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 September 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.)

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

111 Virginia Street

Suite 200

Richmond, VA 23219

(Former name, former address and former fiscal year, if changed since last report)

(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 October 31, 2011 was 26,057,501

 

 

 


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 September 30, 2011, December 31, 2010 and September  30, 2010

     1   
 

Condensed Consolidated Statements of Income for the three and nine months ended September  30, 2011 and 2010

     2   
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 and 2010

     3   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

     4   
 

Notes to Condensed Consolidated Financial Statements

     5   
 

Report of Independent Registered Public Accounting Firm

     32   

Item 2.

 

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

     33   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4.

 

Controls and Procedures

     55   
  PART II - OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     55   

Item 1A.

 

Risk Factors

     56   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 6.

 

Exhibits

     56   
 

Signatures

     57   

 

ii


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)

 

     September 30,     December 31,     September 30,  
     2011     2010     2010  
     (Unaudited)     (Audited)     (Unaudited)  

ASSETS

      

Cash and cash equivalents:

      

Cash and due from banks

   $ 62,546      $ 58,951      $ 76,981   

Interest-bearing deposits in other banks

     86,872        1,449        2,329   

Money market investments

     199        158        143   

Federal funds sold

     160        595        685   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     149,777        61,153        80,138   
  

 

 

   

 

 

   

 

 

 

Securities available for sale, at fair value

     606,485        572,441        576,040   
  

 

 

   

 

 

   

 

 

 

Loans held for sale

     61,786        73,974        84,381   
  

 

 

   

 

 

   

 

 

 

Loans, net of unearned income

     2,818,342        2,837,253        2,842,267   

Less allowance for loan losses

     41,290        38,406        37,395   
  

 

 

   

 

 

   

 

 

 

Net loans

     2,777,052        2,798,847        2,804,872   
  

 

 

   

 

 

   

 

 

 

Bank premises and equipment, net

     90,936        90,680        91,054   

Other real estate owned

     34,464        36,122        26,382   

Core deposit intangibles, net

     22,162        26,827        28,762   

Goodwill

     59,400        57,567        57,567   

Other assets

     112,395        119,636        110,127   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,914,457      $ 3,837,247      $ 3,859,323   
  

 

 

   

 

 

   

 

 

 

LIABILITIES

      

Noninterest-bearing demand deposits

   $ 542,692      $ 484,867      $ 495,779   

Interest-bearing deposits:

      

NOW accounts

     395,822        381,512        359,986   

Money market accounts

     858,426        783,431        756,938   

Savings accounts

     176,531        153,724        153,928   

Time deposits of $100,000 and over

     511,579        563,375        577,239   

Other time deposits

     649,826        703,150        730,325   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,592,184        2,585,192        2,578,416   
  

 

 

   

 

 

   

 

 

 

Total deposits

     3,134,876        3,070,059        3,074,195   
  

 

 

   

 

 

   

 

 

 

Securities sold under agreements to repurchase

     70,450        69,467        69,693   

Other short-term borrowings

     —          23,500        41,200   

Trust preferred capital notes

     60,310        60,310        60,310   

Long-term borrowings

     155,258        154,892        154,864   

Other liabilities

     41,982        30,934        28,465   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     3,462,876        3,409,162        3,428,727   
  

 

 

   

 

 

   

 

 

 

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, 26,057,501 shares, 26,004,197 shares, and 25,955,213 shares, respectively.

     34,581        34,532        34,460   

Surplus

     186,505        185,763        184,964   

Retained earnings

     184,845        169,801        167,718   

Discount on preferred stock

     (982     (1,177     (1,240

Accumulated other comprehensive income

     11,037        3,571        9,099   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     451,581        428,085        430,596   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,914,457      $ 3,837,247      $ 3,859,323   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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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
September 30
     Nine Months Ended
September 30
 
     2011     2010      2011     2010  
     (Unaudited)     (Unaudited)      (Unaudited)     (Unaudited)  

Interest and dividend income:

         

Interest and fees on loans

   $ 42,664      $ 43,571       $ 126,999      $ 126,234   

Interest on Federal funds sold

     1        2         1        17   

Interest on deposits in other banks

     22        49         55        72   

Interest and dividends on securities:

         

Taxable

     3,148        3,176         10,405        10,218   

Nontaxable

     1,771        1,642         5,294        4,539   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     47,606        48,440         142,754        141,080   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense:

         

Interest on deposits

     5,924        7,956         18,774        23,056   

Interest on Federal funds purchased

     —          5         7        19   

Interest on short-term borrowings

     466        367         838        1,628   

Interest on long-term borrowings

     1,770        1,463         5,266        4,001   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     8,160        9,791         24,885        28,704   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     39,446        38,649         117,869        112,376   

