Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2013

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)

(804) 633-5031

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

The number of shares of common stock outstanding as of May 2, 2013 was 24,856,384

 

 

 


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-Q

INDEX

 

ITEM        PAGE  
  PART I - FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets as of March 31, 2013, December 31, 2012, and March 31, 2012      1   
  Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012      2   
  Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012      3   
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012      4   
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012      5   
  Notes to Condensed Consolidated Financial Statements      6   
  Report of Independent Registered Public Accounting Firm      36   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      59   

Item 4.

  Controls and Procedures      60   
  PART II - OTHER INFORMATION   

Item 1.

  Legal Proceedings      61   

Item 1A.

  Risk Factors      61   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      61   

Item 6.

  Exhibits      62   
  Signatures      63   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

     March 31,      December 31,      March 31,  
     2013      2012      2012  
     (Unaudited)      (Audited)      (Unaudited)  

ASSETS

        

Cash and cash equivalents:

        

Cash and due from banks

   $ 52,017       $ 71,426       $ 56,971   

Interest-bearing deposits in other banks

     24,715         11,320         53,878   

Money market investments

     1         1         179   

Federal funds sold

     160         155         155   
  

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

     76,893         82,902         111,183   
  

 

 

    

 

 

    

 

 

 

Securities available for sale, at fair value

     583,217         585,382         621,751   

Restricted stock, at cost

     17,956         20,687         20,715   

Loans held for sale

     127,106         167,698         73,575   

Loans, net of unearned income

     2,973,547         2,966,847         2,841,758   

Less allowance for loan losses

     34,415         34,916         40,204   
  

 

 

    

 

 

    

 

 

 

Net loans

     2,939,132         2,931,931         2,801,554   
  

 

 

    

 

 

    

 

 

 

Bank premises and equipment, net

     83,366         85,409         90,986   

Other real estate owned, net of valuation allowance

     35,878         32,834         37,663   

Core deposit intangibles, net

     14,742         15,778         19,403   

Goodwill

     59,400         59,400         59,400   

Other assets

     113,445         113,844         111,569   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 4,051,135       $ 4,095,865       $ 3,947,799   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Noninterest-bearing demand deposits

     665,992         645,901         564,811   

Interest-bearing deposits:

        

NOW accounts

     459,117         454,150         434,625   

Money market accounts

     945,273         957,130         904,272   

Savings accounts

     225,543         207,846         194,473   

Time deposits of $100,000 and over

     507,972         508,630         541,660   

Other time deposits

     507,852         524,110         575,866   
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     2,645,757         2,651,866         2,650,896   
  

 

 

    

 

 

    

 

 

 

Total deposits

     3,311,749         3,297,767         3,215,707   
  

 

 

    

 

 

    

 

 

 

Securities sold under agreements to repurchase

     72,047         54,270         53,043   

Other short-term borrowings

     —           78,000         —     

Trust preferred capital notes

     60,310         60,310         60,310   

Long-term borrowings

     137,364         136,815         155,503   

Other liabilities

     38,892         32,840         37,132   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     3,620,362         3,660,002         3,521,695   
  

 

 

    

 

 

    

 

 

 

Commitments and contingencies

        

STOCKHOLDERS’ EQUITY

        

Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 24,859,729 shares, 25,270,970 shares, and 25,944,530 shares, respectively.

     32,869         33,510         34,396   

Surplus

     168,304         176,635         185,263   

Retained earnings

     221,330         215,634         195,933   

Accumulated other comprehensive income

     8,270         10,084         10,512   
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     430,773         435,863         426,104   
  

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 4,051,135       $ 4,095,865       $ 3,947,799   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

 

     Three Months Ended  
     March 31  
     2013     2012  
     (Unaudited)     (Unaudited)  

Interest and dividend income:

    

Interest and fees on loans

   $ 39,224      $ 40,608   

Interest on deposits in other banks

     5        22   

Interest and dividends on securities:

    

Taxable

     2,069        3,456   

Nontaxable

     1,987        1,788   
  

 

 

   

 

 

 

