixed - pay floating interest rate swaps   33   $134,496   $4,684   $-    4.28%   2.47%   7.14 
Pay fixed - receive floating interest rate swaps   33   $134,496   $-   $4,684    2.47%   4.28%   7.14 

 

       Notional           Receive   Pay   Life 
   Positions   Amount   Asset   Liability   Rate   Rate   (Years) 
As of December 31, 2014                                   
Receive fixed - pay floating interest rate swaps   30   $122,793   $2,681   $-    4.29%   2.50%   7.14 
Pay fixed - receive floating interest rate swaps   30   $122,793   $-   $2,681    2.50%   4.29%   7.14 

 

Interest Rate Lock Commitments

During the normal course of business, the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”).  Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives.  The period of time between issuance of a loan commitment, closing, and sale of the loan generally ranges from 30 to 120 days.  The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan.  The correlation between the rate lock commitments and the best efforts contracts is high due to their similarity.

 

The market values of rate lock commitments and best efforts forward delivery commitments is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets.  The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close.  The fair value of the rate lock commitments as of March 31, 2015 was $1.3 million and is reported as a component of “Other Assets” in the Company’s Consolidated Balance Sheets; the fair value of the Company’s best efforts forward delivery commitments was $367,000 and is recorded as a component of “Other Liabilities” in the Company’s Consolidated Balance Sheets. Any impact to income is recorded in current period earnings as a component of “Gain on sale of mortgage loans, net of commissions” in the Company’s Consolidated Statements of Income. At March 31, 2015, the aggregate notional amount of these derivatives was $80.2 million.

 

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9.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2015 is summarized as follows, net of tax (dollars in thousands):

 

   Unrealized Gains
(Losses) on
Securities
   Change in Fair
Value of Cash Flow
Hedge
   Total 
Balance - December 31, 2014  $17,439   $(5,184)  $12,255 
                
Other comprehensive income (loss)   3,783    (1,490)   2,293 
Amounts reclassified from accumulated other comprehensive income   (125)   272    147 
Net current period other comprehensive income (loss)   3,658    (1,218)   2,440 
                
Balance - March 31, 2015  $21,097   $(6,402)  $14,695 

 

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2014 is summarized as follows, net of tax (dollars in thousands):

 

   Unrealized Gains
(Losses) on
Securities
   Change in Fair
Value of Cash Flow
Hedge
   Total 
Balance - December 31, 2013  $1,192   $(3,382)  $(2,190)
                
Other comprehensive income (loss)   6,313    575    6,888 
Amounts reclassified from accumulated other comprehensive income   (19)   47    28 
Net current period other comprehensive income (loss)   6,294    622    6,916 
                
Balance - March 31, 2014  $7,486   $(2,760)  $4,726 

 

Reclassifications of unrealized gains (losses) on available for sale securities are reported in the Company’s Consolidated Statements of Income as “Gains on securities transactions, net” with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported gains of $193,000 and $29,000 for the three months ended March, 31, 2015 and 2014, respectively, related to gains and losses on the sale of securities. The tax effect of these transactions during the three months ended March 31, 2015 and 2014 was $68,000 and $10,000, respectively, which amounts were included as a component of income tax expense.

 

Reclassifications of the change in fair value of cash flow hedges are reported in interest income and interest expense in the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported net interest expense of $418,000 and $72,000 for the three months ended March 31, 2015 and 2014, respectively. The tax effect of these transactions during the three months ended March 31, 2015 and 2014 was $146,000 and $25,000, respectively, which amounts were included as a component of income tax expense.

 

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10.FAIR VALUE MEASUREMENTS

 

The Company follows ASC 820, Fair Value Measurements and Disclosures, to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.

 

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:

 

  Level 1     Valuation is based on quoted prices in active markets for identical assets and liabilities.
       
  Level 2   Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.
       
  Level 3     Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

 

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

 

Derivative instruments

As discussed in Note 8 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

 

During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale as well as best effort forward delivery commitments to mitigate interest rate risk; these instruments are recorded at estimated fair value based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market. However, this value is adjusted by a pull-through rate which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data and is adjusted using significant management judgment. The pull-through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments while a decrease in the pull-through rate will result in a negative fair value adjustment. The Company’s weighted average pull-through rate was approximately 80% as of March 31, 2015 and approximately 90% as of December 31, 2014. As of March 31, 2015, the interest rate lock commitments are recorded as a component of “Other Assets” and the best effort forward delivery commitments are recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets.

 

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

 

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

 

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

 

The Company uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of March 31, 2015 and December 31, 2014.