Provision for loan losses

     3,600        5,912         14,400        14,868   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     35,846        32,737         103,469        97,508   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income:

         

Service charges on deposit accounts

     2,294        2,243         6,568        6,795   

Other service charges, commissions and fees

     3,254        2,860         9,529        8,311   

Gains on securities transactions, net

     499        38         483        62   

Other-than-temporary impairment losses

     (400     —           (400     —     

Gains on sales of loans

     4,861        5,962         14,132        15,701   

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

     118        332         (972     376   

Other operating income

     918        918         2,714        2,948   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     11,544        12,353         32,054        34,193   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expenses:

         

Salaries and benefits

     18,076        17,451         53,310        50,269   

Occupancy expenses

     2,885        2,947         8,307        8,453   

Furniture and equipment expenses

     1,756        1,691         5,097        4,874   

Other operating expenses

     11,920        11,895         38,562        42,336   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expenses

     34,637        33,984         105,276        105,932   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     12,753        11,106         30,247        25,769   

Income tax expense

     3,682        3,033         8,162        7,271   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 9,071      $ 8,073       $ 22,085      $ 18,498   

Dividends paid and accumulated on preferred stock

     462        462         1,386        1,227   

Accretion of discount on preferred stock

     66        62         195        163   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 8,543      $ 7,549       $ 20,504      $ 17,108   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.33      $ 0.29       $ 0.79      $ 0.68   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, diluted

   $ 0.33      $ 0.29       $ 0.79      $ 0.68   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Dollars in thousands)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Surplus     Retained
Earnings
    Discount
on
Preferred
Stock
    Accumulated
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

             18,498           $ 18,498        18,498   

Change in fair value of interest rate swap

                  $ (2,858  

Unrealized holding gains arising during the period (net of tax, $4,068)

                    7,554     

Reclassification adjustment for gains included in net income (net of tax, $22)

                    (40  
                 

 

 

   

Other comprehensive income (net of tax, $4,046)

                 4,656         4,656        4,656   
                 

 

 

   

Total comprehensive income

                  $ 23,154     
                 

 

 

   

Issuance of Common stock (7,477,274 shares)

        9,945         86,021                 95,966   

Dividends on Common Stock ($.18 per share)

             (4,667            (4,667

Tax benefit from exercise of stock awards

           3                 3   

Issuance of Preferred Stock

     35,595                (1,403          34,192   

Dividends on Preferred Stock

             (997            (997

Accretion of discount on Preferred Stock

             (163     163             —     

Issuance of Common Stock under Dividend Reinvestment Plan (21,833 shares)

        20         252                 272   

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

        7         11                 18   

Issuance of Restricted Stock under Stock Incentive Plan (21,573 shares)

        26         (26              —     

Stock-based compensation expense

           567                 567   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Balance - September 30, 2010

   $ 35,595       $ 34,460       $ 184,964      $ 167,718      $ (1,240   $ 9,099         $ 430,596   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Balance - December 31, 2010

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

Comprehensive income:

                   

Net income - 2011

             22,085           $ 22,085        22,085   

Change in fair value of interest rate swap (cash flow hedge)

                    (2,826  

Unrealized holding gains arising during the period (net of tax, $5,751)

                    10,346     

Reclassification adjustment for losses included in net income (net of tax, $29)

                    (54  
                 

 

 

   

Other comprehensive income (net of tax, $5,542)

                 7,466         7,466        7,466   
                 

 

 

   

Total comprehensive income

                  $ 29,551     
                 

 

 

   

Dividends on Common Stock ($.21 per share)

             (5,460            (5,460

Tax benefit from exercise of stock awards

           1                 1   

Dividends on Preferred Stock

             (1,386            (1,386

Accretion of discount on Preferred Stock

             (195     195             0   

Issuance of common stock under Dividend Reinvestment Plan (18,135 shares)

        24         243                 267   

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

        9         47                 56   

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

        16         (16              —     

Stock-based compensation expense

           467                 467   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Balance - September 30, 2011

   $ 35,595       $ 34,581       $ 186,505      $ 184,845      $ (982   $ 11,037         $ 451,581   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Dollars in thousands)

(Unaudited)

 

     2011     2010  

Operating activities:

    

Net income

   $ 22,085      $ 18,498   

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

    