Total interest and dividend income

     43,285        45,874   
  

 

 

   

 

 

 

Interest expense:

    

Interest on deposits

     3,962        5,335   

Interest on federal funds purchased

     15        —     

Interest on short-term borrowings

     54        44   

Interest on long-term borrowings

     1,501        2,148   
  

 

 

   

 

 

 

Total interest expense

     5,532        7,527   
  

 

 

   

 

 

 

Net interest income

     37,753        38,347   

Provision for loan losses

     2,050        3,500   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     35,703        34,847   
  

 

 

   

 

 

 

Noninterest income:

    

Service charges on deposit accounts

     2,272        2,130   

Other service charges, commissions and fees

     2,807        2,572   

Losses on securities transactions, net

     (11     (5

Gains on sales of mortgage loans, net of commissions

     3,852        2,766   

Losses on sales of bank premises

     (296     (31

Other operating income

     1,211        1,045   
  

 

 

   

 

 

 

Total noninterest income

     9,835        8,477   
  

 

 

   

 

 

 

Noninterest expenses:

    

Salaries and benefits

     17,966        16,976   

Occupancy expenses

     2,855        2,647   

Furniture and equipment expenses

     1,845        1,763   

Other operating expenses

     10,835        10,882   
  

 

 

   

 

 

 

Total noninterest expenses

     33,501        32,268   
  

 

 

   

 

 

 

Income before income taxes

     12,037        11,056   

Income tax expense

     3,054        3,133   
  

 

 

   

 

 

 

Net income

   $ 8,983      $ 7,923   
  

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.36      $ 0.31   
  

 

 

   

 

 

 

Earnings per common share, diluted

   $ 0.36      $ 0.31   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2013     2012  

Net income

   $ 8,983      $ 7,923   

Other comprehensive income (loss):

    

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

     286        197   

Unrealized holding (losses) gains arising during period (net of tax, $1,135 and $355 for three months ended March 31, 2013 and 2012)

     (2,107     662   

Reclassification adjustment for losses included in net income (net of tax, $4 and $2 for three months ended March 31, 2013 and 2012)

     7        3   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,814     862   
  

 

 

   

 

 

 

Comprehensive income

   $ 7,169      $ 8,785   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

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

(Unaudited)

 

     Common
Stock
    Surplus     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

Balance - December 31, 2011

   $ 34,672      $ 187,493      $ 189,824      $ 9,650      $ 421,639   

Net income - 2012

         7,923          7,923   

Other comprehensive income (net of tax, $357)

           862        862   

Dividends on Common Stock ($.07 per share)

         (1,694       (1,694

Stock purchased under stock repurchase plan (220,265 shares)

     (293     (2,571         (2,864

Issuance of common stock under Dividend Reinvestment Plan (8,731 shares)

     12        108        (120       —     

Vesting of restricted stock under Stock Incentive Plan (4,032 shares)

     5        (5         —     

Stock-based compensation expense

       238            238   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2012

   $ 34,396      $ 185,263      $ 195,933      $ 10,512      $ 426,104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - December 31, 2012

   $ 33,510      $ 176,635      $ 215,634      $ 10,084      $ 435,863   

Net income - 2013

         8,983          8,983   

Other comprehensive income (loss) (net of tax, $1,131)

           (1,814     (1,814

Dividends on Common Stock ($.13 per share)

         (3,064       (3,064

Stock purchased under stock repurchase plan (500,000 shares)

     (664     (8,835         (9,499

Issuance of common stock under Dividend Reinvestment Plan (13,068 shares)

     17        206        (223       —     

Vesting of restricted stock under Stock Incentive Plan (5,299 shares)

     7        (7         —     

Net settle for taxes on Restricted Stock Awards (789 shares)

     (1     (13         (14

Stock-based compensation expense

       318            318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2013

   $ 32,869      $ 168,304      $ 221,330      $ 8,270      $ 430,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(Dollars in thousands)

(Unaudited)

 

     2013     2012  

Operating activities:

    

Net income

   $ 8,983      $ 7,923   

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

    

