UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-20293
UNION FIRST MARKET BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA | 54-1598552 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
111 Virginia Street
Suite 200
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
(804) 633-5031
(Registrants 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 ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of common stock outstanding as of October 22, 2010 was 25,955,213
UNION FIRST MARKET BANKSHARES CORPORATION
FORM 10-Q
INDEX
ii
PART I - FINANCIAL INFORMATION
UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
September 30, 2010 |
December 31, 2009 |
September 30, 2009 |
||||||||||
(Unaudited) | (Audited) | (Unaudited) | ||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents: |
||||||||||||
Cash and due from banks |
$ | 76,981 | $ | 38,725 | $ | 36,601 | ||||||
Interest-bearing deposits in other banks |
2,329 | 4,106 | 31,552 | |||||||||
Money market investments |
143 | 127 | 243 | |||||||||
Other interest-bearing deposits |
| 2,598 | 2,598 | |||||||||
Federal funds sold |
685 | 355 | 318 | |||||||||
Total cash and cash equivalents |
80,138 | 45,911 | 71,312 | |||||||||
Securities available for sale, at fair value |
576,040 | 400,591 | 398,870 | |||||||||
Loans held for sale |
84,381 | 54,280 | 42,096 | |||||||||
Loans, net of unearned income |
2,842,267 | 1,874,224 | 1,885,075 | |||||||||
Less allowance for loan losses |
37,395 | 30,484 | 32,930 | |||||||||
Net loans |
2,804,872 | 1,843,740 | 1,852,145 | |||||||||
Bank premises and equipment, net |
91,054 | 78,722 | 79,196 | |||||||||
Other real estate owned |
26,382 | 22,509 | 13,783 | |||||||||
Core deposit intangibles, net |
28,762 | 7,690 | 8,171 | |||||||||
Goodwill |
57,567 | 56,474 | 56,474 | |||||||||
Other assets |
110,127 | 77,355 | 61,237 | |||||||||
Total assets |
$ | 3,859,323 | $ | 2,587,272 | $ | 2,583,284 | ||||||
LIABILITIES |
||||||||||||
Noninterest-bearing demand deposits |
$ | 495,779 | $ | 294,222 | $ | 299,452 | ||||||
Interest-bearing deposits: |
||||||||||||
NOW accounts |
359,986 | 215,327 | 199,777 | |||||||||
Money market accounts |
756,938 | 446,980 | 428,729 | |||||||||
Savings accounts |
153,928 | 102,852 | 101,655 | |||||||||
Time deposits of $100,000 and over |
577,239 | 407,894 | 446,777 | |||||||||
Other time deposits |
730,325 | 449,089 | 489,178 | |||||||||
Total interest-bearing deposits |
2,578,416 | 1,622,142 | 1,666,116 | |||||||||
Total deposits |
3,074,195 | 1,916,364 | 1,965,568 | |||||||||
Securities sold under agreements to repurchase |
69,693 | 50,550 | 44,455 | |||||||||
Other short-term borrowings |
41,200 | 115,201 | 15,000 | |||||||||
Trust preferred capital notes |
60,310 | 60,310 | 60,310 | |||||||||
Long-term borrowings |
154,864 | 140,000 | 140,000 | |||||||||
Other liabilities |
28,465 | 22,759 | 17,720 | |||||||||
Total liabilities |
3,428,727 | 2,305,184 | 2,243,053 | |||||||||
Commitments and contingencies |
||||||||||||
STOCKHOLDERS EQUITY |
||||||||||||
Preferred stock, $10.00 par value, $1,000 liquidation value, shares authorized 500,000; issued and outstanding, 35,595 shares, no shares and 59,000 shares, respectively |
35,595 | | 58,874 | |||||||||
Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 25,955,213 shares, 18,419,567 shares, and 18,335,266 shares, respectively |
34,460 | 24,462 | 24,395 | |||||||||
Surplus |
184,964 | 98,136 | 96,681 | |||||||||
Retained earnings |
167,718 | 155,047 | 155,073 | |||||||||
Warrant |
| | 2,808 | |||||||||
Discount on preferred stock |
(1,240 | ) | | (2,418 | ) | |||||||
Accumulated other comprehensive income |
9,099 | 4,443 | 4,818 | |||||||||
Total stockholders equity |
430,596 | 282,088 | 340,231 | |||||||||
Total liabilities and stockholders equity |
$ | 3,859,323 | $ | 2,587,272 | $ | 2,583,284 | ||||||
See accompanying notes to condensed consolidated financial statements.
- 1 -
UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest and dividend income: |
||||||||||||||||
Interest and fees on loans |
$ | 43,571 | $ | 28,308 | $ | 126,234 | $ | 83,680 | ||||||||
Interest on Federal funds sold |
2 | | 17 | | ||||||||||||
Interest on deposits in other banks |
49 | 9 | 72 | 123 | ||||||||||||
Interest and dividends on securities: |
||||||||||||||||
Taxable |
3,176 | 2,794 | 10,218 | 7,860 | ||||||||||||
Nontaxable |
1,642 | 1,391 | 4,539 | 4,180 | ||||||||||||
Total interest and dividend income |
48,440 | 32,502 | 141,080 | 95,843 | ||||||||||||
Interest expense: |
||||||||||||||||
Interest on deposits |
7,956 | 9,330 | 23,056 | 31,222 | ||||||||||||
Interest on Federal funds purchased |
5 | 16 | 19 | 16 | ||||||||||||
Interest on short-term borrowings |
367 | 640 | 1,628 | 1,983 | ||||||||||||
Interest on long-term borrowings |
1,463 | 1,699 | 4,001 | 5,387 | ||||||||||||
Total interest expense |
9,791 | 11,685 | 28,704 | 38,608 | ||||||||||||
Net interest income |
38,649 | 20,817 | 112,376 | 57,235 | ||||||||||||
Provision for loan losses |
5,912 | 4,517 | 14,868 | 12,502 | ||||||||||||
Net interest income after provision for loan losses |
32,737 | 16,300 | 97,508 | 44,733 | ||||||||||||
Noninterest income: |
||||||||||||||||
Service charges on deposit accounts |
2,243 | 2,115 | 6,795 | 6,216 | ||||||||||||
Other service charges, commissions and fees |
2,860 | 1,507 | 8,311 | 4,422 | ||||||||||||
Gains on securities transactions, net |
38 | 16 | 62 | 30 | ||||||||||||
Gains on sales of loans |
5,962 | 3,761 | 15,701 | 12,396 | ||||||||||||
Gains (losses) on sales of other real estate and bank premises, net |
332 | 30 | 376 | (24 | ) | |||||||||||
Other operating income |
918 | 482 | 2,948 | 1,482 | ||||||||||||
Total noninterest income |
12,353 | 7,911 | 34,193 | 24,522 | ||||||||||||
Noninterest expenses: |
||||||||||||||||
Salaries and benefits |
17,451 | 10,856 | 50,269 | 32,403 | ||||||||||||
Occupancy expenses |
2,947 | 1,780 | 8,453 | 5,312 | ||||||||||||
Furniture and equipment expenses |
1,691 | 1,080 | 4,874 | 3,451 | ||||||||||||
Other operating expenses |
11,895 | 7,389 | 42,336 | 22,217 | ||||||||||||
Total noninterest expenses |
33,984 | 21,105 | 105,932 | 63,383 | ||||||||||||
Income before income taxes |
11,106 | 3,106 | 25,769 | 5,872 | ||||||||||||
Income tax expense |
3,033 | 301 | 7,271 | 361 | ||||||||||||
Net income |
$ | 8,073 | $ | 2,805 | $ | 18,498 | $ | 5,511 | ||||||||
Dividends paid and accumulated on preferred stock |
462 | 737 | 1,227 | 2,212 | ||||||||||||
Accretion of discount on preferred stock |
62 | 125 | 163 | 372 | ||||||||||||
Net income available to common shareholders |
$ | 7,549 | $ | 1,943 | $ | 17,108 | $ | 2,927 | ||||||||
Earnings per common share, basic |
$ | 0.29 | $ | 0.13 | $ | 0.68 | $ | 0.21 | ||||||||
Earnings per common share, diluted |
$ | 0.29 | $ | 0.13 | $ | 0.68 | $ | 0.21 | ||||||||
See accompanying notes to condensed consolidated financial statements.