Depreciation and amortization of bank premises and equipment

     5,005        4,846   

Other-than-temporary impairment recognized in earnings

     400        —     

Amortization, net

     5,300        4,885   

Provision for loan losses

     14,400        14,868   

Decrease (increase) in loans held for sale, net

     12,188        (30,101

(Gains) losses on the sale of investment securities

     (483     (62

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

     972        (376

Stock-based compensation expense

     467        567   

Decrease in other assets

     4,263        1,021   

Increase in other liabilities

     11,048        3,874   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     75,645        18,020   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of securities available for sale

     (130,160     (141,868

Proceeds from sales of securities available for sale

     18,365        106,549   

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

     87,585        85,153   

Net decrease (increase) in loans

     69,306        (6,427

Sales of bank premises and equipment and OREO, net

     6,815        6,986   

Cash paid in branch acquisition

     (26,437     —     

Cash received in acquisitions

     230        137,460   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by investing activities

     25,704        187,853   
  

 

 

   

 

 

 

Financing activities:

    

Net increase in noninterest-bearing deposits

     53,459        30,440   

Net decrease in interest-bearing deposits

     (37,511     (80,932

Net decrease in short-term borrowings

     (22,517     (114,858

Net increase (decrease) in long-term borrowings

     366        (925

Cash dividends paid - common stock

     (5,460     (4,667

Cash dividends paid - preferred stock

     (1,386     (997

Tax benefit from the exercise of equity-based awards

     1        3   

Proceeds from the issuance of common stock

     323        290   
  

 

 

   

 

 

 

Net cash and cash equivalents used in financing activities

     (12,725     (171,646
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     88,624        34,227   

Cash and cash equivalents at beginning of the period

     61,153        45,911   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 149,777      $ 80,138   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 25,265      $ 28,291   

Income taxes

     4,238        8,672   

Supplemental Schedule of Noncash Activities

    

Unrealized gains on securities available for sale

   $ 15,834      $ 11,569   

Unrealized loss on cash flow hedge

     (2,826     (2,858

Transfer of loans to other real estate owned, net

     9,236        11,851   

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.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 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 and a potential branch site in Waynesboro, Virginia. Under the parties’ 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. The Company operates the acquired bank branch under the name Union First Market Bank (the “Harrisonburg branch”). 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 intangibles. 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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The consideration paid for the Harrisonburg 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 third quarter, interest income of approximately $856,000 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 September 30, 2011 are as follows (dollars in thousands):

 

Outstanding principal balance

   $ 58,292   

Carrying amount

   $ 57,084   

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 condensed consolidated income statement for the nine months ended September 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 condensed 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 upon closing of the acquisition.

 

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Table of Contents
     Pro forma
for the nine months ended
September 30,
 
     2011      2010  
(dollars in thousands)              

Total revenues

   $ 177,034       $ 179,698   

Net income

   $ 23,894       $ 21,250   

The 2011 supplemental pro forma earnings were adjusted to exclude $426,000 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 $426,000 nine month period ended September 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 for the three months ended September 30, 2011 or 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 third quarter of 2011 was approximately $9.8 million. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at September 30, 2011 are as follows (dollars in thousands):

 

Outstanding principal balance

   $ 645,794   

Carrying amount

   $ 636,571   

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 0.26% of the Company’s consolidated assets and, accordingly, are not considered material.

During 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”) and the 2003 Stock Incentive Plan (the “2003 Plan”) provide for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The 2011 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. Fewer than 1,700 shares remain available for grant under the 2003 Plan. Under both plans, the option price cannot be less than the fair market value of the stock on the grant date. The Company issues new shares to satisfy stock-based awards. 904,793 shares remained available as of September 30, 2011 for issuance under the 2011 Plan.

 

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For the three month and nine month periods ended September 30, 2011, the Company recognized stock-based compensation expense of approximately $182,000 and $374,000 net of tax, respectively, and less than $0.01 per common share for both periods ended September 30, 2011.

Stock Options

The following table summarizes the stock option activity for the nine months ended September 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

     (4,110     17.22   

Expired

     (413     29.77   
  

 

 

   

Options outstanding, September 30, 2011

     447,849        17.37   
  

 

 

   

Options exercisable, September 30, 2011

     210,084        21.03   
  

 

 

   

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 nine months ended September 30, 2011 and 2010:

 

     Nine Months Ended September 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 September 30, 2011 (dollars in thousands):

 

     Stock Options
Vested or
Expected to Vest
     Exercisable  

Stock options

     423,735         210,084   

Weighted average remaining contractual life in years

     6.14         3.19   

Weighted average exercise price on shares above water

   $ 10.67       $ 10.67   

Aggregate intrinsic value

   $ 1       $ 1   

The total intrinsic value for stock options exercised during the nine months ended September 30, 2011 was $37,000. There were no stock options exercised during the third quarter of 2011. The fair value of stock options vested during the nine months ended September 30, 2011 was approximately $233,000. Cash received from the exercise of stock options for the nine months ended September 30, 2011 was $56,000.