Depreciation of bank premises and equipment

     1,546        1,694   

Amortization, net

     1,476        3,595   

Provision for loan losses

     2,050        3,500   

Losses on the sale of investment securities

     11        5   

Decrease in loans held for sale, net

     40,592        1,248   

(Gains) losses on sales of other real estate owned, net

     (284     27   

Losses on bank premises, net

     296        31   

Stock-based compensation expenses

     318        238   

Decrease in other assets

     1,281        604   

Increase in other liabilities

     6,338        5,672   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     62,607        24,537   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of securities available for sale

     (54,999     (43,339

Proceeds from sales of securities available for sale

     15,555        —     

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

     40,907        40,602   

Net increase in loans

     (12,080     (32,534

Net increase in bank premises and equipment

     (577     (2,122

Proceeds from sales of other real estate owned

     877        1,485   

Improvements to other real estate owned

     (30     (319
  

 

 

   

 

 

 

Net cash and cash equivalents used in investing activities

     (10,347     (36,227
  

 

 

   

 

 

 

Financing activities:

    

Net increase in noninterest-bearing deposits

     20,091        30,276   

Net (decrease) increase in interest-bearing deposits

     (6,109     10,326   

Net decrease in short-term borrowings

     (60,223     (9,952

Net increase in long-term borrowings (1)

     549        122   

Cash dividends paid - common stock

     (3,064     (1,694

Repurchase of common stock

     (9,499     (2,864

Taxes paid related to net share settlement of equity awards

     (14     —     
  

 

 

   

 

 

 

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

     (58,269     26,214   
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (6,009     14,524   

Cash and cash equivalents at beginning of the period

     82,902        96,659   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 76,893      $ 111,183   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 5,688      $ 8,394   

Income taxes

     1,400        2,914   

Supplemental schedule of noncash investing and financing activities

    

Unrealized (loss) gain on securities available for sale

   $ (3,231   $ 1,022   

Changes in fair value of interest rate swap loss

     286        197   

Transfers from loans to other real estate owned

     2,829        6,593   

Transfers from bank premises to other real estate owned

     778        —     

 

(1) See Note 5 “Borrowings” related to 2013 activity.

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

 

1. ACCOUNTING POLICIES

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

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

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of ASU 2011-11 did not have a material impact on the consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 did not have a material impact on the consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on the consolidated financial statements.

 

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In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Public companies were required to apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the consolidated financial statements ..

 

2. SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of March 31, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):

 

            Gross Unrealized        
     Amortized
Cost
     Gains      (Losses)     Estimated
Fair Value
 

March 31, 2013

          

U.S. government and agency securities

   $ 2,279       $ 539       $ —        $ 2,818   

Obligations of states and political subdivisions

     231,861         13,303         (1,367     243,797   

Corporate and other bonds

     6,728         174         (122     6,780   

Mortgage-backed securities

     319,827         7,107         (474     326,460   

Other securities

     3,293         69         —           3,362   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 563,988       $ 21,192       $ (1,963   $ 583,217   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

U.S. government and agency securities

   $ 2,581       $ 268       $ —        $ 2,849   

Obligations of states and political subdivisions

     214,980         15,123         (325     229,778   

Corporate and other bonds

     7,353         173         (314     7,212   

Mortgage-backed securities

     335,327         7,383         (536     342,174   

Other securities

     3,277         92         —          3,369   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 563,518       $ 23,039       $ (1,175   $ 585,382   
  

 

 

    

 

 

    

 

 

   

 

 

 

Due to restrictions placed upon the Company’s common stock investment in the Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta (“FHLB”), these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications. The FHLB requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 6% of its outstanding capital. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $6.8 million for both March 31, 2013 and December 31, 2012 and FHLB stock in the amount of $11.2 million and $13.9 million as of March 31, 2013 and December 31, 2012.

