Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended June 30, 2011

OR

 

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

Commission File Number: 0-20293

 

 

UNION FIRST MARKET BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

VIRGINIA   54-1598552

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

111 Virginia Street

Suite 200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

(804) 633-5031

(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock outstanding as of August 2, 2011 was 26,047,097

 

 

 


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-Q

INDEX

 

ITEM        PAGE  
  PART I - FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets as of June 30, 2011, December 31, 2010 and June 30, 2010      1   
  Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010      2   
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2011 and 2010      3   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010      4   
  Notes to Condensed Consolidated Financial Statements      5   
  Report of Independent Registered Public Accounting Firm      29   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      48   

Item 4.

  Controls and Procedures      50   
  PART II - OTHER INFORMATION   

Item 1.

  Legal Proceedings      50   

Item 1A.

  Risk Factors      51   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      51   

Item 6.

  Exhibits      51   
  Signatures      52   


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

 

     June 30,
2011
    December 31,
2010
    June 30,
2010
 
     (Unaudited)     (Audited)     (Unaudited)  
ASSETS       

Cash and cash equivalents:

      

Cash and due from banks

   $ 61,465      $ 58,951      $ 56,385   

Interest-bearing deposits in other banks

     1,583        1,449        77,375   

Money market investments

     27        158        177   

Other interest-bearing deposits

     —          —          1   

Federal funds sold

     159        595        1,796   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     63,234        61,153        135,734   
  

 

 

   

 

 

   

 

 

 

Securities available for sale, at fair value

     591,060        572,441        556,926   
  

 

 

   

 

 

   

 

 

 

Loans held for sale

     50,420        73,974        74,722   
  

 

 

   

 

 

   

 

 

 

Loans, net of unearned income

     2,859,569        2,837,253        2,819,651   

Less allowance for loan losses

     39,631        38,406        33,956   
  

 

 

   

 

 

   

 

 

 

Net loans

     2,819,938        2,798,847        2,785,695   
  

 

 

   

 

 

   

 

 

 

Bank premises and equipment, net

     91,601        90,680        92,010   

Other real estate owned

     36,935        36,122        28,394   

Core deposit intangibles, net

     23,658        26,827        30,698   

Goodwill

     59,400        57,567        57,567   

Other assets

     115,278        119,636        112,453   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,851,524      $ 3,837,247      $ 3,874,199   
  

 

 

   

 

 

   

 

 

 
LIABILITIES       

Noninterest-bearing demand deposits

   $ 520,511      $ 484,867      $ 514,301   

Interest-bearing deposits:

      

NOW accounts

     378,511        381,512        352,060   

Money market accounts

     842,135        783,431        746,529   

Savings accounts

     175,709        153,724        151,050   

Time deposits of $100,000 and over

     505,993        563,375        589,213   

Other time deposits

     660,194        703,150        742,321   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,562,542        2,585,192        2,581,173   
  

 

 

   

 

 

   

 

 

 

Total deposits

     3,083,053        3,070,059        3,095,474   
  

 

 

   

 

 

   

 

 

 

Securities sold under agreements to repurchase

     77,324        69,467        77,829   

Other short-term borrowings

     2,900        23,500        35,000   

Trust preferred capital notes

     60,310        60,310        60,310   

Long-term borrowings

     155,136        154,892        155,082   

Other liabilities

     29,685        30,934        28,197   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     3,408,408        3,409,162        3,451,892   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      
STOCKHOLDERS’ EQUITY       

Preferred stock, $10.00 par value, $1,000 liquidation value, shares authorized 500,000; issued and outstanding, 35,595 shares for all periods.

     35,595        35,595        35,595   

Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 26,043,633 shares, 26,004,197 shares, and 25,933,516 shares, respectively.

     34,569        34,532        34,451   

Surplus

     186,177        185,763        184,681   

Retained earnings

     178,125        169,801        161,726   

Discount on preferred stock

     (1,048     (1,177     (1,302

Accumulated other comprehensive income

     9,698        3,571        7,156   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     443,116        428,085        422,307   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,851,524      $ 3,837,247      $ 3,874,199   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-1-


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2011     2010      2011     2010  
     (Unaudited)     (Unaudited)      (Unaudited)     (Unaudited)  

Interest and dividend income:

         

Interest and fees on loans

   $ 42,332      $ 44,269       $ 84,335      $ 82,663   

Interest on Federal funds sold

     —          3         —          15   

Interest on deposits in other banks

     28        15         33        23   

Interest and dividends on securities:

         

Taxable

     3,627        3,503         7,257        7,042   

Nontaxable

     1,769        1,532         3,523        2,897   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     47,756        49,322         95,148        92,640   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense:

         

Interest on deposits

     6,166        7,837         12,850        15,100   

Interest on Federal funds purchased

     —          —           7        14   

Interest on short-term borrowings

     211        663         372        1,261   

Interest on long-term borrowings

     1,756        1,255         3,496        2,538   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     8,133        9,755         16,725        18,913   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     39,623        39,567         78,423        73,727   

Provision for loan losses

     4,500        3,955         10,800        8,956   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     35,123        35,612         67,623        64,771   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income:

         

Service charges on deposit accounts

     2,216        2,381         4,274        4,552   

Other service charges, commissions and fees

     3,351        3,136         6,275        5,451   

Gains (losses) on securities transactions, net

     —          5         (16     24   

Gains on sales of loans

     4,303        5,248         9,271        9,739   

Gains (losses) on sales of other real estate and bank premises, net

     (791     5         (1,090     44   

Other operating income

     884        1,326         1,796        2,030   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     9,963        12,101         20,510        21,840   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expenses:

         

Salaries and benefits

     17,580        17,403         35,234        32,818   

Occupancy expenses

     2,668        2,871         5,422        5,506   

Furniture and equipment expenses

     1,679        1,781         3,341        3,183   

Other operating expenses

     13,945        13,093         26,642        30,441   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expenses

     35,872        35,148         70,639        71,948   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     9,214        12,565         17,494        14,663   

Income tax expense

     2,394        3,839         4,480        4,238   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 6,820      $ 8,726       $ 13,014      $ 10,425   

Dividends paid and accumulated on preferred stock

     462        462         924        765   

Accretion of discount on preferred stock

     65        50         129        101   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 6,293      $ 8,214       $ 11,961      $ 9,559   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.24      $ 0.32       $ 0.46      $ 0.39   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, diluted

   $ 0.24      $ 0.32       $ 0.46      $ 0.39   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-2-


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands, except share amounts)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Surplus     Retained
Earnings
    Discount on
Preferred
Stock
    Accumu-
lated Other
Compre-
hensive
Income
     Compre-
hensive
Income
    Total  

