UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

   For the fiscal year ended December 31, 2010

 

¨ 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)

Registrant’s telephone number, including area code is (804) 633-5031

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

Common Stock, par value $1.33 per share   The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the

Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 29.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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. (Check one):

 

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 Act).    Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2010 was approximately $260,579,337.

The number of shares of common stock outstanding as of February 28, 2011 was 26,012,717.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be used in conjunction with the registrant’s 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-K

INDEX

 

ITEM

        PAGE   
   PART I   

Item 1.

   Business      1   

Item 1A.

   Risk Factors      11   

Item 1B.

   Unresolved Staff Comments      17   

Item 2.

   Properties      17   

Item 3.

   Legal Proceedings      17   

Item 4.

   Reserved      17   
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      17   

Item 6.

   Selected Financial Data      20   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      44   

Item 8.

   Financial Statements and Supplementary Data      45   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      92   

Item 9A.

   Controls and Procedures      92   

Item 9B.

   Other Information      93   
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      93   

Item 11.

   Executive Compensation      94   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      94   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      94   

Item 14.

   Principal Accounting Fees and Services      94   
   PART IV   

Item 15.

   Exhibits, Financial Statement Schedules      94   


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 Company’s website, http://investors.bankatunion.com and on the Securities and Exchange Commission’s website, www.sec.gov. The information on the Company’s website is not a part of this Form 10-K. 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.

PART I

 

ITEM 1.—BUSINESS.

GENERAL

Union First Market Bankshares Corporation (the “Company”) is a bank holding company organized under Virginia law and registered under the Bank Holding Company Act of 1956. The Company is headquartered in Richmond, Virginia and committed to the delivery of financial services through its community bank subsidiary Union First Market Bank (the “Bank”) and three non-bank financial services affiliates. The Company’s Community Bank and non-bank financial services affiliates are:

 

Community Bank
Union First Market Bank    Richmond, Virginia
Financial Services Affiliates
Union Mortgage Group, Inc.   

Annandale, Virginia

Union Investment Services, Inc.

   Ashland, Virginia

Union Insurance Group, LLC

  

Richmond, Virginia

History

The Company was formed in connection with the July 1993 merger of Northern Neck Bankshares Corporation and Union Bancorp, Inc. Although the Company was formed in 1993, certain of the community banks that were acquired and ultimately merged to form what is now Union First Market Bank were among the oldest in Virginia.

 

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The table below indicates the year each community bank was formed, acquired by the Company and merged into what is now Union First Market Bank.

 

Community Banks   

Formed

  

Acquired

  

Merged

Union Bank and Trust Company

   1902    N/A    2010

Northern Neck State Bank

   1909    1993    2010

King George State Bank

   1974    1996    1999

Rappahannock National Bank

   1902    1998    2010

Bay Community Bank

   1999    De novo bank    2008

Guaranty Bank

   1981    2004    2004

Prosperity Bank & Trust Company

   1986    2006    2008

First Market Bank, FSB

   2000    2010    2010

On February 1, 2010, the Company acquired First Market Bank, FSB, a privately held federally chartered savings bank (“First Market Bank” or “FMB”), in an all stock transaction. In connection with the transaction, the Company changed its name to Union First Market Bankshares Corporation and moved its headquarters to Richmond, Virginia. In addition, First Market Bank became a state chartered commercial bank subsidiary of the Company. First Market Bank merged with Union Bank and Trust Company in March 2010 and the combined bank operates under the name Union First Market Bank.

In October 2010, the Company combined its two other community banks, Northern Neck State Bank and Rappahannock National Bank, into its largest bank affiliate, Union First Market Bank and now operates as a single bank. This will create a single brand for the Company’s banking franchise offering the same products and services across Virginia.

The Company’s operations center is located in Ruther Glen, Virginia.

Product Offerings and Market Distribution

The Company is one of the largest community banking organizations based in Virginia and provides full service banking to the Northern, Central, Rappahannock, Tidewater, and Northern Neck regions of Virginia through its bank subsidiary, Union First Market Bank. Union First Market Bank operates 90 locations in the counties of Albemarle, Caroline, Chesterfield, Essex, Fairfax, Fauquier, Fluvanna, Frederick, Hanover, Henrico, James City, King George, King William, Lancaster, Loudoun, Nelson, Northumberland, Richmond, Spotsylvania, Stafford, Warren, Washington, Westmoreland, York, and the independent cities of Charlottesville, Colonial Heights, Fredericksburg, Newport News, Richmond, Roanoke, and Williamsburg. Union First Market Bank also operates a loan production office in Staunton. 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.

Union First Market Bank is a full service community bank offering consumers and businesses a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, as well as loans for commercial, industrial, residential mortgage and consumer purposes. The Bank issues credit cards and delivers automated teller machine (“ATM”) services through the use of reciprocally shared ATMs in the major ATM networks as well as remote ATMs for the convenience of customers and other consumers. Union First Market Bank also offers internet banking services and online bill payment for all customers, whether consumer or commercial. The Bank also offers private banking and trust services to individuals and corporations through its Financial Guidance Group.

 

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The Company provides other financial services through its non-bank affiliates, Union Investment Services, Inc., Union Mortgage Group, Inc. (“Union Mortgage”) and Union Insurance Group, LLC. The Bank also owns a non-controlling interest in Johnson Mortgage Company, LLC.

Union Investment Services, Inc. has provided securities, brokerage and investment advisory services since its formation in February 1993. It has ten offices within the Bank’s trade area and is a full service investment company handling all aspects of wealth management including stocks, bonds, annuities, mutual funds and financial planning. Securities are offered through a third party contractual arrangement with Raymond James Financial Services, Inc., an independent broker dealer.

Union Mortgage has 16 offices in Virginia (eight), Maryland (four), North Carolina (two), and South Carolina (two). Union Mortgage is also licensed to do business in selected states throughout the Mid-Atlantic and Southeast, as well as Washington, D.C. It provides a variety of mortgage products to customers in those areas. The mortgage loans originated by Union Mortgage are generally sold in the secondary market through purchase agreements with institutional investors.

On August 31, 2003, the Company formed Union Insurance Group, LLC (“UIG”), an insurance agency, which is owned by the Bank and Union Mortgage. This agency operates in a joint venture with Bankers Insurance, LLC, a large insurance agency owned by community banks across Virginia and managed by the Virginia Bankers Association. UIG generates revenue through sales of various insurance products, including long term care insurance and business owner policies.

SEGMENTS

The Company has two reportable segments: its traditional full service community banking business and its mortgage loan origination business. For more financial data and other information about each of the Company’s operating segments, refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, “Community Bank Segment,” and to Note 18 “Segment Reporting” in the “Notes to Consolidated Financial Statements.”

EXPANSION AND STRATEGIC ACQUISITIONS

The Company expands its market area and increases its market share through organic growth (internal growth and de novo expansion) and strategic acquisitions. Strategic acquisitions by the Company to date have included whole bank acquisitions, branch and deposit acquisitions, and purchases of existing branches from other banks. The Company generally considers acquisitions of companies in strong growth markets or with unique products or services that will benefit the entire organization. Targeted acquisitions are priced to be economically feasible with minimal short-term drag to achieve positive long-term benefits. These acquisitions may be paid for in the form of cash, stock, debt, or a combination thereof. The amount and type of consideration and deal charges paid could have a short-term dilutive effect on the Company’s earnings per share or book value. However, cost savings and revenue enhancements in such transactions are anticipated to provide long-term economic benefit to the Company.

In September 2007, the Company completed the acquisition of the deposits and facilities of six bank branches (“Acquired Bank Branches”) in Virginia from Provident Bank. The branches acquired are located in the communities of Charlottesville, Middleburg, Warrenton (two) and Winchester (two). They became part of two of the Company’s banking subsidiaries, Union Bank and Trust Company (Charlottesville branch) and Rappahannock National Bank (five branches). The Acquired Bank Branches’ deposits were approximately $43.3 million. In December 2009, one of the two bank branches in the community of Winchester was closed (Picadilly branch) and combined with the other existing bank branch (Millwood branch) located nearby.

 

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The Company’s de novo construction expansion during the last three years consists of opening two new bank branches in Virginia:

 

   

Staples Mill, Union First Market Bank branch located in Henrico County (February 2009)

 

   

Cosner’s Corner, Union First Market Bank branch located in Spotsylvania County (October 2008)

On December 21, 2010, the Company announced that the Bank had entered into a purchase agreement with NewBridge Bank to acquire its branch located in Harrisonburg, Virginia. The Company will acquire approximately $73.5 million of loans and assume approximately $59.3 million in deposits at book value. The Bank will also retain the commercial loan operations and retail teams from the branch. The transaction will also include the purchase of a real estate parcel/future branch site in Waynesboro, Virginia. The purchase is subject to customary closing conditions, including regulatory approvals, and is expected to be completed by late May 2011.

On February 8, 2011 the Bank and MARTIN’S Food Markets announced that the Bank will add in-store bank branches to seven MARTIN’S stores located in Harrisonburg, Waynesboro, Staunton, Winchester (two), Culpeper and Stephens City, Virginia. The Bank currently operates in-store bank branches in 22 MARTIN’S Food Markets through its acquisition of First Market Bank primarily in the Richmond/Fredericksburg area markets.

EMPLOYEES

As of December 31, 2010, the Company had approximately 1,005 full-time equivalent employees, including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel. Of this total, 165 were mortgage segment personnel. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers its employee relations to be excellent.

COMPETITION

The financial services industry remains highly competitive and is constantly evolving. The Company experiences strong competition in all aspects of its business. In its market areas, the Company competes with large national and regional financial institutions, credit unions, other independent community banks, as well as consumer finance companies, mortgage companies, loan production offices, mutual funds and life insurance companies. Competition has increasingly come from out-of-state banks through their acquisitions of Virginia-based banks. Competition for deposits and loans is affected by various factors including interest rates offered, the number and location of branches and types of products offered, and the reputation of the institution. Credit unions have been allowed to increasingly expand their membership definitions and because they enjoy a favorable tax status have been able to offer more attractive loan and deposit pricing. The Company’s non-bank affiliates also operate in highly competitive environments. The Company is headquartered in Richmond, Virginia and, at $3.8 billion in assets, is the largest independent community bank holding company based in Virginia. The Company believes its community bank framework and philosophy provide a competitive advantage, particularly with regard to larger national and regional institutions, allowing the Company to compete effectively. The Company’s community bank segment generally has strong market shares within the markets it serves. The Company’s deposit market share in Virginia was 2.02% as of June 30, 2010.

ECONOMY

Continued weakness in employment and real estate markets, congressional and regulatory responses in the aftermath of the most recent financial crisis, and general uncertainty as to the state of the economic recovery made for a challenging 2010 for community bankers and the Company. Unemployment levels

 

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remain relatively high in Virginia, but lower than the national average, with jobs shed principally in information technology, construction, and manufacturing sectors in Virginia. During 2010, management increased efforts to manage nonperforming assets and work with borrowers to mitigate and protect against risk of loss. Additionally, efforts to understand and prepare for ever increasing regulatory requirements have taken considerable time and effort and it is expected that additional rules and regulations will be forthcoming from bodies such as the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (the “SEC”), and newly created bodies writing new rules and regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). These mandatory and discretionary rulemakings by federal regulatory agencies will expose the banking industry to more extensive regulations and heavier compliance burdens. Despite these headwinds management continues to be cautiously optimistic and will protect its interest in the value of its collateral, work with borrowers, and strive to meet the changing needs of the communities it serves.

SUPERVISION AND REGULATION

Bank holding companies and banks are extensively and increasingly regulated under both federal and state laws. The following description briefly addresses certain historic and current provisions of federal and state laws and certain regulations, proposed regulations, and the potential impacts on the Company and the Bank. To the extent statutory or regulatory provisions or proposals are described herein, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

The Bank Holding Company

As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), the Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks are also able to branch across state lines provided certain conditions are met, including that applicable state law must expressly permit interstate branching. Virginia law permits branching across state lines if there is reciprocity with the state law where the out-of-state bank is based. The Company currently has no plans to branch outside the Commonwealth of Virginia.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy. Collectively, these are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) if the depository institution is either in danger of default or is in default. For example, under a Federal Reserve policy relating to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the DIF as a result of the default of a commonly controlled insured depository institution. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the DIF. The FDIC’s claim for damages is superior to claims of stockholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

 

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The Federal Deposit Insurance Act (the “FDIA”) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment to any other general creditor or stockholder. This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the assets of such depository institution.

The Company is registered under the bank holding company laws of Virginia. The Company and the Bank are subject to regulation and supervision by the State Corporation Commission of Virginia (the “SCC”) and the Federal Reserve.

Capital Requirements

The Federal Reserve and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U. S. banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements of these federal bank regulatory agencies, the Company and the Bank are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%. At least half of the total capital is required to be “Tier 1 capital,” which consists principally of common and certain qualifying preferred shareholders’ equity (including Trust Preferred Securities), less certain intangibles and other adjustments. The remainder (“Tier 2 capital”) consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company were 12.95% and 14.68%, respectively, as of December 31, 2010, thus exceeding the minimum requirements. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 13.45% and 14.70%, respectively, as of December 31, 2009, thus exceeding the minimum requirements.

Each of the federal regulatory agencies has established a minimum leverage capital ratio of Tier 1 capital to average adjusted assets (“Tier 1 leverage ratio”). These guidelines provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet certain specified criteria, including having the highest regulatory examination rating and are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as of December 31, 2010 was 10.55%, which is above the minimum requirements. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.

Limits on Dividends and Other Payments

The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company and to the payment of dividends by the Company to its respective shareholders. The Bank is subject to various statutory restrictions on its ability to pay dividends to the Company. Under the current supervisory practices of the Bank’s regulatory agencies, prior approval from those agencies is required if cash dividends declared in any given year exceed net income for that year, plus retained net profits of the two preceding years. The payment of dividends by the Bank or the Company may be limited by other factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending on the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice.

Under the FDIA, insured depository institutions such as the Bank, are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the statute). Based on the Bank’s current financial

 

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condition, the Company does not expect this provision will have any impact on its ability to receive dividends from the Bank. Non-bank subsidiaries pay the parent company dividends periodically on a non-regulated basis.