 

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

 

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

March 31, 2013

           

Obligations of states and political subdivisions

  $ 48,672      $ (1,327   $ 651        (40   $ 49,323      $ (1,367

Mortgage-backed securities

    84,264        (456     2,829        (18     87,093        (474

Corporate bonds and other securities

    —           —           1,748        (122     1,748        (122
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 132,936      $ (1,783   $ 5,228      $ (180   $ 138,164      $ (1,963
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

           

Obligations of states and political subdivisions

  $ 22,397      $ (283   $ 649      $ (42   $ 23,046      $ (325

Mortgage-backed securities

    86,183        (536     —          —          86,183        (536

Corporate bonds and other securities

    —          —          1,555        (314     1,555        (314
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 108,580      $ (819   $ 2,204      $ (356   $ 110,784      $ (1,175
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2013, there were $5.2 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 $180,000 and consisted of municipal obligations, mortgage-backed securities, and corporate bonds.

The following table presents the amortized cost and estimated fair value of securities as of March 31, 2013, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     March 31, 2013      December 31, 2012  
     Amortized      Estimated      Amortized      Estimated  
     Cost      Fair Value      Cost      Fair Value  

Due in one year or less

   $ 4,116       $ 4,168       $ 2,346       $ 2,372   

Due after one year through five years

     15,841         16,536         16,413         17,016   

Due after five years through ten years

     65,056         69,379         69,164         73,501   

Due after ten years

     475,682         489,772         472,318         489,124   

Other securities

     3,293         3,362         3,277         3,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 563,988       $ 583,217       $ 563,518       $ 585,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities with an amortized cost of $176.8 million and $183.7 million as of March 31, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes.

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is OTTI if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the quarter ended March 31, 2013, and in accordance with the guidance, no OTTI was recognized.

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, which was recognized in earnings for the quarter ended September 30, 2011. 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;

 

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Table of Contents
   

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.

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

 

    OTTI Losses  

Cumulative credit losses on investment securities, through December 31, 2012

  $ 400   

Cumulative credit losses on investment securities

    —     

Additions for credit losses not previously recognized

    —     
 

 

 

 

Cumulative credit losses on investment securities, through March 31, 2013

  $ 400   
 

 

 

 

 

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31,
2013
     December 31,
2012
 

Commercial:

     

Commercial Construction

   $ 202,225       $ 202,344   

Commercial Real Estate - Owner Occupied

     512,029         513,671   

Commercial Real Estate - Non-Owner Occupied

     705,036         682,760   

Raw Land and Lots

     202,114         205,726   

Single Family Investment Real Estate

     230,673         233,395   

Commercial and Industrial

     204,257         217,661   

Other Commercial

     53,865         47,551   

Consumer:

     

Mortgage

     222,949         220,567   

Consumer Construction

     39,306         33,969   

Indirect Auto

     163,491         157,518   

Indirect Marine

     39,118         36,586   

HELOCs

     283,070         288,092   

Credit Card

     21,204         21,968   

Other Consumer

     94,210         105,039   
  

 

 

    

 

 

 

Total

   $ 2,973,547       $ 2,966,847   
  

 

 

    

 

 

 

 

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Table of Contents

The following table shows the aging of the Company’s loan portfolio, by class, at March 31, 2013 (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

  $ 189      $ —        $ —        $ —        $ 4,547      $ 197,489      $ 202,225   

Commercial Real Estate - Owner Occupied

    1,518        309        304        221        2,184        507,493        512,029   

Commercial Real Estate - Non-Owner Occupied

    957        417        156        —          804        702,702        705,036   

Raw Land and Lots

    332        1,003        43        2,555        6,353        191,828        202,114   

Single Family Investment Real Estate

    323        25        561        302        2,117        227,345        230,673   

Commercial and Industrial

    464        90        600        —          2,261        200,842        204,257   

Other Commercial

    390        —          441        —          190        52,844        53,865   

Consumer:

             

Mortgage

    6,275        1,610        1,362        —          1,533        212,169        222,949   

Consumer Construction

    —          —          —          —          239        39,067        39,306   

Indirect Auto

    1,320        237        273        17        —          161,644        163,491   

Indirect Marine

    65        —          114        —          158        38,781        39,118   

HELOCs

    774        367        1,371        821        2,173        277,564        283,070   