Balance - December 31, 2009

   $ —         $ 24,462       $ 98,136      $ 155,047      $ —        $ 4,443         $ 282,088   

Comprehensive income:

                   

Net income

             10,425           $ 10,425        10,425   

Interest rate swap (cash flow hedge)

                    (1,444  

Unrealized holding gains arising during the period (net of tax, $2,246)

                    4,173     

Reclassification adjustment for gains included in net income (net of tax, $8)

                    (16  

Other comprehensive income (net of tax, $2,238)

                 2,713         2,713        2,713   
                 

 

 

   

Total comprehensive income

                  $ 13,138     
                 

 

 

   

Issuance of Common Stock (7,477,273 shares)

        9,945         86,137                 96,082   

Dividends on Common Stock ($.12 per share)

             (3,110            (3,110

Issuance of Preferred Stock

     35,595                (1,403          34,192   

Dividends on Preferred Stock

             (535            (535

Accretion of discount on Preferred Stock

             (101     101             —     

Issuance of Common Stock under Dividend Reinvestment Plan (9,846 shares)

        13         170                 183   

Issuance of Common Stock under Incentive Stock Option Plan (4,541 shares)

        6         11                 17   

Vesting of Restricted Stock under Stock Incentive Plan (14,334 shares)

        25         (25              —     

Stock-based compensation expense

           252                 252   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Balance - June 30, 2010

   $ 35,595       $ 34,451       $ 184,681      $ 161,726      $ (1,302   $ 7,156         $ 422,307   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Balance - December 31, 2010

   $ 35,595       $ 34,532       $ 185,763      $ 169,801      $ (1,177   $ 3,571         $ 428,085   

Comprehensive income:

                   

Net income - 2011

             13,014           $ 13,014        13,014   

Interest rate swap (cash flow hedge)

                    (999  

Unrealized holding gains arising during the period (net of tax, $3,830)

                    7,116     

Reclassification adjustment for losses included in net income (net of tax, $6)

                    10     
                 

 

 

   

Other comprehensive income (net of tax, $3,836)

                 6,127         6,127        6,127   
                 

 

 

   

Total comprehensive income

                  $ 19,141     
                 

 

 

   

Dividends on Common Stock ($.14 per share)

             (3,637            (3,637

Tax benefit from exercise of stock awards

           1                 1   

Dividends on Preferred Stock

             (924            (924

Accretion of discount on Preferred Stock

             (129     129             —     

Issuance of common stock under Dividend Reinvestment Plan (9,747 shares)

        13         147                 160   

Issuance of common stock under Stock Incentive Plan (6,450 shares)

        8         47                 55   

Vesting of restricted stock under Stock Incentive Plan (12,243 shares)

        16         (16              —     

Stock-based compensation expense

           235                 235   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Balance - June 30, 2011

   $ 35,595       $ 34,569       $ 186,177      $ 178,125      $ (1,048   $ 9,698         $ 443,116   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

-3-


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands)

(Unaudited)

 

     2011     2010  

Operating activities:

    

Net income

   $ 13,014      $ 10,425   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Depreciation and amortization of bank premises and equipment

     3,312        3,168   

Amortization, net

     3,182        2,837   

Provision for loan losses

     10,800        8,956   

Decrease (increase) in loans held for sale, net

     23,554        (20,442

Losses (gains) on the sale of investment securities

     16        (24

Losses (gains) on sales of other real estate owned and premises, net

     1,090        (44

Stock-based compensation expense

     235        252   

Decrease in other assets

     3,852        318   

(Decrease) increase in other liabilities

     (1,249     3,606   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     57,806        9,052   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of securities available for sale

     (72,737     (91,429

Proceeds from sales of securities available for sale

     2,174        103,836   

Proceeds from maturities, calls and paydowns of securities available for sale

     58,730        53,048   

Net decrease in loans

     30,469        21,003   

Sales of bank premises and equipment and OREO, net

     4,564        3,140   

Cash paid in branch acquisition

     (26,437     —     

Cash received in acquisitions

     230        137,460   
  

 

 

   

 

 

 

Net cash and cash equivalents (used in) provided by investing activities

     (3,007     227,058   
  

 

 

   

 

 

 

Financing activities:

    

Net increase in noninterest - bearing deposits

     31,278        48,962   

Net decrease in interest-bearing deposits

     (67,153     (78,175

Net decrease in short-term borrowings

     (12,743     (112,922

Net increase (decrease) in long-term borrowings

     244        (707

Cash dividends paid - common stock

     (3,637     (3,110

Cash dividends paid - preferred stock

     (924     (535

Tax benefit from the exercise of equity-based awards

     1        —     

Proceeds from the issuance of common stock

     215        200   
  

 

 

   

 

 

 

Net cash and cash equivalents used in financing activities

     (52,719     (146,287
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     2,081        89,823   

Cash and cash equivalents at beginning of the period

     61,153        45,911   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 63,234      $ 135,734   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 16,928      $ 18,294   

Income taxes

     2,464        3,143   

Supplemental Schedule of Noncash Activities

    

Unrealized gains on securities available for sale

   $ 10,052      $ 6,395   

Unrealized loss on cash flow hedge

     (999     (1,444

Transfer of loans to other real estate owned, net

     8,546        9,627   

Common stock issued for acquisition

     —          96,083   

Preferred stock issued for acquisition

     —          34,192   

Transactions related to acquisitions

    

Increase in assets and liabilities:

    

Loans

   $ 70,817      $ 981,541   

Securities

     —          218,676   

Other assets

     4,324        78,542   

Noninterest bearing deposits

     4,366        171,117   

Interest bearing deposits

     44,503        1,037,206   

Borrowings

     —          75,789   

Other liabilities

     65        1,832   

See accompanying notes to condensed consolidated financial statements.

 

-4-


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2011

 

1. ACCOUNTING POLICIES

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

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

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

 

2. BUSINESS COMBINATIONS

On May 20, 2011 the Company completed the purchase of the NewBridge Bank branch in Harrisonburg, Virginia (the “Harrisonburg branch”). As part of the agreement, the Company purchased loans of $72.5 million and assumed deposit liabilities of $48.7 million, and purchased the related fixed assets of the branch and a potential branch site in Waynesboro, Virginia. The Company operates the acquired bank branch under the name Union First Market Bank. The acquisition, which allowed the Company to establish immediately a meaningful presence in a new banking market, is consistent with the Company’s secondary growth strategy of expanding operations along the I-81 corridor. The Company’s condensed consolidated statements of income include the results of operations of the Harrisonburg branch from the closing date of the acquisition.