 

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

 

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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

   Fair Value Measurements at March 31, 2015 using 
   Quoted Prices in
Active Markets for
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Securities available for sale:                    
U.S. government and agency securities  $-   $8,595   $-   $8,595 
Obligations of states and political subdivisions   -    452,438    -    452,438 
Corporate bonds   -    78,141    -    78,141 
Mortgage-backed securities   -    540,463    -    540,463 
Other securities   -    10,027    -    10,027 
Derivatives:                    
Interest rate swap   -    4,684    -    4,684 
Cash flow hedges   -    1,185    -    1,185 
Interest rate lock commitments   -    -    1,271    1,271 
                     
LIABILITIES                    
Derivatives:                    
Interest rate swap  $-   $4,684   $-   $4,684 
Cash flow hedges   -    10,854    -    10,854 
Best effort forward delivery commitments   -    -    367    367 

 

   Fair Value Measurements at December 31, 2014 using 
   Quoted Prices in
Active Markets for
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Securities available for sale:                    
U.S. government and agency securities  $-   $8,454   $-   $8,454 
Obligations of states and political subdivisions   -    445,647    -    445,647 
Corporate bonds   -    78,680    -    78,680 
Mortgage-backed securities   -    559,329    -    559,329 
Other securities   -    10,004    -    10,004 
Derivatives:                    
Interest rate swap   -    2,681    -    2,681 
Cash flow hedges   -    580    -    580 
Interest rate lock commitments   -    -    513    513 
                     
LIABILITIES                    
Derivatives:                    
Interest rate swap  $-   $2,681   $-   $2,681 
Cash flow hedges   -    8,433    -    8,433 

 

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

 

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

 

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 $17,000 and $44,000 were recorded on loans held for sale during the three months ended March 31, 2015 and 2014, respectively. Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a separate line item in the Company’s 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 dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Company’s Consolidated Statements of Income.

 

Other real estate owned

OREO is evaluated for impairment at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment and included as a component of noninterest expense. Fair values of OREO are carried at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the 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 the three months ended March 31, 2015 and 2014 totaled $590,000 and $256,000, respectively.

 

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The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

   Fair Value Measurements at March 31, 2015 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  $-   $46,048   $-   $46,048 
Impaired loans   -    -    12,621    12,621 
Other real estate owned   -    -    25,434    25,434 

 

   Fair Value Measurements at December 31, 2014 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  $-   $42,519   $-   $42,519 
Impaired loans   -    -    15,797    15,797 
Other real estate owned   -    -    28,118    28,118 

 

The following table displays quantitative information about Level 3 Fair Value Measurements at March 31, 2015 (dollars in thousands):

 

   Fair Value Measurements at March 31, 2015 
   Fair Value   Valuation Technique(s)  Unobservable Inputs  Weighted
Average
 
ASSETS                
Commercial Real Estate - Owner Occupied  $4,524   Market comparables  Discount applied to market comparables(1)   37%
Commercial Real Estate - Non-Owner Occupied   3,860   Market comparables  Discount applied to market comparables(1)   0%
Single Family Investment Real Estate   1,220   Market comparables  Discount applied to market comparables(1)   5%
Commercial and Industrial   2,011   Market comparables  Discount applied to market comparables(1)   11%
Other (2)   1,006   Market comparables  Discount applied to market comparables(1)   5%
Total Impaired Loans   12,621            
                 
Other real estate owned   25,434   Market comparables  Discount applied to market comparables(1)   31%
Total  $38,055            

 

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

(2) The “Other” category of the impaired loans section consists of Other Commercial, Mortgage, Consumer Construction, Indirect Marine, HELOCs, and Other Consumer.

 

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The following table displays quantitative information about Level 3 Fair Value Measurements at December 31, 2014 (dollars in thousands):

 

   Fair Value Measurements at December 31, 2014 
   Fair Value   Valuation Technique(s)  Unobservable Inputs  Weighted
Average
 
ASSETS                
Commercial Real Estate - Owner Occupied  $3,304   Market comparables  Discount applied to market comparables(1)   34%
Commercial Real Estate - Non-Owner Occupied   7,828   Market comparables  Discount applied to market comparables(1)   1%
Raw Land and Lots   431   Market comparables  Discount applied to market comparables(1)   16%
Single Family Investment Real Estate   1,366   Market comparables  Discount applied to market comparables(1)   14%
Commercial and Industrial   339   Market comparables  Discount applied to market comparables(1)   45%
Other (2)   2,529   Market comparables  Discount applied to market comparables(1)   6%
Total Impaired Loans   15,797            
                 
Other real estate owned   28,118   Market comparables  Discount applied to market comparables(1)   32%
Total  $43,915            

 

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

(2) The “Other” category of the impaired loans section consists of Other Commercial, Mortgage, Consumer Construction, Indirect Marine, 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.