Credit Card

    181        153        227        —          —          20,643        21,204   

Other Consumer

    1,275        283        735        103        474        91,340        94,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 14,063      $ 4,494      $ 6,187      $ 4,019      $ 23,033      $ 2,921,751      $ 2,973,547   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2012 (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

  $ —        $ —        $ —        $ —        $ 5,781      $ 196,563      $ 202,344   

Commercial Real Estate - Owner Occupied

    2,105        153        1,711        247        2,206        507,249        513,671   

Commercial Real Estate - Non-Owner Occupied

    866        63        207        —          812        680,812        682,760   

Raw Land and Lots

    277        —          75        2,942        8,760        193,672        205,726   

Single Family Investment Real Estate

    1,819        261        756        326        3,420        226,813        233,395   

Commercial and Industrial

    506        270        441        79        2,036        214,329        217,661   

Other Commercial

    70        182        1        —          193        47,105        47,551   

Consumer:

             

Mortgage

    5,610        2,244        3,017        —          747        208,949        220,567   

Consumer Construction

    157        —          —          —          235        33,577        33,969   

Indirect Auto

    2,504        276        329        21        —          154,388        157,518   

Indirect Marine

    67        —           114        —          158        36,247        36,586   

HELOCs

    3,063        640        1,239        845        1,325        280,980        288,092   

Credit Card

    269        101        397        —          —          21,201        21,968   

Other Consumer

    1,525        487        556        105        533        101,833        105,039   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 18,838      $ 4,677      $ 8,843      $ 4,565      $ 26,206      $ 2,903,718      $ 2,966,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonaccrual loans totaled $23.0 million, $26.2 million, and $42.4 million at March 31, 2013, December 31, 2012, and March 31, 2012, respectively. There were no nonaccrual loans excluded from impaired loan disclosure in 2013 or 2012. Loans past due 90 days or more and accruing interest totaled $6.2 million, $8.8 million, and $12.3 million at March 31, 2013, December 31,2012, and March 31, 2012, respectively.

The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status at March 31, 2013 (dollars in thousands):

 

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

Commercial:

           

Commercial Real Estate - Owner Occupied

   $ —         $ 173       $ 48       $ 221   

Raw Land and Lots

     —           —           2,555         2,555   

Single Family Investment Real Estate

     —           12         290         302   

Consumer:

           

Indirect Auto

     —           2         15         17   

HELOCs

     15         32         774         821   

Other Consumer

     —           —           103         103   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15       $ 219       $ 3,785       $ 4,019   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status at December 31, 2012 (dollars in thousands):

 

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

Commercial:

           

Commercial Real Estate - Owner Occupied

   $  —         $ 193       $ 54       $ 247   

Raw Land and Lots

     —           81         2,861         2,942   

Single Family Investment Real Estate

     —           14         312         326   

Commercial and Industrial

     —           79         —           79   

Consumer:

           

Indirect Auto

     3         2         16         21   

HELOCs

     —           51         794         845   

Other Consumer

     —           —           105         105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3       $ 420       $ 4,142       $ 4,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At March 31, 2013, the Company had $145.7 million in loans considered to be impaired of which $11.8 million were collectively evaluated for impairment and $133.9 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at March 31, 2013 (dollars in thousands):

 

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

Loans without a specific allowance

              

Commercial:

              

Commercial Construction

   $ 18,766       $ 18,768       $ —         $ 18,444       $ 245   

Commercial Real Estate - Owner Occupied

     10,117         10,214         —           10,258         134   

Commercial Real Estate - Non-Owner Occupied

     11,384         11,466         —           12,938         162   

Raw Land and Lots

     34,101         34,168         —           34,480         310   

Single Family Investment Real Estate

     3,394         3,772         —           3,786         37   

Commercial and Industrial

     1,970         2,095         —           2,096         23   

Consumer:

              

Mortgage

     1,229         1,229         —           1,229         10   

Indirect Marine

     158         283         —           283         —     

HELOCs

     1,080         1,179         —           1,690         —     

Other Consumer

     12         13         —           13         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans without a specific allowance