In connection with the acquisition, the Company recorded $1.8 million of goodwill and $9,500 of core deposit intangible. The core deposit intangible of $9,500 was expensed in the current period. The recorded goodwill was allocated to the community banking segment of the Company and is deductible for tax purposes.

The Company acquired the $72.5 million loan portfolio at a fair value discount of $1.7 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments. The performing loan portfolio fair value estimate was $70.5 million and the impaired loan portfolio fair value estimate was $276,000.

 

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Table of Contents

The consideration paid for the acquired branch and the amounts of acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):

 

Purchase price:

  

Cash

   $  26,437   
  

 

 

 

Total purchase price

     26,437   

Identifiable assets:

  

Cash and due from banks

     230   

Loans and leases

     70,817   

Core deposit intangible

     10   

Other assets

     2,481   
  

 

 

 

Total assets

     73,538   
  

 

 

 

Liabilities and equity:

  

Deposits

     48,869   

Other liabilities

     65   
  

 

 

 

Total liabilities

     48,934   
  

 

 

 

Net assets acquired

     24,604   
  

 

 

 

Goodwill resulting from acquisition

   $ 1,833   
  

 

 

 

Harrisonburg Branch Acquisition

In the second quarter interest income of approximately $392,000 was recorded on loans acquired in the Harrisonburg branch acquisition. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at June 30, 2011 are as follows (dollars in thousands):

 

Outstanding principal balance

   $  60,323   

Carrying amount

   $  58,848   

Loans obtained in the acquisition of the Harrisonburg branch for which there is specific evidence of credit deterioration and for which it was probable that the Company would be unable to collect all contractually required principal and interest payments represent less than 0.01% of the Company’s consolidated assets and, accordingly, are not considered material.

The amounts of the Harrisonburg branch revenue and earnings included in the Company’s consolidated income statement for the six months ended June 30, 2011, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2010, are presented in the pro forma table below. These results combine the historical results of the Harrisonburg branch into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2010. In particular, no adjustments have been made to include provision for credit losses in 2010 on the acquired loan portfolio and related branch specific income taxes. The disclosure of the Harrisonburg branch post-acquisition revenue and net income were not practicable due to combining its operations with the Company’s largest affiliate shortly after the acquisition.

 

     Pro forma
for the six months ended
June 30,
 
(dollars in thousands)    2011      2010  

Total revenues

   $ 117,276       $ 118,087   

Net income

   $ 14,475       $ 12,548   

 

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The 2011 supplemental pro forma earnings were adjusted to exclude $498,000 of acquisition-related costs incurred in 2011 and $149,000 of nonrecurring income principally related to the fair value adjustments to acquisition-date loans and deposits. The 2010 supplemental pro forma earnings were adjusted to include these charges.

Acquisition-related expenses associated with the acquisition of Harrisonburg branch were $204,000 and $498,000 for the three and six month periods ended June 30, 2011, respectively, and are recorded in “Other operating expenses” in the Company’s condensed consolidated statements of income. There were no acquisition-related expenses related to the Harrisonburg branch in 2010. Such costs included principally system conversion and integrating operations charges which have been expensed as incurred.

First Market Bank Acquisition

Interest income on acquired loans for the second quarter of 2011 was approximately $10.7 million. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at June 30, 2011 are as follows (dollars in thousands):

 

Outstanding principal balance

   $  706,387   

Carrying amount

   $  695,825   

Loans obtained in the acquisition of the First Market Bank for which there is specific evidence of credit deterioration and for which it was probable that the Company would be unable to collect all contractually required principal and interest payments represent less than 0.29% of the Company’s consolidated assets and, accordingly, are not considered material.

During the second quarter of 2011, the Company compared the expected prepayments at acquisition to actual payments and anticipated future payments on three purchased performing loan pools. The slower prepayment speed noted on real estate, commercial real estate and auto pools during this assessment resulted in an adjustment to the fair value discount accretion rate. This is considered a change in accounting estimate and resulted in a lower effective yield in each pool.

 

3. STOCK-BASED COMPENSATION

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) provides for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The 2011 Plan became effective on January 1, 2011 after its approval by shareholders at the annual meeting of shareholders held on April 26, 2011. The 2011 Plan makes available 1,000,000 shares which may be awarded to employees of the Company and its subsidiaries in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”), non-statutory stock options, and nonvested stock. Under the plan, the option price cannot be less than the fair market value of the stock on the grant date. The Company issues new shares to satisfy stock-based awards. 907,536 shares remained available as of June 30, 2011, for issuance under the Company’s 2011 Stock Incentive Plan.

For the three month and six month periods ended June 30, 2011, the Company recognized stock-based compensation expense of approximately $117,000 and $191,000 net of tax, respectively, and less than $0.01 per common share for the both periods ended June 30, 2011.

 

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Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2011:

 

     Number of Stock
Options
    Weighted
Average
Exercise Price
 

Options outstanding, December 31, 2010

     324,776      $ 19.38   

Granted

     134,046        12.11   

Exercised

     (6,450     8.54   

Forfeited

     (3,629     16.65   

Expired

     (413 )      29.77   
  

 

 

   

Options outstanding, June 30, 2011

     448,330        17.37   
  

 

 

   

Options exercisable, June 30, 2011

     209,884        21.04   
  

 

 

   

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table for the six months ended June 30, 2011 and 2010:

 

     Six Months Ended
June 30,
 
     2011     2010  

Dividend yield (1)

     2.36     2.48

Expected life in years (2)

     7.0        7.0   

Expected volatility (3)

     41.02     37.92

Risk-free interest rate (4)

     2.71     3.23

Weighted average fair value per option granted

   $ 4.31      $ 5.53   

 

 

(1) Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.
(2) Based on the average of the contractual life and vesting schedule for the respective option.
(3) Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.
(4) Based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant.

The following table summarizes information concerning stock options issued to the Company’s employees that are vested or are expected to vest and stock options exercisable as of June 30, 2011 (dollars in thousands, except share and per share amounts):

 

     Stock Options
Vested or
Expected to Vest
     Exercisable  

Stock options

     421,766         209,884   

Weighted average remaining contractual life in years

     6.40         3.48   

Weighted average exercise price on shares above water

   $ 11.90       $ 10.67   

Aggregate intrinsic value

   $ 43       $ 35   

The total intrinsic value for stock options exercised during the six months ended June 30, 2011, was $37,000. There were no stock options exercised during the second quarter of 2011. The fair value of stock options vested during the six months ended June 30, 2011, was approximately $237,000. Cash received from the exercise of stock options for the six months ended June 30, 2011 was $55,000.