 

Bank owned life insurance

The carrying value of bank owned life insurance approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.

 

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

 

Borrowings

The carrying value of the Company’s repurchase agreements is a reasonable estimate of fair value. Other borrowings are discounted using the current yield curve for the same type of borrowing. For borrowings with embedded optionality, a third party source is used to value the instrument. The Company validates all third party valuations for borrowings with optionality using Bloomberg’s derivative pricing functions.

 

Accrued interest

The carrying amounts of accrued interest approximate fair value.

 

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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 March 31, 2015 and December 31, 2014, 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 at March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):

 

       Fair Value Measurements at March 31, 2015 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  $137,362   $137,362   $-   $-   $137,362 
Securities available for sale   1,089,664    -    1,089,664    -    1,089,664 
Restricted stock   53,146    -    53,146    -    53,146 
Loans held for sale   46,048    -    46,048    -    46,048 
Net loans   5,356,778    -    -    5,381,792    5,381,792 
Derivatives:                         
Interest rate lock commitments   1,271    -    -    1,271    1,271 
Interest rate swap   4,684    -    4,684    -    4,684 
Cash flow hedges   1,185    -    1,185    -    1,185 
Accrued interest receivable   22,313    -    22,313    -    22,313 
Bank owned life insurance   140,143    -    140,143    -    140,143 
                          
LIABILITIES                         
Deposits  $5,670,228   $-   $5,669,754   $-   $5,669,754 
Borrowings   674,348    -    653,782    -    653,782 
Accrued interest payable   1,818    -    1,818    -    1,818 
Derivatives:                         
Best effort forward delivery commitments   367    -    -    367    367 
Interest rate swap   4,684    -    4,684    -    4,684 
Cash flow hedges   10,854    -    10,854    -    10,854 
                          

 

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       Fair Value Measurements at December 31, 2014 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  $133,260   $133,260   $-   $-   $133,260 
Securities available for sale   1,102,114    -    1,102,114    -    1,102,114 
Restricted stock   54,854    -    54,854    -    54,854 
Loans held for sale   42,519    -    42,519    -    42,519 
Net loans   5,313,612    -    -    5,340,759    5,340,759 
Derivatives:                         
Interest rate lock commitments   513    -    -    513    513 
Interest rate swap   2,681    -    2,681    -    2,681 
Cash flow hedges   580    -    580    -    580 
Accrued interest receivable   21,775    -    21,775    -    21,775 
Bank owned life insurance   139,005    -    139,005    -    139,005 
                          
LIABILITIES                         
Deposits  $5,638,770   $-   $5,637,929   $-   $5,637,929 
Borrowings   686,935    -    666,224    -    666,224 
Accrued interest payable   1,899    -    1,899    -    1,899 
Derivatives:                         
Interest rate swap   2,681    -    2,681    -    2,681 
Cash flow hedges   8,433    -    8,433    -    8,433 

 

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.

 

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11.STOCK-BASED COMPENSATION

 

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) provides for the granting of stock-based awards to key employees of the Company and its subsidiaries in the form of: (i) incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”); (ii) non-qualified stock options; (iii) restricted stock, and (iv) other stock-based awards. The Company issues new shares to satisfy stock-based awards, and the option price cannot be less than the fair market value of the stock on the grant date. A stock option’s maximum term is ten years from the date of grant. No stock options have been granted since February 2012, and restricted stock and other stock-based awards typically vest in varying annual installments over a three to five year vesting schedule. The 2011 Plan was approved by the Company’s Board of Directors with an effective date of January 1, 2011, subject to shareholder approval that was received at the annual meeting of shareholders held on April 26, 2011.

 

Based on the recommendation of the Compensation Committee of the Company’s Board of Directors, on January 29, 2015, the Company’s Board of Directors adopted, subject to shareholder approval, the Union Bankshares Corporation Stock and Incentive Plan (the “Amended and Restated SIP”), which amends and restates the 2011 Plan. The Amended and Restated SIP was approved by the Company’s shareholders and became effective on April 21, 2015. The Amended and Restated SIP amends the 2011 Plan to, among other things, increase the maximum number of shares of the Company’s common stock issuable under the plan from 1,000,000 to 2,500,000 and add non-employee directors of the Company and certain subsidiaries, as well as regional advisory boards, as potential participants in the plan.