   $ 82,211       $ 83,187       $ —         $ 85,217       $ 921   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance

              

Commercial:

              

Commercial Construction

   $ 8,264       $ 8,747       $ 460       $ 8,861       $ 55   

Commercial Real Estate - Owner Occupied

     2,674         2,827         808         2,833         7   

Commercial Real Estate - Non-Owner Occupied

     13,617         13,659         634         13,682         182   

Raw Land and Lots

     11,294         12,413         1,217         12,416         81   

Single Family Investment Real Estate

     3,059         3,436         249         3,441         12   

Commercial and Industrial

     8,541         8,622         1,049         8,679         87   

Other Commercial

     134         134         28         134         —     

Consumer:

              

Mortgage

     958         959         39         960         —     

Consumer Construction

     239         270         66         259         —     

HELOCs

     2,408         2,469         965         2,675         3   

Other Consumer

     462         496         197         496         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with a specific allowance

   $ 51,650       $ 54,032       $ 5,712       $ 54,436       $ 427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

   $ 133,861       $ 137,219       $ 5,712       $ 139,653       $ 1,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

At December 31, 2012, the Company had $155.4 million in loans considered to be impaired of which $13.0 million were collectively evaluated for impairment and $142.4 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 31, 2012 (dollars in thousands):

 

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

Loans without a specific allowance

              

Commercial:

              

Commercial Construction

   $ 28,212       $ 28,695       $ —         $ 28,925       $ 1,237   

Commercial Real Estate - Owner Occupied

     13,356         13,449         —           14,362         773   

Commercial Real Estate - Non-Owner Occupied

     13,997         14,076         —           15,153         768   

Raw Land and Lots

     40,421         40,485         —           43,162         1,537   

Single Family Investment Real Estate

     5,348         6,046         —           6,887         242   

Commercial and Industrial

     1,582         1,610         —           1,926         105   

Consumer:

              

Mortgage

     857         857         —           892         43   

Indirect Auto

     4         4         —           8         —     

Indirect Marine

     158         283         —           283         3   

HELOCs

     1,330         1,429         —           1,481         5   

Other Consumer

     125         127         —           129         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans without a specific allowance

   $ 105,390       $ 107,061       $ —         $ 113,208       $ 4,713   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance

              

Commercial:

              

Commercial Construction

   $ 3,786       $ 3,834       $ 596       $ 4,614       $ 157   

Commercial Real Estate - Owner Occupied

     2,699         2,838         698         2,878         30   

Commercial Real Estate - Non-Owner Occupied

     13,791         13,828         691         13,896         761   

Raw Land and Lots

     9,711         9,919         2,411         10,656         145   

Single Family Investment Real Estate

     1,740         1,826         499         1,953         47   

Commercial and Industrial

     2,413         2,573         603         2,584         31   

Other Commercial

     134         134         28         134         —     

Consumer:

              

Mortgage

     545         549         154         550         —     

Consumer Construction

     235         262         106         230         —     

HELOCs

     1,563         1,630         942         1,840         25   

Other Consumer

     408         438         193         438         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with a specific allowance

   $ 37,025       $ 37,831       $ 6,921       $ 39,773       $ 1,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

   $ 142,415       $ 144,892       $ 6,921       $ 152,981       $ 5,911   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers troubled debt restructurings (“TDRs”) to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Included in the impaired loan disclosures above are $54.7 million and $63.5 million of loans considered to be troubled debt restructurings as of March 31, 2013 and December 31, 2012, respectively. All loans that are considered to be TDRs are specifically evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

 

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The following table provides a summary, by class, 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 March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31, 2013      December 31, 2012  
     No. of
Loans
     Recorded
Investment
     Outstanding
Commitment
     No. of
Loans
     Recorded
Investment
     Outstanding
Commitment
 

Performing

                 

Commercial:

                 