 

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Nonvested Stock

The 2011 and 2003 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 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 nine months ended September 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

     77,225        —          11.39   

Released

     (12,243     —          23.83   

Forfeited

     (11,189     (9,000     12.05   
  

 

 

   

 

 

   

Balance, September 30, 2011

     148,070        6,000        12.53   
  

 

 

   

 

 

   

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

 

     Stock Options      Restricted
Stock
     Total  

For the remaining three months of 2011

   $ 71       $ 171       $ 242   

For year ending December 31, 2012

     262         632         894   

For year ending December 31, 2013

     254         398         652   

For year ending December 31, 2014

     252         83         335   

For year ending December 31, 2015

     176         16         192   

For year ending December 31, 2016

     55         —           55   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,070       $ 1,300       $ 2,370   
  

 

 

    

 

 

    

 

 

 

 

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4. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

 

     September 30,
2011
     December 31,
2010
 

Commercial:

     

Commercial Construction

   $ 186,951       $ 205,795   

Commercial Real Estate

     835,695         758,034   

Other Commercial

     918,044         975,830   
  

 

 

    

 

 

 

Total

     1,940,690         1,939,659   

Consumer:

     

Mortgages

     220,108         212,228   

Consumer Construction

     19,339         15,615   

Indirect Auto

     166,045         180,778   

Indirect Marine

     41,899         46,383   

HELOCs

     276,893         273,025   

Credit Card

     17,835         19,308   

Other Consumer

     135,533         150,257   
  

 

 

    

 

 

 

Total

     877,652         897,594   
  

 

 

    

 

 

 

Loans, net of unearned income

   $ 2,818,342       $ 2,837,253   
  

 

 

    

 

 

 

The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 2011 (dollars in thousands):

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days and
still accruing
     Purchased Impaired
( net of credit mark)
     Nonaccrual      Current      Total Loans  

Commercial:

                    

Commercial Construction

   $ —         $ —         $ 315       $ —         $ 9,818       $ 176,818       $ 186,951   

Commercial Real Estate

     6,942         1,954         174         1,294         7,682         817,649         835,695   

Other Commercial

     4,705         1,675         3,184         7,794         29,747         870,939         918,044   

Consumer:

                    

Mortgages

     5,365         1,838         4,989         —           240         207,676         220,108   

Consumer Construction

     —           —           —           —           210         19,129         19,339   

Indirect Auto

     2,424         303         548         47         9         162,714         166,045   

Indirect Marine

     406         —           —           —           544         40,949         41,899   

HELOCs

     1,412         153         1,009         822         1,102         272,395         276,893   

Credit Card

     145         137         217         —           —           17,336         17,835   

Other Consumer

     1,986         3,770         1,690         193         2,614         125,280         135,533   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,385       $ 9,830       $ 12,126       $ 10,150       $ 51,966       $ 2,710,885       $ 2,818,342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2010 (dollars in thousands):

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days and still
Accruing
     Purchased Impaired
(net of credit mark)
     Nonaccrual      Current      Total Loans  

Commercial:

                    

Commercial Construction

   $ 1,834       $ 283       $ 900       $ 1,170       $ 11,410       $ 190,198       $ 205,795   

Commercial Real Estate

     5,960         2,379         609         911         9,276         738,899         758,034   

Other Commercial

     7,236         1,286         3,459         10,720         38,908         914,221         975,830   

Consumer:

                    

Mortgages

     5,967         1,944         4,242         —           261         199,814         212,228   

Consumer Construction

     159         —           —           —           218         15,238         15,615   

Indirect Auto

     3,457         613         729         81         14         175,884         180,778   

Indirect Marine

     920         181         481         —           124         44,677         46,383   

HELOCs

     1,155         371         1,704         980         1,329         267,486         273,025   

Credit Card

     292         90         199         —           —           18,727         19,308   

Other Consumer

     2,447         624         3,009         138         176         143,863         150,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,427       $ 7,771       $ 15,332       $ 14,000       $ 61,716       $ 2,709,007       $ 2,837,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans totaled $51.9 and 51.6 at September 30, 2011 and 2010, respectively. 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 $12.1 million and $18.6 million at September 30, 2011 and 2010, respectively.