- 2 -
UNION FIRST MARKET BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Preferred Stock |
Common Stock |
Surplus | Retained Earnings |
Warrant | Discount on Preferred Stock |
Accumulated Other Comprehensive Income (Loss) |
Comprehensive Income |
Total | ||||||||||||||||||||||||||||
Balance - December 31, 2008 |
$ | 58,874 | $ | 18,055 | $ | 43,435 | $ | 155,140 | $ | 2,808 | $ | (2,790 | ) | $ | (1,724 | ) | $ | 273,798 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
5,511 | $ | 5,511 | 5,511 | ||||||||||||||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax, $3,533) |
6,561 | |||||||||||||||||||||||||||||||||||
Reclassification adjustment for gains included in net income (net of tax, $11) |
(19 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive income (net of tax, $3,522) |
6,542 | 6,542 | 6,542 | |||||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 12,053 | ||||||||||||||||||||||||||||||||||
Issuance of Common stock (4,725,000 shares) |
6,284 | 52,686 | 58,970 | |||||||||||||||||||||||||||||||||
Dividends on Common Stock ($.24 per share) |
(3,272 | ) | (3,272 | ) | ||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock awards |
4 | 4 | ||||||||||||||||||||||||||||||||||
Issuance costs of Preferred Stock |
(50 | ) | (50 | ) | ||||||||||||||||||||||||||||||||
Dividends on Preferred Stock |
(1,934 | ) | (1,934 | ) | ||||||||||||||||||||||||||||||||
Accretion of discount on Preferred Stock |
(372 | ) | 372 | | ||||||||||||||||||||||||||||||||
Issuance of Common Stock under Dividend Reinvestment Plan (26,471 shares) |
35 | 322 | 357 | |||||||||||||||||||||||||||||||||
Issuance of Common Stock under Incentive Stock Option Plan (900 shares) |
1 | 8 | 9 | |||||||||||||||||||||||||||||||||
Vesting of Restricted Stock under Stock Incentive Plan (14,313 shares) |
20 | (20 | ) | | ||||||||||||||||||||||||||||||||
Stock-based compensation expense |
296 | 296 | ||||||||||||||||||||||||||||||||||
Balance - September 30, 2009 |
$ | 58,874 | $ | 24,395 | $ | 96,681 | $ | 155,073 | $ | 2,808 | $ | (2,418 | ) | $ | 4,818 | $ | 340,231 | |||||||||||||||||||
Balance - December 31, 2009 |
$ | | $ | 24,462 | $ | 98,136 | $ | 155,047 | $ | | $ | | $ | 4,443 | $ | 282,088 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
18,498 | $ | 18,498 | 18,498 | ||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap |
(2,858 | ) | ||||||||||||||||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax, $4,068) |
7,554 | |||||||||||||||||||||||||||||||||||
Reclassification adjustment for gains included in net income (net of tax, $22) |
(40 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive income (net of tax, $4,046) |
4,656 | 4,656 | 4,656 | |||||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 23,154 | ||||||||||||||||||||||||||||||||||
Issuance of Common stock (7,477,274 shares) |
9,945 | 86,021 | 95,966 | |||||||||||||||||||||||||||||||||
Dividends on Common Stock ($.18 per share) |
(4,667 | ) | (4,667 | ) | ||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock awards |
3 | 3 | ||||||||||||||||||||||||||||||||||
Issuance of Preferred Stock |
35,595 | (1,403 | ) | 34,192 | ||||||||||||||||||||||||||||||||
Dividends on Preferred Stock |
(997 | ) | (997 | ) | ||||||||||||||||||||||||||||||||
Accretion of discount on Preferred Stock |
(163 | ) | 163 | | ||||||||||||||||||||||||||||||||
Issuance of Common Stock under Dividend Reinvestment Plan (21,833 shares) |
20 | 252 | 272 | |||||||||||||||||||||||||||||||||
Issuance of Common Stock under Incentive Stock Option Plan (4,541 shares) |
7 | 11 | 18 | |||||||||||||||||||||||||||||||||
Vesting of Restricted Stock under Stock Incentive Plan (21,573 shares) |
26 | (26 | ) | | ||||||||||||||||||||||||||||||||
Stock-based compensation expense |
567 | 567 | ||||||||||||||||||||||||||||||||||
Balance - September 30, 2010 |
$ | 35,595 | $ | 34,460 | $ | 184,964 | $ | 167,718 | $ | | $ | (1,240 | ) | $ | 9,099 | $ | 430,596 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
- 3 -
UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 18,498 | $ | 5,511 | ||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
||||||||
Depreciation and amortization of bank premises and equipment |
4,846 | 3,845 | ||||||
Amortization, net |
4,885 | 3,127 | ||||||
Provision for loan losses |
14,868 | 12,502 | ||||||
Increase in loans held for sale, net |
(30,101 | ) | (12,672 | ) | ||||
Gains on the sale of investment securities |
(62 | ) | (30 | ) | ||||
(Gains) losses on sales of other real estate owned and premises, net |
(376 | ) | 24 | |||||
Stock-based compensation expense |
567 | 296 | ||||||
Decrease (increase) in other assets |
1,021 | (129 | ) | |||||
Increase in other liabilities |
3,874 | 176 | ||||||
Net cash and cash equivalents provided by operating activities |
18,020 | 12,650 | ||||||
Investing activities: |
||||||||
Purchases of securities available for sale |
(141,868 | ) | (145,850 | ) | ||||
Proceeds from sales of securities available for sale |
106,549 | 4,127 | ||||||
Proceeds from maturities, calls and paydowns of securities available for sale |
85,153 | 61,359 | ||||||
Net increase in loans |
(6,427 | ) | (26,219 | ) | ||||
Sales (purchases) of bank premises and equipment and OREO, net |
6,986 | (2,118 | ) | |||||
Cash received in bank acquisition |
137,460 | | ||||||
Net cash and cash equivalents provided by (used in) investing activities |
187,853 | (108,701 | ) | |||||
Financing activities: |
||||||||
Net increase in noninterest-bearing deposits |
30,440 | 24,623 | ||||||
Net (decrease) increase in interest-bearing deposits |
(80,932 | ) | 13,946 | |||||
Net decrease in short-term borrowings |
(114,858 | ) | (63,827 | ) | ||||
Net decrease in long-term borrowings |
(925 | ) | (10,000 | ) | ||||
Cash dividends paid - common stock |
(4,667 | ) | (3,272 | ) | ||||
Cash dividends paid - preferred stock |
(997 | ) | (1,934 | ) | ||||
Tax benefit from the exercise of equity-based awards |
3 | 4 | ||||||
Proceeds from the issuance of common stock |
290 | 59,336 | ||||||
Issuance costs of preferred stock |
| (50 | ) | |||||
Net cash and cash equivalents (used in) provided by financing activities |
(171,646 | ) | 18,826 | |||||
Increase (decrease) in cash and cash equivalents |
34,227 | (77,225 | ) | |||||
Cash and cash equivalents at beginning of the period |
45,911 | 148,537 | ||||||
Cash and cash equivalents at end of the period |
$ | 80,138 | $ | 71,312 | ||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Cash payments for: |
||||||||
Interest |
$ | 28,291 | $ | 39,232 | ||||
Income taxes |
8,672 | | ||||||
Supplemental Schedule of Noncash Activities |
||||||||
Unrealized gains on securities available for sale |
$ | 11,569 | $ | 10,064 | ||||
Unrealized loss on cash flow hedge |
(2,858 | ) | | |||||
Transfer of loans to other real estate owned, net |
11,851 | 10,165 | ||||||
Common stock issued for acquisition |
96,083 | | ||||||
Preferred stock issued for acquisition |
34,192 | | ||||||
Transactions related to bank acquisitions |
||||||||
Increase in assets and liabilities: |
||||||||
Loans |
$ | 981,541 | $ | | ||||
Securities |
218,676 | | ||||||
Other Assets |
78,542 | | ||||||
Noninterest bearing deposits |
171,117 | | ||||||
Interest bearing deposits |
1,037,206 | | ||||||
Borrowings |
75,789 | | ||||||
Other Liabilities |
1,832 | |
See accompanying notes to condensed consolidated financial statements.
- 4 -
UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010
1. | ACCOUNTING POLICIES |
The condensed consolidated financial statements include the accounts of Union First Market Bankshares Corporation and its subsidiaries (the Company). Significant inter-company accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys 2009 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.
The Company has adopted Accounting Standards Codification (ASC) 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162.
2. | BUSINESS COMBINATIONS |
On February 1, 2010, the Company completed its previously announced acquisition of First Market Bank, FSB (First Market Bank or FMB) in an all stock transaction. First Market Banks common shareholders received 6,273.259 shares of the Companys common stock in exchange for each share of First Market Banks common stock, resulting in the Company issuing 6,701,478 common shares. The Series A preferred shareholder of First Market Bank received 775,795 shares of the Companys common stock in exchange for all shares of the Series A preferred stock. In connection with the transaction, the Company issued a total of 7,477,273 common shares with an acquisition date fair value of $96.1 million. The Series B and Series C preferred shareholder of First Market Bank received 35,595 shares of the Companys Series B preferred stock in exchange for all shares of the Series B and Series C preferred stock.
The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the acquisition date. Assets acquired totaled $1.4 billion, including $981.5 million in net loans and $218.7 million in investment securities. Liabilities assumed were $1.3 billion, including $1.2 billion of deposits. In connection with the acquisition, the Company recorded $1.1 million of goodwill and $26.4 million of core deposit intangible. The core deposit intangible is being amortized over an average of 4.3 years using an accelerated method. In addition, the Company recorded $1.2 million related to a trademark intangible. This is being amortized over a three year time period. The recorded goodwill was allocated to the community banking segment of the Company and is non-deductible for tax purposes.
In many cases, determining the estimated fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the fair valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference
- 5 -
between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carryover of First Market Banks previously established allowance for loan losses. Subsequent decreases in the expected cash flows will require the Company to evaluate the need for additions to the Companys allowance for credit losses. Subsequent improvements in expected cash flows will result in the recognition of additional interest income over the then remaining lives of the loans.
The consideration paid for First Market Bank and the amounts of acquired identifiable assets and liabilities and preferred equity assumed as of the acquisition date were as follows (dollars in thousands):
Purchase price: |
||||
Value of: |
||||
Common shares issued (7,477,273 shares) |
$ | 96,083 | ||
U. S. Treasury investment in First Market Bank |
34,192 | |||
Total purchase price |
130,275 | |||
Identifiable assets: |
||||
Cash and due from banks |
137,460 | |||
Investment securities |
218,676 | |||
Loans and leases |
981,541 | |||
Core deposit intangible |
26,400 | |||
Other assets |
51,049 | |||
Total assets |
1,415,126 | |||
Liabilities and equity: |
||||
Deposits |
1,208,323 | |||
Short-term borrowings |
60,000 | |||
Long-term borrowings |
15,789 | |||
Other liabilities |
1,832 | |||
Total liabilities |
1,285,944 | |||
Net assets acquired |
129,182 | |||
Goodwill resulting from acquisition |
$ | 1,093 | ||
Interest income on acquired loans for the third quarter of 2010 was approximately $13.4 million. The outstanding principal balance and the carrying amount of these loans that is included in the consolidated balance sheet at September 30, 2010 is as follows (dollars in thousands):
Outstanding principal balance |
$ | 872,343 | ||
Carrying amount |
$ | 857,061 |
Loans obtained in the acquisition of First Market Bank for which there is specific evidence of credit deterioration and for which it was probable that the Company would be unable to collect all contractually required principal and interest payments represent less than 0.43% of the Companys consolidated assets and, accordingly, are not considered material.
The table that follows presents certain pro forma information as if First Market Bank had been acquired on January 1, 2009 for 2009 and January 1, 2010 for 2010. These results combine the historical results of First Market Bank into the Companys consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the stated dates. In particular, no adjustments have been made to eliminate the amount of First Market Banks provision for credit losses of $4.4 million in 2009 (there was no provision for loan losses during the month of January 2010 for First Market Bank) that would not have been necessary had the acquired loans been recorded at fair value as of the beginning of each year. The disclosure of First Market Banks post-acquisition revenue and net income were not practicable due to combining its operations with the Companys largest affiliate shortly after the acquisition.