 

The following table summarizes the shares granted and available in the 2011 Plan as of March 31, 2015; there were no shares granted or available under the Amended and Restated SIP as of March 31, 2015 because the Amended and Restated SIP was not effective as of such date.

 

   2011 Plan 
Beginning Authorization   1,000,000 
Granted   (600,641)
Remaining available for grant   399,359 

 

For the three months ended March 31, 2015 and 2014, the Company recognized stock-based compensation expense (included in salaries and benefits expense) of approximately $390,000 and $374,000 ($281,000 and $270,000 net of tax), respectively. Stock-based compensation expense represents approximately $0.01 per common share for both the three months ended March 31, 2015 and 2014.

 

Stock Options

 

The following table summarizes the stock option activity for the three months ended March 31, 2015:

 

   Number of
Stock Options
   Weighted
Average
Exercise Price
 
Options outstanding, December 31, 2014   389,269   $16.69 
Exercised   (7,686)   17.72 
Expired   (13,188)   23.45 
Options outstanding, March 31, 2015   368,395    16.42 
Options exercisable, March 31, 2015   263,890    17.47 

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model. The model uses variables which include the historical dividend yield of the Company’s common stock, the average contractual life and vesting schedule of the option, the historic volatility of the Company’s common stock price, and the risk-free interest rate at the time the option was granted. Other than options that were assumed and converted upon completion of the StellarOne merger, the Company has not granted incentive compensation in the form of options since February 2012.

 

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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 March 31, 2015:

 

   Stock Options
Vested or
Expected to Vest
   Exercisable 
Stock options (number of shares)   368,361    263,890 
Weighted average remaining contractual life in years   5.08    4.62 
Weighted average exercise price on shares above water  $14.36   $14.63 
Aggregate intrinsic value  $2,471,164   $1,594,675 

 

Restricted Stock

 

The 2011 Plan permits the granting of restricted stock awards but is limited to one-third of the aggregate number of total awards granted. This equity component of compensation is divided between restricted (time-based) stock grants and performance-based stock grants. Generally, the restricted stock vests 50% on each of the third and fourth anniversaries from the date of the grant. The performance-based stock is subject to vesting based on achieving certain performance metrics; the grant of performance-based stock is subject to approval by the Company’s Compensation Committee at its sole discretion. The value of the restricted stock awards was calculated by multiplying the fair market value of the Company’s common stock on grant date by the number of shares awarded. Employees have the right to vote the shares and to receive cash or stock dividends (restricted stock), if any, except for the nonvested stock under the performance-based component (performance stock). Nonvested shares of restricted stock are included in the computation of basic earnings per share. The following table summarizes the restricted stock activity for the quarter ended March 31, 2015:

 

   Number of
Shares of
Restricted Stock
   Weighted Average
Grant-Date Fair
Value
 
Balance, December 31, 2014   287,120   $20.07 
Granted   81,414    22.01 
Net settle for taxes   (9,869)   21.58 
Vested   (30,401)   16.03 
Forfeited   (4,419)   19.68 
Balance, March 31, 2015   323,845    21.20 

 

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2015 that will be recognized in future periods is as follows (dollars in thousands):

 

   Stock Options   Restricted Stock   Total 
For the remaining nine months of 2015  $155   $1,275   $1,430 
For year ending December 31, 2016   130    1,586    1,716 
For year ending December 31, 2017   15    899    914 
For year ending December 31, 2018   -    495    495 
For year ending December 31, 2019   -    70    70 
Total  $300   $4,325   $4,625 

 

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12.EARNINGS PER SHARE

 

Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards.

 

There were approximately 159,460 and 212,306 shares underlying anti-dilutive awards for the three months ended March 31, 2015 and 2014, respectively. Anti-dilutive awards were excluded from the calculation of diluted EPS.

 

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three months ended March 31, 2015 and 2014 (in thousands except per share data):

 

   Net Income Available to
Common Shareholders
(Numerator)
   Weighted
Average
Common Shares
(Denominator)
   Per Share
Amount
 
For the three months ended March 31, 2015               
Net income, basic  $15,701    45,106   $0.35 
Add: potentially dilutive common shares - stock awards   -    82    - 
Diluted  $15,701    45,188   $0.35 
                
For the three months ended March 31, 2014               
Net income, basic  $7,708    46,977   $0.16 
Add: potentially dilutive common shares - stock awards   -    103    - 
Diluted  $7,708    47,080   $0.16 

 

13.SEGMENT REPORTING DISCLOSURES

 

The Company has two reportable segments: a traditional full service community bank segment and a mortgage loan origination business segment. The community bank segment includes one subsidiary bank, the Bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 131 retail locations in Virginia. The mortgage segment includes UMG, which provides a variety of mortgage loan products principally in Virginia, North Carolina, South Carolina, Maryland, and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which serves to mitigate the Company’s exposure to interest rate risk.