In addition to dividends it receives from the Bank, the Company receives management fees from its affiliated companies for various services provided to them including: data processing, item processing, loan operations, deposit operations, financial accounting, human resources, funds management, credit administration, credit support, sales and marketing, collections, facilities management, call center, legal, compliance, and internal audit. These fees are charged to each subsidiary based upon various specific allocation methods measuring the estimated usage of such services by that subsidiary. The fees are eliminated from the financial statements in the consolidation process.

Under federal law, the Bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, the Company or take securities of the Company as collateral for loans to any borrower. The Bank is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.

The Bank

The Bank is supervised and regularly examined by the Federal Reserve and the SCC. The various laws and regulations administered by the regulatory agencies affect corporate practices, such as the payment of dividends, incurrence of debt, and acquisition of financial institutions and other companies; they also affect business practices, such as the payment of interest on deposits, the charging of interest on loans, types of business conducted, and location of offices.

The Bank is subject to the requirements of the Community Reinvestment Act (the “CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of the local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s efforts in meeting community credit needs are evaluated regularly as part of the examination process pursuant to up to ten assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Many of the bank’s competitors, such as credit unions, are not subject to the requirements of CRA.

Federal Deposit Insurance

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. Currently, the FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory ratings (“CAMELS rating”). The risk matrix utilizes four risk categories, which are distinguished by capital levels and supervisory ratings.

On February 27, 2009, the FDIC issued final rules to amend the DIF restoration plan, change the risk-based assessment system and set assessment rates for Risk Category 1 institutions, effective on April 1, 2009. The new rule is intended to tie more closely each bank’s deposit insurance assessments to the risk it poses to the DIF. The rule sets initial base assessment rates at 12 to 45 basis points of deposits (basis points representing cents per $100 of assessable deposits). Under this risk-based assessment system the FDIC evaluates each bank’s risk based on three primary factors: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if the bank has one. In 2010 and 2009, the Company paid only the base assessment rate for “well capitalized” institutions, which totaled $5.0 million and $3.4 million, respectively, in regular deposit insurance assessments. The increase from the prior year is related to the deposits acquired in the FMB acquisition.

On May 22, 2009, the FDIC issued a final rule that levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June

 

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30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment was part of the FDIC’s efforts to rebuild the DIF. Deposit insurance expense during 2009 for the Company included an additional $1.2 million recognized in the second quarter related to the special assessment.

On November 12, 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. In December 2009, the Company paid $12.6 million in prepaid risk-based assessments, which will be expensed in the appropriate periods through December 31, 2012.

Recent Legislation

In response to the most recent financial crisis, Dodd-Frank was signed into law on July 21, 2010. The Dodd-Frank legislation centers around, among other things, deposit insurance, consumer financial protection, interchange and debit card processing, and supervision and is further discussed below.

Deposit Insurance

On October 20, 2010, pursuant to Dodd-Frank, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by Dodd-Frank. Dodd-Frank requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The final rule allows the FDIC to increase or decrease total base assessment rates by no more than 2 basis points from one quarter to the next, and cumulative increases and decreases cannot be 2 basis points higher or lower than the total base assessment rates.

On November 9, 2010 and January 18, 2011, pursuant to Dodd-Frank, the FDIC adopted rules providing for unlimited deposit insurance for traditional noninterest-bearing transaction accounts and Interest on Lawyers Trust Accounts for two years starting December 31, 2010. This coverage applies to all insured deposit institutions and there is no separate FDIC assessment for the insurance. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.

On February 7, 2011, the FDIC adopted a final rule, which redefines the deposit insurance assessment base as required by Dodd-Frank; makes changes to assessment rates; implements Dodd-Frank’s DIF dividend provisions; and, revises the risk-based assessment system for all large insured depository institutions, generally, those institutions with at least $10 billion in total assets. It is expected that nearly all of the 7,600-plus institutions with assets less than $10 billion will pay smaller assessments as a result of this final rule. For institutions less than $10 billion the following rules apply:

 

   

Redefines the deposit insurance assessment base as average consolidated total assets minus average tangible equity;

 

   

Makes generally conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates;

 

   

Creates a depository institution debt adjustment;

 

   

Eliminates the secured liability adjustment; and

 

   

Adopts a new assessment rate schedule effective April 1, 2011, and, in lieu of dividends, other rate schedules when the reserve ratio reaches certain levels.

This final rule and its total impact on the Company remain unclear at this time. A school of thought regarding the redefined deposit insurance assessment base calculation and the resulting lowered insurance assessments is that it may or may not offset the expected competition for deposits by larger banks, thereby increasing overall deposit competition and increasing the cost of those funds in the marketplace. The Company cannot provide any assurance as to the effect of any proposed change in its deposit insurance premium rate, should such a change occur, as such changes are dependent upon a variety of factors, some

 

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of which are beyond the Company’s control. The final rule will take effect for the quarter beginning April 1, 2011, and will be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011.

Consumer Financial Protection

Dodd-Frank established a new federal regulatory body named the Bureau of Consumer Financial Protection (“BCFP”), an independent entity within the Federal Reserve system that will assume responsibility for most consumer protection laws. This body issues rules for federal protection laws for banks and non-banks engaged in financial services. The head of this organization is an independent director appointed by the President of the United States and confirmed by the Senate with a dedicated budget paid by the Federal Reserve system. The BCFP will have the authority to supervise, examine, and take enforcement action with respect to institutions greater than $10 billion in assets, nonbank mortgage entities, and other nonbank providers of consumer financial services. Financial institutions with less than $10 billion in assets, like the Company, still have prudential regulatory agencies (i.e. Federal Reserve and SCC) as their lead supervisory bodies, however, the BCFP has the authority to include its examiners in examinations conducted by prudential regulatory agencies. The BCFP will create a national consumer complaint hotline so consumers will have, for the first time, a single toll-free number to report problems with financial products and services. It is in the Company’s best interest to have consumer protections that meet the needs of customers while ensuring that any new regulatory proposals and rules are subjected to cost-benefit analysis and to ensure that other financial services not under the purview of the BCFP (i.e., securities and insurance) are afforded the same protection standards so as not to shift consumers to financial services not subject to the BCFP’s supervision and rules. The impact to the Company as a result of the creation of the BCFP is unknown at this time.

Interchange and debit card processing

Dodd-Frank amended the Electronic Funds Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers. In December 2010, the Federal Reserve proposed a new regulation that, in part, establishes standards for determining whether an interchange fee received or charged by an issuer with respect to an electronic debit transaction is reasonable and proportional to the cost incurred by the issuer with respect to the transaction. These new standards would take effect on July 21, 2011 and would apply to companies having assets greater than $10 billion. It is possible that despite the Company’s having fewer assets than $10 billion, the overall market will move to lower pricing due to this mandated pricing and the Company may be negatively impacted. The Federal Reserve is requesting comments on two alternative interchange fee standards that would apply to all covered issuers. One alternative would be based on each company’s costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction). The Federal Reserve believes that if either of these proposed standards becomes the final rule, the maximum allowable interchange fee received by covered issuers for debit card transactions would be more than 70 percent lower than the 2009 average, once the new rule takes effect on July 21, 2011. Under both alternatives, circumvention or evasion of the interchange fee limitations would be prohibited. Estimates of the impact to the Company could be material and if under the stand-alone cap in the current year net income would have been lower by more than 20%. Because of the uncertainty as to the final outcome of the Federal Reserve’s rulemaking process, the Company cannot provide any assurance as to the ultimate impact of the alternative proposals.

Supervision

Dodd-Frank restructures the supervision of holding companies and depository institutions in several ways. It requires (subject to certain exceptions) that capital requirements for holding companies be at least as strict as capital requirements for depository institutions. This is the so-called Collins amendment that, in part, grandfathers existing issues of trust preferred securities but eliminates them as regulatory capital for larger holding companies five and one half years after enactment. Holding companies, like the Company, with less than $15 billion in consolidated assets, are not subject to this new restriction, but new issuances

 

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of trust preferred securities do not count as Tier 1 capital. It also enhances the authority of the Federal Reserve to examine non-bank subsidiaries, such as mortgage affiliates, and gives other bank regulators the opportunity to examine and take enforcement action against such entities. Lastly, it establishes a statutory source of strength requirement for both bank and savings and loan holding companies.

Beginning in the third quarter of 2010, a new rule (i.e., a revision to Regulation E) issued by the Federal Reserve prohibits financial institutions from charging consumers fees for paying overdrafts on ATMs and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Consumers must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. The Company cannot provide any definitive assurance as to the ultimate impact of this rule on the amount of overdraft/insufficient funds charges reported in future periods. An assessment by management of the fourth quarter activity of 2010 estimated minimal exposure as a result of this new regulation. Even though this rule went into full effect on August 15, 2010, the Company’s net overdraft income was flat from the third quarter to the fourth quarter of 2010. As the Company adds to the existing customer base for these types of products, it is anticipated that any adverse impact would be negligible, if any, in 2011 and beyond.

New regulations and statutes are regularly proposed that contain wide-ranging proposals that may or will alter the structures, regulations, and competitive relationships of the nation’s financial institutions. The Company cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which the Company’s business may be affected by any new regulation or statute.

Other Safety and Soundness Regulations

The federal banking agencies have broad powers under current federal law to make prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” All such terms are defined under uniform regulations issued by each of the federal banking agencies. The Bank meets the definition of being “well capitalized” as of December 31, 2010.

The Gramm-Leach-Bliley Act

Effective March 11, 2001, the Gramm-Leach Bliley Act (the “GLB Act”) allows a bank holding company or other company to certify its status as a financial holding company, thereby allowing such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker; underwriting; dealing in or making markets in securities; and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 (“Patriot Act”) was enacted in response to the September 11, 2001 terrorist attacks in New York, Pennsylvania, and Northern Virginia. The Patriot Act is intended to strengthen U. S. law enforcement and the intelligence communities’ abilities to work cohesively to combat terrorism. The continuing impact on financial institutions of the Patriot Act and related regulations and policies is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities to identify persons who may be involved in terrorism or money laundering.

 

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Effect of Governmental Monetary Policies

The Company’s operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve regulates money and credit conditions and interest rates to influence general economic conditions. These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future. As a result, the Company is unable to predict the effects of possible changes in monetary policies upon its future operating results.

Filings with the SEC

The Company files annual, quarterly, and other reports under the Securities Exchange Act of 1934 with the SEC. These reports and this Form 10-K are posted and available at no cost on the Company’s investor relations website, http://investors.bankatunion.com, as soon as reasonably practicable after the Company files such documents with the SEC. The information contained on the Company’s website is not a part of this Form 10-K. The Company’s filings are also available through the SEC’s website at www.sec.gov.

ITEM 1A.—RISK FACTORS

Risks Related To The Company’s Business

The Company’s business may be adversely affected by conditions in the financial markets and economic conditions generally.

From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are still in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets. Market conditions also led to the failure or merger of several prominent financial institutions and numerous regional and community-based financial institutions. These failures, as well as projected future failures, have had a significant negative impact on the capitalization level of the DIF of the FDIC, which, in turn, has led to a significant increase in deposit insurance premiums paid by financial institutions. Such conditions could adversely affect the credit quality of the Company’s loans, and the Company’s results of operations and financial condition. The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent upon on the business environment in the markets where the Company operates. While general economic conditions in Virginia and the U.S. began to improve in 2010, there can be no assurance that this improvement will continue.

The Company’s allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolio.

Like all financial institutions, the Company maintains an allowance for loan losses to provide for loans that its borrowers may not repay in their entirety. The Company believes that it maintains an allowance for loan losses at a level adequate to absorb probable losses inherent in the loan portfolio as of the corresponding balance sheet date and in compliance with applicable accounting and regulatory guidance. However, the allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially and adversely affect the Company’s operating results. The Company has seen an increase in the level of potential problem loans in its loan portfolio with higher than normal risk. The Company expects to receive more frequent requests from borrowers to modify loans. The related accounting measurements related to impairment and the loan loss allowance require significant estimates that are subject to uncertainty and changes relating to new information and changing circumstances. The significant uncertainties surrounding the Company’s borrowers’ abilities to execute their business models successfully through changing economic environments, competitive challenges and other factors complicate the Company’s estimates of the risk of loss and amount of loss on any loan.

 

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Because of the degree of uncertainty and susceptibility of these factors to change, the actual losses may vary from current estimates. The Company expects fluctuations in the loan loss provisions due to the uncertain economic conditions.

The Company’s regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Company to increase its allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease the allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such required additional provisions for loan losses or charge-offs could have a material adverse effect on the Company’s financial condition and results of operations.

Nonperforming assets take significant time to resolve and adversely affect the Company’s results of operations and financial condition.

The Company’s nonperforming assets adversely affect its net income in various ways. Until economic and market conditions improve, the Company expects to continue to incur additional losses relating to an increase in nonperforming loans. The Company does not record interest income on non-accrual loans, thereby adversely affecting its income and increasing loan administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related loan to the then fair market value of the collateral less estimated selling costs, which may result in a loss. An increase in the level of nonperforming assets also increases the Company’s risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts, restructurings and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect the Company’s business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid further increases in nonperforming loans in the future.

Changes in interest rates could adversely affect the Company’s income and cash flows.

The Company’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets, such as loans and investment securities, and the interest rates paid on interest-bearing liabilities, such as deposits and borrowings. These rates are highly sensitive to many factors beyond the Company’s control, including general economic conditions and the policies of the Federal Reserve and other governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment of loans, the purchase of investments, the generation of deposits, and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if the Company does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates. In addition, the Company’s ability to reflect such interest rate changes in pricing its products is influenced by competitive pressures. Fluctuations in these areas may adversely affect the Company and its shareholders. The Bank is often at a competitive disadvantage in managing its costs of funds compared to the large regional, super-regional or national banks that have access to the national and international capital markets.

The Company generally seeks to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period so that it may reasonably maintain its net interest margin; however, interest rate fluctuations, loan prepayments, loan production, deposit flows and competitive pressures are constantly changing and influence the ability to maintain a neutral position. Generally, the Company’s earnings will be more sensitive to fluctuations in interest rates depending upon the variance in volume of assets and liabilities that mature and re-price in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of changes in interest rates, shape and slope of the yield curve, and whether the Company is more asset sensitive or liability sensitive. Accordingly, the Company may not be successful in maintaining a neutral position and, as a result, the Company’s net interest margin may be impacted.