Commercial Construction

     3       $ 1,494       $  —           5       $ 4,549       $ 73   

Commercial Real Estate - Owner Occupied

     10         5,207         —           11         6,009         —     

Commercial Real Estate - Non-Owner Occupied

     10         7,837         11         10         13,103         —     

Raw Land and Lots

     13         22,560         —           13         22,886         —     

Single Family Investment Real Estate

     8         1,760         —           6         928         —     

Commercial and Industrial

     4         887         —           5         1,041         —     

Other Commercial

     1         236         —           1         236         —     

Consumer:

                 

Mortgage

     13         2,401         —           12         2,256         —     

Other Consumer

     3         262         —           4         460         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing

     65       $ 42,644       $ 11         67       $ 51,468       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming

                 

Commercial:

                 

Commercial Construction

     3       $ 3,471       $  —           4       $ 4,260       $  —     

Commercial Real Estate - Owner Occupied

     4         1,270         —           3         1,079         —     

Commercial Real Estate - Non-Owner Occupied

     2         510         —           2         514         —     

Raw Land and Lots

     2         4,013         —           2         4,032         —     

Single Family Investment Real Estate

     2         427         —           2         427         —     

Commercial and Industrial

     9         1,288         —           7         1,251         —     

Consumer:

                 

Mortgage

     2         809         —           1         202         —     

Indirect Marine

     1         158         —           1         158         —     

Other Consumer

     1         66         —           1         68         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming

     26       $ 12,012       $  —           23       $ 11,991       $  —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing and nonperforming

     91       $ 54,656       $ 11         90       $ 63,459       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers a default of a restructured loan to occur when subsequent to the restructure, the borrower is 90 days past due or results in foreclosure and repossession of the applicable collateral.

During the three months ended March 31, 2013, the Company did not identify any restructured loans that went into default that had been restructured in the twelve-month period prior to the time of default. The Company identified one restructured loan, totaling approximately $453,000, that went into default in the first quarter of 2012 that had been restructured during the previous twelve months; this loan was a commercial real estate (owner occupied) loan for which the term had been extended at a market rate.

 

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Table of Contents

The following table shows, by class and modification type, TDRs that occurred during the three month periods ended March 31, 2013 and 2012 (dollars in thousands):

 

     Three months ended
March 31, 2013
     Three months ended
March 31, 2012
 
     No. of
Loans
     Recorded
investment
at period end
     No. of
Loans
     Recorded
investment at

period end
 

Modified to interest only, at a market rate

           

Commercial:

           

Raw Land and Lots

     —         $ —           3       $ 329   

Single Family Investment Real Estate

     1         210         2         180   

Consumer:

           

Mortgage

     1         608         1         202   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest only at market rate of interest

     2       $ 818         6       $ 711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Term modification, at a market rate

           

Commercial:

           

Commercial Real Estate - Owner Occupied

     —         $ —           2       $ 1,701   

Raw Land and Lots

     —           —           1         604   

Single Family Investment Real Estate

     1         630         —           —     

Commercial and Industrial

     1         56         1         104   

Consumer:

           

Mortgage

     1         166         1         273   

Other Consumer

     —           —           1         206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan term extended at a market rate

     3       $ 852         6       $ 2,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Term modification, below market rate

           

Commercial:

           

Commercial Real Estate - Owner Occupied

     1       $ 206         1       $ 10   

Commercial and Industrial

     1         10         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan term extended at a below market rate

     2       $ 216         1       $ 10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 1,886         13       $ 3,609   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the allowance for loan loss activity, by portfolio segment, balances for allowance for credit losses, and loans based on impairment methodology for the three months ended March 31, 2013. 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

   $ 24,821      $ 10,107      $ (12   $ 34,916   

Recoveries credited to allowance

     575        259        —          834   

Loans charged off

     (2,583     (802     —          (3,385

Provision charged to operations

     1,869        135        46        2,050   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 24,682      $ 9,699      $ 34      $ 34,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     4,428        1,267        —          5,695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     20,237        8,432        34        28,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     17        —          —          17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 24,682      $ 9,699      $ 34      $ 34,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

        