- 6 -
Additionally, the Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow (dollars in thousands):
Pro forma Nine months ended |
||||||||
2010 | 2009 | |||||||
Total revenues |
$ | 181,518 | $ | 178,978 | ||||
Net income |
$ | 23,821 | $ | 9,044 |
Acquisition-related expenses associated with the acquisition of First Market Bank were $123,000 and $7.8 million for the three and nine month periods ended September 30, 2010, respectively, and are recorded in Other operating expenses in the Companys condensed consolidated statements of income. Acquisition-related expenses were $307,000 and $948,000 for the three and nine months ended September 2009. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, integrating operations, and employee severances, which have been expensed as incurred.
A summary of acquisition-related expenses associated with the First Market Bank acquisition included in the condensed consolidated statements of income is as follows (dollars in thousands). Included in the equipment and net occupancy category is the write-down of select fixed assets of approximately $1.7 million following acquisition.
Three months ended September 30, 2010 |
Nine months ended September 30, 2010 |
|||||||
Salaries and employee benefits |
$ | | $ | 1,671 | ||||
Equipment and net occupancy |
| 2,405 | ||||||
Professional services |
5 | 1,652 | ||||||
Other costs of operations |
118 | 2,109 | ||||||
Total |
$ | 123 | $ | 7,837 | ||||
Total acquisition costs incurred from the date the Company announced the acquisition of First Market Bank through September 30, 2010 were $9.3 million, approximately $1.5 million below the initial estimate of approximately $10.8 million. No further costs are expected.
During the third quarter of 2010, the Company compared the expected prepayments at acquisition to actual prepayments and anticipated future payments. The slower prepayment speed noted on land loans during this assessment is considered a change in accounting estimate and resulted in a lower effective yield. A cumulative reduction of $994,000 in discount accretion was recorded during the third quarter, of which $319,000 relates to the current quarter, to align year-to-date accretion following an assessment of actual and anticipated future payments.
3. | STOCK-BASED COMPENSATION |
Effective January 1, 2006, the Company adopted ASC 718, Stock Compensation. This statement requires the costs resulting from all share-based payments to employees to be recognized in the financial statements.
The Companys 2003 Stock Incentive Plan provides for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company. The stock incentive plan makes available 525,000 shares which may be awarded to employees of the Company in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986, non-statutory stock options, and nonvested stock. Under the plan, the option price cannot be less than the fair market value of the stock on the grant date. The stock options maximum term is 10 years from the date of grant and generally vests in equal annual installments of 20 percent over a five-year vesting schedule. The Company issues new shares to satisfy share-based awards. As of September 30, 2010, there were 94,268 shares available for issuance under the Companys 2003 Stock Incentive Plan.
- 7 -
For the three month and nine month periods ended September 30, 2010, the Company recognized stock-based compensation expense of approximately $223,000 and $410,000, net of tax, respectively, and less than $0.01 per common share for both periods ended September 30, 2010.
Stock Options
The following table summarizes the stock option activity for the nine months ended September 30, 2010:
Number of Stock Options |
Weighted Average Exercise Price |
|||||||
Options outstanding, December 31, 2009 |
216,180 | $ | 21.03 | |||||
Granted |
130,000 | 16.40 | ||||||
Exercised |
(4,541 | ) | 8.73 | |||||
Forfeited |
(9,854 | ) | 19.61 | |||||
Options outstanding, September 30, 2010 |
331,786 | 19.33 | ||||||
Options exercisable, September 30, 2010 |
188,919 | 20.78 | ||||||
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table for the nine months ended September 30, 2010 and 2009:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Dividend yield (1) |
2.48 | % | 2.45 | % | ||||
Expected life in years (2) |
7.0 | 7.2 | ||||||
Expected volatility (3) |
37.92 | % | 34.84 | % | ||||
Risk-free interest rate (4) |
3.23 | % | 2.80 | % | ||||
Weighted average fair value per option granted |
$ | 5.53 | $ | 3.89 |
(1) | Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant. |
(2) | Based on the average of the contractual life and vesting schedule for the respective option. |
(3) | Based on the monthly historical volatility of the Companys stock price over the expected life of the options. |
(4) | Based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant. |
The following table summarizes information concerning stock options issued to the Companys employees that are vested or are expected to vest and stock options exercisable as of September 30, 2010 (dollars in thousands, except share and per share amounts):
Stock Options Vested or Expected to Vest |
Exercisable | |||||||
Stock options |
315,386 | 188,919 | ||||||
Weighted average remaining contractual life in years |
5.61 | 3.20 | ||||||
Weighted average exercise price on shares above water |
$ | 10.30 | $ | 10.13 | ||||
Aggregate intrinsic value |
$ | 98 | $ | 96 |
The total intrinsic value for stock options exercised during the three and nine months ended September 30, 2010 was zero and $18,000, respectively. No options were exercised in the third quarter of 2010. The fair value of stock options vested during the nine months ended September 30, 2010 was approximately $113,000. Cash received from the exercise of stock options for the three and nine months ended September 30, 2010 was zero and $40,000, respectively.
- 8 -
Nonvested Stock
The 2003 plan permits the granting of nonvested stock, but such grants are 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. The restricted stock generally vests on either of the following vesting schedules: 1) In four installments, 25% at the ends of each of the four years following the grant date, or 2) In two installments, 50% at the end of the third year following the grant date and 50% at the end of the fourth year following the grant date. The performance-based stock is subject to vesting on the fourth anniversary of the date of the grant based on the performance of the Companys stock price. The value of the nonvested stock awards was calculated by multiplying the fair market value of the Companys common stock on the 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).
The following table summarizes the nonvested stock activity for the nine months ended September 30, 2010:
Number of Shares of Restricted Stock |
Performance Stock |
Weighted Average Grant- Date Fair Value |
||||||||||
Balance, December 31, 2009 |
79,190 | 330 | $ | 20.66 | ||||||||
Granted |
49,462 | 15,000 | 15.03 | |||||||||
Released |
(21,573 | ) | | 22.99 | ||||||||
Forfeited |
(5,304 | ) | (330 | ) | 15.94 | |||||||
Balance, September 30, 2010 |
101,775 | 15,000 | 15.49 | |||||||||
The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of September 30, 2010 that will be recognized in future periods is as follows (dollars in thousands):
Stock Options | Restricted Stock |
Total | ||||||||||
For the three months remaining of 2010 |
$ | 57 | $ | 152 | $ | 209 | ||||||
For year ending December 31, 2011 |
174 | 389 | 563 | |||||||||
For year ending December 31, 2012 |
151 | 384 | 535 | |||||||||
For year ending December 31, 2013 |
151 | 163 | 314 | |||||||||
For year ending December 31, 2014 |
163 | 58 | 221 | |||||||||
For year ending December 31, 2015 |
77 | | 77 | |||||||||
Total |
$ | 773 | $ | 1,146 | $ | 1,919 | ||||||
4. | ALLOWANCE FOR LOAN LOSSES |
The following summarizes activity in the allowance for loan losses for the nine months ended September 30, 2010 and 2009 (dollars in thousands):
September 30, 2010 |
September 30, 2009 |
|||||||
Beginning balance |
$ | 30,484 | $ | 25,496 | ||||
Recoveries credited to allowance |
1,736 | 1,024 | ||||||
Loans charged off |
(9,693 | ) | (6,092 | ) | ||||
Provision for loan losses |
14,868 | 12,502 | ||||||
Ending balance |
$ | 37,395 | $ | 32,930 | ||||
In accordance with current GAAP, the allowance for loan losses of First Market Bank was not carried over to the Company at acquisition date.
- 9 -
5. | EARNINGS PER SHARE |
Basic earnings per common share (EPS) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS uses as the denominator the weighted average number of common shares outstanding during the period, including the effect of potentially dilutive common shares outstanding attributable to stock awards. Dividends on preferred stock and amortization of discount on preferred stock are treated as a reduction of the numerator in calculating basic and diluted EPS. There were approximately 247,206 and 178,203 shares underlying anti-dilutive stock awards as of September 30, 2010 and 2009, respectively. Dividends paid on nonvested stock awards were approximately $10,000 and $8,000 as of September 30, 2010 and 2009.
The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2010 and 2009 (dollars and shares in thousands, except per share amounts):
Net Income Available to Common Shareholders (Numerator) |
Weighted Average Common Shares (Denominator) |
Per Share Amount |
||||||||||
For the Three Months ended September 30, 2010 |
||||||||||||
Net income |
$ | 8,073 | 25,882 | $ | 0.31 | |||||||
Less: dividends paid and accumulated on preferred stock |
462 | | 0.02 | |||||||||
Less: accretion of discount on preferred stock |
62 | | | |||||||||
Basic |
$ | 7,549 | 25,882 | $ | 0.29 | |||||||
Add: potentially dilutive common shares - stock awards |
| 39 | | |||||||||
Diluted |
$ | 7,549 | 25,920 | $ | 0.29 | |||||||
For the Three Months ended September 30, 2009 |
||||||||||||
Net income |
2,805 | 15,124 | $ | 0.19 | ||||||||
Less: dividends paid and accumulated on preferred stock |
737 | | 0.05 | |||||||||
Less: accretion of discount on preferred stock |
125 | | 0.01 | |||||||||
Basic |
$ | 1,943 | 15,124 | $ | 0.13 | |||||||
Add: potentially dilutive common shares - stock awards |
| 41 | | |||||||||
Diluted |
$ | 1,943 | 15,165 | $ | 0.13 | |||||||
For the Nine Months ended September 30, 2010 |
||||||||||||
Net income |
$ | 18,498 | 24,993 | $ | 0.74 | |||||||
Less: dividends paid and accumulated on preferred stock |
1,227 | | 0.05 | |||||||||
Less: accretion of discount on preferred stock |
163 | | 0.01 | |||||||||
Basic |
$ | 17,108 | 24,993 | $ | 0.68 | |||||||
Add: potentially dilutive common shares - stock awards |
| 43 | | |||||||||
Diluted |
$ | 17,108 | 25,036 | $ | 0.68 | |||||||
For the Nine Months ended September 30, 2009 |
||||||||||||
Net income |
$ | 5,511 | 14,093 | $ | 0.39 | |||||||
Less: dividends paid and accumulated on preferred stock |
2,212 | | 0.16 | |||||||||
Less: accretion of discount on preferred stock |
372 | | 0.02 | |||||||||
Basic |
$ | 2,927 | 14,093 | $ | 0.21 | |||||||
Add: potentially dilutive common shares - stock awards |
| 41 | | |||||||||
Diluted |
$ | 2,927 | 14,134 | $ | 0.21 | |||||||
- 10 -
6. | TRUST PREFERRED CAPITAL NOTES |
During the first quarter of 2006, Union Bankshares Corporation Statutory Trust II (Statutory Trust II), a wholly owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities in connection with the acquisition of Prosperity Bank & Trust Company. A Trust Preferred Capital Note of $36.0 million was issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate (three month LIBOR plus 1.40%) which adjusts and is payable quarterly. The interest rate for the period ended September 30, 2010 was 1.69%. The redeemable capital securities may be called at par after five years on March 31, 2011 and each quarterly anniversary of such date until the securities mature in 30 years on March 31, 2036. The principal asset of the Statutory Trust II is $37.1 million of the Companys junior subordinated debt securities with like maturities and like interest rates to the capital notes, of which $1.1 million is reflected as the Companys investment in Statutory Trust II reported as Other assets within the financial statements.