 

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The Company faces substantial competition that could adversely affect the Company’s growth and/or operating results.

The Company operates in a competitive market for financial services and faces intense competition from other financial institutions both in making loans and attracting deposits. Many of these financial institutions have been in business for many years, are significantly larger, have established customer bases, and have greater financial resources and higher lending limits.

The inability of the Company to successfully manage its growth or implement its growth strategy may adversely affect the results of operations and financial conditions.

The Company may not be able to successfully implement its growth strategy if it is unable to identify attractive markets, locations or opportunities to expand in the future. The ability to manage growth successfully depends on whether the Company can maintain adequate capital levels, maintain cost controls, asset quality, and successfully integrate any businesses acquired into the organization.

As the Company continues to implement its growth strategy by opening new branches or acquiring branches or banks, it expects to incur increased personnel, occupancy and other operating expenses. In the case of new branches, the Company must absorb those higher expenses while it begins to generate new deposits; there is also further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, the Company’s plans to branch could depress earnings in the short run, even if it efficiently executes a branching strategy leading to long-term financial benefits.

Difficulties in combining the operations of acquired entities with the Company’s own operations may prevent the Company from achieving the expected benefits from acquisitions.

The Company may not be able to achieve fully the strategic objectives and operating efficiencies in an acquisition. Inherent uncertainties exist in integrating the operations of an acquired entity. In addition, the markets and industries in which the Company and its potential acquisition targets operate are highly competitive. The Company may lose customers or the customers of acquired entities as a result of an acquisition; the Company also may lose key personnel, either from the acquired entity or from itself. These factors could contribute to the Company’s not achieving the expected benefits from its acquisitions within desired time frames, if at all. Future business acquisitions could be material to the Company and it may issue additional shares of common stock to pay for those acquisitions, which would dilute current shareholders’ ownership interests. Acquisitions also could require the Company to use substantial cash or other liquid assets or to incur debt; the Company could therefore become more susceptible to economic downturns and competitive pressures.

The Company’s exposure to operational, technological and organizational risk may adversely affect the Company.

Similar to other financial institutions, the Company is exposed to many types of operational and technological risk, including reputation, legal, and compliance risk. The Company’s ability to grow and compete is dependent on its ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure while it expands and integrates acquired businesses. Similar to other financial institutions, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or persons outside of the Company and exposure to external events. The Company is dependent on its operational infrastructure to help manage these risks. From time to time, it may need to change or upgrade its technology infrastructure. The Company may experience disruption, and it may face additional exposure to these risks during the course of making such changes. As the Company acquires other financial institutions, it faces additional challenges when integrating different operational platforms. Such integration efforts may be more disruptive to the business and/or more costly than anticipated.

 

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The Company’s dependency on its management team and the unexpected loss of any of those personnel could adversely affect operations.

The Company is a customer-focused and relationship-driven organization. Future growth is expected to be driven in large part by the relationships maintained with customers. While the Company has assembled an experienced management team, is building the depth of that team, and has management development plans in place, the unexpected loss of key employees could have a material adverse effect on the Company’s business and may result in lower revenues or greater expenses.

The Company’s concentration in loans secured by real estate may adversely impact earnings due to changes in the real estate markets.

The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer, and other loans. Many of the Company’s loans are secured by real estate (both residential and commercial) in the Company’s market areas. A major change in the real estate markets, resulting in deterioration in the value of this collateral, or in the local or national economy, could adversely affect customers’ ability to pay these loans, which in turn could impact the Company. Risks of loan defaults and foreclosures are unavoidable in the banking industry; the Company tries to limit its exposure to these risks by monitoring carefully extensions of credit. The Company cannot fully eliminate credit risk; thus, credit losses may occur in the future.

The Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses.

The Company takes credit risk by virtue of making loans and leases and extending loan commitments and letters of credit. The Company manages credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. The Company’s exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company’s credit administration function employs risk management techniques to help ensure that problem loans and leases are promptly identified. While these procedures are designed to provide the Company with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.

Legislative or regulatory changes or actions, or significant litigation, could adversely impact the Company or the businesses in which the Company is engaged.

The Company is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the FDIC’s DIF. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defend itself and may lead to liability or penalties that materially affect the Company and its shareholders. Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse to the Company and its shareholders.

The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.

A significant portion of the Company’s loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of the Company’s loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan.

 

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Changes in accounting standards could impact reported earnings.

The bodies that promulgate accounting standards, including the FASB, SEC, and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods.

Limited availability of financing or inability to raise capital could adversely impact the Company.

The amount, type, source, and cost of the Company’s funding directly impacts the ability to grow assets. The ability to raise capital in the future could become more difficult, more expensive, or altogether unavailable. A number of factors could make such financing more difficult, more expensive or unavailable including: the financial condition of the Company at any given time; rate disruptions in the capital markets; the reputation for soundness and security of the financial services industry as a whole; and, competition for funding from other banks or similar financial service companies, some of which could be substantially larger, or be more favorably rated.

The FDIC has revised the way in which it will assess deposit insurance premiums to restore and maintain the federal DIF, the ultimate outcome of the FDIC’s plan is unknown and could adversely affect the Company.

The new assessment calculation redefines the deposit insurance assessment base as average consolidated total assets less average tangible equity plus adjustments for unsecured debt, brokered deposits, other debt and secured liability adjustments. If the plan to restore the DIF to required levels falls short or additional losses in the future due to bank failures further deplete the DIF, there can be no assurance that there will not be additional significant deposit insurance premium increases to restore the insurance fund’s reserve ratio.

Twenty-two of Union First Market Bank’s ninety branches are located in MARTIN’S grocery stores.

On February 8, 2010, Royal Ahold N.V., a Netherlands company and international group of leading supermarket companies based in the United States and Europe, announced that Giant-Carlisle, a division of Ahold USA, had acquired Ukrop’s Super Markets. The sale resulted in the rebranding of Ukrop’s Super Markets to MARTIN’S Food Market and changed various operational aspects of the business. These changes may or may not be widely accepted by current grocery store customers. If business declines in the grocery stores, Union First Market Bank customers may no longer find the grocery store branch locations to be convenient, which could have a materially adverse effect on the earnings of the Union First Market Bank branches located in MARTIN’S grocery stores.

The Company’s mortgage subsidiary has been sued in a class action lawsuit under the Maryland Secondary Mortgage Loan Law and it is possible that it will suffer losses as a result of this lawsuit.

On September 2, 2009, Union Mortgage, a wholly owned subsidiary of the Company, received notice that it has been sued in Maryland state court in a class action lawsuit under the Maryland Secondary Mortgage Loan Law (the “SMLL”). In general, the lawsuit alleges that Union Mortgage, in connection with making second mortgage loans to customers, violated the SMLL by charging certain fees, closing costs and interest in excess of the limitations established by the SMLL. The case was removed to federal court and consolidated for certain pre-trial purposes with approximately 18 other cases brought under the SMLL by the same attorneys. Union Mortgage is a defendant in only one of these cases. On April 23, 2010, Union Mortgage filed an answer and a motion for judgment on the pleadings as to certain issues. The motion remains pending.

 

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While Union Mortgage is contesting the lawsuit vigorously and asserted a number of defenses, because of the nature of this lawsuit, cannot adequately assess its merits at this time. Union Mortgage also cannot predict when the lawsuit will be resolved. Any possible loss is not probable, reasonably assured nor estimable and accordingly, no liability has been accrued. It is possible that the plaintiff(s) ultimately may prevail in the litigation and if there is a substantial monetary judgment, then any such judgment could materially and adversely affect the financial condition of the Company.

Risks Related To The Company’s Securities

The Company’s ability to pay dividends depends upon the results of operations of its subsidiaries.

The Company is a bank holding company that conducts substantially all of its operations through the Bank and other subsidiaries. As a result, the Company’s ability to make dividend payments on its common stock depends primarily on certain federal regulatory considerations and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory restrictions on the ability of the Bank to pay dividends or make other payments to the Company.

The Company’s governing documents and Virginia law contain anti-takeover provisions that could negatively impact its shareholders.

The Company’s Articles of Incorporation and Bylaws and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the board of directors to deal with attempts to acquire control of the Company. These provisions and the ability to set the voting rights, preferences and other terms of any series of preferred stock that may be issued, may be deemed to have an anti-takeover effect and may discourage takeovers (which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of the Company’s common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders, and could potentially adversely affect the market price of the Company’s common stock.

In connection with the Company’s acquisition of First Market Bank, FSB and the assumption of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B and Series C, the Company issued 35,595 shares of Series B preferred stock (the “Series B Preferred Stock”) to the Treasury. This is treated as equity and is subordinate to all of its existing and future indebtedness; regulatory and contractual restrictions may limit or prevent the Company from paying dividends on the Series B Preferred Stock; and the Series B Preferred Stock places no limitations on the amount of indebtedness the Company may incur in the future.

The shares of Series B Preferred Stock are equity interests in the Company and do not constitute indebtedness. As such, the Series B Preferred Stock, like the Company’s common stock, ranks junior to all indebtedness and other non-equity claims on the Company with respect to assets available to satisfy claims on the Company, including in a liquidation of the Company. Additionally, unlike indebtedness, where principal and interest would customarily be payable on specified due dates, in the case of the Series B Preferred Stock, (a) dividends are payable only when, as and if authorized and declared by the Company’s board of directors and depend on, among other things, the results of operations, financial condition, debt service requirements, other cash needs and any other factors the Company’s board deems relevant, (b) as a Virginia corporation, the Company may not pay dividends if, after giving effect thereto, the Company would not be able to pay debts as they come due in the usual course of business, or total assets would be less than total liabilities and the amount needed to satisfy the liquidity preferences of any preferred stock, and (c) the Company may not pay dividends on capital stock if it is in default on certain indebtedness or has elected to defer payments of interest on subordinated indebtedness. The Company is unable to pay any dividends on its common stock unless it is current in the dividend payments on the Series B Preferred Stock.

The Company derives substantially all of its revenue in the form of dividends from its subsidiaries. The Company is and will be dependent upon dividends from its subsidiaries to pay the principal and interest on

 

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its indebtedness, to satisfy its other cash needs, and to pay dividends on the Series B Preferred Stock and its common stock. The ability of each subsidiary to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the subsidiaries are unable to pay dividends, the Company may not be able to pay dividends on the Series B Preferred Stock. The Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of such subsidiary’s creditors. The Series B Preferred Stock does not limit the amount of debt or other obligations the Company may incur in the future. The Company may incur substantial amounts of additional debt and other obligations that will rank senior to the Series B Preferred Stock or to which the Series B Preferred Stock will be structurally subordinated.

ITEM 1B.—UNRESOLVED STAFF COMMENTS.

The Company does not have any unresolved staff comments to report for the year ended December 31, 2010.

ITEM 2.—PROPERTIES.

The Company, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Effective with the February 1, 2010 acquisition of First Market Bank, the corporate headquarters was relocated from 211 North Main Street, Bowling Green, Virginia, to 111 Virginia Street, Suite 200, Richmond, Virginia. The Company’s subsidiaries own or lease various other offices in the counties and cities in which they operate. At December 31, 2010, Union First Market Bank operated 90 branches throughout Virginia. All of the offices of Union Mortgage are leased. The vast majority of the offices for Union Investment Services, Inc. are within retail branch locations. The Company’s operations center is in Ruther Glen, Virginia. See the Note 1 “Summary of Significant Accounting Policies” and Note 5 “Bank Premises and Equipment” in the “Notes to the Consolidated Financial Statements” of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.

ITEM 3.—LEGAL PROCEEDINGS.

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

ITEM 4.—RESERVED.

PART II

ITEM 5.—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the performance graph by reference therein.

 

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Five-Year Stock Performance Graph

The following chart compares the yearly percentage change in the cumulative shareholder return on the Company’s common stock during the five years ended December 31, 2010, with (1) the Total Return Index for the NASDAQ Stock Market and (2) the Total Return Index for NASDAQ Bank Stocks. This comparison assumes $100 was invested on December 31, 2005, in the Company’s common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.

LOGO

Information on Common Stock, Market Prices and Dividends

There were 26,004,197 shares of the Company’s common stock outstanding at the close of business on December 31, 2010, which were held by 2,412 shareholders of record. The closing price of the Company’s common stock on December 31, 2010 was $14.78 per share compared to $12.39 on December 31, 2009.

The Company completed a follow-on equity raise on September 16, 2009 of 4,725,000 shares of common stock at a price of $13.25 per share. In addition, on February 1, 2010, the Company issued 7,477,273 shares of common stock in connection with its acquisition of First Market Bank.

 

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The following table summarizes the high and low sales prices and dividends declared for quarterly periods during the years ended December 31, 2010 and 2009.

 

     Sales Prices      Dividends
Declared
 
     2010      2009      2010      2009  
     High      Low      High      Low                

First Quarter

   $ 15.52       $ 11.79       $ 24.91       $ 9.00       $ 0.060       $ 0.120   

Second Quarter

     17.93         12.25         20.93         13.50         0.060         0.060   

Third Quarter

     14.73         11.19         16.99         11.82         0.060         0.060   

Fourth Quarter

     15.61         11.98         13.23         10.76         0.070         0.060   
                             
               $ 0.250       $ 0.300   
                             

Regulatory restrictions on the ability of the Bank to transfer funds to the Company at December 31, 2010 are set forth in Note 17, “Parent Company Financial Information”, contained in the “Notes to the Consolidated Financial Statements” of this Form 10-K.

A discussion of certain limitations on the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends on its common stock, is set forth in Part I., Item 1—Business, of this Form 10-K under the headings “Supervision and Regulation—Limits on Dividends and Other Payments” and “Supervision and Regulation—The Bank.”

It is anticipated the dividends will continue to be paid near the end of February, May, August, and November. In making its decision on the payment of dividends on the Company’s common stock, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.

Stock Repurchase Program

The Board of Directors authorized management of the Company to buy up to 150,000 shares of its outstanding common stock in the open market at prices that management determines to be prudent. No shares were repurchased during the year ended December 31, 2010.

 

19


ITEM 6.—SELECTED FINANCIAL DATA.

