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
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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
UNION FIRST MARKET BANKSHARES CORPORATION
FORM 10-Q
ITEM | PAGE | |||||
PART I - FINANCIAL INFORMATION | ||||||
Item 1. |
||||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
32 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
33 | ||||
Item 3. |
53 | |||||
Item 4. |
55 | |||||
PART II - OTHER INFORMATION | ||||||
Item 1. |
55 | |||||
Item 1A. |
56 | |||||
Item 2. |
56 | |||||
Item 6. |
56 | |||||
57 |
ii
PART I - FINANCIAL INFORMATION
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 | |||||||||
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|
|
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|
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Total cash and cash equivalents |
149,777 | 61,153 | 80,138 | |||||||||
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Securities available for sale, at fair value |
606,485 | 572,441 | 576,040 | |||||||||
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Loans held for sale |
61,786 | 73,974 | 84,381 | |||||||||
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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 | |||||||||
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Net loans |
2,777,052 | 2,798,847 | 2,804,872 | |||||||||
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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 | |||||||||
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Total assets |
$ | 3,914,457 | $ | 3,837,247 | $ | 3,859,323 | ||||||
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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 | |||||||||
|
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|
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Total deposits |
3,134,876 | 3,070,059 | 3,074,195 | |||||||||
|
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|
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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 | |||||||||
|
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|
|
|||||||
Total liabilities |
3,462,876 | 3,409,162 | 3,428,727 | |||||||||
|
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|
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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 | |||||||||
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|
|
|
|||||||
Total stockholders equity |
451,581 | 428,085 | 430,596 | |||||||||
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Total liabilities and stockholders equity |
$ | 3,914,457 | $ | 3,837,247 | $ | 3,859,323 | ||||||
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|
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See accompanying notes to condensed consolidated financial statements.
- 1 -
UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
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 | ||||||||||||
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Total interest and dividend income |
47,606 | 48,440 | 142,754 | 141,080 | ||||||||||||
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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 | ||||||||||||
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Total interest expense |
8,160 | 9,791 | 24,885 | 28,704 | ||||||||||||
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Net interest income |
39,446 | 38,649 | 117,869 | 112,376 | ||||||||||||
Provision for loan losses |
3,600 | 5,912 | 14,400 | 14,868 | ||||||||||||
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Net interest income after provision for loan losses |
35,846 | 32,737 | 103,469 | 97,508 | ||||||||||||
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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 | ||||||||||||
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|
|
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Total noninterest income |
11,544 | 12,353 | 32,054 | 34,193 | ||||||||||||
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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 | ||||||||||||
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Total noninterest expenses |
34,637 | 33,984 | 105,276 | 105,932 | ||||||||||||
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|||||||||
Income before income taxes |
12,753 | 11,106 | 30,247 | 25,769 | ||||||||||||
Income tax expense |
3,682 | 3,033 | 8,162 | 7,271 | ||||||||||||
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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 | ||||||||||||
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Net income available to common shareholders |
$ | 8,543 | $ | 7,549 | $ | 20,504 | $ | 17,108 | ||||||||
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Earnings per common share, basic |
$ | 0.33 | $ | 0.29 | $ | 0.79 | $ | 0.68 | ||||||||
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Earnings per common share, diluted |
$ | 0.33 | $ | 0.29 | $ | 0.79 | $ | 0.68 | ||||||||
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See accompanying notes to condensed consolidated financial statements.