 

Profit and loss is measured by net income after taxes including realized gains and losses on the Company’s investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process.

 

Both of the Company’s reportable segments are service-based. The mortgage business is a fee-based business while the bank is driven principally by net interest income. The bank segment provides a distribution and referral network through its customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank segment.

 

The community bank segment provides the mortgage segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the three month LIBOR rate plus 0.15% with no floor, effective January 1, 2015. During the quarter ended March 31, 2014, the interest rate on the warehouse line of credit was the three month LIBOR rate plus 1.5% with a floor of 2.0%. These transactions are eliminated in the consolidation process. A management fee for operations and administrative support services is charged to all subsidiaries and eliminated in the consolidated totals.

 

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Information about reportable segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31, 2015 and 2014 is as follows (dollars in thousands):

 

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

SEGMENT FINANCIAL INFORMATION

(Dollars in thousands)

 

   Community Bank   Mortgage   Eliminations   Consolidated 
Three Months Ended March 31, 2015                    
Net interest income  $61,723   $246   $-   $61,969 
Provision for loan losses   1,750    -    -    1,750 
Net interest income after provision for loan losses   59,973    246    -    60,219 
Noninterest income   12,848    2,376    (170)   15,054 
Noninterest expenses   50,972    3,038    (170)   53,840 
Income (loss) before income taxes   21,849    (416)   -    21,433 
Income tax expense (benefit)   5,881    (149)   -    5,732 
Net income (loss)  $15,968   $(267)  $-   $15,701 
Total assets  $7,382,266   $55,380   $(49,087)  $7,388,559 
                     
Three Months Ended March 31, 2014                    
Net interest income  $63,526   $232   $-   $63,758 
Provision for loan losses   -    -    -    - 
Net interest income after provision for loan losses   63,526    232    -    63,758 
Noninterest income   11,659    2,300    (171)   13,788 
Noninterest expenses   62,746    4,710    (171)   67,285 
Income (loss) before income taxes   12,439    (2,178)   -    10,261 
Income tax expense (benefit)   3,351    (798)   -    2,553 
Net income (loss)  $9,088   $(1,380)  $-   $7,708 
Total assets  $7,282,311   $57,705   $(45,511)  $7,294,505 

 

14.SUBSEQUENT EVENTS

 

Subsequent to quarter-end the Company performed a review of the investment portfolio and the related classification of securities. In connection with this review, management determined that the Company has the ability and the intent to hold certain municipal securities to their contractual maturity. On April 30, 2015, the Company reclassified certain municipal securities with an amortized cost of $193.6 million and a fair value of $202.8 million from available for sale to held-to-maturity. The reclassification will be accounted for in accordance with the guidance established in ASC 320, Investments – Debt and Equity Securities.

 

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Review Report of Independent Registered Public Accounting Firm

 

The Shareholders and Board of Directors of Union Bankshares Corporation

 

We have reviewed the consolidated balance sheet of Union Bankshares Corporation (the “Company”) as of March 31, 2015, and the related consolidated statements of income, comprehensive income and cash flows for the three-month period ended March 31, 2015. These financial statements are the responsibility of the Company's management. The consolidated financial statements of the Company as of March 31, 2014, and for the three-month period then ended, were reviewed by other auditors whose report dated May 8, 2014 stated that based on their review they were not aware of any material modifications that should be made to those statements for them to be in conformity with U.S. generally accepted accounting principles. The consolidated balance sheet of the Company as of December 31, 2014, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year then ended (not presented herein) were audited by other auditors whose report dated February 27, 2015 expressed an unqualified opinion on those statements.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the 2015 consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst & Young LLP

 

Richmond, Virginia

May 7, 2015

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union Bankshares Corporation and its subsidiaries (collectively, the “Company”). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2014. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three months ended March 31, 2015 and 2014 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

 

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events.  Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic and bank industry conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, stock and bond markets, accounting standards or interpretations of existing standards, mergers and acquisitions, technology, and consumer spending and savings habits. More information is available on the Company’s website, http://investors.bankatunion.com and on the Securities and Exchange Commission’s website, www.sec.gov. The information on the Company’s website is not a part of this Form 10-Q. The Company does not intend or assume any obligation to update or revise any forward-looking statements that may be made from time to time by or on behalf of the Company.