Nonvested Stock

The 2011 and 2003 Stock Incentive Plans permit the granting of nonvested stock, but are limited to one-third of the aggregate number of total awards granted. This equity component of compensation is divided between restricted (time-based) stock grants and performance-based stock grants. Generally, the

 

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restricted stock vests fifty percent on each of the third and fourth anniversaries from the date of the grant. The performance-based stock is subject to vesting on the fourth anniversary of the date of the grant dependent upon the performance of the Company’s stock price. The value of the nonvested stock awards was calculated by multiplying the fair market value of the Company’s common stock on grant date by the number of shares awarded. Employees have the right to vote the shares and to receive cash or stock dividends (restricted stock), if any, except for the nonvested stock under the performance-based component (performance stock).

The following table summarizes the nonvested stock activity for the six months ended June 30, 2011:

 

     Number of
Shares of
Restricted Stock
    Performance
Stock
    Weighted
Average Grant-
Date Fair Value
 

Balance, December 31, 2010

     94,277        15,000      $ 15.93   

Granted

     73,761        —          11.22   

Released

     (12,243     —          23.83   

Forfeited

     (10,949     (9,000     13.71   
  

 

 

   

 

 

   

Balance, June 30, 2011

     144,846        6,000        12.52   
  

 

 

   

 

 

   

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of June 30, 2011 that will be recognized in future periods is as follows (dollars in thousands):

 

     Stock Options      Restricted
Stock
     Total  

For the remaining six months of 2011

   $ 136       $ 299       $ 435   

For year ending December 31, 2012

     270         621         891   

For year ending December 31, 2013

     263         388         651   

For year ending December 31, 2014

     260         75         335   

For year ending December 31, 2015

     170         11         181   

For year ending December 31, 2016

     48         —           48   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,147       $ 1,394       $ 2,541   
  

 

 

    

 

 

    

 

 

 

 

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at June 30, 2011 and December 31, 2010 (dollars in thousands):

 

     June      December  
     2011      2010  

Commercial:

     

Commercial Construction

   $ 194,171       $ 205,795   

Commercial Real Estate

     831,890         758,034   

Other Commercial

     951,914         975,830   
  

 

 

    

 

 

 

Total

     1,977,975         1,939,659   

Consumer:

     

Mortgages

     219,639         212,228   

Consumer Construction

     17,250         15,615   

Indirect auto

     169,526         180,778   

Indirect marine

     43,055         46,383   

HELOCs

     275,279         273,025   

Credit Card

     17,334         19,308   

Other Consumer

     139,511         150,257   
  

 

 

    

 

 

 

Total

     881,594         897,594   
  

 

 

    

 

 

 

Loans, net of unearned income

   $ 2,859,569       $ 2,837,253   
  

 

 

    

 

 

 

 

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The following table shows the Company’s class types that were past due, current, and greater than 90 days and still accruing at June 30, 2011 (dollars in thousands):

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past Due      Current      Total Loans      Recorded
Investment > 90
Days and
Accruing
 

Commercial:

                    

Commercial Construction

   $ 6,627       $ 210       $ 4,624       $ 11,461       $ 182,710       $ 194,171       $ 626   

Commercial Real Estate

     4,884         699         4,755         10,338         821,552         831,890         181   

Other Commercial

     16,705         6,143         20,068         42,916         908,998         951,914         1,093   

Consumer:

                    

Mortgages

     5,021         1,884         3,673         10,578         209,061         219,639         3,366   

Consumer Construction

     477         —           —           477         16,773         17,250         —     

Indirect Auto

     2,133         256         504         2,893         166,633         169,526         504   

Indirect Marine

     640         —           597         1,237         41,818         43,055         232   

HELOCs

     1,544         642         2,004         4,190         271,089         275,279         1,083   

Credit Card

     145         137         217         499         16,835         17,334         217   

Other Consumer

     3,906         748         2,297         6,951         132,560         139,511         1,772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,082       $ 10,719       $ 38,739       $ 91,540       $ 2,768,029       $ 2,859,569       $ 9,074   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the Company’s class types that are past due, current, and greater than 90 days and still accruing at December 31, 2010 (dollars in thousands):

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past Due      Current      Total Loans      Recorded
Investment > 90
Days and
Accruing
 

Commercial:

                    

Commercial Construction

   $ 6,392       $ 1,157       $ 6,878       $ 14,427       $ 191,368       $ 205,795       $ 900   

Commercial Real Estate

     7,353         2,379         8,493         18,224         739,809         758,034         609   

Other Commercial

     24,308         3,016         23,566         50,889         924,941         975,830         3,459   

Consumer:

                    

Mortgages

     6,161         1,944         4,308         12,414         199,815         212,228         4,242   

Consumer Construction

     377         —           —           377         15,238         15,615         —     

Indirect auto

     3,472         613         729         4,814         175,964         180,778         729   

Indirect marine

     920         181         605         1,706         44,677         46,383         481   

HELOCs

     1,285         371         2,904         4,559         268,466         273,025         1,704   

Credit Card

     292         90         199         581         18,727         19,308         199   

Other Consumer

     2,447         624         3,185         6,256         144,001         150,257         3,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,007       $ 10,374       $ 50,866       $ 114,247       $ 2,723,005       $ 2,837,253       $ 15,332   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table reflects the Company’s class types that are in nonaccrual status as of June 30, 2011 and excludes purchased impaired loans (dollars in thousands):

 

     2011  

Commercial:

  

Commercial Construction

   $ 9,886   

Commercial Real Estate

     7,136   

Other Commercial

     32,012   

Consumer:

  

Mortgages

     1,087   

Consumer Construction

     214   

Indirect Auto

     11   

Indirect Marine

     365   

HELOC

     1,267   

Other Consumer

     2,344   
  

 

 

 

Total

   $ 54,322   
  

 

 

 

Nonaccrual loans totaled $54.3 million and $48.9 at June 30, 2011 and 2010, respectively. The increase was principally related to the residential home builder market. There were no non-accrual loans excluded from impaired loan disclosure in 2011 or 2010. Loans past due 90 days or more and accruing interest totaled $9.1 million and $18.6 million at June 30, 2011 and 2010, respectively.