The following table sets forth selected financial data for the Company over each of the past five years ended December 31 (dollars in thousands, except per share amounts):

 

     2010     2009     2008     2007     2006  

Results of Operations

          

Interest and dividend income

   $ 189,821      $ 128,587      $ 135,095      $ 140,996      $ 129,156   

Interest expense

     38,245        48,771        57,222        65,251        52,441   
                                        

Net interest income

     151,576        79,816        77,873        75,745        76,715   

Provision for loan losses

     24,368        18,246        10,020        1,060        1,450   
                                        

Net interest income after provision for loan losses

     127,208        61,570        67,853        74,685        75,265   

Noninterest income

     47,298        32,967        30,555        25,105        28,245   

Noninterest expenses

     143,001        85,287        79,636        73,550        67,567   
                                        

Income before income taxes

     31,505        9,250        18,772        26,240        35,943   

Income tax expense

     8,583        890        4,258        6,484        9,951   
                                        

Net income

   $ 22,922      $ 8,360      $ 14,514      $ 19,756      $ 25,992   
                                        

Financial Condition

          

Assets

   $ 3,837,247      $ 2,587,272      $ 2,551,932      $ 2,301,397      $ 2,092,891   

Loans, net of unearned income

     2,837,253        1,874,224        1,874,088        1,747,820        1,549,445   

Deposits

     3,070,059        1,916,364        1,926,999        1,659,578        1,665,908   

Stockholders’ equity

     428,085        282,088        273,798        212,082        199,416   

Ratios

          

Return on average assets

     0.61     0.32     0.61     0.91     1.30

Return on average equity

     5.50     2.90     6.70     9.61     13.64

Cash basis return on average assets (1)

     0.76     0.38     0.68     1.00     1.40

Cash basis return on average tangible common equity (1)

     9.35     5.54     10.69     14.88     20.31

Efficiency ratio (2)

     71.91     75.62     73.45     72.93     64.37

Equity to assets

     11.16     10.90     10.73     9.22     9.53

Tangible common equity / tangible assets

     8.22     8.64     6.10     6.45     6.75

Asset Quality

          

Allowance for loan losses

   $ 38,406      $ 30,484      $ 25,496      $ 19,336      $ 19,148   

Nonaccrual loans

   $ 61,716      $ 22,348      $ 14,412      $ 9,436      $ 10,873   

Other real estate owned

   $ 36,122      $ 22,509      $ 7,140      $ 693      $ —     

Allowance for loan losses / total outstanding loans

     1.35     1.63     1.36     1.11     1.24

Allowance for loan losses / nonperforming loans

     62.23     136.41     176.91     204.92     176.11

NPAs / total outstanding loans

     3.45     2.39     1.15     0.58     0.70

Net charge-offs / total outstanding loans

     0.58     0.71     0.21     0.05     0.01

Per Share Data

          

Earnings per share, basic

   $ 0.83      $ 0.19      $ 1.08      $ 1.48      $ 1.97   

Earnings per share, diluted

     0.83        0.19        1.07        1.47        1.94   

Cash basis earnings per share, diluted (1)

     1.10        0.63        1.16        1.56        2.03   

Cash dividends paid

     0.250        0.300        0.740        0.725        0.630   

Market value per share

     14.78        12.39        24.80        21.14        30.59   

Book value per common share

     15.16        15.34        16.03        15.82        14.99   

Price to earnings ratio, diluted

     17.81     65.21     23.18     14.38     15.77

Price to book value ratio

     97.48     80.79     154.67     133.66     204.08

Dividend payout ratio

     30.12     157.89     69.16     49.32     31.98

Weighted average shares outstanding, basic

     25,222,565        15,160,619        13,477,760        13,341,741        13,233,101   

Weighted average shares outstanding, diluted

     25,268,216        15,201,993        13,542,948        13,422,139        13,361,773   

 

(1) Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, section
   “Non GAAP Measures” for a reconciliation.
(2) The efficiency ratio is calculated by dividing noninterest expense over the sum of net interest income plus noninterest income.

 

20


ITEM 7.—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis provides information about the major components of the results of operations and financial condition, liquidity and capital resources of the Company and its subsidiaries. This discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and the “Notes to the Consolidated Financial Statements” presented in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

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 Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

The more critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses, mergers and acquisitions and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The following is a summary of the Company’s 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: (a) ASC 450 Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated, and (b) 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 Company’s 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. Management’s 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

 

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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 management’s 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 and lease 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

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

Prior to 2009, the Company accounted for its business combinations under the purchase method of accounting, a cost allocation process which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. Beginning January 1, 2009, business combinations are accounted for under ASC 805 Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will continue to rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions. Costs that the Company expects, but is not obligated to incur in the future, to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. The Company does not recognize these costs as part of applying the acquisition method. Instead, the Company recognizes these costs as expenses in its post-combination financial statements in accordance with other applicable GAAP.

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

Goodwill and Intangible Assets

The Company follows ASC 805, Business Combinations, using the acquisition method of accounting for business combinations and ASC 350 Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this guidance 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.

 

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Goodwill totaled $57.6 million and $56.5 million for the years ended December 31, 2010 and 2009, respectively. Changes in goodwill in the Company’s consolidated balance sheet from December 31, 2009 were attributable to the acquisition of First Market Bank. Based on the testing of goodwill for impairment, there were no impairment charges for 2010, 2009 or 2008. The Company used the acquisition method of accounting when acquiring First Market Bank and 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. Core deposit intangible assets are being amortized over the periods of expected benefit, which range from 5 to 14 years. 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. Core deposit intangibles, net of amortization, amounted to $26.8 million and $7.7 million as of December 31, 2010 and 2009, respectively.

Amortization expense of core deposit intangibles for the years ended December 31, 2010, 2009, and 2008 totaled $7.3 million, $1.9 million and $2.0 million, respectively. Amortization expense of the trademark intangible for the year ended December 31, 2010 was $367,000. The Company had no trademark intangible prior to 2010.

RESULTS OF OPERATIONS

Net Income

For the year ended December 31, 2010 compared to the year ended December 31, 2009, net income increased $14.6 million, or 174.2%, from $8.4 million to $22.9 million. Net income available to common shareholders, which deducts from net income the dividends and discount accretion on preferred stock, was $21.0 million for the year ended December 31, 2010 compared to $2.9 million a year ago. This represents an increase in earnings per share, on a diluted basis, of $0.64, to $0.83 from $0.19. Of this increase, $0.36 was due to lower prior year earnings per share from dividends and acceleration of the discount accretion associated with the redemption of the Treasury’s investment in the Company. Return on average common equity (using net income in the numerator) for the year ended December 31, 2010 was 5.50%, while return on average assets was 0.61%, compared to 2.90% and 0.32%, respectively, for the year ended 2009.

The $14.6 million increase of reported net income for the year ended December 31, 2010 was largely attributable to the addition of First Market Bank and improvement in the net interest margin, partially offset by nonrecurring acquisition costs and increased credit costs.

Net Interest Income

Net interest income, which represents the principal source of earnings for the Company, is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of average earning assets. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income, the net interest margin and net income.

The decline in the general level of interest rates over the last three years has placed downward pressure on the Company’s earning asset yields and related interest income. The decline in earning asset yields, however, has been offset principally by repricing of money market accounts and certificates of deposits. The Company also expects net interest margin to be relatively stable over the next several quarters based on the market’s expectations for future interest rates.

For the year ended December 31, 2010, tax-equivalent net interest income increased $72.1 million, or 86.31%, to $155.7 million compared to the prior year. This improvement was principally attributable to a decline in cost of interest-bearing liabilities and increased interest-earning assets related to the acquisition

 

23


of FMB. The tax-equivalent net interest margin increased 101 basis points to 4.56 % from 3.55% in the prior year. 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 the Federal Home Loan Bank of Atlanta (“FHLB”) borrowings. The following table shows the volume, interest income and expense and related yields and costs of the Company’s interest-earning assets and interest-bearing liabilities (dollars in thousands):

 

     Years Ended December 31,  
     2010     2009     Change  

Average interest-earning assets

   $ 3,412,495      $ 2,353,854      $ 1,058,641   

Interest income

   $ 193,904      $ 132,318      $ 61,586   

Yield on interest-earning assets

     5.68     5.62     6   bps 

Average interest-earning liabilities

   $ 2,838,200      $ 1,980,504      $ 857,696   

Interest expense

   $ 38,245      $ 48,772      $ (10,527

Cost of interest-bearing liabilities

     1.35     2.46     (111 ) bps 

The Company uses the level yield accounting method to calculate accretion and amortization on its investment securities. In the fourth quarter, the Company changed from the Level Yield as a Bullet (“LYB”) methodology to the Level Yield as an Amortizing Instrument (“LYAI”) methodology for all amortizing securities. Under LYB, accretion and amortization on amortizing securities were calculated as if the instruments were non-amortizing with a maturity equal to the average life. The LYAI methodology uses actual cash flows, as projected by prepayment models, over the remaining life of the bond to calculate the average yield. Management determined that the LYAI methodology better reflects the dynamic nature of mortgage prepayments and therefore is a more precise level yield calculation. The calculation change impacts the timing of accretion and amortization, but not the total amount over the life of the security. The change in investment securities yields during the fourth quarter, as compared to the most recent linked quarter, was principally related to this change accounted for as a change in accounting estimate.

Acquisition Activity

The impact of acquisition accounting fair value adjustments on net interest income was $10.8 million for the year ended December 31, 2010. If not for this impact, the net interest margin would have been 4.24%, a 69 basis point improvement from a year ago. The Company’s ability to maintain the net interest margin at current levels is largely dependent upon future interest rates, loan demand, and deposit competition.

The acquired loan and investment security portfolios of FMB were marked-to-market with a fair value discount to market rates. Performing loan and investment security discount accretion was recognized as interest income over the estimated remaining life of the loans and investment securities. 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 was accreted/amortized as an increase (or decrease) to interest expense over the estimated lives of the liabilities.

 

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The fourth quarter, year-to-date and remaining estimated discount/premium is reflected in the following table (dollars in thousands):

 

     Loan
Accretion
     Investment
Securities
     Borrowings     Certificates
of Deposit
 

For the quarter ended December 31, 2010

   $ 1,634       $ 139       $ (27   $ 524   

For the year ended December 31, 2010

     6,243         510         898        3,158   

For the years ending:

          

2011

     5,312         387         (489     763   

2012

     3,576         201         (489     222   

2013

     2,925         15         (489     —     

2014

     1,835         —           (489     —     

Thereafter

     —           —           (652     —     
                                  

Total

   $ 19,891       $ 1,113       $ (1,711   $ 4,143   

Loans obtained in connection with the FMB acquisition have been accounted for in accordance with ASC 805 Business Combinations and/or ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”) if the loan experienced deterioration of credit quality at the time of acquisition. Both require that acquired loans be recorded at fair value and prohibit the carryover of the related allowance for loan losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans. Because ASC 310-30 loans (i.e., impaired loans) have been recorded at fair value, such loans are not classified as nonaccrual even though some payments may be contractually past due. In addition, such purchased impaired loans are not included in loans that were contractually 90+ days past due and still accruing. The carrying amount of purchased impaired loans was $14.0 million at December 31, 2010, or approximately 0.50% of total loans.

 

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The following table shows interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid for the years ended December 31, (dollars in thousands):

 

     2010     2009     2008  
     Average
Balance
    Interest
Income /
Expense
     Yield /
Rate
    Average
Balance
    Interest
Income /
Expense
     Yield /
Rate
    Average
Balance
    Interest
Income /
Expense
     Yield /
Rate
 

Assets:

                     

Securities:

                     

Taxable

   $ 407,975      $ 13,958         3.42   $ 261,078      $ 10,606         4.06   $ 178,221      $ 9,068         5.09

Tax-exempt

     142,099        9,569         6.73     118,676        8,506         7.17     111,027        7,997         7.20
                                                         

Total securities (2)

     550,074        23,527         4.28     379,754        19,112         5.03     289,248        17,065         5.90

Loans, net (1) (2)

     2,750,756        167,612         6.09     1,873,606        111,139         5.93     1,817,755        119,898         6.60

Loans held for sale

     68,414        2,671         3.90     46,454        1,931         4.16     24,320        1,370         5.63

Federal funds sold

     12,910        17         0.13     313        1         0.20     8,217        98         1.19

Money market investments

     171        —           0.00     135        —           0.00     153        1         0.40

Interest-bearing deposits in other banks

     29,444        77         0.25     50,994        135         0.26     1,355        39         1.73

Other interest-bearing deposits

     726        —           0.00     2,598        —           0.00     2,598        49         1.87
                                                         

Total earning assets

     3,412,495        193,904         5.68     2,353,854        132,318         5.62     2,143,646        138,520         6.46
                                       

Allowance for loan losses

     (34,539          (29,553          (21,830     

Total non-earning assets

     374,613             254,507             257,587        
                                       

Total assets

   $ 3,752,569           $ 2,578,808           $ 2,379,403        
                                       

Liabilities and Stockholders’ Equity:

                     

Interest-bearing deposits:

                     

Checking

   $ 345,927        765         0.22   $ 201,520      $ 314         0.16   $ 218,349      $ 1,352         0.62

Money market savings

     724,802        6,422         0.89     429,501        7,905         1.84     238,540        5,708         2.39

Regular savings

     151,169        560         0.37     99,914        384         0.38     100,782        584         0.58

Certificates of deposit:

                     

$100,000 and over

     639,406        12,000         1.88     456,644        15,063         3.30     435,807        17,363         3.98

Under $100,000

     645,110        10,995         1.70     492,186        15,786         3.21     499,591        19,291         3.86
                                                         

Total interest-bearing deposits

     2,506,414        30,742         1.23     1,679,765        39,452         2.35     1,493,069        44,298         2.97

Other borrowings

     331,786        7,502         2.26     300,739        9,320         3.10     377,601        12,924         3.42
                                                         

Total interest-bearing liabilities

     2,838,200        38,244         1.35     1,980,504        48,772         2.46     1,870,670        57,222         3.06
                                       

Noninterest-bearing liabilities:

                     

Demand deposits

     468,631             289,769             272,764        

Other liabilities

     29,161             20,292             19,347        
                                       

Total liabilities

     3,335,992             2,290,565             2,162,781        

Stockholders’ equity

     416,577             288,243             216,622        
                                       

Total liabilities and stockholders’ equity

   $ 3,752,569           $ 2,578,808           $ 2,379,403        
                                       

Net interest income

     $ 155,660           $ 83,546           $ 81,298      
                                       

Interest rate spread

          4.33          3.16          3.40

Interest expense as a percent of average earning assets

          1.12          2.07          2.67

Net interest margin

          4.56          3.55          3.79

 

(1) Nonaccrual loans are included in average loans outstanding.
(2) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%.