During the first quarter of 2004, Union Bankshares Corporation Statutory Trust I (Statutory Trust I), a wholly owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities in connection with the acquisition of Guaranty Financial Corporation. A Trust Preferred Capital Note of $22.5 million was issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate (three month LIBOR plus 2.75%) which adjusts and is payable quarterly. The interest rate for the period ended September 30, 2010 was 3.04%. The redeemable capital securities have been redeemable at par since June 17, 2009 and each quarterly anniversary of such date until the securities mature on June 17, 2034. The principal asset of the Statutory Trust I is $23.2 million of the Companys junior subordinated debt securities with like maturities and like interest rates to the capital notes, of which $696,000 is reflected as the Companys investment in Statutory Trust I reported as Other assets within the financial statements.
7. | SEGMENT REPORTING DISCLOSURES |
The Company has two reportable segments: a traditional full service community bank business and a mortgage loan origination business. The community bank business includes three banks, which provide loan, deposit, investment, and other banking services to consumer and commercial customers through 91 branch offices located in Virginia. On October 12, 2010, the Company combined two of its community banks, Northern Neck State Bank and Rappahannock National Bank, into its largest bank affiliate, Union First Market Bank. As a result of this transaction, Union First Market Bank is the Companys only bank subsidiary. The Companys largest affiliate, Union First Market Bank, also offers trust services. The mortgage segment provides a variety of mortgage loan products principally in Virginia, Maryland, North Carolina, and South Carolina. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which subject the Company to only de minimis risk.
Profit and loss is measured by net income after taxes including realized gains and losses on the Companys 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 Companys reportable segments are service based. The mortgage business is a fee-based business while the community banks are driven principally by net interest income. The community banks provide a distribution and referral network through their customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the banks, due largely to the number of mortgage branches outside the banks operating markets.
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 25 basis points. 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.
- 11 -
Information about reportable segments and reconciliation of such information to the consolidated financial statements for three and nine months ended September 30, 2010 and 2009 was as follows (dollars in thousands):
Community Banks |
Mortgage | Eliminations | Consolidated | |||||||||||||
Three Months Ended September 30, 2010 |
||||||||||||||||
Net interest income |
$ | 38,100 | $ | 548 | $ | | $ | 38,648 | ||||||||
Provision for loan losses |
5,912 | | | 5,912 | ||||||||||||
Net interest income after provision for loan losses |
32,188 | 548 | | 32,736 | ||||||||||||
Noninterest income |
6,509 | 5,962 | (118 | ) | 12,353 | |||||||||||
Noninterest expenses |
28,999 | 5,103 | (118 | ) | 33,984 | |||||||||||
Income before income taxes |
9,698 | 1,407 | | 11,105 | ||||||||||||
Income tax expense |
2,525 | 508 | | 3,033 | ||||||||||||
Net income |
$ | 7,173 | $ | 899 | $ | | $ | 8,072 | ||||||||
Total assets |
$ | 3,849,574 | $ | 91,736 | $ | (81,987 | ) | $ | 3,859,323 | |||||||
Three Months Ended September 30, 2009 |
||||||||||||||||
Net interest income |
$ | 20,467 | $ | 350 | $ | | $ | 20,817 | ||||||||
Provision for loan losses |
4,517 | | | 4,517 | ||||||||||||
Net interest income after provision for loan losses |
15,950 | 350 | | 16,300 | ||||||||||||
Noninterest income |
4,234 | 3,757 | (80 | ) | 7,911 | |||||||||||
Noninterest expenses |
17,542 | 3,644 | (80 | ) | 21,105 | |||||||||||
Income before income taxes |
2,642 | 463 | | 3,106 | ||||||||||||
Income tax expense |
133 | 168 | | 301 | ||||||||||||
Net income |
$ | 2,509 | $ | 295 | $ | | $ | 2,805 | ||||||||
Total assets |
$ | 2,578,505 | $ | 48,835 | $ | (44,056 | ) | $ | 2,583,284 | |||||||
Nine Months Ended September 30, 2010 |
||||||||||||||||
Net interest income |
$ | 110,844 | $ | 1,532 | $ | | $ | 112,376 | ||||||||
Provision for loan losses |
14,868 | | | 14,868 | ||||||||||||
Net interest income after provision for loan losses |
95,976 | 1,532 | | 97,508 | ||||||||||||
Noninterest income |
18,838 | 15,706 | (351 | ) | 34,193 | |||||||||||
Noninterest expenses |
92,671 | 13,612 | (351 | ) | 105,932 | |||||||||||
Income before income taxes |
22,143 | 3,626 | | 25,769 | ||||||||||||
Income tax expense |
5,919 | 1,352 | | 7,271 | ||||||||||||
Net income |
$ | 16,224 | $ | 2,274 | $ | | $ | 18,498 | ||||||||
Total assets |
$ | 3,849,574 | $ | 91,736 | $ | (81,987 | ) | $ | 3,859,323 | |||||||
Nine Months Ended September 30, 2009 |
||||||||||||||||
Net interest income |
$ | 56,145 | $ | 1,091 | | $ | 57,235 | |||||||||
Provision for loan losses |
12,502 | | | 12,502 | ||||||||||||
Net interest income after provision for loan losses |
43,643 | 1,091 | | 44,733 | ||||||||||||
Noninterest income |
12,378 | 12,385 | (241 | ) | 24,522 | |||||||||||
Noninterest expenses |
53,156 | 10,469 | (241 | ) | 63,383 | |||||||||||
Income before income taxes |
2,865 | 3,007 | | 5,872 | ||||||||||||
Income tax (benefit) expense |
(699 | ) | 1,060 | | 361 | |||||||||||
Net income |
$ | 3,564 | $ | 1,947 | $ | | $ | 5,511 | ||||||||
Total assets |
$ | 2,578,505 | $ | 48,835 | $ | (44,056 | ) | $ | 2,583,284 | |||||||
8. | RECENT ACCOUNTING PRONOUNCEMENTS |
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-04, Accounting for Various Topics Technical Corrections to SEC Paragraphs (ASU 2010-04). This update makes technical corrections to existing Securities and Exchange Commission guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of this new guidance did not have a material impact on the Companys consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, requires new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
- 12 -
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this new guidance did not have a material impact on the Companys consolidated financial statements.
In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics (ASU 2010-08). ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this new guidance did not have a material impact on the Companys consolidated financial statements.
In May 2010, the FASB issued an Exposure Draft (ED) of a proposed ASU of Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815) (File Reference No 1810-100). This proposal would require (1) presentation of both amortized cost and fair value on an entitys statement of financial position for most financial instruments held for collection or payment of contractual cash flows and (2) the inclusion of both amortized cost and fair value information for these instruments in determining net income and comprehensive income. In addition, this proposal would require that financial instruments held for sale or settlement (primarily derivatives and trading financial instruments) be recognized and measured at fair value with all changes in fair value recognized in net income. The FASB is currently working on this amendment to existing accounting standards. Upon completion of the standards, the Company will need to re-evaluate its accounting and disclosures. The FASB is proposing sweeping changes to the classification and measurement of financial instruments, hedging and impairment guidance. This project may have significant impacts for the Company. However, due to ongoing deliberations of the standard-setters, the Company is currently unable to determine the effect of future amendments or proposals at this time.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance roll-forward and modification disclosures, will be required for periods beginning after December 15, 2010. The Company is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.
In August 2010, the FASB issued an ED of a proposed ASU of Leases, Topic 840 (File Reference No. 1850-100). This ED generally proposes that lessees and lessors should apply a right-of-use model in accounting for all leases (including leases of right-of-use assets in a sublease). For leases within the scope of the proposed guidance, this means that: a lessee would recognize an asset representing its right to use the leased (underlying) asset for the lease term (the right-of-use asset) and a liability to make lease payments; a lessor would recognize an asset representing its right to receive lease payments and, depending on its exposure to risks or benefits associated with the underlying asset, would either: (i) recognize a lease liability while continuing to recognize the underlying asset (a performance obligation approach); or (ii) derecognize the rights in the underlying asset that it transfers to the lessee and continue to recognize a residual asset representing its rights to the underlying asset at the end of the lease term (a derecognition approach). Assets and liabilities recognized by lessees and lessors would be measured on a basis that assumes the longest possible term, uses an expected outcome technique and is updated when facts and circumstances change and significant changes occur in those recorded assets or liabilities. The ED also proposes disclosures based on stated objectives, including disclosures about the amounts recognized in the financial statements arising from leases and the amount, timing and uncertainty of cash flows arising from those contracts. The FASB is currently working on this amendment to existing accounting standards governing financial lease accounting. Upon completion of the standards, the Company will need to re-evaluate its accounting and disclosures. Due to ongoing deliberations of the standard-setters, the Company is currently unable to determine the effect of future amendments or proposals at this time.