 

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The following table reflects the Company’s class types that are in nonaccrual status as of December 31, 2010 and excludes purchased impaired loans (dollars in thousands):

 

     2010  

Commercial:

  

Commercial Construction

   $ 11,410   

Commercial Real Estate

     9,276   

Other Commercial

     38,908   

Consumer:

  

Mortgages

     261   

Consumer Construction

     218   

Indirect auto

     14   

Indirect marine

     124   

HELOC

     1,329   

Other Consumer

     176   
  

 

 

 

Total

   $ 61,716   
  

 

 

 

The following table shows the Company’s class types that are impaired with a related allowance at June 30, 2011 (dollars in thousands):

 

Class Category

   Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
     Average Recorded
Investment
     Interest Income
Recognized
 

Commercial Construction

   $ 10,049       $ 11,746       $ 1,004       $ 10,376       $ 134   

Commercial Real Estate

     12,926         17,286         484         13,089         266   

Other Commercial

     39,092         43,447         6,964         40,470         556   

Consumer Construction

     214         249         91         228         —     

Indirect Auto

     93         352         —           106         3   

Indirect Marine

     365         414         179         365         —     

HELOC

     1,267         1,304         908         1,578         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 64,006       $ 74,798       $ 9,630       $ 66,212       $ 959   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the Company’s class types that are impaired with a related allowance at December 31, 2010 (dollars in thousands):

 

Class Category

   Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
     Average Recorded
Investment
     Interest Income
Recognized
 

Commercial Construction

   $ 18,234       $ 18,274       $ 3,684       $ 18,649       $ 970   

Commercial Real Estate

     10,303         10,348         1,200         9,869         664   

Other Commercial

     48,678         49,337         5,672         49,157         1,854   

Mortgage

     66         66         —           105         —     

Consumer Construction

     218         228         95         228         —     

Indirect Auto

     14         15         —           17         1   

Indirect Marine

     124         124         —           124         5   

HELOC

     1,329         1,330         606         1,330         29   

Other Consumer

     177         187         —           187         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 79,144       $ 79,908       $ 11,257       $ 79,666       $ 3,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the Company’s class types that are impaired without a related allowance at June 30, 2011 (dollars in thousands):

 

Class Category

   Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
     Average Recorded
Investment
     Interest Income
Recognized
 

Commercial Construction

   $ 45,092       $ 55,291       $ —         $ 44,822       $ 1,015   

Commercial Real Estate

     25,270         27,694         —           25,983         595   

Other Commercial

     118,523         137,360         —           124,876         2,499   

Mortgage

     2,053         2,155         —           2,059         61   

Indirect Auto

     88         330         —           120         —     

HELOC

     2,047         2,260         —           2,274         10   

Other Consumer

     350         618         —           577         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 193,423       $ 225,708       $ —         $ 200,711       $ 4,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the Company’s class types that are impaired without a related allowance at December 31, 2010 (dollars in thousands):

 

Class Category

   Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
     Average Recorded
Investment
     Interest Income
Recognized
 

Commercial Construction

   $ 39,184       $ 39,271       $ —         $ 42,001       $ 1,707   

Commercial Real Estate

     29,522         29,643         —           29,698         1,656   

Other Commercial

     124,054         124,398         —           143,434         5,082   

Mortgage

     2,260         2,274         —           2,291         105   

Indirect Auto

     119         119         —           143         8   

HELOC

     650         650         —           650         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 195,788       $ 196,354       $ —         $ 218,217       $ 8,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for credit losses, and loans based on impairment methodology for the quarter ended June 30, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

 

     Commercial     Consumer     Unallocated     Total  

Allowance for loan losses:

        

Balance, beginning of the year

   $ 28,956      $ 9,488      $ (38   $ 38,406   

Recoveries credited to allowance

     338        549        —          887   

Loans charged off

     (6,881     (3,581     —          (10,462

Provision charged to operations

     6,939        3,859        2        10,800   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 29,352      $ 10,315      $ (36   $ 39,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     9,214        310        —          9,524   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     20,033        10,005        (36     30,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     105        —          —          105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 29,352      $ 10,315      $ (36   $ 39,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

        

Ending balance

   $ 1,977,975      $ 881,594      $ —        $ 2,859,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     240,742        6,477        —          247,219   

Ending balance: collectively evaluated for impairment

     1,727,023        875,117        —          2,602,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     10,210        —          —          10,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,977,975      $ 881,594      $ —        $ 2,859,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table shows the portfolio segment types, balances for allowance for credit losses, and loans based on impairment methodology for the year ended December 31, 2010.

 

     Commercial      Consumer      Unallocated     Total  

Balance, end of year

   $ 28,255       $ 10,189       $ (38 )    $ 38,406   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     10,065         701         —          10,766   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     17,699         9,488         (38     27,149   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     491         —           —          491   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 28,255       $ 10,189       $ (38   $ 38,406   
  

 

 

    

 

 

    

 

 

   

 

 

 

Loans:

          

Ending balance

   $ 1,939,659       $ 897,594       $ —        $ 2,837,253   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     259,386         1,547         —          260,933   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     1,667,473         896,047         —          2,563,520   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     12,800         —           —          12,800   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,939,659       $ 897,594       $ —        $ 2,837,253   
  

 

 

    

 

 

    

 

 

   

 

 

 

Activity in the allowance for loan losses for the six months ended June 30, 2010 is summarized below (dollars in thousands):

 

Beginning balance

   $ 30,484   

Recoveries credited to allowance

     1,416   

Loans charged off

     (6,900

Provision for loan losses

     8,956   
  

 

 

 

Ending balance

   $ 33,956   
  

 

 

 

The Company uses a risk rating system for commercial loans. They are graded on a scale of 1 through 9. A general description of the characteristics of the risk grades is as follows:

 

   

Risk rated 1 loans have little or no risk and are generally secured by cash or cash equivalents;

 

   

Risk rated 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

 

   

Risk rated 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

 

   

Risk rated 4 loans are satisfactory loans with borrowers not as strong as risk rated 3 loans and may exhibit a greater degree of financial risk based on the type of business supporting the loan;

 

   

Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay;

 

   

Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position;

 

   

Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged; these have well defined weaknesses that

 

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jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;

 

   

Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined; and

 

   

Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

Classified loans include loans with risk ratings of 7 and worse. The following table shows classified loans, excluding purchased impaired loans, classified in the commercial portfolios by class with their related risk rating as of June 30, 2011. The risk rating information has been updated through June 30, 2011 (dollars in thousands):

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 55,924       $ 35,982       $ 144,803       $ 236,709   

Risk rated 8

     —           —           335         335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,924       $ 35,982       $ 145,138       $ 237,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows classified loans, excluding purchased impaired loans, classified in the commercial portfolios by class with their related risk rating as of December 31, 2010. The risk rating information has been updated through December 31, 2010 (dollars in thousands):

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 55,633       $ 41,409       $ 168,719       $ 265,761   