 

CRITICAL ACCOUNTING POLICIES

General

The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

 

The more critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses, mergers and acquisitions, and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions, and judgments.

 

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Allowance for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb incurred losses in the portfolio. Loans are charged against the allowance when management believes the collectability of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make adjustments to the allowance based on their judgments about information available to them at the time of their examination.

 

The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. The credit reviews consist of reviews by its Loan Review group and reviews performed by an independent third party. Upon origination, each commercial loan is assigned a risk rating ranging from one to nine, with loans closer to one having less risk. This risk rating scale is the Company’s primary credit quality indicator. Consumer loans are generally not risk rated; the primary credit quality indicator for this portfolio segment is delinquency status. The Company has various committees that review and ensure that the allowance for loan losses methodology is in accordance with U.S. GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio.

 

The Company’s ALL consists of specific and general components.

 

Specific Reserve Component - The specific reserve component relates to impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Upon being identified as impaired, for loans not considered to be collateral dependent, an allowance is established when the discounted cash flows of the impaired loan are lower than the carrying value of that loan. Nonaccrual loans under $100,000 and other impaired loans under $500,000 are aggregated based on similar risk characteristics. The level of credit impairment within the pool(s) is determined based on historical loss factors for loans with similar risk characteristics, taking into consideration environmental factors specifically related to the underlying pool. The impairment of collateral dependent loans is measured based on the fair value of the underlying collateral (based on independent appraisals), less selling costs, compared to the carrying value of the loan. If the Company determines that the value of an impaired collateral dependent loan is less than the recorded investment in the loan, it either recognizes an impairment reserve as a specific component to be provided for in the allowance for loan losses or charges off the deficiency if it is determined that such amount represents a confirmed loss. Typically, a loss is confirmed when the Company is moving towards foreclosure (or final disposition) of the underlying collateral, the collateral deficiency has not improved for two consecutive quarters, or when there is a payment default of 180 days, whichever occurs first.

 

The Company obtains independent appraisals from a pre-approved list of independent, third party appraisal firms located in the market in which the collateral is located. The Company’s approved appraiser list is continuously maintained to ensure the list only includes such appraisers that have the experience, reputation, character, and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is currently licensed in the state in which the property is located, experienced in the appraisal of properties similar to the property being appraised, has knowledge of current real estate market conditions and financing trends, and is reputable. The Company’s internal Real Estate Valuation Group, which reports to the Risk and Compliance Group, performs either a technical or administrative review of all appraisals obtained. A technical review will ensure the overall quality of the appraisal, while an administrative review ensures that all of the required components of an appraisal are present. Generally, independent appraisals are updated every 12 to 24 months or more frequently as necessary. The Company’s impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Adjustments to appraisals generally include discounts for continued market deterioration subsequent to the appraisal date. Any adjustments from the appraised value to carrying value are documented in the impairment analysis, which is reviewed and approved by senior credit administration officers and the Special Assets Loan Committee. External appraisals are the primary source to value collateral dependent loans; however, the Company may also utilize values obtained through broker price opinions or other valuations sources. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed, and approved on a quarterly basis at or near the end of each reporting period.

 

General Reserve Component – The general reserve component covers non-impaired loans and is derived from an estimate of credit losses adjusted for various environmental factors applicable to both commercial and consumer loan segments. The estimate of credit losses is a function of the product of net charge-off historical loss experience to the loan balance of the loan portfolio averaged during the preceding twelve quarters, as management has determined this to adequately reflect the losses inherent in the loan portfolio. The environmental factors consist of national, local, and portfolio characteristics and are applied to both the commercial and consumer segments. The following table shows the types of environmental factors management considers:

 

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ENVIRONMENTAL FACTORS
Portfolio   National   Local
Experience and ability of lending team   Interest rates   Level of economic activity
Depth of lending team   Inflation   Unemployment
Pace of loan growth   Unemployment   Competition
Franchise expansion   Gross domestic product   Military/government impact
Execution of loan risk rating process   General market risk and other concerns    
Degree of oversight / underwriting standards   Legislative and regulatory environment    
Value of real estate serving as collateral        
Delinquency levels in portfolio        
Charge-off levels in portfolio        
Credit concentrations / nature and volume of the portfolio        

 

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan that is classified substandard or worse is considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The impaired loan policy is the same for each of the seven classes within the commercial portfolio segment.

 

For the consumer loan portfolio segment, large groups of smaller balance homogeneous loans are collectively evaluated for impairment. This evaluation subjects each of the Company’s homogenous pools to a historical loss factor derived from net charge-offs experienced over the preceding twelve quarters. The Company applies payments received on impaired loans to principal and interest based on the contractual terms until they are placed on nonaccrual status. All payments received are then applied to reduce the principal balance and recognition of interest income is terminated.