- 13 -
9. | GOODWILL AND INTANGIBLE ASSETS |
The Company adopted ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this statement discontinued the amortization of goodwill and intangible assets with indefinite lives but require an impairment review at least annually and more frequently if certain impairment indicators are evident. Based on the annual testing during the second quarter of each year and the absence of impairment indicators during the current quarter the Company has recorded no impairment charges to date.
Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 15 years. In connection with the First Market Bank acquisition, accounted for using the acquisition method of accounting, the Company recorded $26.4 million of core deposit intangible, $1.2 million of trademark intangible and $1.1 million in goodwill. None of the goodwill recognized will be deductible for income tax purposes. Changes in goodwill in the Companys consolidated balance sheet from December 31, 2009 were attributable to the acquisition of First Market Bank. The core deposit intangible on that acquisition is being amortized over an average of 4.3 years using an accelerated method and the trademark intangible is being amortized over three years using the straight-line method.
Information concerning goodwill and intangible assets is presented in the following table (in thousands):
Gross Carrying Value |
Accumulated Amortization |
Net Carrying Value |
||||||||||
September 30, 2010 |
||||||||||||
Amortizable core deposit intangibles |
$ | 46,615 | $ | 17,853 | $ | 28,762 | ||||||
Unamortizable goodwill |
57,909 | 342 | 57,567 | |||||||||
Trademark intangible |
1,200 | 267 | 933 | |||||||||
December 31, 2009 |
||||||||||||
Amortizable core deposit intangibles |
$ | 20,215 | $ | 12,525 | $ | 7,690 | ||||||
Unamortizable goodwill |
56,816 | 342 | 56,474 | |||||||||
September 30, 2009 |
||||||||||||
Amortizable core deposit intangibles |
$ | 20,215 | $ | 12,044 | $ | 8,171 | ||||||
Unamortizable goodwill |
56,816 | 342 | 56,474 |
Amortization expense of the core deposit intangibles for the three and nine month periods ended September 30, 2010 totaled $1.9 million and $5.3 million, respectively, compared to $481,000 and $1.4 million for the comparable periods in 2009. Amortization expense of the trademark intangibles for the three and nine month periods ended September 30, 2010 was $100,000 and $267,000, respectively. The Company had no trademark intangible in 2009. As of September 30, 2010, the estimated remaining amortization expense of core deposit and trademark intangibles for each of the five succeeding fiscal years is as follows (dollars in thousands):
2011 |
$ | 7,006 | ||
2012 |
5,805 | |||
2013 |
4,234 | |||
2014 |
3,030 | |||
2015 |
2,490 | |||
Thereafter |
7,130 | |||
$ | 29,695 | |||
- 14 -
10. | COMMITMENTS AND CONTINGENCIES |
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 payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. At September 30, 2010 and 2009, the Company had outstanding loan commitments approximating $858.8 million and $473.5 million, respectively.
Letters of credit written are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $39.7 million and $26.3 million at September 30, 2010, and 2009, respectively.
At September 30, 2010, Union Mortgage Group, Inc. (Union Mortgage), a wholly owned subsidiary of Union First Market Bank, a wholly owned subsidiary of Union First Market Bankshares Corporation, had rate lock commitments to originate mortgage loans amounting to $161.5 million and loans held for sale of $84.4 million. Union Mortgage has entered into corresponding commitments on a best-efforts basis to sell loans on a servicing released basis totaling approximately $246.0 million. These commitments to sell loans are designed to mitigate the mortgage companys exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.
11. | SECURITIES |
The amortized cost, gross unrealized gains and losses and estimated fair values of investment securities as of September 30, 2010 and December 31, 2009 are summarized as follows (in thousands):
Gross Unrealized | ||||||||||||||||
Amortized Cost |
Gains | (Losses) | Estimated Fair Value |
|||||||||||||
September 30, 2010 |
||||||||||||||||
U.S. government and agency securities |
$ | 10,585 | $ | 462 | $ | (84 | ) | $ | 10,963 | |||||||
Obligations of states and political subdivisions |
165,687 | 7,318 | (540 | ) | 172,465 | |||||||||||
Corporate and other bonds |
18,942 | 408 | (489 | ) | 18,861 | |||||||||||
Mortgage-backed securities |
336,312 | 11,540 | (204 | ) | 347,648 | |||||||||||
Federal Reserve Bank stock - restricted |
6,711 | | | 6,711 | ||||||||||||
Federal Home Loan Bank stock - restricted |
19,062 | | | 19,062 | ||||||||||||
Other securities |
258 | 84 | (12 | ) | 330 | |||||||||||
Total securities |
$ | 557,557 | $ | 19,812 | $ | (1,329 | ) | $ | 576,040 | |||||||
December 31, 2009 |
||||||||||||||||
U.S. government and agency securities |
$ | 5,516 | $ | 247 | $ | | $ | 5,763 | ||||||||
Obligations of states and political subdivisions |
123,573 | 2,928 | (2,375 | ) | 124,126 | |||||||||||
Corporate and other bonds |
16,924 | 225 | (1,350 | ) | 15,799 | |||||||||||
Mortgage-backed securities |
228,766 | 7,415 | (176 | ) | 236,005 | |||||||||||
Federal Reserve Bank stock - restricted |
3,683 | | | 3,683 | ||||||||||||
Federal Home Loan Bank stock - restricted |
14,958 | | | 14,958 | ||||||||||||
Other securities |
257 | 14 | (14 | ) | 257 | |||||||||||
Total securities |
$ | 393,677 | $ | 10,829 | $ | (3,915 | ) | $ | 400,591 | |||||||
- 15 -
The following table shows the gross unrealized losses and fair value (in thousands) of the Companys investments with unrealized losses that are not deemed to be other-than-temporarily impaired. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position and are as follows:
Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
Fair value | Unrealized Losses |
Fair value | Unrealized Losses |
Fair value | Unrealized Losses |
|||||||||||||||||||
As of September 30, 2010 |
||||||||||||||||||||||||
U.S. government and agency securities |
$ | 59 | $ | (84 | ) | $ | | $ | | $ | 59 | $ | (84 | ) | ||||||||||
Obligations of states and political subdivisions |
8,410 | (95 | ) | 17,040 | (445 | ) | 25,450 | (540 | ) | |||||||||||||||
Mortgage-backed securities |
25,570 | (204 | ) | | | 25,570 | (204 | ) | ||||||||||||||||
Corporate bonds and other securities |
968 | (32 | ) | 4,447 | (469 | ) | 5,415 | (501 | ) | |||||||||||||||
Totals |
$ | 35,007 | $ | (415 | ) | $ | 21,487 | $ | (914 | ) | $ | 56,494 | $ | (1,329 | ) | |||||||||
As of December 31, 2009 |
||||||||||||||||||||||||
Obligations of states and political subdivisions |
$ | 9,597 | $ | (174 | ) | $ | 35,898 | $ | (2,201 | ) | $ | 45,495 | $ | (2,375 | ) | |||||||||
Mortgage-backed securities |
23,815 | (176 | ) | | | 23,815 | (176 | ) | ||||||||||||||||
Corporate bonds and other securities |
1,836 | (45 | ) | 5,118 | (1,319 | ) | 6,954 | (1,364 | ) | |||||||||||||||
$ | 35,248 | $ | (395 | ) | $ | 41,016 | $ | (3,520 | ) | $ | 76,264 | $ | (3,915 | ) | ||||||||||
As of September 30, 2010, there were $21.5 million, or 48 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 $914,000 and consisted primarily of municipal obligations. In the second quarter of 2009, the Company adopted other-than-temporary impairment (OTTI) guidance, as amended, for debt securities regarding recognition and disclosure. The major change in the guidance was that an impairment is other-than-temporary if any of the following conditions exists: 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 securitys 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.
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, managements judgment, expectations of future performance and relevant industry research and analysis. Based on the assessment for the current quarter ended September 30, 2010 and in accordance with the revised guidance, no OTTI was recognized.
12. | FAIR VALUE MEASUREMENTS |
The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This statement 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 Companys 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. |
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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 Companys 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.
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. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3). The carrying value of restricted Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.
Interest rate swap agreement used for interest rate risk management
The Company utilizes an interest rate swap agreement as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Companys interest-bearing liabilities. The Company determines the fair value of its interest rate swap using externally developed pricing models based on market observable inputs and therefore classifies such valuation as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
Fair Value Measurements at September 30, 2010 using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Level 1 | Level 2 | Level 3 | Balance | |||||||||||||
ASSETS |
||||||||||||||||
Loan derivative |
$ | | $ | 230,257 | $ | | $ | 230,257 | ||||||||
Securities available for sale |
| 550,267 | | 550,267 | ||||||||||||
Total |
$ | | $ | 780,524 | $ | | $ | 780,524 | ||||||||
LIABILITIES |
||||||||||||||||
Loan derivative |
$ | 230,257 | $ | 230,257 | ||||||||||||
Interest Rate Swap (cash flow hedge) |
| 2,858,294 | | 2,858,294 | ||||||||||||
Total |
$ | | $ | 3,088,551 | $ | | $ | 3,088,551 | ||||||||
Fair Value Measurements at December 31, 2009 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 |
$ | | $ | 381,950 | $ | | $ | 381,950 | ||||||||
Total |
$ | | $ | 381,950 | $ | | $ | 381,950 | ||||||||
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Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial 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. No nonrecurring fair value adjustments were recorded on loans held for sale during the nine months ended September 30, 2010. Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income.
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Companys 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 (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable businesss financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. At September 30, 2010, the Companys Level 3 loans consisted of three relationships secured by commercial real estate of $2.0 million with a $417,000 valuation reserve; three relationships secured by residential real estate and lots of $1.6 million with a valuation reserve of $177,000; four relationships secured by inventory, receivables or equipment of $1.0 million with a $576,000 valuation reserve; and one relationship unsecured of $110,000 with a $6,000 valuation reserve.