Risk rated 8

     —           —           376         376   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,633       $ 41,409       $ 169,095       $ 266,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired commercial portfolios by class with their related risk rating as of June 30, 2011. The credit quality indicator information has been updated through June 30, 2011 (dollars in thousands):

 

      Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ —         $ 1,342       $ 7,958       $ 9,300   

Risk rated 8

     —           —           910         910   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 1,342       $ 8,868       $ 10,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired commercial portfolios by class with their related risk rating as of December 31, 2010. The credit quality indicator information has been updated through December 31, 2010 (dollars in thousands):

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 945       $ 375       $ 8,164       $ 9,484   

Risk rated 8

     225         535         2,556         3,316   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,170       $ 910       $ 10,720       $ 12,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows purchased impaired commercial and consumer portfolios by class and their delinquency status. The credit quality indicator information has been updated through June 30, 2011 (dollars in thousands):

 

     30-89 Days
Past Due
     Greater
Than 90
Days
     Current      Total  

Commercial:

           

Commercial Real Estate

   $ —         $ —         $ 1,342       $ 1,342   

Other Commercial

     —           2,524         6,344         8,868   

Consumer:

           

Indirect auto

     10         5         43         58   

HELOCs

     20         35         857         912   

Other Consumer

     5         228         —           233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35       $ 2,792       $ 8,586       $ 11,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

The current column represents loans that are less than 30 days past due.

The following table shows purchased impaired commercial and consumer portfolios by class and their delinquency status. The credit quality indicator information has been updated through December 31, 2010 (dollars in thousands):

 

     30-89 Days
Past Due
     Greater
Than 90
Days
     Current      Total  

Commercial:

           

Commercial Construction

   $ —         $ 1,170       $ —         $ 1,170   

Commercial Real Estate

     —           910         —           910   

Other Commercial

     —           9,341         1,379         10,720   

Consumer:

           

Indirect auto

     8         10         63         81   

HELOCs

     20         844         116         980   

Other Consumer

     81         56         1         137   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 109       $ 12,331       $ 1,559       $ 13,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

The current column represents loans that are less than 30 days past due.

 

5. EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS uses as the denominator the weighted average number of common shares outstanding during the period, including the effect of potentially dilutive common shares outstanding attributable to stock awards. Dividends on preferred stock and amortization of discount on preferred stock are treated as a reduction of the numerator in calculating basic and diluted EPS. There were approximately 380,657 and 220,978 shares underlying anti-dilutive stock awards as of June 30, 2011 and 2010, respectively. Dividends paid on nonvested stock awards were approximately $8,000 and $7,000 for the three months ended June 30, 2011 and 2010, respectively.

 

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The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2011 and 2010 (dollars and shares in thousands, except per share amounts):

 

     Net Income
Available to
Common
Shareholders
(Numerator)
     Weighted
Average
Common Shares
(Denominator)
     Per Share
Amount
 

For the Three Months ended June 30, 2011

        

Net income

   $ 6,820         25,970       $ 0.26   

Less: dividends paid and accumulated on preferred stock

     462         —           0.02   

Less: accretion of discount on preferred stock

     65         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 6,293         25,970       $ 0.24   

Add: potentially dilutive common shares - stock awards

     —           22         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 6,293         25,992       $ 0.24   
  

 

 

    

 

 

    

 

 

 

For the Three Months ended June 30, 2010

        

Net income

   $ 8,726         25,872       $ 0.34   

Less: dividends paid and accumulated on preferred stock

     462         —           0.02   

Less: accretion of discount on preferred stock

     50         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 8,214         25,872       $ 0.32   

Add: potentially dilutive common shares - stock awards

     —           42         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 8,214         25,914       $ 0.32   
  

 

 

    

 

 

    

 

 

 

For the Six Months ended June 30, 2011

        

Net income

   $ 13,014         25,964       $ 0.50   

Less: dividends paid and accumulated on preferred stock

     924         —           0.04   

Less: accretion of discount on preferred stock

     129         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 11,961         25,964       $ 0.46   

Add: potentially dilutive common shares - stock awards

     —           23         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 11,961         25,987       $ 0.46   
  

 

 

    

 

 

    

 

 

 

For the Six Months ended June 30, 2010

        

Net income

   $ 10,425         24,542       $ 0.42   

Less: dividends paid and accumulated on preferred stock

     765         —           0.03   

Less: accretion of discount on preferred stock

     101         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 9,559         24,542       $ 0.39   

Add: potentially dilutive common shares - stock awards

     —           41         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 9,559         24,583       $ 0.39   
  

 

 

    

 

 

    

 

 

 

 

6. TRUST PREFERRED CAPITAL NOTES

Statutory Trust I, a wholly owned subsidiary of the Company, issued a Trust Preferred Capital Note of $22.5 million through a pooled underwriting for an acquisition in 2004. The securities have an indexed London Interbank Offer Rate (“LIBOR”) floating rate (three month LIBOR rate plus 2.75%) which adjusts and is payable quarterly. The interest rate at June 30, 2011 was 3.00%. The capital securities were redeemable at par beginning on June 17, 2009 and quarterly thereafter until the securities mature on June 17, 2034. The principal asset of Statutory Trust I is $23.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital notes. Of the above amount, $696,000 is reflected as the Company’s investment in Statutory Trust I and reported as “Other assets” within the consolidated balance sheet.

Statutory Trust II, a wholly owned subsidiary, of the Company, issued a Trust Preferred Capital Note of $36.0 million through a pooled underwriting for an acquisition in 2006. The securities have a LIBOR-indexed floating rate (three month LIBOR plus 1.40%) which adjusts and is payable quarterly. The interest rate at June 30, 2011 was 1.65%. The redeemable capital securities may be called at par on June 30, 2011 and each calendar quarter thereafter until the securities mature on March 31, 2036. The principal asset of the Statutory Trust II is $37.1 million of the Company’s junior subordinated debt securities with like maturities

 

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and like interest rates to the capital notes. Of this amount $1.1 million is reflected as the Company’s investment in Statutory Trust II reported as “Other assets” within the consolidated balance sheet.

 

7. SEGMENT REPORTING DISCLOSURES

The Company has two reportable segments: a traditional full service community bank and a mortgage loan origination business. The community bank segment provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 99 retail locations in Virginia. The mortgage segment provides a variety of mortgage loan products principally in Virginia, North Carolina, South Carolina, Maryland and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which subject the Company to only de minimus risk.

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

Both of the Company’s reportable segments are service based. The mortgage business is a fee-based business while the bank is driven principally by net interest income. The bank segment provides a distribution and referral network through their customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank, due largely to the minimal degree of overlapping geographic markets.