 

Business Combinations and Acquired Loans

The Company’s merger and acquisition strategy focuses on high-growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance, and good asset quality, among other factors.

 

Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will continue to rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions. If they are necessary to implement its plan to exit an activity of an acquiree, costs that the Company expects, but is not obligated, to incur in the future are not liabilities at the acquisition date, nor are costs to terminate the employment of or relocate an acquiree’s employees. The Company does not recognize these costs as part of applying the acquisition method. Instead, the Company recognizes these costs as expenses in its post-combination financial statements in accordance with other applicable U.S. GAAP.

 

Acquisition-related costs are incremental costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of acquisition-related costs to the Company include systems conversions, integration planning consultants, and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable U.S. GAAP. These acquisition-related costs are included within the Consolidated Statements of Income classified within the noninterest expense caption.

 

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Loans acquired in a business combination are recorded at fair value on the date of the acquisition. Loans acquired with deteriorated credit quality are accounted for in accordance with ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are not considered to be impaired unless they deteriorate further subsequent to the acquisition. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

 

Goodwill and Intangible Assets

The Company follows ASC 350, Intangibles - Goodwill and Other, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected April 30th as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives, which range from 4 to 14 years, to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s Consolidated Balance Sheets.

 

The Company performed its annual impairment testing in the second quarter of 2014 and determined that there was no impairment to its goodwill or intangible assets. Subsequently, the Company determined that an additional evaluation was necessary at year-end due to potential indicators based on the net losses recorded at the mortgage company during 2014. Based on this additional testing, the Company confirmed that no impairment charges to date for goodwill or intangible assets were necessary. If the Company’s mortgage segment does not show improvement in subsequent periods, the Company may be required to perform a step two impairment analysis.

 

Long-lived assets, including purchased intangible assets subject to amortization, such as the core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Management concluded that no circumstances indicating an impairment of these assets existed as of the balance sheet date.

 

ABOUT UNION BANKSHARES CORPORATION

 

Headquartered in Richmond, Union Bankshares Corporation is the largest community banking organization headquartered in Virginia and operates in all major banking markets of the Commonwealth. Union Bankshares Corporation is the holding company for Union Bank & Trust, which provides banking, trust, and wealth management services and has a statewide presence of 131 bank branches and 200 ATMs. Non-bank affiliates of the holding company include: Union Investment Services, Inc., which provides full brokerage services; Union Mortgage Group, Inc., which provides a full line of mortgage products; and Union Insurance Group, LLC, which offers various lines of insurance products.

 

The Company announced that, effective February 16, 2015, it had changed its subsidiary bank’s name from “Union First Market Bank” to “Union Bank & Trust”.

 

Shares of the Company’s common stock are traded on the NASDAQ Global Select Market under the symbol UBSH. Additional information is available on the Company’s website at http://investors.bankatunion.com. The information contained on the Company’s website is not a part of or incorporated into this report.

 

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RESULTS OF OPERATIONS

 

Executive Overview

 

For the quarter ended March 31, 2015, the Company reported net income of $15.7 million and earnings per share of $0.35. These results represent an increase of $8.0 million from $7.7 million, or 103.7%, in earnings from the first quarter of 2014. Excluding after-tax acquisition-related expenses of $9.0 million incurred during the first quarter of 2014, operating earnings(1) declined $1.0 million, primarily a result of lower net interest income and an increase in provision for loan losses, partially offset by higher noninterest income and lower personnel costs. Operating earnings per share were $0.35 and $0.36 for the quarters ended March 31, 2015 and 2014, respectively.

 

·Net income for the first quarter of 2015 for the community bank segment was $16.0 million, or $0.36 per share, compared to operating earnings of $18.1 million, or $0.39 per share, in the first quarter of 2014.
·The mortgage segment reported a net loss of $267,000, or $0.01 per share, for the quarter ended March 31, 2015, an improvement of $1.1 million from a loss of $1.4 million, or $0.03 per share, for the first quarter of 2014. The improvement was largely a result of cost control initiatives in personnel costs, loan production costs, and other operating expenses.
·Operating Return on Average Assets(1) (“ROA”) was 0.86% for the quarter ended March 31, 2015 compared to operating ROA(1) of 0.94% for the first quarter of 2014. The operating ROA(1) of the community bank segment was 0.88% for the first quarter of 2015.
·Operating Return on Average Tangible Common Equity(1) (“ROTCE”) was 9.67% for the quarter ended March 31, 2015 compared to operating ROTCE(1) of 10.27% for the quarter ended March 31, 2014. The operating ROTCE(1) of the community bank segment was 9.88% for the first quarter of 2015.
·Operating efficiency ratio(1) of 68.0% stayed comparatively flat for the first quarter of 2015 when compared to the operating efficiency ratio of 68.1% for the first quarter of 2014. The operating efficiency ratio for the community bank segment was 66.4% for the first quarter of 2015.
·Loans grew $113.6 million, or 2.2%, from March 31, 2014, while average loan balances increased $80.8 million, or 1.5%, from March 31, 2014. Loans grew $41.8 million, or 3.1% (annualized), from December 31, 2014, while average loan balances increased $140.5 million, or 10.8% (annualized), from December 31, 2014.