The following tables summarize the Companys financial assets that were measured at fair value on a nonrecurring basis (dollars in thousands):
Fair Value Measurements at September 30, 2010 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 |
$ | | $ | 84,381 | $ | | $ | 84,381 | ||||||||
Impaired loans |
| 194,354 | 3,575 | 197,929 | ||||||||||||
Total |
$ | | $ | 278,735 | $ | 3,575 | $ | 282,310 | ||||||||
- 18 -
Fair Value Measurements at December 31, 2009 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 |
$ | | $ | 54,280 | $ | | $ | 54,280 | ||||||||
Impaired Loans |
| 111,095 | 10,707 | 121,802 | ||||||||||||
Total |
$ | | $ | 165,375 | $ | 10,707 | $ | 176,082 | ||||||||
The Companys nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to other real estate owned (OREO), goodwill, and intangible assets. In accordance with ASC 360, Property, Plant and Equipment, OREO with a carrying value above fair value is written down to its fair value and results in an impairment charge. The fair value of the real property is generally determined using appraisals or other indicators of value based on recent comparables of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Total valuation expenses related to OREO for the three and nine months ended September 30, 2010 were $43,000 for both periods and for the three and nine months ended September 30, 2009 were zero and $62,000, respectively. No impairment charges have been recorded for goodwill or intangible assets.
ASC 825, Financial Instruments, was effective for interim periods ending after June 15, 2009. This statement 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 the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.
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 short-term borrowings is a reasonable estimate of fair value. The fair value of long-term borrowings is estimated based on interest rates currently available for debt with similar terms and remaining maturities.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Cash Flow Hedge
The carrying amount of the cash flow hedge approximates 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 September 30, 2010, the fair value of loan commitments and standby letters of credit were immaterial.
The carrying values and estimated fair values of the Companys financial instruments as of September 30, 2010 are in the following table (dollars in thousands):
September 30, 2010 | ||||||||
Carrying Amount |
Fair Value |
|||||||
Financial assets: |
||||||||
Cash and cash equivalents |
$ | 80,138 | $ | 80,138 | ||||
Securities available for sale |
576,040 | 576,040 | ||||||
Loans held for sale |
84,381 | 84,381 | ||||||
Net loans |
2,804,872 | 2,795,154 | ||||||
Accrued interest receivable |
16,376 | 16,376 | ||||||
Financial liabilities: |
||||||||
Deposits |
$ | 3,074,195 | $ | 3,090,622 | ||||
Borrowings |
326,067 | 332,221 | ||||||
Accrued interest payable |
2,426 | 2,426 | ||||||
Cash flow hedge |
2,858 | 2,858 |
13. | DERIVATIVES |
During the second quarter of 2010, the Company entered into one interest rate swap agreement (the trust swap) as part of the management of interest rate risk. The Company designated the trust swap as a cash flow hedge intended to protect against the variability of cash flows associated with the aforementioned Statutory Trust II preferred capital securities. The trust swap hedges the interest rate risk, wherein the Company receives interest of LIBOR from a counterparty and pays a fixed rate of 3.51% to the same counterparty calculated on a notional amount of $36.0 million. The term of the trust swap is six years with a fixed rate that starts June 15, 2011. The trust swap was entered into with a counterparty that met the Companys credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.
Amounts receivable or payable are recognized as accrued under the terms of the agreements. The trust swap is designated as a cash flow hedge, with the effective portion of the derivatives unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. At September 30, 2010, the fair value of the trust swap agreement was an unrealized loss of $2.9 million, the amount the Company would have expected to pay if the contract was terminated. There was no hedge ineffectiveness for this trust swap. The below offsetting asset or liability is recorded as a component of other comprehensive income recorded in the Companys Condensed Consolidated Statements of Changes in Stockholders Equity. Shown below is a summary of the derivative designated as an accounting hedge at September 30, 2010:
Positions | Notional Amount |
Asset | Liability | Receive Rate |
Pay Rate |
Life (Years) |
||||||||||||||||||||
Pay fixed - receive floating interest rate swaps |
1 | $ | 36,000,000 | | $ | 2,858,294 | 0.29 | % | 3.51 | % | 6.71 | |||||||||||||||
Total derivatives used in hedging relationships |
$ | 36,000,000 | | $ | 2,858,294 | 0.29 | % | 3.51 | % | 6.71 | ||||||||||||||||
- 20 -
The Company continues to have two interest rate swap loan relationships (loan swaps) as a result of the acquisition of First Market Bank. Upon entering into loan swaps with borrowers to meet their financing needs, offsetting positions with counterparties were entered into in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values reported in other assets and other liabilities. The Company had loan swaps with a notional value of $4.3 million and offsetting fair values of $230,257 recorded in other assets and other liabilities with no net effect on other operating income. Shown below is a summary regarding loan swap derivative activities at September 30, 2010:
Positions | Notional Amount |
Asset | Liability | Receive Rate |
Pay Rate |
Life (Years) |
||||||||||||||||||||||
Receive fixed - pay floating interest rate swaps |
2 | $ | 4,250,227 | $ | 230,257 | | 6.34 | % | 2.76 | % | 2.25 | |||||||||||||||||
Pay fixed - receive floating interest rate swaps |
2 | 4,250,227 | | 230,257 | 2.76 | % | 6.34 | % | 2.25 | |||||||||||||||||||
Net interest rate swaps |
$ | 8,500,453 | $ | 230,257 | $ | 230,257 | 3.59 | % | 3.59 | % | 2.25 | |||||||||||||||||
- 21 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Union First Market Bankshares Corporation
Richmond, Virginia
We have reviewed the accompanying condensed consolidated balance sheets of Union First Market Bankshares Corporation and subsidiaries as of September 30, 2010 and 2009, the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2010 and 2009, and the related condensed consolidated statements of changes in stockholders equity and cash flows for the nine-month periods ended September 30, 2010 and 2009. These condensed consolidated financial statements are the responsibility of the Companys management.
We conducted our reviews 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 to financial data 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, 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 reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Union First Market Bankshares Corporation and subsidiaries as of December 31, 2009, and the related consolidated statements of income, changes in stockholders equity and cash flows for the year then ended (not presented herein); and in our report dated March 16, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Winchester, Virginia
November 9, 2010
- 22 -
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union First Market 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 thereto, and the other financial data included in this report, as well as the Companys Annual Report on Form 10-K and managements discussion and analysis for the year ended December 31, 2009. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three and nine month periods ended September 30, 2010 and 2009 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 conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. More information is available on the Companys website, www.ubsh.com and on the Securities and Exchange Commissions website, www.sec.gov. 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 and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America (GAAP) and conform to general practices within the banking industry. The Companys financial position and results of operations are affected by managements 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 Companys consolidated financial position and/or results of operations.
The more critical accounting and reporting policies include the Companys accounting for the allowance for loan losses, mergers and acquisitions, and goodwill and intangible assets. The Companys accounting policies are fundamental to understanding the Companys consolidated financial position and consolidated results of operations. Accordingly, the Companys significant accounting policies are discussed in detail in Note 1 Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The Company adopted Accounting Standards Codification (ASC) 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162, during the third quarter 2009.
- 23 -
The following is a summary of the Companys critical accounting policies that are highly dependent on estimates, assumptions, and judgments.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated, and (ii) ASC 310 Receivables, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.
The Companys allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to applicable GAAP. Managements estimate of each homogenous pool component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.
Applicable GAAP requires that the impairment of loans that have been separately identified for evaluation are measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. This statement also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on impaired loans.
Reserves for commercial loans are determined by applying estimated loss factors to the portfolio based on historical loss experience and managements evaluation and risk grading of the commercial loan portfolio. Reserves are provided for noncommercial loan categories using historical loss factors applied to the total outstanding loan balance of each loan category. Additionally, environmental factors based on national and local economic conditions, as well as portfolio-specific attributes, are considered in estimating the allowance for loan losses.
While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.
Mergers and Acquisitions
On February 1, 2010, the Company completed its acquisition of First Market Bank, FSB (First Market Bank or FMB) in an all stock transaction. First Market Banks common shareholders received 6,273.259 shares of the Companys common stock in exchange for each share of First Market Banks common stock, resulting in the Company issuing 6,701,478 common shares. The Series A preferred shareholder of First Market Bank received 775,795 shares of the Companys common stock in exchange for all shares of the Series A preferred stock. In connection with the transaction the Company issued a total of 7,477,273 common shares with an acquisition date fair value of $96.1 million. The Series B and Series C preferred shareholder of First Market Bank received 35,595 shares of the Companys Series B preferred stock in exchange for all shares of the Series B and Series C preferred stock.
- 24 -
The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the acquisition date. Assets acquired totaled $1.4 billion, including $981.5 million in net loans and $218.7 million in investment securities. Liabilities assumed were $1.3 billion, including $1.2 billion of deposits. In connection with the acquisition, the Company recorded $1.1 million of goodwill and $26.4 million of core deposit intangible. The core deposit intangible is being amortized over an average of 4.3 years using an accelerated method. In addition, the Company recorded $1.2 million related to a trademark intangible. This is being amortized over a three year time period.
In many cases, determining the estimated fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the fair valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carryover of First Market Banks previously established allowance for loan losses. Subsequent decreases in the expected cash flows (credit deterioration) will require the Company to evaluate the need for additions to the Companys allowance for credit losses. Subsequent improvements in expected cash flows will result in the recognition of additional interest income over the then remaining lives of the loans.
The estimated fair value of liabilities assumed was based on the discounted value of contractual cash flows and compared to other securities with similar characteristics and remaining maturities. Specifically, First Market Banks Federal Home Loan Bank of Atlanta (FHLB) advances, subordinated debt and certificates of deposit were assumed at a net premium. This premium will have a favorable impact on the Companys net interest expense over the next 7 quarters as the premium reduces interest expense based on an accelerated method.
ABOUT UNION FIRST MARKET BANKSHARES CORPORATION
Union First Market Bankshares Corporation is the largest community banking organization based in Virginia, providing full service banking to the Northern, Central, Rappahannock, Tidewater and Northern Neck regions of Virginia through its bank subsidiary, Union First Market Bank (91 locations in the counties of Albemarle, Caroline, Chesterfield, Essex, Fairfax, Fluvanna, Hanover, Henrico, James City, King George, King William, Nelson, Richmond, Spotsylvania, Stafford, Westmoreland, York, and the cities of Richmond, Fredericksburg, Williamsburg, Newport News, Grafton, Charlottesville, Colonial Heights, Roanoke, Washington, Front Royal, Middleburg, Warrenton, and Winchester). Union Investment Services, Inc. provides full brokerage services; Union Mortgage Group, Inc. provides a full line of mortgage products; and Union Insurance Group, LLC offers various lines of insurance products. Union First Market Bank also owns a non-controlling interest in Johnson Mortgage Company, LLC.