The community bank segment provides the mortgage segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the three month LIBOR rate plus 1.5%. These transactions are eliminated in the consolidation process. A management fee for operations and administrative support services is charged to all subsidiaries and eliminated in the consolidated totals.

 

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Information about reportable segments and reconciliation of such information to the consolidated financial statements for three and six months ended June 30, 2011 and 2010 was as follows (dollars in thousands):

 

     Community
Banks
     Mortgage      Eliminations     Consolidated  

Three Months Ended June 30, 2011

          

Net interest income

   $ 39,341       $ 282       $ —        $ 39,623   

Provision for loan losses

     4,500         —           —          4,500   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     34,841         282         —          35,123   

Noninterest income

     5,777         4,304         (118     9,963   

Noninterest expenses

     31,665         4,325         (118     35,872   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     8,953         261         —          9,214   

Income tax expense

     2,299         95         —          2,394   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 6,654       $ 167       $ —        $ 6,820   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,846,714       $ 57,215       $ (52,405   $ 3,851,524   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended June 30, 2010

          

Net interest income

   $ 38,965       $ 602       $ —        $ 39,567   

Provision for loan losses

     3,955         —           —          3,955   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     35,010         602         —          35,612   

Noninterest income

     6,964         5,254         (118     12,101   

Noninterest expenses

     30,663         4,603         (118     35,148   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     11,311         1,253         —          12,565   

Income tax expense

     3,383         456         —          3,839   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 7,928       $ 797       $ —        $ 8,726   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,865,549       $ 81,857       $ (73,207   $ 3,874,199   
  

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2011

          

Net interest income

   $ 77,654       $ 769       $ —        $ 78,423   

Provision for loan losses

     10,800         —           —          10,800   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     66,854         769         —          67,623   

Noninterest income

     11,472         9,272         (234     20,510   

Noninterest expenses

     61,621         9,252         (234     70,639   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     16,705         789         —          17,494   

Income tax expense

     4,186         294         —          4,480   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 12,519       $ 495       $ —        $ 13,014   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,846,714       $ 57,215       $ (52,405   $ 3,851,524   
  

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2010

          

Net interest income

   $ 72,743       $ 984       $ —        $ 73,727   

Provision for loan losses

     8,956         —           —          8,956   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     63,787         984         —          64,771   

Noninterest income

     12,329         9,746         (235     21,840   

Noninterest expenses

     63,674         8,509         (235     71,948   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     12,442         2,221         —          14,663   

Income tax (benefit) expense

     3,394         844         —          4,238   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 9,048       $ 1,377       $ —        $ 10,425   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,865,549       $ 81,857       $ (73,207   $ 3,874,199   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

8. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). This amends previous guidance to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010.

 

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Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. This is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this guidance modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this update were effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (“SEC”) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting”, which requires companies to submit financial statements in extensible business reporting language (“XBRL”) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company will submit financial statements in XBRL format for the second quarter of 2011.

In March 2011, the SEC issued Staff Accounting Bulletin (“SAB”) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the SAB. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-02”). This clarifies the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this guidance are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently preparing for and assessing the impact that ASU 2011-02 will have on its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) — Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”). The amendments in this ASU remove

 

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from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). This ASU is the result of joint efforts by the FASB and International Accounting Standards Board to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and international financial reporting standards. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“ASU 2011-05”). The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

 

9. GOODWILL AND INTANGIBLE ASSETS

The Company adopted ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this statement discontinued the amortization of goodwill and intangible assets with indefinite lives but require an impairment review at least annually and more frequently if certain impairment indicators are evident.

Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years. In connection with the First Market Bank acquisition in 2010, 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. 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.

In the recent acquisition of the Harrisonburg branch, the Company recorded $1.8 million in goodwill and $9,500 of core deposit intangible. The goodwill is deductible for tax purposes.

 

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Based on the annual testing during the second quarter of each year and the absence of impairment indicators during the quarter ended June 30, 2011, the Company has recorded no impairment charges to date for goodwill or intangible assets.

Information concerning goodwill and intangible assets is presented in the following table (in thousands):

 

     Gross Carrying
Value
     Accumulated
Amortization
     Net Carrying
Value
 

June 30, 2011

        

Amortizable core deposit intangibles

   $ 46,615       $ 22,957       $ 23,658   

Unamortizable goodwill

     59,742         342         59,400   

Trademark intangible

     1,200         567         633   

December 31, 2010

        

Amortizable core deposit intangibles

   $ 46,615       $ 19,788       $ 26,827   

Unamortizable goodwill

     57,909         342         57,567   

Trademark intangible

     1,200         367         833   

June 30, 2010

        

Amortizable core deposit intangibles

   $ 46,615       $ 15,917       $ 30,698   

Unamortizable goodwill

     57,909         342         57,567   

Trademark intangible

     1,200         167         1,033   

Amortization expense of the core deposit intangibles for the three and six month periods ended June 30, 2011 totaled $1.6 million and $3.2 million, respectively compared to $1.9 million and $3.4 million, respectively in 2010. The Harrisonburg branch core deposit intangible of $9,500 was expensed in the second quarter of 2011. Amortization expense of the trademark intangibles for the three and six month periods ended June 30, 2011 was $100,000 and $200,000, respectively compared to $100,000 and $167,000, respectively for 2010.

As of June 30, 2011, the estimated remaining amortization expense of core deposit and trademark intangibles for each of the five succeeding fiscal years is as follows (dollars in thousands):

 

2012

   $ 6,033   

2013

     4,698   

2014

     3,273   

2015

     2,578   

2016

     2,117   

Thereafter

     5,590   
  

 

 

 
   $ 24,291   
  

 

 

 

 

10. COMMITMENTS AND CONTINGENCIES

Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. At June 30, 2011 and 2010, the Company had outstanding loan commitments approximating $773.3 million and $761.3 million, respectively.

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

 

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amounts represent credit risk totaled approximately $39.7 million and $38.7 million at June 30, 2011, and 2010, respectively.