The following table shows purchased impaired commercial and consumer loan portfolios, by class, and their delinquency status through September 30, 2011 (dollars in thousands):

 

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

Commercial:

           

Commercial Real Estate

   $ —         $ 51       $ 1,243       $ 1,294   

Other Commercial

     —           1,907         5,887         7,794   

Consumer:

           

Indirect Auto

     13         4         30         47   

HELOCs

     66         32         724         822   

Other Consumer

     12         125         56         193   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 91       $ 2,119       $ 7,940       $ 10,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The following table shows purchased impaired commercial and consumer loan portfolios, by class, and their delinquency status 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

     —           911         —           911   

Other Commercial

     —           9,340         1,380         10,720   

Consumer:

           

Indirect Auto

     8         10         63         81   

HELOCs

     20         844         116         980   

Other Consumer

     81         56         1         138   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 109       $ 12,331       $ 1,560       $ 14,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At September 30, 2011, the Company had $287.9 million in loans considered to be impaired of which $8.1 million were collectively evaluated for impairment and $279.8 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at September 30, 2011 (dollars in thousands):

 

Class Category

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

Loans without a specific allowance:

              

Commercial Construction

   $ 46,084       $ 46,137       $ —         $ 43,586       $ 1,402   

Commercial Real Estate

     33,817         34,442         —           34,731         1,350   

Other Commercial

     133,340         134,279         —           140,128         4,377   

Mortgage

     2,901         2,947         —           2,911         127   

Indirect Auto

     76         95         —           112         —     

HELOC

     2,005         2,200         —           2,229         16   

Other Consumer

     728         812         —           827         26   

Loans with a specific allowance:

              

Commercial Construction

     9,241         9,461         735         9,978         206   

Commercial Real Estate

     6,643         6,764         1,352         6,790         72   

Other Commercial

     40,592         41,333         7,786         43,695         1,006   

Consumer Construction

     210         227         88         1,330         —     

Indirect Marine

     544         547         240         548         13   

HELOC

     1,002         1,042         890         228         —     

Other Consumer

     2,614         2,632         793         2,636         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 279,797       $ 282,918       $ 11,884       $ 289,729       $ 8,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010, the Company had $284.6 million in loans considered to be impaired of which $9.7 million were collectively evaluated for impairment and $274.9 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 30, 2010 (dollars in thousands):

 

Class Category

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

Loans without a specific allowance:

              

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   

Loans with a specific allowance:

              

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

   $ 274,932       $ 276,264       $ 11,257       $ 297,883       $ 12,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On July 1, 2011, the Company adopted the amendments in Accounting Standards Update No. 2011-02 A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all loans that were renewed on or after January 1, 2011 for identification as a troubled debt restructuring (“TDR”). The Company identified as troubled debt restructurings certain loans for which impairment had previously been measured collectively within their homogeneous pool. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective evaluation of the impairment measurement guidance for those receivables newly identified as impaired. At September 30, 2011, the recorded investment in loans for which the allowance for

 

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credit losses were previously measured collectively within their homogeneous pool and now considered impaired, due to being designated as a TDR, was $21.4 million, and the allowance for credit losses associated with those loans, on the basis of a current evaluation of loss, was $275,000. The impact of this new guidance did not have a material impact on the Company’s non-performing assets, allowance for loan losses, earnings, or capital.

The Company considers troubled debt restructurings to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Included in the impaired loan disclosure above are $116 million of loans considered to be troubled debt restructurings as of September 30, 2011. All loans that are considered to be TDRs are specifically evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

The following table provides a summary of modified loans that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and modified loans that have been placed in nonaccrual status, which are considered to be nonperforming, as of September 30, 2011 (dollars in thousands):

 

     September 30, 2011  
     Recorded
Investment
     Outstanding
Commitment
 

Performing restructurings

     

Commercial Construction

   $ 21,945       $ 3,831   

Commercial Real Estate

     5,382         —     

Mortgage

     1,584         —     

Other Commercial

     72,958         500   

Other Consumer

     263         —     
  

 

 

    

 

 

 
     102,132         4,331   

Nonperforming restructurings

     

Commercial Construction

     4,556         —     

Commercial Real Estate

     1,077         —     

Other Commercial

     8,340         —     

Other Consumer

     270         —     
  

 

 

    

 

 

 
     14,243         —     
  

 

 

    

 

 

 

Total restructurings

   $ 116,375       $ 4,331   
  

 

 

    

 

 

 

The following table shows, by class, TDRs that occurred during the three and nine month periods ended September 30, 2011 (dollars in thousands):

 

     Three Months Ended September 30, 2011      Nine Months Ended September 30, 2011  

Class

   Number of
Loans
     Recorded Investment      Number of
Loans
     Recorded Investment  

Commercial Construction

     8       $ 7,072         41       $ 26,501   

Commercial Real Estate

     —           —           8         4,294   

Mortgage

     1         56         5         1,045   

Other Commercial

     30         31,509         142         74,172   

Other Consumer

     1         270         3         533   
  

 