 

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The Volume Rate Analysis table presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionally. Results, on a taxable equivalent basis, are as follows in this Volume Rate Analysis table for the years ended December 31, (dollars in thousands):

 

     2010 vs. 2009 Increase (Decrease)
Due to Change in:
    2009 vs. 2008 Increase (Decrease)
Due to Change in:
 
     Volume     Rate     Total     Volume     Rate     Total  

Earning Assets:

            

Securities:

            

Taxable

   $ 5,228      $ (1,876   $ 3,352      $ 1,813      $ (275   $ 1,538   

Tax-exempt

     1,604        (541     1,063        517        (8     509   
                                                

Total securities

     6,832        (2,417     4,415        2,330        (283     2,047   

Loans, net

     53,402        3,074        56,476        3,730        (12,489     (8,759

Loans held for sale

     867        (127     740        1,130        (569     561   

Federal funds sold

     16        —          16        (49     (48     (97

Money market investments

     —          —          —          (1     —          (1

Interest-bearing deposits in other banks

     (57     (4     (61     105        (9     96   

Other interest-bearing deposits

     —          —          —          —          (49     (49
                                                

Total earning assets

   $ 61,060      $ 526      $ 61,586      $ 7,245      $ (13,447   $ (6,202
                                                

Interest-Bearing Liabilities:

            

Interest-bearing deposits:

            

Checking

   $ 301      $ 150      $ 451      $ (99   $ (939   $ (1,038

Money market savings

     3,831        (5,314     (1,483     3,628        (1,431     2,197   

Regular savings

     186        (10     176        (11     (189     (200

Certificates of deposit:

            

$100,000 and over

     4,765        (7,828     (3,063     1,001        (3,301     (2,300

Under $100,000

     4,031        (8,822     (4,791     (296     (3,209     (3,505
                                                

Total interest-bearing deposits

     13,114        (21,824     (8,710     4,223        (9,069     (4,846

Other borrowings

     898        (2,715     (1,817     (2,437     (1,167     (3,604
                                                

Total interest-bearing liabilities

     14,012        (24,539     (10,527     1,786        (10,236     (8,450
                                                

Change in net interest income

   $ 47,048      $ 25,065      $ 72,113      $ 5,459      $ (3,211   $ 2,248   
                                                

Interest Sensitivity

An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap and liquidity gap. The interest sensitivity gap is the difference between interest-sensitive assets and interest-sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which are variable rate instruments, by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact of rising or falling interest rates on net interest income.

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional and local economies, and other financial and business risk factors. The Company uses computer simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

At December 31, 2010, the Company was in an asset-sensitive position for all scenarios except up 100 basis points. As described in the table below, management’s earnings simulation model indicates net interest income will increase as rates increase and decrease when rates decrease. The exception is the up 100 basis points scenario, where net interest income will decrease. The decrease in this scenario is

 

27


principally attributable to floors on floating rate loans. An asset-sensitive company generally will be impacted favorably by increasing interest rates while a liability-sensitive company’s net interest margin and net interest income generally will be impacted favorably by declining interest rates.

Earnings Simulation Analysis

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. Such assumptions are monitored by management and periodically adjusted as appropriate. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

The Company uses its simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates. The Company previously evaluated change to net interest income by gradually ramping rates up or down over a 12 month period. The Company now views the immediate shock of rates as a more effective measure of interest rate risk exposure. The analysis assesses the impact on net interest income over a 12 month time horizon after an immediate increase or “shock” in rates, of 100 basis points up to 300 basis points. The shock down 200 or 300 basis points analysis is not as meaningful as interest rates across most of the yield curve are at historic lows and cannot decrease another 200 or 300 basis points. The model, under all scenarios, does not drop the index below zero. The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled for balances ended December 31, 2010 (dollars in thousands):

 

     Change In Net Interest Income  
     %     $  

Change in Yield Curve:

    

+300 basis points

     1.78   $ 2,918   

+200 basis points

     0.59        968   

+100 basis points

     (0.58     (947

Most likely rate scenario

     0.00        —     

-100 basis points

     (2.09     (3,425

-200 basis points

     (6.59     (10,795

-300 basis points

     (8.47     (13,866

Economic Value Simulation

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.

 

28


The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the period ended December 31, 2010 (dollars in thousands):

 

     Change In Economic Value Of Equity  
     %     $  

Change in Yield Curve:

    

+300 basis points

     2.60   $ 14,072   

+200 basis points

     2.74        14,787   

+100 basis points

     2.38        12,850   

Most likely rate scenario

     0.00        —     

-100 basis points

     (7.41     (40,037

-200 basis points

     (12.85     (69,412

-300 basis points

     (17.26     (93,260

The shock down 200 or 300 basis points analysis is not as meaningful since interest rates across most of the yield curve are at historic lows and cannot decrease another 200 or 300 basis points. While management considers this scenario highly unlikely, the natural floor increases the Company’s sensitivity in rates down scenarios.

Noninterest Income

For the year ended December 31, 2010, noninterest income increased $14.3 million, or 43.5%, to $47.3 million from $33.0 million in 2009, and reflects the FMB acquisition for eleven months since the acquisition date. Other service charges and fees increased $5.4 million, primarily related to increases in debit card income, ATM income, and brokerage commissions and letter of credit fees. Mortgage originations increased $105.0 million from $703.7 million to $808.7 million, or 14.9%, over last year, as gains on the sale of loans increased $5.5 million, or 33.0%. Gains on the sale of loans were driven by increased originations in addition to the contribution of newer branches originating loans at favorable margins, adjustments to loan fee and pricing policies and volume related revenue incentives. Other operating income increased $2.0 million and relates to revenue from the acquired FMB trust operations and bank owned life insurance investment income. Account service charges increased $853,000 from overdraft and returned check charges and fees on commercial and savings accounts. During the year, the Company recorded non-recurring gains on sales of other real estate owned of $628,000.

Beginning in the third quarter of 2010, a new rule (i.e., updating Regulation E) issued by the Federal Reserve prohibits financial institutions from charging consumers fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Consumers must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. The Company cannot provide any definitive assurance as to the ultimate impact of this rule on the amount of overdraft/insufficient funds charges reported in future periods. An assessment by management of the fourth quarter activity of 2010 estimated minimal exposure as a result of this new regulation. Even though this rule went into full effect on August 15, 2010, net overdraft income was flat from the third quarter to the fourth quarter of 2010. As the Company adds to the existing customer base for these types of products, it is anticipated that any adverse impact would be negligible, if any, in 2011 and beyond.

For the year ended December 31, 2009, noninterest income increased $2.4 million, or 7.9%, to $33.0 million from $30.6 million for 2008. Of this increase, gains on sales of loans in the mortgage segment accounted for $5.5 million and related to higher origination volume and a surge in refinance activity. These increases were partially offset by declines in account service charges and other fee income of $902,000 and $634,000, respectively, as well as gains on sales of bank property of $1.9 million from 2008. During 2008, the Company recorded gains of $1.9 million from the sale of bank property and $198,000

 

29


relating to the mandatory redemption of certain classes of common stock to financial institution members of Visa U.S.A. Excluding the contribution of the mortgage segment and prior period gain transactions, noninterest income declined $1.0 million, or 5.7%.

Noninterest Expense

For the year ended December 31, 2010, noninterest expense increased $57.7 million, or 67.7%, to $143.0 million from $85.3 million for the year ended December 31, 2009 and reflects the FMB acquisition for the eleven months since acquisition date. Other operating expenses increased $26.7 million. This increase included increases in acquisition costs of $7.9 million, increases in amortization of acquired deposit intangible assets of $5.7 million, increases in marketing and advertising expenses of $2.9 million related to multi-media brand awareness campaigns and Loyalty Banking® premiums for Union First Market Bank, and increases in communications expenses of $3.0 million. Data processing fees increased $2.0 million principally as a result of increases in acquired loans and deposits volumes. Additional other increases of $1.5 million related to ATM, bank card and overdraft losses. Professional fees increased $1.0 million primarily as a result of higher legal fees for continuing problem loan work outs and foreclosure activity. Due to maintenance of the Company’s portfolio of other real estate owned and collection efforts on problem loans, loan expenses increased $1.4 million. Salaries and benefits expense increased $24.6 million primarily due to higher salaries expense of $17.2 million related principally to additional personnel from the FMB acquisition, higher profit sharing expense of $3.0 million from improved profitability, higher group insurance costs of $1.9 million from higher current year premiums, and additional personnel. Commissions in the mortgage segment increased $2.5 million, or 31.2%, as a result of increased originations. Occupancy costs increased $4.4 million and primarily related to additional rental expense and operations of acquired branches. Furniture and equipment expense increased $2.0 million resulting from higher depreciation and amortization expense related to acquired fixed assets and maintenance and equipment service contracts.

Total costs associated with the acquisition of FMB were $7.9 million and $1.5 million for the years ended December 31, 2010 and 2009, respectively. Costs included legal and accounting fees, lease and contract termination expenses, system conversion, integrating operations, and employee severances, which were expensed as incurred. The costs are reported as a component of “Other operating expenses” within the Company’s “Consolidated Statements of Income.” Total acquisition costs incurred from the date the Company announced the acquisition of FMB in 2009 through December 31, 2010 were $9.4 million, $1.4 million below the initial estimate of $10.8 million. Other nonrecurring costs of $843,000 were incurred relating to merging two affiliate banks, Rappahannock National Bank and Northern Neck State Bank, into Union First Market Bank. The consolidation was completed on October 12, 2010 and no additional costs are expected to be incurred.

For the year ended December 31, 2009, noninterest expense increased $5.7 million, or 7.1 %, to $85.3 million compared to $79.6 million for the year ended December 31, 2008. Other operating expenses increased $5.8 million. Of this increase, FDIC insurance assessment premiums accounted for $3.4 million and were comprised of a special insurance assessment of $1.2 million during the second quarter and an increase in the regular insurance assessment of $2.2 million. Merger and conversion costs, which included costs associated with the acquisition of First Market Bank increased $1.0 million to $1.5 million in 2009. Other costs contributing to the increase were higher professional fees of $1.1 million which included legal expenses of $665,000 relating to the Company’s problem loan workouts and collection activities and an accelerated contract payment of $420,000. Costs related to other real estate owned and loan expenses increased to $1.6 million from $754,000 last year. Marketing and advertising costs increased $125,000 primarily related to the Company’s Loyalty Banking® and other campaigns. These increases in other operating expenses were partially offset by a decrease in costs of approximately $600,000 related to administrative expenses. Salary and benefits costs increased $189,000, related to higher mortgage segment commissions of $2.6 million, partially offset by lower salary expenses of $942,000, profit sharing expense of $809,000 and incentive compensation of $959,000. In addition, furniture and equipment expenses declined $415,000, or 8.3%, primarily related to declining depreciation and amortization expense

 

30


and rental costs. Excluding mortgage segment operations, increased FDIC special insurance assessment, the accelerated contract payment discussed above, acquisition related expenses and prior year conversion costs, noninterest expense increased approximately $388,000, or 0.5 %.

During the first quarter of 2009, to replenish the FDIC’s DIF, the FDIC issued a final rule to impose a special insurance assessment of 5 basis points calculated on each bank’s total assets minus Tier 1 capital. The special insurance assessment was billed on June 30, payable on September 30 and recorded as a second quarter expense. During the second quarter of 2009, the Company expensed $1.2 million related to the FDIC special insurance assessment. The special insurance assessment was in addition to the regular quarterly risk-based assessment. The assessment base for regular quarterly insurance assessments was not changed. On November 12, 2009, the FDIC issued a final rule to require institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective January 1, 2011, and extended the restoration period from seven to eight years. The Company made a prepayment of $12.6 million during the fourth quarter, of which $3.3 million was expensed in 2010.

SEGMENT INFORMATION

Community Bank Segment

2010

For the year ended December 31, 2010, net income for the community banking segment increased approximately $13.9 million, or 234.3%, to $19.8 million compared to $5.9 million at December 31, 2009, largely attributable to the addition of FMB and improvement in the net interest margin, partially offset by nonrecurring acquisition costs. Net interest income increased $71.0 million, or 90.7%. This improvement was principally attributable to a decline in cost of interest-bearing liabilities and increased interest-earning assets related to the acquisition of FMB. The tax-equivalent net interest margin increased 100 basis points to 4.55 % from 3.55% in the prior year. 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. Provision for loan loss increased $6.1 million during 2010. Net interest income after the provision for loan losses increased $64.9 million, or 108.1%.

Noninterest income increased $9.0 million, or 53.8%, to $25.6 million from $16.6 million in the same period in 2009, and reflects the FMB acquisition for eleven months since the acquisition date. Other service charges and fees increased $5.4 million, primarily related to increases in debit and ATM card income, brokerage commissions and letter of credit fees. Other operating income increased $2.2 million and related to revenue from the acquired FMB trust operations and bank owned life insurance investment income. Account service charges increased $821,000 from overdraft and returned check charges and fees on commercial and deposit accounts. During the year, the Company recorded non-recurring gains on sales of other real estate owned of $628,000.

For the year ended December 31, 2010, noninterest expense increased $52.9 million, or 74.3%, to $124.1 million from $71.2 million for the year ended December 31, 2009 and reflects the FMB acquisition for the eleven months since acquisition date. Other operating expenses increased $26.1 million. This increase included increases in acquisition costs of $7.4 million, increases in amortization of acquired deposit intangible assets of $5.7 million, increases in marketing and advertising expenses of $2.9 million related to Loyalty Banking® premiums and multi-media brand awareness campaigns for Union First Market Bank, and increases in communications expenses of $2.8 million. Data processing fees increased $2.0 million principally as a result of increases in acquired loans and deposits volumes. Additional other increases of $1.4 million related to ATM, bank card and overdraft losses. Professional fees increased $947,000 primarily as a result of higher legal fees for continuing problem loan work outs and foreclosure activity. Due to maintenance of the Company’s portfolio of other real estate owned and collection efforts on problem loans these types of expenses increased $1.1 million.