At June 30, 2011, Union Mortgage Group, Inc. (“Union Mortgage”), a wholly owned subsidiary of Union First Market Bank, a wholly owned subsidiary of Union First Market Bankshares Corporation, had rate lock commitments to originate mortgage loans amounting to $109.9 million and loans held for sale of $50.4 million. Union Mortgage Group has entered into corresponding agreements on a best-efforts basis to sell loans on a servicing released basis totaling approximately $160.3 million. These commitments to sell loans are designed to mitigate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

 

11. SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of investment securities as of June 30, 2011 and December 31, 2010 are summarized as follows (in thousands):

 

            Gross Unrealized        
     Amortized
Cost
     Gains      (Losses)     Estimated
Fair Value
 

June 30, 2011

          

U.S. government and agency securities

   $ 8,533       $ 780       $ —        $ 9,313   

Obligations of states and political subdivisions

     182,466         5,675         (724     187,417   

Corporate and other bonds

     15,005         461         (422     15,044   

Mortgage-backed securities

     341,423         12,226         (101     353,548   

Federal Reserve Bank stock - restricted

     6,711         —           —          6,711   

Federal Home Loan Bank stock - restricted

     16,172         —           —          16,172   

Other securities

     2,857         —           (2     2,855   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 573,167       $ 19,142       $ (1,249 )    $ 591,060   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010

          

U.S. government and agency securities

   $ 9,610       $ 454       $ (103   $ 9,961   

Obligations of states and political subdivisions

     176,431         2,189         (3,588     175,032   

Corporate and other bonds

     15,543         380         (858     15,065   

Mortgage-backed securities

     334,696         9,767         (425     344,038   

Federal Reserve Bank stock - restricted

     6,716         —           —          6,716   

Federal Home Loan Bank stock - restricted

     18,345         —           —          18,345   

Other securities

     3,259         32         (7     3,284   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 564,600       $ 12,822       $ (4,981   $ 572,441   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

     Less than 12 months     More than 12 months     Total  
     Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
 

As of June 30, 2011

               

Obligations of states and political subdivisions

   $ 18,493       $ (675   $ 4,608       $ (49   $ 23,101       $ (724

Mortgage-backed securities

     13,472         (101     —           —          13,472         (101

Corporate bonds and other securities

     21         (2     4,498         (422     4,519         (424
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Totals

   $ 31,986       $ (778   $ 9,106       $ (471   $ 41,092       $ (1,249
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of December 31, 2010

               

U.S. government and agency securities

   $ 43       $ (103   $ —         $ —        $ 43       $ (103

Obligations of states and political subdivisions

     82,952         (2,451     14,762         (1,137     97,714         (3,588

Mortgage-backed securities

     49,515         (425     —           —          49,515         (425

Corporate bonds and other securities

     —           (7     4,104         (858     4,104         (865
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Totals

   $ 132,510       $ (2,986   $ 18,866       $ (1,995   $ 151,376       $ (4,981
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2011, there were $9.1 million, or 17 issues, of individual securities that had been in a continuous loss position for more than 12 months. Additionally, these securities had an unrealized loss of $0.5 million and consisted of corporate and municipal obligations.

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is OTTI if any of the following conditions exists: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the quarter ended June 30, 2011 and in accordance with the guidance, no OTTI was recognized.

 

12. FAIR VALUE MEASUREMENTS

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

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

 

Level 1   -   Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2   -   Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.
Level 3   -   Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the

 

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    Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

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

Interest rate swap agreement used for interest rate risk management

Interest rate swaps are recorded at fair value on a recurring basis. The Company utilizes an interest rate swap agreement as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing liabilities. The Company determines the fair value of its interest rate swap using externally developed pricing models based on market observable inputs and therefore classifies such valuation as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3). The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

 

     Fair Value Measurements at June 30, 2011 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
  

 

 

 
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Interest rate swap - loans

   $ —         $ 137       $ —         $ 137   

Securities available for sale:

           

U.S. government and agency securities

     —           9,313         —           9,313   

Obligations of states and political subdivisions

     —           187,417         —           187,417   

Corporate and other bonds

     —           15,044         —           15,044   

Mortgage-backed securities

     —           353,548         —           353,548   

Other securities

     —           2,855         —           2,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 568,314       $ —         $ 568,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES

           

Interest rate swap - loans

   $ —         $ 137       $ —         $ 137   

Cash flow hedge - trust

     —           2,474         —           2,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 2,611       $ —         $ 2,611   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Fair Value Measurements at December 31, 2010 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
  

 

 

 
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Interest rate swap - loans

   $ —         $ 189       $ —         $ 189   

Securities available for sale:

           

U.S. government and agency securities

     —           9,961         —           9,961   

Obligations of states and political subdivisions

     —           175,032         —           175,032   

Corporate and other bonds

     —           15,065         —           15,065   

Mortgage-backed securities

     —           344,038         —           344,038   

Other securities

     —           3,284         —           3,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 547,569       $ —         $ 547,569   
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES

           

Interest rate swap - loans

   $ —         $ 189       $ —         $ 189   

Cash flow hedge - trust

     —           1,476         —           1,476   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 1,665       $ —         $ 1,665   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

Loans held for sale

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different from cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the three and six months ended June 30, 2011. Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. At June 30, 2011, the Company’s Level 3 loans consisted of nine relationships secured by residential real estate and lots of $10.6 million with a valuation reserve of $2.1 million; three relationships secured by commercial real estate of $2.3 million with a valuation reserve of $484,000; and two relationships secured by inventory, receivables, or equipment of $4.0 million with a valuation reserve of $952,000.

 

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The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis (dollars in thousands):

 

     Fair Value Measurements at June 30, 2011 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
  

 

 

 
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Loans held for sale

   $ —         $ 50,420       $ —         $ 50,420   

Impaired loans

     —           40,998         13,379         54,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 91,418       $ 13,379       $ 104,797   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at December 31, 2010 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
  

 

 

 
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Loans held for sale

   $ —         $ 73,974       $ —         $ 73,974   

Impaired loans

     —           59,992         7,895         67,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 133,966       $ 7,895       $ 141,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to other real estate owned (“OREO”), goodwill, and intangible assets. In accordance with ASC 360, Property, Plant and Equipment, OREO with a carrying value above fair value is written down to its fair value and results in an impairment charge. The fair value of the real property is generally determined using appraisals or other indicators of value based on recent comparables of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Total valuation expenses related to two OREO properties for the three and six months ended June 30, 2011 were $165,000 and 177,000, and for the three and six months ended June 30, 2010 were zero for both periods. No impairment charges have been recorded for goodwill or intangible assets.

ASC 825, Financial Instruments requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Cash and Cash Equivalents

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Loans

The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.

Deposits

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

 

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Borrowings

The carrying value of short-term borrowings is a reasonable estimate of fair value. The fair value of long-term borrowings is estimated based on interest rates currently available for debt with similar terms and remaining maturities.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Cash Flow Hedge

The carrying amount of the cash flow hedge approximates fair value.

Commitments to Extend Credit and Standby Letters of Credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At June 30, 2011, the fair value of loan commitments and standby letters of credit was immaterial and excluded from the table below.

The carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2011 are in the following table (dollars in thousands):

 

     Carrying      Fair  
     Amount