 

    

 

 

    

 

 

    

 

 

 
     40       $ 38,907         199       $ 106,545   
  

 

 

    

 

 

    

 

 

    

 

 

 

The primary modification to each loan class identified as TDRs during the period related to a renewal at the current terms and those terms were considered to be below market based on the risk characteristics of the borrower. Generally, the Company does not modify interest rates or reduce principal balances when

 

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restructuring loans thus the recorded investment is unchanged after the modification is made. There were no TDRs that were restructured during the previous twelve months for which there was a payment default in the three and nine month periods ended September 30, 2011. A default for purposes of this disclosure is a TDR in which subsequent to the restructure, the borrower is 90 days past due or results in foreclosure and repossession of the applicable collateral.

The following table shows the allowance for loan loss activity, by portfolio segment, balances for allowance for credit losses, and loans based on impairment methodology for the nine months ended September 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):

 

$2,818,342 $2,818,342 $2,818,342 $2,818,342
     Commercial     Consumer     Unallocated     Total  

Allowance for loan losses:

        

Balance, beginning of the year

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

Recoveries credited to allowance

     709        852        —          1,561   

Loans charged off

     (8,291     (4,786     —          (13,077

Provision charged to operations

     9,066        5,209        125        14,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 30,440      $ 10,763      $ 87      $ 41,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     11,304        479        —          11,783   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     19,035        10,284        87        29,406   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     101        —          —          101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 30,440      $ 10,763      $ 87      $ 41,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

        

Ending balance

   $ 1,940,690      $ 877,652      $ —        $ 2,818,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     260,629        10,080        —          270,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     1,670,973        867,572        —          2,538,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     9,088        —          —          9,088   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,940,690      $ 877,652      $ —        $ 2,818,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table shows the allowance for loan loss activity, by portfolio segment, balances for allowance for credit losses, and loans based on impairment methodology for the quarter ended December 31, 2010 (dollars in thousands):

 

$2,818,342 $2,818,342 $2,818,342 $2,818,342
     Commercial      Consumer      Unallocated     Total  

Allowance for loan losses:

          

Balance, beginning of the year

           $ 30,484   

Recoveries credited to allowance

             2,103   

Loans charged off

             (18,549

Provision charged to operations

             24,368   
          

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 follows:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;

 

   

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

 

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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 ratings as of September 30, 2011. The risk rating information has been updated through September 30, 2011 (dollars in thousands):

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 52,275       $ 39,153       $ 151,180       $ 242,608   

Risk rated 8

     —           —           252         252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 52,275       $ 39,153       $ 151,432       $ 242,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2011. The risk rating information has been updated through September 30, 2011 (dollars in thousands):

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ —         $ 1,294       $ 6,935       $ 8,229   

Risk rated 8

     —           —           298         298   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $     —         $   1,294       $     7,233       $     8,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired 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

   $ 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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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 409,562 and 247,206 shares underlying anti-dilutive stock awards as of September 30, 2011 and 2010, respectively. Dividends paid on nonvested stock awards were approximately $12,000 and $10,000 for the three months ended September 30, 2011 and 2010, respectively.

The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and nine months ended September 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 September 30, 2011

        

Net income

   $ 9,071         25,987       $ 0.35   

Less: dividends paid and accumulated on preferred stock

     462         —           0.02   

Less: accretion of discount on preferred stock

     66         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 8,543         25,987       $ 0.33   

Add: potentially dilutive common shares - stock awards

     —           15         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 8,543         26,002       $ 0.33   
  

 

 

    

 

 

    

 

 

 

For the Three Months ended September 30, 2010

        

Net income

   $ 8,073         25,882       $ 0.31   

Less: dividends paid and accumulated on preferred stock

     462         —           0.02   

Less: accretion of discount on preferred stock

     62         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 7,549         25,882       $ 0.29   

Add: potentially dilutive common shares - stock awards

     —           39         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 7,549         25,921       $ 0.29   
  

 

 

    

 

 

    

 

 

 

For the Nine Months ended September 30, 2011

        

Net income

   $ 22,085         25,972       $ 0.85   

Less: dividends paid and accumulated on preferred stock

     1,386         —           0.06   

Less: accretion of discount on preferred stock

     195         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 20,504         25,972       $ 0.79   

Add: potentially dilutive common shares - stock awards

     —           22         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 20,504         25,994       $ 0.79   
  

 

 

    

 

 

    

 

 

 

For the Nine Months ended September 30, 2010

        

Net income

   $ 18,498         24,993       $ 0.74   

Less: dividends paid and accumulated on preferred stock

     1,227         —           0.05   

Less: accretion of discount on preferred stock

     163         —           0.01   
  

 