 

31


Salaries and benefits expense increased $20.7 million primarily due to higher salaries expense of $14.0 million related principally to additional personnel from the FMB acquisition, higher profit sharing expense of $2.8 million from improved profitability, higher group insurance costs of $1.7 million from higher current year premiums and additional personnel. Occupancy costs increased $4.1 million primarily related to additional rental expense and operations of acquired branches. Furniture and equipment expense increased $1.9 million resulting from higher depreciation and amortization expense related to acquired fixed assets and maintenance and equipment service contracts.

2009

For the year ended December 31, 2009, net income for the community banking segment decreased approximately $8.6 million, or 59.1%, to $5.9 million compared to $14.5 million at December 31, 2008. Net interest income increased $1.0 million, or 1.4%, principally as a result of lower interest expense on deposits and borrowings. Provision for loan losses increased $8.2 million during 2009. Net interest income after the provision for loan losses decreased $7.2 million, or 10.7%.

Noninterest income decreased $3.2 million, or 15.8%, to $16.7 million for the year ended December 31, 2009 compared to 2008. Contributing to this decrease were declines in gains on sales of bank property of $1.9 million and service charges on deposit accounts and other fee income of $902,000 and $634,000, respectively. The decline in service charges and fees was primarily the result of decreased overdraft fees and returned check charges, annuity and brokerage commissions. During the same period in 2008, the Company recorded gains of $1.9 million from the sale of bank property and $198,000 relating to the mandatory redemption of certain classes of common stock to financial institution members of Visa U.S.A.

Noninterest expense increased $2.9 million, or 4.3 %, to $71.2 million for the year ended December 31, 2009 compared to 2008. Other operating expenses increased $5.6 million compared to a year ago. Of this increase, FDIC insurance assessment premiums accounted for $3.4 million and were comprised of a special insurance assessment of $1.2 million during the second quarter and an increase in the regular insurance assessment of $2.2 million. Costs associated with the acquisition of First Market Bank were $1.5 million in 2009. Other costs contributing to the increase were higher professional fees of $1.1 million which included legal expenses of $665,000 relating to the Company’s problem loan workouts and collection activities and an accelerated contract payment of $420,000. Costs related to other real estate owned and loan expenses increased to $1.6 million from $754,000 a year ago.

Salary and benefits costs decreased $2.6 million, related to lower incentive compensation of $967,000, salary expenses of $964,000 and profit sharing expense of $852,000. In addition, furniture and equipment expenses decreased $348,000, or 7.6%, primarily related to declining depreciation and amortization expense. Occupancy expenses increased $285,000, or 4.7%. Excluding the costs related to the First Market Bank acquisition, the special FDIC insurance assessment premium in 2009, and the prior year’s affiliate banks’ conversion costs in 2008, noninterest expense increased $338,000, or 0.5%, when compared to the year ended December 31, 2008.

Mortgage Segment

For the year ended December 31, 2010, the mortgage segment net income increased $688,000, or 28.2%, to $3.1 million from $2.4 million in the same period of 2009. Originations increased $104.9 million from $703.7 million to $808.7 million, or 14.9%, compared to the same period last year, as gains on the sale of loans increased $5.5 million, or 33.1%. Gains on the sale of loans were driven by increased originations in addition to the contribution of newer branches originating loans at favorable margins, adjustments to loan fee and pricing policies and volume related revenue incentives. Noninterest expenses increased $5.0 million. Of this amount, salaries and benefits increased $3.8 million primarily related to increased commissions generated by loan originations as well as costs associated with additional branch office and corporate support personnel required to support production growth. Other operating expenses increased $756,000 principally due to origination related increased underwriting costs and loan expenses, investments in technology and additions to the branch office network.

 

32


For the year ended December 31, 2009, mortgage segment net income increased $2.4 million, to $2.4 million from $39,000 in 2008. Originations increased $279.0 million, or 65.7%, to $703.7 million from 2008 to 2009, resulting in an increase in loan revenue of $5.5 million, or 49.6%. Salaries and benefits increased $2.8 million principally due to commission expenses related to increased loan originations. Occupancy costs decreased $194,000 and furniture and equipment costs decreased $66,000 due to the nonrenewal of certain leased office locations and lower equipment rental expense, partially offset by the addition of two new office locations. Other operating expenses increased $168,000, principally due to increased underwriting fees related to loan volume and marketing costs.

BALANCE SHEET

Balance Sheet Overview

At December 31, 2010, total cash and cash equivalents were $61.2 million, an increase of $15.2 million from December 31, 2009. Securities available for sale increased $171.9 million, primarily related to higher investments in mortgage-backed and municipal securities acquired in the acquisition. Loans held for sale by the Company’s mortgage segment increased by $19.7 million from December 31, 2009 as mortgage production increased. Net loans increased $955.1 million, or 51.8%, from December 31, 2009, as a result of the acquired loan portfolio of FMB, which totaled $981.5 million at acquisition. At December 31, 2010, total assets were $3.8 billion, an increase of $1.2 billion from $2.6 billion at December 31, 2009, driven principally by the acquisition of FMB. Total deposits increased$1.2 billion from the prior year and related to the acquisition of FMB. Total other borrowings decreased by $57.9 million to $308.2 million at December 31, 2010 and principally related to lower short-term borrowings.

The Company completed a follow-on equity raise on September 16, 2009, which generated cash and capital of approximately $58.8 million, net of underwriting discounts, commissions and estimated offering expenses from the issuance of 4,725,000 shares of common stock at a price of $13.25 per share. During the fourth quarter of that same year, the Company redeemed the Series A Preferred Stock issued to the United States Department of the Treasury (the “Treasury”) by repaying $59 million received in December 2008 under the Capital Purchase Program.

The Company’s management remains focused on maintaining adequate levels of liquidity and capital at all times and believes sound risk management practices in underwriting and lending will enable it to successfully weather continued economic uncertainty in the marketplace.

The following table presents the Company’s contractual obligations and scheduled payment amounts due at the various intervals over the next five years and beyond as of December 31, 2010 (dollars in thousands):

 

     Total      Less than 1
year
     1-3 years      4-5 years      More than
5 years
 

Long-term debt

   $ 215,202       $ —         $ —         $ —         $ 215,202   

Operating leases

     23,119         4,473         6,318         4,942         7,386   

Other short-term borrowings

     23,500         23,500         —           —           —     

Repurchase agreements

     69,467         69,467         —           —           —     
                                            

Total contractual obligations

   $ 331,288       $ 97,440       $ 6,318       $ 4,942       $ 222,588   
                                            

For more information pertaining to the previous table, reference Note 5 “Bank Premise and Equipment” and Note 8 “Borrowings” in the “Notes to the Consolidated Financial Statements.”

 

33


Loan Portfolio

Loans, net of unearned income were $2.8 billion and $1.9 billion at December 31, 2010 and 2009. Loans secured by real estate continue to represent the Company’s largest category, comprising 82.3% of the total loan portfolio.

The following table presents the composition of the Company’s loans, net of unearned income, and as a percentage of the Company’s total gross loans as of December 31, (dollars in thousands):

 

    2010     2009     2008     2007     2006  

Mortgage loans on real estate:

                   

Residential 1-4 family

  $ 431,614        15.2   $ 349,277        18.6   $ 292,003        15.6   $ 281,847        16.1   $ 263,770        17.0

Commercial

    924,548        32.6     596,773        31.8     550,680        29.4     500,118        28.6     448,691        29.0

Construction, land development, and other land loans

    489,601        17.3     307,726        16.4     403,502        21.5     396,928        22.7     324,606        20.9

Second mortgages

    64,534        2.3     34,942        1.9     38,060        2.0     37,875        2.2     35,584        2.3

Equity lines of credit

    305,741        10.8     182,449        9.7     162,740        8.7     128,897        7.4     112,079        7.2

Multifamily

    91,397        3.2     46,581        2.5     37,321        2.0     32,970        1.9     29,263        1.9

Agriculture

    26,787        0.9     26,191        1.4     30,727        1.6     18,958        1.1     12,903        0.8
                                                                         

Total real estate loans

    2,334,222        82.3     1,543,939        82.4     1,515,033        80.8     1,397,593        80.0     1,226,896        79.2

Commercial Loans

    180,840        6.4     126,157        6.7     146,827        7.8     136,317        7.8     136,617        8.8

Consumer installment loans

                   

Personal

    277,184        9.8     148,811        7.9     160,161        8.5     173,650        9.9     153,865        9.9

Credit cards

    19,308        0.6     17,743        0.9     15,723        0.8     13,108        0.7     9,963        0.6
                                                                         

Total consumer installment loans

    296,492        10.4     166,554        8.8     175,884        9.3     186,758        10.6     163,828        10.6

All other loans

    25,699        0.9     37,574        2.0     36,344        1.9     27,152        1.6     22,104        1.4
                                                                         

Gross loans

    2,837,253        100.0     1,874,224        100.0     1,874,088        100.0     1,747,820        100.0     1,549,445        100.0
                                                 

The following table presents the remaining maturities and type of rate (variable or fixed) on commercial and real estate constructions loans as of December 31, 2010 (dollars in thousands):

 

                   Variable Rate      Fixed Rate  
     Total
Maturities
     Less than
1 year
     Total      1-5 years      More than
5 years
     Total      1-5 years      More than
5 years
 

Construction, land development and other land loans

   $ 489,601       $ 416,022       $ 3,661       $ 3,646       $ 15       $ 69,918       $ 64,573       $ 5,345   

Commercial

   $ 180,840       $ 97,638       $ 3,325       $ 3,325       $ —         $ 79,877       $ 64,509       $ 15,367   

While the current economic environment is challenging, the Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade areas. To manage the growth of the real estate loans in the loan portfolio, facilitate asset/liability management and generate additional fee income, the Company sells a portion of conforming first mortgage residential real estate loans to the secondary market as they are originated. Union Mortgage serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market or selling loans to meet Union First Market Bank’s current asset/liability management needs. This venture has provided Union First Market Bank’s customers with enhanced mortgage products and the Company with improved efficiencies through the consolidation of this function.

Asset Quality

The Company continued to experience deterioration in asset quality during 2010, principally within the builder residential real estate portfolio, as the housing market remained soft. While economic indicators suggest the recession has technically ended and there are some signs of increased economic activity, the signals are somewhat mixed and there could be additional deterioration in asset quality in the near term. The magnitude of any such softening is largely dependent upon any lagging impact on commercial real estate, the recovery of residential housing, and the pace at which the economies in the markets we serve recover. The Company does not originate or purchase loans from foreign entities or loans classified by regulators as highly leveraged transactions. The Company’s loan portfolio does not include exposure to option adjustable rate mortgage products, high loan-to-value ratio mortgages, interest only mortgage loans, subprime mortgage loans or mortgage loans with initial teaser rates. The Company does have junior lien mortgages (“second mortgages”), primarily home equity loans. The Company’s second mortgage

 

34


portfolio is originated within the Company’s footprint and represented approximately 2.3% of the total loan portfolio at December 31, 2010. The Company has low loss experience within this portfolio and is prompted to perform updated valuations upon identification of a borrower weakness. The sources of valuations are appraisals, broker price opinions, and automated valuation models.

While the level of nonperforming assets increased at the end of 2010, the levels are considered manageable by the Company. Resources continue to be devoted specifically to the ongoing review of the loan portfolio and the workouts of problem assets to minimize any losses to the Company. The Company has in place a special assets loan committee, which includes the Company’s Chief Executive Officer, Chief Credit Officer, and other senior lenders and credit officers. This committee formulates strategies, develops action plans, and approves all credit actions taken on significant problem loans. During the fourth quarter, the Company reassigned a senior officer, with significant real estate experience, to oversee the problem loan and other real estate owned (“OREO”) areas of the Company and manage the five special asset loan officers previously dedicated to that area. Management continues to monitor delinquencies, risk rating changes, charge-offs, market trends and other indicators of risk in the Company’s portfolio, particularly those tied to residential and commercial real estate, and adjusts the allowance for loan losses accordingly. Historically, and particularly in the current economic environment, the Company seeks to work with its customers on loan collection matters while taking appropriate actions to improve the Company’s position and minimize any losses. These loans are closely managed and evaluated for collection with appropriate loss reserves established whenever necessary.

Net charge-offs for 2010 were $16.4 million, or 0.58%, of total loans. Net charge-offs included commercial loans of $7.1 million, other consumer loans of $2.9 million, construction loans of $2.7 million, commercial real estate loans of $1.9 million, and home equity lines of $1.4 million. At December 31, 2010, total past due loans were $114.2 million, or 4.02%, of total loans, an increase from 1.56% a year ago.

At December 31, 2010, nonperforming assets totaled $97.8 million, an increase of $53.0 million over the prior year-end. The increase in nonperforming assets was related to stresses in the residential home builder market, which were largely a result of the recent recession and the subsequent slow pace of the economic recovery. Nonperforming loans have increased as residential real estate borrowers (i.e., builders) continue to experience financial difficulties with the protracted economic recovery depleting their cash reserves and other repayment resources. In addition, after working with the borrowers, the Company has had to foreclose on various real estate collateral in order to avoid additional losses. The increase in nonperforming assets during the year related to increases in nonaccrual loans of $39.4 million and OREO of $13.6 million. Of the net increase in nonaccrual loans approximately half was attributable to residential real estate, and the remaining half split between the commercial real estate and land loan portfolios. The net increase in OREO was within the residential real estate portfolio. At December 31, 2010, the coverage ratio of the allowance for loan losses to nonperforming loans was 62.2%, a decline from 136.4% a year earlier. Despite this decline, impairment analyses provided appropriate reserves on these nonperforming loans while appropriate reserves on homogenous pools continue to be maintained. Nonperforming assets at December 31, 2010 included $61.7 million in nonperforming loans. This total includes residential real estate loans of $29.8 million, land loans of $14.1 million, commercial real estate loans of $13.7 million, commercial and industrial loans of $2.6 million and land development loans of $1.5 million.