On October 12, 2010, the Company combined two of its community banks, Northern Neck State Bank and Rappahannock National Bank, into its largest bank affiliate, Union First Market Bank. As a result of this transaction, Union First Market Bank is the Companys only bank subsidiary.
Additional information is available on the Companys website at www.ubsh.com. The information contained on the Companys website is not a part of this report. Shares of the Companys common stock are traded on the NASDAQ Global Select Market under the symbol UBSH.
- 25 -
RESULTS OF OPERATIONS
Net Income
The Company reported net income of $8.1 million and basic and diluted earnings per share of $0.29 for its third quarter ended September 30, 2010. The results are a year-over-year increase of $5.3 million in net income and $0.16 in basic and diluted earnings per share from the prior year period which ended on September 30, 2009. The increase in net income from last year largely relates to improvements in the net interest margin and the addition of the operations of the former FMB for the period. Third quarter net income available to common shareholders, which deducts dividends and discount accretion on preferred stock from net income, was $7.5 million compared to $1.9 million for the third quarter last year.
Third quarter net income decreased $653,000 from the second quarter ended June 30, 2010. The decrease was largely attributable to an increase in the provision for loan losses in response to continued slowness in economic recovery.
The reported net income of $18.5 million for the nine months ended September 30, 2010, represented an increase of $13.0 million from the same period a year ago. The increase was largely attributable to the addition of FMB and improvement in the net interest margin, partially offset by nonrecurring acquisition costs and provision for loan losses.
NET INTEREST INCOME
On a linked quarter basis, tax-equivalent net interest income decreased $897,000, or 2.2%, to $39.7 million due principally to lower yields on loans and lower accretion from purchased performing loans partially offset by the continued low cost structure of interest-bearing liabilities. The tax-equivalent net interest margin decreased 18 basis points from 4.65% in the prior quarter to 4.47%. The net interest margin decrease was principally attributable to the aforementioned lower accretion from purchased performing loans and lower yields on investment securities partially offset by a continued low cost structure from interest-bearing liabilities. During the third quarter of 2010, the funding mix shifted from higher cost certificates of deposit to lower cost money market accounts and demand deposits. The following table shows average interest-earning assets, interest-bearing liabilities, their related income/expense and change for the periods shown:
Linked quarter results | ||||||||||||
Dollars in thousands | ||||||||||||
Three Months Ended | ||||||||||||
09/30/10 | 06/30/10 | Change | ||||||||||
Average interest-earning assets |
$ | 3,523,678 | $ | 3,502,398 | $ | 21,280 | ||||||
Related interest income |
$ | 49,490 | $ | 50,351 | $ | (861 | ) | |||||
Yield on interest-earning assets |
5.57 | % | 5.77 | % | -20 | bps | ||||||
Average interest-earning liabilities |
$ | 2,914,482 | $ | 2,917,606 | $ | (3,124 | ) | |||||
Related interest expense |
$ | 9,791 | $ | 9,755 | $ | 36 | ||||||
Cost of interest-bearing liabilities |
1.33 | % | 1.34 | % | -1 | bps |
For the three months ended September 30, 2010, tax-equivalent net interest income increased $18.0 million, or 82.6%, to $39.7 million compared to the same period last year. This improvement was principally attributable to declines in costs of interest-bearing liabilities, as well as increased interest-earning assets related to the acquisition of FMB. The tax-equivalent net interest margin increased 78 basis points from 3.69% in the prior year to 4.47%. Improvements in the cost of funds were principally a result of declining costs on certificates of deposit, fair value adjustments from acquisition accounting and lower costs related to FHLB borrowings. The decrease in interest-earning asset yields were principally related to improvements in loan yields offset by lower yields on investment securities.
- 26 -
The following table shows average interest-earning assets, interest-bearing liabilities, their related income/expense and change for the periods shown:
Year-over-year results Dollars in thousands Three Months Ended |
||||||||||||
09/30/10 | 09/30/09 | Change | ||||||||||
Average interest-earning assets |
$ | 3,523,678 | $ | 2,333,648 | $ | 1,190,030 | ||||||
Related interest income |
$ | 49,490 | $ | 33,427 | $ | 16,063 | ||||||
Yield on interest-earning assets |
5.57 | % | 5.68 | % | -11 | bps | ||||||
Average interest-earning liabilities |
$ | 2,914,482 | $ | 1,957,974 | $ | 956,508 | ||||||
Related interest expense |
$ | 9,791 | $ | 11,685 | $ | (1,894 | ) | |||||
Cost of interest-bearing liabilities |
1.33 | % | 2.37 | % | -104 | bps |
For the nine months ended September 30, 2010, tax-equivalent net interest income increased $55.4 million, or 92.3%, to $115.4 million compared to the same period last year. This improvement was principally attributable to declines in costs of interest-bearing liabilities as well as increased interest-earning assets related to the acquisition of FMB. The tax-equivalent net interest margin increased 115 basis points from 3.41% in the prior year to 4.56%. The improvement in the cost of funds was principally a result of declining costs on certificates of deposit and money market accounts, fair value adjustments from acquisition accounting and lower costs related to FHLB borrowings. The following table shows average interest-earning assets, interest-bearing liabilities, their related income/expense and change for the periods shown:
Year-to-date results Dollars in thousands Nine Months Ended |
||||||||||||
09/30/10 | 09/30/09 | Change | ||||||||||
Average interest-earning assets |
$ | 3,378,128 | $ | 2,355,462 | $ | 1,022,666 | ||||||
Related interest income |
$ | 144,096 | $ | 98,629 | $ | 45,467 | ||||||
Yield on interest-earning assets |
5.69 | % | 5.60 | % | 9 | bps | ||||||
Average interest-earning liabilities |
$ | 2,818,950 | $ | 1,994,602 | $ | 824,348 | ||||||
Related interest expense |
$ | 28,704 | $ | 38,608 | $ | (9,904 | ) | |||||
Cost of interest-bearing liabilities |
1.36 | % | 2.59 | % | -123 | bps |
Acquisition Activity
Total net loans and investment securities acquired in the First Market Bank transaction were recorded at their estimated fair values of $981.5 million and $218.7 million, respectively. The fair value of noninterest and interest-bearing liabilities assumed were $171.1 million and $1.0 billion, respectively. Borrowings assumed were $75.8 million, of which $61.4 million and $14.4 million consisted of FHLB advances and subordinated debt, respectively. Following the acquisition of First Market Bank, the Company reduced wholesale funding by approximately $159.0 million through the sale of $103.0 million in acquired investment securities and excess cash balances.
The acquired loan and investment security portfolios of FMB were marked-to-market with a fair value discount to market rates. The excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and the investment security fair value discount is recognized on a straight line basis over the estimated lives of the investment securities. The Company also assumed FHLB borrowings, subordinated debt and certificates of deposit. These liabilities were marked-to-market with estimates of fair value on acquisition date. FHLB borrowings and certificates of deposit were purchased at a premium to market rates. Subordinated debt was purchased at a discount to market. The related discount (or premium) to market is recorded as an increase (or decrease) to interest expense over the estimated lives of the liabilities.
The impact of acquisition accounting fair value adjustments on net interest income was $2.8 million and $8.5 million for the three and nine months ended September 30, 2010, respectively. If not for this impact, the net interest margin for the third quarter would have been 4.23%, unchanged from the second quarter and a 54 basis point improvement from the same quarter a year ago. The Companys ability to maintain the net interest margin at current levels is largely dependent upon future interest rates, loan demand, and deposit competition.
- 27 -
Performing loan and investment security discount accretion is recognized as interest income over the estimated remaining life of the loans and investment securities. During the third quarter of 2010, the Company compared the expected prepayments at acquisition to actual prepayments and anticipated future payments. The slower prepayment speed noted on land loans during this assessment is considered a change in accounting estimate and resulted in a lower effective yield. A cumulative reduction of $994,000 in discount accretion was recorded during the third quarter, of which $319,000 relates to the current quarter, to align year-to-date accretion following an assessment of actual and anticipated future payments. The Company also assumed borrowings (FHLB and subordinated debt) and certificates of deposit. These liabilities were marked-to-market with estimates of fair value on acquisition date. The resulting discount/premium to market will be accreted/amortized as an increase (or decrease) to interest expense over the estimated lives of the liabilities.