 

    

 

 

    

 

 

 

Basic

   $ 17,108         24,993       $ 0.68   

Add: potentially dilutive common shares - stock awards

     —           43         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 17,108         25,036       $ 0.68   
  

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2011 was 3.12%. 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%) that adjusts and is payable quarterly. The interest rate at September 30, 2011 was 1.77%. The capital securities were redeemable at par on March 31, 2011 and quarterly thereafter until the securities mature on March 31, 2036. The principal asset of Statutory Trust II is $37.1 million of the Company’s junior subordinated debt securities with like maturities 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 business 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 nine months ended September 30, 2011 and 2010 was as follows (dollars in thousands):

 

     Community
Bank
     Mortgage      Eliminations     Consolidated  

Three Months Ended September 30, 2011

          

Net interest income

   $ 39,208       $ 238       $ —        $ 39,446   

Provision for loan losses

     3,600         —           —          3,600   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     35,608         238         —          35,846   

Noninterest income

     6,798         4,862         (116     11,544   

Noninterest expenses

     30,392         4,361         (116     34,637   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     12,014         739         —          12,753   

Income tax expense

     3,407         275         —          3,682   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 8,607       $ 464         —        $ 9,071   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,902,362       $ 70,055       $ (57,960   $ 3,914,457   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended September 30, 2010

          

Net interest income

   $ 38,100       $ 548       $ —        $ 38,648   

Provision for loan losses

     5,912         —           —          5,912   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     32,188         548         —          32,736   

Noninterest income

     6,509         5,962         (118     12,353   

Noninterest expenses

     28,999         5,103         (118     33,984   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     9,698         1,407         —          11,105   

Income tax expense

     2,525         508         —          3,033   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 7,173       $ 899       $ —        $ 8,072   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,849,574       $ 91,736       $ (81,987   $ 3,859,323   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2011

          

Net interest income

   $ 116,862       $ 1,007       $ —        $ 117,869   

Provision for loan losses

     14,400         —           —          14,400   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     102,462         1,007         —          103,469   

Noninterest income

     18,270         14,135         (351     32,054   

Noninterest expenses

     92,013         13,614         (351     105,276   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     28,719         1,528         —          30,247   

Income tax expense

     7,593         569         —          8,162   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 21,126       $ 959       $ —        $ 22,085   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,902,362       $ 70,055       $ (57,960   $ 3,914,457   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2010

          

Net interest income

   $ 110,844       $ 1,532       $ —        $ 112,376   

Provision for loan losses

     14,868         —           —          14,868   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     95,976         1,532         —          97,508   

Noninterest income

     18,838         15,706         (351     34,193   

Noninterest expenses

     92,671         13,612         (351     105,932   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     22,143         3,626         —          25,769   

Income tax (benefit) expense

     5,919         1,352         —          7,271   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 16,224       $ 2,274       $ —        $ 18,498   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,849,574       $ 91,736       $ (81,987   $ 3,859,323   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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 became 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 were 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

 

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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. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures were 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 was 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 was 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 reports for fiscal periods ending on or after June 15, 2010. All remaining filers were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company complied with this Rule beginning with the filing on the June 30, 2011 Form 10-Q.

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 was 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 became effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption was 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 was required. As a result of applying these amendments, the Company identified receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, and in accordance with the ASU, the Company applied the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in Note 4 to the consolidated financial statements.

 

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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 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.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is

 

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less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 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.

Based on the annual testing during the second quarter of each year and the absence of impairment indicators during the quarter ended September 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
 

September 30, 2011

        

Amortizable core deposit intangibles

   $ 46,615       $ 24,453       $ 22,162   

Unamortizable goodwill

     59,742         342         59,400   

Trademark intangible

     1,200         667         533   

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   

September 30, 2010

        

Amortizable core deposit intangibles

   $ 46,615       $ 17,853       $ 28,762   

Unamortizable goodwill

     57,909         342         57,567   

Trademark intangible

     1,200         267         933   

Amortization expense of the core deposit intangibles for the three and nine month periods ended September 30, 2011 totaled $1.5 million and $4.6 million, respectively compared to $1.9 million and $5.3 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 nine month periods ended September 30, 2011 was $100,000 and $300,000, respectively compared to $100,000 and $267,000, respectively for 2010.

 

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As of September 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

   $ 5,597   

2013

     4,199   

2014

     3,124   

2015

     2,557   

2016

     2,022   

Thereafter

     5,196   
  

 

 

 
   $ 22,695   
  

 

 

 

 

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 September 30, 2011 and 2010, the Company had outstanding loan commitments approximating $735.1 million and $858.8 million, respectively.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $40.2 million and $39.7 million at September 30, 2011, and 2010, respectively.