Nonperforming assets also included $36.1 million in other real estate owned. This total includes residential real estate of $13.4 million, land development of $11.2 million, land of $7.7 million, commercial real estate of $2.8 million and land held for development of bank branch sites of $1.0 million. Included in land development is $8.6 million related to a residential community in the Northern Neck region of Virginia, which includes developed residential lots, a golf course and undeveloped land. Foreclosed properties were adjusted to their fair values at the time of each foreclosure and any losses were taken as loan charge-offs against the allowance for loan losses at that time. OREO asset valuations are also evaluated at least quarterly and any necessary write down to fair value is recorded as impairment. For

 

35


the year ended December 31, 2010, the Company increased OREO by $13.6 million, selling $11.7 million of OREO at a net gain of $207,000 while adding $24.8 million, capitalizing costs of $404,000 and writing down OREO to fair market value by $43,000. The Company expects this type of activity to continue until the market for these properties and the economy as a whole sees marked improvement. The Company’s foreclosure practices are sound.

The following provides a roll-forward of the OREO activity from the end of 2009 to the end of 2010 (dollars in thousands):

 

     Amounts  

Beginning Balance - 12/31/2009

   $ 22,509   

Additions

     24,791   

Capitalized Improvements

     404   

Valuation Adjustments

     (43

Proceeds from sales

     (11,747

Gains from sales

     207   
        

Ending Balance - 12/31/2010

   $ 36,122   
        

Approximately $1.0 billion, or 35.8% of the Company’s loan portfolio is comprised of amortizing commercial real estate loans, of which approximately 44% is owner-occupied real estate and which typically carries a lower risk of loss. While there remain industry concerns over further softening in the commercial real estate sector, the Company’s portfolio is not highly speculative or concentrated in large credits. In addition, $489.6 million of the loan portfolio is concentrated in real estate construction loans, including raw land, land development, residential lots, speculative and pre-sold residential construction and commercial construction loans (both owner-occupied and non-owner-occupied). Of this amount, $209.0 million, or 42.7%, represents land and lot loans; $123.5 million, or 25.2%, represents land development loans; $83.8 million, or 17.1%, represents speculative and pre-sold residential construction loans and $73.3 million, or 15.0%, is commercial construction. The Company’s real estate lending is conducted within its operating footprint in markets it understands and monitors.

The following table summarizes activity in the allowance for loan losses over the past five years ended December 31, (dollars in thousands):

 

     2010     2009     2008     2007     2006  

Balance, beginning of year

   $ 30,484      $ 25,496      $ 19,336      $ 19,148      $ 17,116   

Allowance from acquired bank

     —          —          —          —          785   

Loans charged-off:

          

Commercial

     2,205        2,039        1,638        207        22   

Real estate

     12,581        8,702        18        —          —     

Consumer

     3,763        3,667        2,544        1,005        600   
                                        

Total loans charged-off

     18,549        14,408        4,200        1,212        622   
                                        

Recoveries:

          

Commercial

     551        71        52        30        102   

Real estate

     628        807        —          —          —     

Consumer

     924        272        288        310        317   
                                        

Total recoveries

     2,103        1,150        340        340        419   
                                        

Net charge-offs

     16,446        13,258        3,860        872        203   

Provision for loan losses

     24,368        18,246        10,020        1,060        1,450   
                                        

Balance, end of year

   $ 38,406      $ 30,484      $ 25,496      $ 19,336      $ 19,148   
                                        

Allowance for loan losses to loans

     1.35     1.63     1.36     1.11     1.24

Net charge-offs to average loans

     0.58     0.71     0.21     0.05     0.01

 

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The following table shows an allocation of the allowance for loan losses among loan categories based upon analysis of the loan portfolio’s composition, historical loan loss experience and other factors, as well as, the ratio of the related outstanding loan balances to total loans as of December 31, (dollars in thousands).

 

     2010     2009     2008     2007     2006  
     $      % (1)     $      % (1)     $      % (1)     $      % (1)     $      % (1)  

Commercial, financial and agriculture

   $ 9,071         6.4   $ 7,200         6.7   $ 6,022         8.1   $ 4,567         8.0   $ 4,523         8.9

Real estate construction

     21,332         17.3     16,931         16.4     14,161         21.5     10,740         22.7     10,635         20.9

Real estate mortgage

     1,214         65.0     964         66.0     806         59.3     611         57.3     605         58.2

Consumer & other

     6,789         11.3     5,389         10.9     4,507         11.1     3,418         12.0     3,385         11.9
                                                                                     

Total

   $ 38,406         100.0   $ 30,484         100.0   $ 25,496         100.0   $ 19,336         100.0   $ 19,148         100.0
                                                       

 

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

The provision for loan losses for the year ended December 31, 2010 was $24.4 million, an increase of $6.1 million from December 31, 2009. The allowance for loan losses as a percentage of the loan portfolio was 1.35% at December 31, 2010 and 1.63% for the period ended December 31, 2009. The current level of the allowance for loan losses reflect specific reserves related to nonperforming loans, changes in risk ratings on loans, net charge-off activity, loan growth, delinquency trends and other credit risk factors that the Company considers in assessing the adequacy of the allowance for loan losses. In acquisition accounting there was no carryover of FMB’s previously established allowance for loan losses. The increases in the provision for loan losses during the year were principally related to asset quality deterioration resulting from continued weaknesses in the residential home builder market. The reduction in the allowance for loan losses as a percentage of loans compared to the prior year is related to the elimination of FMB’s allowance for loan losses. The allowance for loan losses as a percentage of the total loan portfolio, adjusted for acquired loans, was 1.88% at December 31, 2010.

The following table presents a five-year comparison of nonperforming assets as of December 31, (dollars in thousands):

 

     2010     2009     2008     2007     2006  

Nonaccrual loans

   $ 61,716      $ 22,348      $ 14,412      $ 9,436      $ 10,873   

Foreclosed properties

     35,101        21,489        6,511        217        —     

Real estate investment

     1,020        1,020        629        476        —     
                                        

Total nonperforming assets

   $ 97,838      $ 44,857      $ 21,552      $ 10,129      $ 10,873   
                                        

Loans past due 90 days and accruing interest

   $ 15,332      $ 7,296      $ 3,082      $ 905      $ 208   
                                        

Nonperforming assets to loans, foreclosed properties & real estate investments

     3.40     2.36     1.15     0.58     0.70

Allowance for loan losses to nonaccrual loans

     62.23     136.41     176.91     204.92     176.11

Securities Available for Sale

At December 31, 2010, the Company had securities available for sale, at fair value, in the amount of $572.4 million, or 14.9% of total assets, as compared to $400.6 million, or 15.5%, of total assets as of December 31, 2009. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. All of the Company’s mortgage-backed securities are investment grade. The investment portfolio has a high percentage of municipals and mortgage-backed securities; therefore a higher taxable equivalent yield exists on the portfolio compared to its peers. The Company does not engage in structured derivative or hedging activities within the investment portfolio.

 

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The following table sets forth a summary of the securities available for sale, at fair value as of December 31, (dollars in thousands):

 

     2010      2009      2008  

U.S. government and agency securities

   $ 9,961       $ 5,763       $ —     

Obligations of states and political subdivisions

     175,032         124,126         120,257   

Corporate and other bonds

     15,065         15,799         12,136   

Mortgage-backed securities

     344,038         236,005         160,531   

Federal Reserve Bank stock

     6,716         3,683         3,383   

Federal Home Loan Bank stock

     18,345         14,958         13,171   

Other securities

     3,284         257         233   
                          

Total securities available for sale, at fair value

   $ 572,441       $ 400,591       $ 309,711   
                          

During each quarter and at year end the Company conducts an assessment of the securities portfolio for other-than-temporary-impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance and relevant industry research and analysis. Based on the assessment and in accordance with the revised guidance, no OTTI was recognized at December 31, 2010. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes, to see if adjustments are needed. The primary cause of temporary impairments was the increase in spreads over comparable Treasury bonds.

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following table summarizes the contractual maturity of securities available for sale, at fair value and their weighted average yields as of December 31, 2010 (dollars in thousands):

 

     1 Year or
Less
    1 - 5 Years     5 - 10 Years     Over 10
Years and
Equity
Securities
    Total  

U.S. government and agency securities:

          

Amortized cost

   $ —        $ 9,464      $ —        $ 146      $ 9,610   

Fair value

     —          9,918        —          43        9,961   

Weighted average yield (1)

     —          4.38     —          —          4.48

Mortgage backed securities:

          

Amortized cost

   $ 4,254      $ 19,258      $ 57,286      $ 253,898      $ 334,696   

Fair value

     4,334        20,094        59,686        259,924        344,038   

Weighted average yield (1)

     4.33     4.40     3.99     3.91     3.96

Obligations of states and political subdivisions:

          

Amortized cost

   $ 325      $ 8,370      $ 32,015      $ 135,721      $ 176,431   

Fair value

     331        8,571        32,741        133,389        175,032   

Weighted average yield (1)

     4.68     4.66     4.65     4.20     4.30

Other securities:

          

Amortized cost

   $ 1,499      $ 2,029      $ 1,326      $ 39,009      $ 43,863   

Fair value

     1,567        2,026        1,365        38,452        43,410   

Weighted average yield (1)

     5.90     5.28     4.70     5.15     5.17

Total securities available for sale:

          

Amortized cost

   $ 6,078      $ 39,121      $ 90,627      $ 428,774      $ 564,600   

Fair value

     6,232        40,609        93,792        431,808        572,441   

Weighted average yield (1)

     4.74     4.50     4.23     4.11     4.17

 

(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.

 

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As of December 31, 2010, the Company maintained a diversified municipal bond portfolio with three quarters of its holdings in general obligation issues and the remainder backed by revenue bonds. Issuances within the Commonwealth of Virginia represented 10% and the only state with a concentration above 10% was Texas which represented 29% of the municipal portfolio. Approximately 80% of municipal holdings are considered investment grade by Moody’s or S&P. The non-investment grade securities are principally insured Texas municipalities with no underlying rating. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.

Deposits

As of December 31, 2010, total average deposits were $3.0 billion, up $1.0 billion from December 31, 2009. This net increase was due to the acquisition of First Market Bank. Total interest-bearing deposits consist principally of certificates of deposit and money market account balances. Total certificates of deposit and money market accounts were $1.3 billion and $783.4 million, respectively, or 79.3% of total interest-bearing deposits.

The average deposits and rates paid for the past three years and maturities of certificates of deposit of $100,000 and over as of December 31 are as follows (dollars in thousands):

 

     2010     2009     2008  
     Amount      Rate     Amount      Rate     Amount      Rate  

Noninterest-bearing demand deposits

   $ 468,631         $ 289,769         $ 272,764      

Interest-bearing deposits:

               

NOW accounts

     345,927         0.22     201,520         0.16     218,349         0.62

Money market accounts

     724,802         0.89     429,501         1.84     238,540         2.39

Savings accounts

     151,169         0.37     99,914         0.38     100,782         0.58

Time deposits of $100,000 and over

     639,406         1.88     447,659         3.36     435,807         3.98

Brokered CDs

     —           0.00     8,985         2.75     57,100         3.59

Other time deposits

     645,110         1.70     492,186         3.16     442,491         3.90
                                 

Total interest-bearing

     2,506,414         1.23     1,679,765         2.35     1,493,069         2.97
                                 

Total average deposits

   $ 2,975,045         $ 1,969,533         $ 1,765,833      
                                 
     Within 3
Months
     3 - 6
Months
    6 - 12
Months
     Over 12
Months
    Total      Percent Of
Total
Deposits
 

Maturities of time deposits of $100,000 and over

   $ 154,162       $ 74,836      $ 119,298       $ 215,079      $ 563,375         18.35

Capital Resources

Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.

The Federal Reserve and the FDIC, has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity, retained earnings and a limited amount of perpetual preferred stock, less certain intangible items. The Company had a ratio of total capital to risk-weighted assets of 14.68% and 14.70% on December 31, 2010 and 2009, respectively. The Company’s ratio of Tier 1 capital to risk-weighted assets was 12.95% and 13.45% at December 31, 2010 and 2009, respectively, allowing the Company to meet the definition of “well-capitalized” for regulatory purposes. Both of these ratios exceeded the fully phased-in capital requirements in 2010 and 2009. The Company’s equity to asset ratio at December 31, 2010, 2009 and 2008 were 11.16%, 10.90% and 10.73%, respectively.

 

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In connection with two bank acquisitions, Prosperity Bank & Trust Company and Guaranty Bank, the Company has issued trust preferred capital notes to fund the cash portion of those acquisitions, collectively totaling $58.5 million. The total of the trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes. The acquired bank branches were financed through normal operations.

On December 19, 2008, the Company entered into a Letter Agreement with Treasury, pursuant to which it issued 59,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) for $59 million. The issuance was made pursuant to the Treasury’s Capital Purchase Program (the “CPP”) under the Troubled Asset Relief Program. In November 2009, the Company redeemed the Series A Preferred Stock, by repaying, with accumulated dividends, the $59 million it received in December 2008. Additionally, in December 2009, the Company entered into a Warrant Repurchase Letter Agreement (“Warrant Repurchase”) with the Treasury to repurchase a warrant to purchase 211,318 shares of the Company’s common stock that was issued in connection with the Company’s sale of Series A Preferred Stock. As a result of the Warrant Repurchase, the Company had no securities issued or outstanding to the Treasury and was no longer participating in the Treasury’s CPP as of November 18, 2009.

The Company’s outstanding series of preferred stock resulted from the acquisition of First Market Bank. On February 6, 2009, First Market Bank issued and sold to the Treasury 33,900 shares of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B and a warrant to purchase up to 1,695 shares of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C. The Treasury immediately exercised the warrant for the entire 1,695 shares. In connection with the Company’s acquisition of FMB, the Company’s board of directors established a series of preferred stock with substantially identical preferences, rights and limitations to the First Market Bank preferred stock, except as explained below. Pursuant to the closing of the acquisition, each share of First Market Bank Series B and Series C preferred stock was exchanged for one share of the Company’s Series B Preferred Stock. The Series B Preferred Stock of the Company pays cumulative dividends to the Treasury at a rate of 5.19% per annum for the first five years and thereafter at a rate of 9.0% per annum. The 5.19% dividend rate is a blended rate comprised of the dividend rate of the 33,900 shares of First Market Bank 5% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B and 1,695 shares of First Market Bank 9% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A. The Series B Preferred Stock of the Company is non-voting and each share has a liquidation preference of $1,000. The Company anticipates redemption of this capital issue during 2011, subject to regulatory approval. Despite the Treasury’s being the sole holder of the Company’s Series B Preferred Stock, the Company is not considered a participant in the Treasury’s CPP.