The 2010 third quarter, year-to-date and remaining estimated unamortized discount/premium is reflected in the following table (in 000s):
Loan Accretion |
Investment Securities |
Borrowings | Certificates of Deposit |
|||||||||||||
Quarter-to-date |
$ | 1,077 | $ | 139 | $ | 217 | $ | 725 | ||||||||
Year-to-date |
4,609 | 371 | 925 | 2,635 | ||||||||||||
For the remaining three months of 2010 |
1,634 | 139 | (27 | ) | 524 | |||||||||||
For the year ended 2011 |
5,312 | 387 | (489 | ) | 763 | |||||||||||
For the year ended 2012 |
3,576 | 201 | (489 | ) | 222 | |||||||||||
For the year ended 2013 |
2,925 | 15 | (489 | ) | | |||||||||||
For the year ended 2014 |
1,835 | | (489 | ) | | |||||||||||
Thereafter |
| | (652 | ) | |
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AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
For the Three Months September 30, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Average Balance |
Interest Income / Expense |
Yield / Rate (1) |
Average Balance |
Interest Income / Expense |
Yield / Rate (1) |
Average Balance |
Interest Income / Expense |
Yield / Rate (1) |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
$ | 420,394 | $ | 3,176 | 3.00 | % | $ | 279,394 | $ | 2,794 | 3.97 | % | $ | 176,959 | $ | 2,220 | 4.99 | % | ||||||||||||||||||
Tax-exempt |
151,622 | 2,527 | 6.61 | % | 119,597 | 2,140 | 7.10 | % | 112,825 | 2,053 | 7.24 | % | ||||||||||||||||||||||||
Total securities (2) |
572,016 | 5,703 | 3.96 | % | 398,991 | 4,934 | 4.91 | % | 289,784 | 4,273 | 5.87 | % | ||||||||||||||||||||||||
Loans, net (3) (4) |
2,827,451 | 43,062 | 6.04 | % | 1,872,906 | 28,054 | 5.94 | % | 1,840,979 | 30,231 | 6.53 | % | ||||||||||||||||||||||||
Loans held for sale |
75,261 | 675 | 3.56 | % | 48,126 | 430 | 3.54 | % | 24,682 | 379 | 6.10 | % | ||||||||||||||||||||||||
Federal funds sold |
12,960 | 2 | 0.04 | % | 304 | | 0.18 | % | 1,661 | 5 | 1.20 | % | ||||||||||||||||||||||||
Money market investments |
160 | | 0.00 | % | 151 | | 0.00 | % | 124 | | 0.01 | % | ||||||||||||||||||||||||
Interest-bearing deposits in other banks |
35,830 | 48 | 0.53 | % | 10,572 | 9 | 0.33 | % | 1,738 | 8 | 1.88 | % | ||||||||||||||||||||||||
Other interest-bearing deposits |
| | 0.00 | % | 2,598 | | 0.00 | % | 2,598 | 7 | 1.01 | % | ||||||||||||||||||||||||
Total earning assets |
3,523,678 | 49,490 | 5.57 | % | 2,333,648 | 33,427 | 5.68 | % | 2,161,566 | 34,903 | 6.42 | % | ||||||||||||||||||||||||
Allowance for loan losses |
(34,486 | ) | (30,321 | ) | (22,125 | ) | ||||||||||||||||||||||||||||||
Total non-earning assets |
376,057 | 263,511 | 251,569 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 3,865,249 | $ | 2,566,838 | $ | 2,391,010 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||||||||||||||
Checking |
$ | 354,590 | 196 | 0.22 | % | $ | 199,063 | 83 | 0.17 | % | $ | 215,675 | 341 | 0.63 | % | |||||||||||||||||||||
Money market savings |
754,238 | 1,652 | 0.87 | % | 441,106 | 1,504 | 1.35 | % | 272,513 | 1,701 | 2.48 | % | ||||||||||||||||||||||||
Regular savings |
152,219 | 124 | 0.32 | % | 101,923 | 97 | 0.38 | % | 102,181 | 143 | 0.56 | % | ||||||||||||||||||||||||
Certificates of deposit: (5) |
||||||||||||||||||||||||||||||||||||
$100,000 and over |
665,980 | 3,110 | 1.85 | % | 451,249 | 3,717 | 3.27 | % | 419,448 | 3,895 | 3.69 | % | ||||||||||||||||||||||||
Under $100,000 |
664,248 | 2,873 | 1.72 | % | 489,091 | 3,930 | 3.19 | % | 495,901 | 4,605 | 3.69 | % | ||||||||||||||||||||||||
Total interest-bearing deposits |
2,591,275 | 7,955 | 1.22 | % | 1,682,432 | 9,331 | 2.20 | % | 1,505,718 | 10,685 | 2.82 | % | ||||||||||||||||||||||||
Other borrowings (6) |
323,207 | 1,836 | 2.25 | % | 275,542 | 2,354 | 3.38 | % | 378,126 | 3,074 | 3.23 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
2,914,482 | 9,791 | 1.33 | % | 1,957,974 | 11,685 | 2.37 | % | 1,883,844 | 13,759 | 2.91 | % | ||||||||||||||||||||||||
Noninterest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
489,633 | 302,207 | 273,696 | |||||||||||||||||||||||||||||||||
Other liabilities |
32,008 | 19,787 | 18,430 | |||||||||||||||||||||||||||||||||
Total liabilities |
3,436,123 | 2,279,968 | 2,175,970 | |||||||||||||||||||||||||||||||||
Stockholders equity |
429,126 | 286,870 | 215,040 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 3,865,249 | $ | 2,566,838 | $ | 2,391,010 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 39,699 | $ | 21,742 | $ | 21,144 | ||||||||||||||||||||||||||||||
Interest rate spread (7) |
4.24 | % | 3.31 | % | 3.51 | % | ||||||||||||||||||||||||||||||
Interest expense as a percent of average earning assets |
1.10 | % | 1.99 | % | 2.53 | % | ||||||||||||||||||||||||||||||
Net interest margin (8) |
4.47 | % | 3.69 | % | 3.89 | % |
(1) | Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above. |
(2) | Interest income on securities includes $139 thousand in accretion of the fair market value adjustments related to the acquisition of FMB. Remaining estimated accretion for 2010 is $139 thousand. |
(3) | Nonaccrual loans are included in average loans outstanding. |
(4) | Interest income on loans includes $1.7 million in accretion of the fair market value adjustments related to the acquisition of FMB. Remaining estimated accretion for 2010 is $1.6 million. |
(5) | Interest expense on certificates of deposits includes $725 thousand in accretion of the fair market value adjustments related to the acquisition of FMB. Remaining estimated accretion for 2010 is $524 thousand. |
(6) | Interest expense on borrowings includes $217 thousand in accretion of the fair market value adjustments related to the acquisition of FMB. Remaining estimated expense for 2010 is $27 thousand. |
(7) | Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%. |
(8) | Core net interest margin excludes purchase accounting adjustment and was 4.23% for the quarter ending 9/30/10. |
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AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Average Balance |
Interest Income / Expense |
Yield / Rate (1) |
Average Balance |
Interest Income / Expense |
Yield / Rate (1) |
Average Balance |
Interest Income / Expense |
Yield / Rate (1) |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
$ | 402,771 | $ | 10,218 | 3.39 | % | $ | 252,991 | $ | 7,860 | 4.15 | % | $ | 177,184 | $ | 6,797 | 5.12 | % | ||||||||||||||||||
Tax-exempt |
137,019 | 6,983 | 6.81 | % | 119,256 | 6,431 | 7.21 | % | 109,750 | 5,943 | 7.23 | % | ||||||||||||||||||||||||
Total securities (2) |
539,790 | 17,201 | 4.26 | % | 372,247 | 14,291 | 5.13 | % | 286,934 | 12,740 | 5.93 | % | ||||||||||||||||||||||||
Loans, net (3) (4) |
2,723,904 | 124,969 | 6.13 | % | 1,871,281 | 82,774 | 5.91 | % | 1,801,561 | 90,751 | 6.73 | % | ||||||||||||||||||||||||
Loans held for sale |
60,020 | 1,838 | 4.09 | % | 46,150 | 1,441 | 4.17 | % | 26,398 | 1,104 | 5.59 | % | ||||||||||||||||||||||||
Federal funds sold |
16,132 | 17 | 0.14 | % | 305 | | 0.19 | % | 1,615 | 34 | 2.81 | % | ||||||||||||||||||||||||
Money market investments |
160 | | 0.00 | % | 116 | | 0.00 | % | 170 | 1 | 0.47 | % | ||||||||||||||||||||||||
Interest-bearing deposits in other banks |
37,151 | 71 | 0.26 | % | 62,765 | 123 | 0.26 | % | 1,259 | 22 | 2.31 | % | ||||||||||||||||||||||||
Other interest-bearing deposits |
971 | | 0.00 | % | 2,598 | | 0.00 | % | 2,598 | 47 | 2.41 | % | ||||||||||||||||||||||||
Total earning assets |
3,378,128 | 144,096 | 5.69 | % | 2,355,462 | 98,629 | 5.60 | % | 2,120,535 | 104,699 | 6.60 | % | ||||||||||||||||||||||||
Allowance for loan losses |
(33,419 | ) | (28,253 | ) | (20,833 | ) | ||||||||||||||||||||||||||||||
Total non-earning assets |
373,398 | 254,991 | 249,887 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 3,718,107 | $ | 2,582,200 | $ | 2,349,589 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||||||||||||||
Checking |
$ | 339,910 | 579 | 0.23 | % | $ | 200,156 | $ | 250 | 0.17 | % | $ | 220,627 | 1,077 | 0.65 | % | ||||||||||||||||||||
Money market savings |
707,334 | 4,852 | 0.92 | % | 428,050 | 6,630 | 2.07 | % | 216,255 | 3,776 | 2.33 | % | ||||||||||||||||||||||||
Regular savings |
150,326 | 440 | 0.39 | % | 99,291 | 295 | 0.40 | % | 102,295 | 451 | 0.59 | % | ||||||||||||||||||||||||
Certificates of deposit: (5) |
||||||||||||||||||||||||||||||||||||
$100,000 and over |
638,249 | 8,997 | 1.88 | % | 465,304 | 11,730 | 3.37 | % | 436,229 | 13,315 | 4.08 | % | ||||||||||||||||||||||||
Under $100,000 |
642,657 | 8,188 | 1.70 | % | 498,448 | 12,317 | 3.30 | % | 486,581 | 14,477 | 3.97 | % | ||||||||||||||||||||||||
Total interest-bearing deposits |
2,478,476 | 23,056 | 1.24 | % | 1,691,249 | 31,222 | 2.47 | % | 1,461,987 | 33,096 | 3.02 | % | ||||||||||||||||||||||||
Other borrowings (6) |
340,474 | 5,648 | 2.22 | % | 303,353 | 7,386 | 3.26 | % | 380,220 | 9,888 | 3.47 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
2,818,950 | 28,704 | 1.36 | % | 1,994,602 | 38,608 | 2.59 | % | 1,842,207 | 42,984 | 3.12 | % | ||||||||||||||||||||||||
Noninterest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
459,015 | 287,246 | 272,616 | |||||||||||||||||||||||||||||||||
Other liabilities |
28,341 | 20,576 | 19,862 | |||||||||||||||||||||||||||||||||
Total liabilities |
3,306,306 | 2,302,424 | 2,134,685 | |||||||||||||||||||||||||||||||||
Stockholders equity |
411,801 | 279,776 | 214,904 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 3,718,107 | $ | 2,582,200 | $ | 2,349,589 | ||||||||||||||||||||||||||||||