- 2 -
UNION FIRST MARKET BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 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 | ) | ||||||||||||||||||||||||||||||
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Other comprehensive income (net of tax, $4,046) |
4,656 | 4,656 | 4,656 | |||||||||||||||||||||||||||||
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Total comprehensive income |
$ | 23,154 | ||||||||||||||||||||||||||||||
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|
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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 | ||||||||||||||||||||||||||||||
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Balance - September 30, 2010 |
$ | 35,595 | $ | 34,460 | $ | 184,964 | $ | 167,718 | $ | (1,240 | ) | $ | 9,099 | $ | 430,596 | |||||||||||||||||
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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 | ) | ||||||||||||||||||||||||||||||
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|
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Other comprehensive income (net of tax, $5,542) |
7,466 | 7,466 | 7,466 | |||||||||||||||||||||||||||||
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|
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Total comprehensive income |
$ | 29,551 | ||||||||||||||||||||||||||||||
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|
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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 | ||||||||||||||||||||||||||||||
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Balance - September 30, 2011 |
$ | 35,595 | $ | 34,581 | $ | 186,505 | $ | 184,845 | $ | (982 | ) | $ | 11,037 | $ | 451,581 | |||||||||||||||||
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See accompanying notes to condensed consolidated financial statements.
- 3 -
UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 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 | ||||||
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|
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Net cash and cash equivalents provided by operating activities |
75,645 | 18,020 | ||||||
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|
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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 | ||||||
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|
|||||
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 | ||||||
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|
|||||
Net cash and cash equivalents used in financing activities |
(12,725 | ) | (171,646 | ) | ||||
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|
|||||
Increase in cash and cash equivalents |
88,624 | 34,227 | ||||||
Cash and cash equivalents at beginning of the period |
61,153 | 45,911 | ||||||
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|
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Cash and cash equivalents at end of the period |
$ | 149,777 | $ | 80,138 | ||||
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|
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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.
- 4 -
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 Companys 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 Companys secondary growth strategy of expanding operations along the I-81 corridor. The Companys 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.
- 5 -
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 Companys consolidated assets and, accordingly, are not considered material.
The amounts of the Harrisonburg branch revenue and earnings included in the Companys 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 Companys 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 Companys largest affiliate upon closing of the acquisition.
- 6 -
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 Companys 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 Companys 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 Companys 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.
- 7 -
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 Companys stock price over the expected life of the options. |
(4) | Based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant. |
The following table summarizes information concerning stock options issued to the Companys employees that are vested or are expected to vest and stock options exercisable as of September 30, 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.
- 8 -
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 Companys stock price. The value of the nonvested stock awards was calculated by multiplying the fair market value of the Companys 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 | ||||||
|
|
|
|
|
|
- 9 -
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 Companys 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 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 10 -
The following table shows the aging of the Companys 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.
- 11 -
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 Companys 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 Companys 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 Creditors 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
- 12 -
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 Companys non-performing assets, allowance for loan losses, earnings, or capital.
The Company considers troubled debt restructurings to be impaired loans. A modification of a loans terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrowers 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 Companys 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
- 13 -
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):
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 | ||||||||
|
|
|
|
|
|
|
|
- 14 -
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):
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 borrowers 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 Companys 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 |
- 15 -
| 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 | ||||||||
|
|
|
|
|
|
|
|
- 16 -
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 | |||||||
|
|
|
|
|
|
- 17 -
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process.
Both of the Companys reportable segments are service based. The mortgage business is a fee-based business while the 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.
- 18 -
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 Companys 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
- 19 -
existing requirements and will lead to greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period 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 Companys 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 Companys 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 FASBs 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 Companys consolidated financial statements.
In April 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02). This clarifies the guidance on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditors 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 FASBs 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 Companys 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
- 21 -
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 entitys 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 customers 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 companys 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 Companys investments with unrealized losses that are not deemed to be other-than-temporarily impaired. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position and are as follows:
Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
Fair value | Unrealized Losses |
Fair value | Unrealized Losses |
Fair value | Unrealized Losses |
|||||||||||||||||||
As of September 30, 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.
- 24 -
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, managements 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 securitys entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss.
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. |
- 25 -
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 Companys market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
Level 1 | - | Valuation is based on quoted prices in active markets for identical assets and liabilities. | ||
Level 2 | - | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets. | ||
Level 3 | - | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Companys assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort. |
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
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 Companys interest-bearing liabilities. The Company determines the fair value of its interest rate swap using externally developed pricing models based on market observable inputs and therefore classifies such valuation as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.
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
- 26 -
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 | |