 

40


The following summarizes the Company’s regulatory capital and related ratios over the past three years ended December 31, (dollars in thousands):

 

     2010     2009     2008  

Tier 1 capital:

      

Preferred stock - liquidity value

   $ 35,595      $ —        $ 590   

Common stock - par value

     34,532        24,462        18,055   

Surplus

     185,763        98,136        101,719   

Retained earnings

     169,801        155,047        155,140   

Warrant

     —          —          2,808   

Discount on preferred stock

     (1,177     —          (2,790
                        

Total equity

     424,514        277,645        275,522   

Plus: qualifying trust preferred capital notes

     58,500        58,500        58,500   

Less: core deposit intangibles/goodwill/unrealized gain(loss) on AFS

     84,849        63,797        65,896   
                        

Total Tier 1 capital

     398,165        272,348        268,126   
                        

Tier 2 capital:

      

Subordinated debt

     14,892        —          —     

Allowance for loan losses

     38,406        25,374        25,191   
                        

Total Tier 2 capital

     53,298        25,374        25,191   
                        

Total risk-based capital

   $ 451,463      $ 297,722      $ 293,317   
                        

Risk-weighted assets

   $ 3,075,330      $ 2,024,824      $ 2,015,008   
                        

Capital ratios:

      

Tier 1 risk-based capital ratio

     12.95     13.45     13.31

Total risk-based capital ratio

     14.68     14.70     14.56

Leverage ratio (Tier 1 capital to average adjusted assets)

     10.55     10.86     11.14

Equity to total assets

     11.16     10.90     10.73

Commitments and off-balance sheet obligations

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. For more information pertaining to these commitments, reference Note 11 “Financial Instruments with Off-Balance Sheet Risk” in the “Notes to the Consolidated Financial Statements.”

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk.

At December 31, 2010, Union Mortgage had rate lock commitments to originate mortgage loans amounting to $111.7 million and loans held for sale of $74.0 million. Union Mortgage has entered into corresponding mandatory commitments on a best-efforts basis to sell loans on a servicing-released basis totaling approximately $185.7 million. These commitments to sell loans are designed to eliminate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

 

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The following table represents the Company’s other commitments with balance sheet or off-balance sheet risk as of December 31, 2010 and 2009 (dollars in thousands):

 

     2010      2009  

Commitments with off-balance sheet risk:

     

Commitments to extend credit (1)

   $ 782,782       $ 462,541   

Standby letters of credit

     38,347         25,449   

Mortgage loan rate lock commitments

     111,655         111,123   
                 

Total commitments with off-balance sheet risk

   $ 932,784       $ 599,113   
                 

Commitments with balance sheet risk:

     

Loans held for sale

   $ 73,974       $ 54,280   
                 

Total commitments with balance sheet risk

   $ 73,974       $ 54,280   
                 

Total other commitments

   $ 1,006,758       $ 653,393   
                 

 

(1) Includes unfunded overdraft protection.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, Federal funds sold, securities available for sale, loans held for sale and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through Federal funds lines with several correspondent banks, a line of credit with the FHLB, and a corporate line of credit with a large correspondent bank. The Company completed a follow-on equity raise on September 16, 2009, which generated cash and capital of approximately $58.8 million, net of underwriting discounts, commissions and estimated offering expenses from the issuance of 4,725,000 shares of common stock at a price of $13.25 per share. It is anticipated that the proceeds of this offering will be used for general corporate purposes, including organic and opportunistic acquisition-based growth. During the fourth quarter of 2009, the Company redeemed the Preferred Stock and warrant issued to the Treasury by repaying $59 million received in December 2008 under the Capital Purchase Program. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

At December 31, 2010, cash and cash equivalents and securities classified as available for sale comprised 16.5% of total assets, compared to 17.3% at December 31, 2009. Asset liquidity is also provided by managing loan and securities maturities and cash flows.

Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The community bank segment maintains Federal funds lines with several regional banks totaling $129.0 million as of December 31, 2010. Under these lines $23.5 million was outstanding at December 31, 2010. The Company had outstanding borrowings pursuant to securities sold under agreements to repurchase transactions with a maturity of one day of $69.5 million as of December 31, 2010 compared to $50.6 million as of December 31, 2009. Lastly, the Company had a collateral dependent line of credit with the FHLB for up to $660.5 million as of December 31, 2010. There was approximately $141.0 million outstanding under this line at December 31, 2010.

NON GAAP MEASURES

Beginning January 1, 2009, business combinations must be accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The Company has accounted for its previous business combinations under the purchase method of accounting. The acquisitions of the acquired bank

 

42


branches, Prosperity, and Guaranty are the three business combinations accounted for using the purchase method of accounting. 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. At December 31, 2010, core deposit intangible, goodwill, and trademark intangible, assets totaled $26.8 million, $57.6 million, and $833,000, respectively, compared to $7.7 million in core deposit intangible and $56.5 million in goodwill in 2009.

In reporting the results of 2010 and 2009, the Company has provided supplemental performance measures on an operating or tangible basis. Such measures exclude amortization expense related to intangible assets, such as core deposit intangibles. The Company believes these measures are useful to investors as they exclude non-operating adjustments resulting from acquisition activity and allow investors to see the combined economic results of the organization. Cash basis operating earnings per share was $1.10 for the year ended December 31, 2010 compared to $0.63 in 2009. Cash basis return on average tangible common equity and assets for the year ended December 31, 2010 was 9.35% and 0.76%, respectively, compared to 5.54% and 0.38%, respectively, in 2009.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies.

The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31, (dollars in thousands):

 

     2010     2009  

Net income

   $ 22,922      $ 8,360   

Plus: core deposit intangible amortization, net of tax

     4,721        1,251   

Plus: trademark intangible amortization, net of tax

     239        —     
                

Cash basis operating earnings

     27,882        9,611   
                

Average assets

     3,752,569        2,578,808   

Less: average trademark intangible

     933        —     

Less: average goodwill

     57,566        56,474   

Less: average core deposit intangibles

     28,470        8,639   
                

Average tangible assets

     3,665,599        2,513,695   
                

Average equity

     416,577        288,243   

Less: average trademark intangible

     933        —     

Less: average goodwill

     57,566        56,474   

Less: average core deposit intangibles

     28,470        8,639   

Less: average preferred equity

     31,387        49,512   
                

Average tangible common equity

   $ 298,221      $ 173,618   
                

Weighted average shares outstanding, diluted

     25,268,216        15,201,993   

Cash basis earnings per share, diluted

   $ 1.10      $ 0.63   

Cash basis return on average tangible assets

     0.76     0.38

Cash basis return on average tangible common equity

     9.35     5.54

 

43


QUARTERLY RESULTS

The following table presents the Company’s quarterly performance for the years ended December 31, 2010 and 2009 (dollars in thousands, except per share amounts):

 

     Quarter        
     First      Second     Third      Fourth     Total (1)  

For the Year 2010

            

Interest and dividend income

   $ 43,318       $ 49,295      $ 48,440       $ 48,768      $ 189,821   

Interest expense

     9,158         9,755        9,791         9,541        38,245   
                                          

Net interest income

     34,160         39,540        38,649         39,227        151,576   

Provision for loan losses

     5,001         3,955        5,912         9,500        24,368   
                                          

Net interest income after provision for loan losses

     29,159         35,585        32,737         29,727        127,208   

Noninterest income

     9,739         12,128        12,353         13,078        47,298   

Noninterest expenses

     36,800         35,148        33,984         37,069        143,001   
                                          

Income before income taxes

     2,098         12,565        11,106         5,736        31,505   

Income tax expense

     399         3,839        3,033         1,312        8,583   
                                          

Net income

   $ 1,699       $ 8,726      $ 8,073       $ 4,424      $ 22,922   

Dividends paid and accumulated on preferred stock

     303         462        462         462        1,689   

Accretion of discount on preferred stock

     51         50        62         63        225   
                                          

Net income available to common shareholders

   $ 1,345       $ 8,214      $ 7,549       $ 3,899      $ 21,008   
                                          

Earnings per share, basic

   $ 0.06       $ 0.32      $ 0.29       $ 0.15      $ 0.83   

Earnings per share, diluted

   $ 0.06       $ 0.32      $ 0.29       $ 0.15      $ 0.83   

For the Year 2009

            

Interest and dividend income

   $ 31,364       $ 31,977      $ 32,502       $ 32,744      $ 128,587   

Interest expense

     13,650         13,273        11,685         10,163        48,771   
                                          

Net interest income

     17,714         18,704        20,817         22,581        79,816   

Provision for loan losses

     3,130         4,855        4,517         5,744        18,246   
                                          

Net interest income after provision for loan losses

     14,584         13,849        16,300         16,837        61,570   

Noninterest income

     7,333         9,278        7,911         8,445        32,967   

Noninterest expenses

     19,927         22,351        21,105         21,904        85,287   
                                          

Income before income taxes

     1,990         776        3,106         3,378        9,250   

Income tax expense (benefit)

     237         (177     301         529        890   
                                          

Net income

   $ 1,753       $ 953      $ 2,805       $ 2,849      $ 8,360   
                                          

Dividends paid and accumulated on preferred stock

     738         738        737         483        2,696   

Accretion of discount on preferred stock

     123         124        125         2,418        2,790   
                                          

Net income (loss) available to common shareholders

   $ 892       $ 91      $ 1,943       $ (52   $ 2,874   
                                          

Earnings per share, basic

   $ 0.07       $ 0.01      $ 0.13       $ —        $ 0.19   

Earnings per share, diluted

   $ 0.07       $ 0.01      $ 0.13       $ —        $ 0.19   

 

(1) The sum of quarterly financial information may vary from year-to-date financial information due to rounding.

ITEM 7A.—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

This information is incorporated herein by reference from Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

 

44


ITEM 8.—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Union First Market Bankshares Corporation

Richmond, Virginia

We have audited the accompanying consolidated balance sheets of Union First Market Bankshares Corporation (formerly Union Bankshares Corporation) and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union First Market Bankshares Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Union First Market Bankshares Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 9, 2011 expressed an unqualified opinion on the effectiveness of Union Bankshares Corporation and subsidiaries’ internal control over financial reporting.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

March 9, 2011

 

45


LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Union First Market Bankshares Corporation

Richmond, Virginia

We have audited Union First Market Bankshares Corporation (formerly Union Bankshares Corporation) and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Union Bankshares Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

46


In our opinion, Union First Market Bankshares Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010 of Union First Market Bankshares Corporation and subsidiaries and our report dated March 9, 2011 expressed an unqualified opinion.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

March 9, 2011

 

47


UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2010 AND 2009

(Dollars in thousands, except share amounts)

 

     2010     2009  

ASSETS

    

Cash and cash equivalents:

    

Cash and due from banks

   $ 58,951      $ 38,725   

Interest-bearing deposits in other banks

     1,449        4,106   

Money market investments

     158        127   

Other interest-bearing deposits

     —          2,598   

Federal funds sold

     595        355   
                

Total cash and cash equivalents

     61,153        45,911   
                

Securities available for sale, at fair value

     572,441        400,591   
                

Loans held for sale

     73,974        54,280   
                

Loans, net of unearned income

     2,837,253        1,874,224   

Less allowance for loan losses

     38,406        30,484   
                

Net loans

     2,798,847        1,843,740   
                

Bank premises and equipment, net

     90,680        78,722   

Other real estate owned

     36,122        22,509   

Core deposit intangibles, net

     26,827        7,690   

Goodwill

     57,567        56,474   

Other assets

     119,636        77,355   
                

Total assets

   $ 3,837,247      $ 2,587,272   
                

LIABILITIES

    

Noninterest-bearing demand deposits

   $ 484,867      $ 294,222   

Interest-bearing deposits:

    

NOW accounts

     381,512        215,327   

Money market accounts

     783,431        446,980   

Savings accounts

     153,724        102,852   

Time deposits of $100,000 and over

     563,375        407,894   

Other time deposits

     703,150        449,089   
                

Total interest-bearing deposits

     2,585,192        1,622,142   
                

Total deposits

     3,070,059        1,916,364   
                

Securities sold under agreements to repurchase

     69,467        50,550   

Other short-term borrowings

     23,500        115,201   

Long-term borrowings

     154,892        140,000   

Trust preferred capital notes

     60,310        60,310   

Other liabilities

     30,934        22,759   
                

Total liabilities

     3,409,162        2,305,184   
                

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Preferred stock Series B, $10.00 par value, $1,000 liquidation preference, shares authorized 59,000; issued and outstanding, 35,595 shares at December 31, 2010 and none at December 31, 2009

     35,595        —     

Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 26,004,197 shares at December 31, 2010 and 18,419,567 shares at December 31, 2009

     34,532        24,462   

Surplus

     185,763        98,136   

Retained earnings

     169,801        155,047   

Discount on preferred stock

     (1,177     —     

Accumulated other comprehensive income

     3,571        4,443   
                

Total stockholders’ equity

     428,085        282,088   
                

Total liabilities and stockholders’ equity

   $ 3,837,247      $ 2,587,272   
                

See accompanying notes to consolidated financial statements.

 

48


UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(Dollars in thousands, except per share amounts)

 

     2010      2009     2008  

Interest and dividend income:

       

Interest and fees on loans

   $ 169,549       $ 112,316      $ 120,642   

Interest on Federal funds sold

     17         1        98   

Interest on deposits in other banks

     77         135        39   

Interest on money market investments

     —           —          1   

Interest on other interest-bearing deposits

     —           —          49   

Interest and dividends on securities:

       

Taxable

     13,958         10,606        9,068   

Nontaxable

     6,220         5,529        5,198   
                         

Total interest and dividend income

     189,821         128,587        135,095   
                         

Interest expense:

       

Interest on deposits

     30,742         39,451        44,298   

Interest on Federal funds purchased

     33         27        380   

Interest on short-term borrowings

     1,790         2,261        4,407   

Interest on long-term borrowings

     5,680         7,032        8,137   
                         

Total interest expense

     38,245         48,771        57,222   
                         

Net interest income

     151,576         79,816        77,873   

Provision for loan losses

     24,368