 

(1) These supplementary measures are provided because the Company believes they may be valuable to investors. For a reconciliation of the non-GAAP measures operating earnings, EPS, ROA, ROTCE, and efficiency ratio, see “NON-GAAP MEASURES” included in this Item 2.

 

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Net Interest Income

 

   For the Three Months Ended     
   March 31,     
   2015   2014   Change 
   (Dollars in thousands) 
Average interest-earning assets  $6,576,415   $6,432,326   $144,089 
Interest income (FTE)  $69,761   $70,154   $(393)
Yield on interest-earning assets   4.30%   4.42%   (12)bps
Average interest-bearing liabilities  $5,096,040   $5,236,101   $(140,061)
Interest expense  $5,631   $4,450   $1,181 
Cost of interest-bearing liabilities   0.45%   0.34%   11bps
Cost of funds   0.35%   0.28%   7bps
Net Interest Income (FTE)  $64,130   $65,704   $(1,574)
Net Interest Margin (FTE)   3.95%   4.14%   (19)bps
Core Net Interest Margin (FTE) (1)   3.84%   3.99%   (15)bps

 

(1) Core net interest margin (FTE) excludes the impact of acquisition accounting accretion and amortization adjustments in net interest income.

 

For the first quarter of 2015, tax-equivalent net interest income was $64.1 million, a decrease of $1.6 million from the first quarter of 2014, primarily driven by the impact of declines in net interest margin and lower net accretion related to acquisition accounting. The first quarter 2015 tax-equivalent net interest margin decreased by 19 bps to 3.95% compared to 4.14% in the comparable quarter in the prior year. Core tax-equivalent net interest margin (which excludes the 11 bps impact of acquisition accounting accretion in the first quarter of 2015 and 15 bps in the first quarter of 2014) decreased by 15 bps from 3.99% in the first quarter of 2014 to 3.84% in the first quarter of 2015. The decrease in core tax-equivalent net interest margin was driven by the 20 basis point decline in interest-earning asset yields outpacing the 5 basis point reduction in cost of funds. The decline in interest-earning asset yields was primarily driven by lower loan yields, as new and renewed loans were originated and re-priced at lower rates, and by lower investment securities yields, as cash flows from securities were reinvested at lower yields. Net accretion related to acquisition accounting decreased $599,000 from the first quarter of 2014 to $1.9 million in the first quarter of 2015.

 

The Company continues to believe that net interest margin will decline modestly over the next several quarters as decreases in interest-earning asset yields are projected to outpace declines in interest-bearing liabilities rates.

 

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The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands):

 

 

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

 

   For the Three Months Ended March 31, 
   2015   2014 
   Average Balance   Interest
Income /
Expense
   Yield /
Rate (1)
   Average
Balance
   Interest
Income /
Expense
   Yield /
Rate (1)
 
   (Dollars in thousands) 
Assets:                              
Securities:                              
Taxable  $730,404   $3,807    2.11%  $683,620   $3,648    2.16%
Tax-exempt   413,228    5,114    5.02%   392,859    5,044    5.21%
Total securities   1,143,632    8,921    3.16%   1,076,479    8,692    3.27%
Loans, net (2) (3)   5,360,676    60,527    4.58%   5,279,924    61,033    4.69%
Loans held for sale   38,469    296    3.12%   49,767    417    3.40%
Federal funds sold   792    -    0.20%   268    -    0.17%
Money market investments   1    -    0.00%   1    -    0.00%
Interest-bearing deposits in other banks   32,845    17    0.20%   25,887    12    0.19%
Total earning assets   6,576,415   $69,761    4.30%   6,432,326   $70,154    4.42%
Allowance for loan losses   (32,992)             (30,925)          
Total non-earning assets   819,260              848,049           
Total assets  $7,362,683             $7,249,450