At September 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 $132.7 million and loans held for sale of $61.8 million compared to $161.5 million and $84.4 million, respectively, at September 30, 2011 and 2010. Union Mortgage has entered into corresponding agreements on a best-efforts basis to sell loans on a servicing released basis totaling approximately $194.5 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.

 

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11. SECURITIES

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

 

            Gross Unrealized        
     Amortized
Cost
     Gains      (Losses)     Estimated
Fair Value
 

September 30, 2011

          

U.S. government and agency securities

   $ 7,973       $ 584       $ —        $ 8,557   

Obligations of states and political subdivisions

     181,710         10,863         (248     192,325   

Corporate and other bonds

     14,466         279         (450     14,295   

Mortgage-backed securities

     354,707         12,067         (222     366,552   

Federal Reserve Bank stock - restricted

     6,714         —           —          6,714   

Federal Home Loan Bank stock - restricted

     15,103         —           —          15,103   

Other securities

     2,950         —           (11     2,939   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 583,623       $ 23,793       $ (931   $ 606,485   
  

 

 

    

 

 

    

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 September 30, 2011

               

Obligations of states and political subdivisions

   $ 3,966       $ (244   $ 679       $ (4   $ 4,645       $ (248

Mortgage-backed securities

     31,458         (222     —           —          31,458         (222

Corporate bonds and other securities

     2,397         (116     4,073         (345     6,470         (461
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Totals

   $ 37,821       $ (582   $ 4,752       $ (349   $ 42,573       $ (931
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 September 30, 2011, there were $4.8 million, or 4 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 $348 thousand and consisted of corporate and municipal obligations.

 

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The following table summarizes the contractual maturity of securities available for sale, at fair value and their weighted average yields as of September 30, 2011:

 

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

U.S. government and agency securities:

          

Amortized cost

   $ —        $ 7,913      $ —        $ 60      $ 7,973   

Fair value

     —          8,418        —          139        8,557   

Weighted average yield (1)

     —          3.69     —          —          3.66

Mortgage backed securities:

          

Amortized cost

   $ 1,522      $ 11,288      $ 47,182      $ 294,715      $ 354,707   

Fair value

     1,548        11,730        49,708        303,566        366,552   

Weighted average yield (1)

     4.17     4.19     3.92     3.20     3.33

Obligations of states and political subdivisions:

          

Amortized cost

   $ 559      $ 8,112      $ 36,424      $ 136,615      $ 181,710   

Fair value

     561        8,387        38,510        144,867        192,325   

Weighted average yield (1)

     5.16     4.60     4.53     4.17     4.27

Other securities:

          

Amortized cost

   $ 2,001      $ 1,518      $ 924      $ 34,790      $ 39,233   

Fair value

     2,019        1,480        947        34,605        39,051   

Weighted average yield (1)

     5.69     5.35     4.67     5.16     5.18

Total securities available for sale:

          

Amortized cost

   $ 4,082      $ 28,831      $ 84,530      $ 466,180      $ 583,623   

Fair value

     4,128        30,016        89,165        483,176        606,485   

Weighted average yield (1)

     5.05     4.23     4.19     3.63     3.75

 

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

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 September 30, 2011 and in accordance with the guidance, the Company determined that a single issuer Trust Preferred security incurred credit-related OTTI of $400,000, and was recognized in earnings for the quarter ended September 30, 2011. No OTTI had been recognized prior to the current quarter. There is a possibility that the Company will sell the security before recovering all unamortized costs. The significant inputs the Company considered in determining the amount of the credit loss are as follows:

 

   

The assessment of security credit rating agencies and research performed by third parties;

 

   

The continued interest payment deferral by the issuer;

 

   

The lack of improving asset quality of the issuer and worsening economic conditions; and

 

   

The security is thinly traded and trading at its historical low, below par.

 

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

 

     OTTI Losses  

Cumulative credit losses on investment securities, through December 31, 2010

   $ —     

Cumulative credit losses on investment securities

     —     

Additions for credit losses not previously regognized

     400   
  

 

 

 

Cumulative credit losses on investment securities, through September 30, 2011

   $ 400   
  

 

 

 

 

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 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

 

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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 September 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

   $ —         $ 93          $ 93   

Securities available for sale:

           

U.S. government and agency securities

     —           8,557         —           8,557   

Obligations of states and political subdivisions

     —           192,325         —           192,325   

Corporate and other bonds

     —           14,296         —           14,296   

Mortgage-backed securities

     —           366,460         —