Ending balance: individually evaluated for impairment

   $ 124,237      $ 5,605      $ —        $ 129,842   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     1,982,884        856,802        —          2,839,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     3,078        941        —          4,019   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,110,199      $ 863,348      $  —        $ 2,973,547   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the year ended December 31, 2012. 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

   $ 27,891      $ 11,498      $ 81      $ 39,470   

Recoveries credited to allowance

     589        1,122        —          1,711   

Loans charged off

     (12,852     (5,613     —          (18,465

Provision charged to operations

     9,193        3,100        (93     12,200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 24,821      $ 10,107      $ (12   $ 34,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     5,404        1,395        —          6,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     19,295        8,712        (12     27,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     122        —          —          122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 24,821      $ 10,107      $ (12   $ 34,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

        

Ending balance: individually evaluated for impairment

     133,596        4,254        —          137,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     1,965,918        858,514        —          2,824,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     3,594        971        —          4,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,103,108      $ 863,739      $  —        $ 2,966,847   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the three months ended March 31, 2012. 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

   $ 27,891      $ 11,498      $ 81      $ 39,470   

Recoveries credited to allowance

     66        275        —          341   

Loans charged off

     (1,399     (1,708     —          (3,107

Provision charged to operations

     3,086        479        (65     3,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 29,644      $ 10,544      $ 16      $ 40,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     10,070        1,057        —          11,127   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     19,413        9,487        16        28,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     161        —          —          161   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 29,644      $ 10,544      $ 16      $ 40,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

        

Ending balance: individually evaluated for impairment

     215,948        6,701        —          222,649   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     1,763,200        847,769        —          2,610,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     7,071        1,069        —          8,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,986,219      $ 855,539      $  —        $ 2,841,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company uses the past due status and trends as the primary credit quality indicator for the consumer loan portfolio segment while a risk rating system is utilized for commercial loans. Commercial loans are graded on a scale of 1 through 9. A general description of the characteristics of the risk grades follows:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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.

 

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Table of Contents

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of March 31, 2013. The risk rating information has been updated through March 31, 2013 (dollars in thousands):

 

     1-3      4      5      6      7      8      Total  

Commercial Construction

   $ 9,629       $ 116,422       $ 14,529       $ 38,408       $ 23,237       $ —         $ 202,225   

Commercial Real Estate - Owner Occupied

     145,030         328,232         12,425         16,735         9,386         —           511,808   

Commercial Real Estate - Non-Owner Occupied

     188,303         416,735         51,904         30,431         17,663         —           705,036   

Raw Land and Lots

     3,847         112,707         9,685         34,977         38,157         186         199,559   

Single Family Investment Real Estate

     40,424         158,361         11,492         13,215         6,879         —           230,371   

Commercial and Industrial

     57,487         118,163         9,144         7,816         11,647         —           204,257   

Other Commercial

     18,935         20,905         10,204         2,923         842         56         53,865   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 463,655       $ 1,271,525       $ 119,383       $ 144,505       $ 107,811       $ 242       $ 2,107,121   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of December 31, 2012. The risk rating information has been updated through December 31, 2012 (dollars in thousands):

 

     1-3      4      5      6      7      8      Total  

Commercial Construction

   $ 5,504       $ 117,769       $ 14,637       $ 33,815       $ 30,619       $ —         $ 202,344   

Commercial Real Estate - Owner Occupied

     145,977         321,486         15,197         19,051         11,713         —           513,424   

Commercial Real Estate - Non-Owner Occupied

     161,343         417,412         48,840         34,646         20,519         —           682,760   

Raw Land and Lots

     3,943         114,053         13,260         29,194         42,148         186         202,784   

Single Family Investment Real Estate

     43,705         156,636         12,111         13,150         7,467         —           233,069   

Commercial and Industrial

     68,308         120,442         10,584         12,064         6,045         139         217,582   

Other Commercial

     14,189         18,260         10,710         3,489         844         59         47,551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 442,969       $ 1,266,058       $ 125,339       $ 145,409       $ 119,355       $ 384       $ 2,099,514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of March 31, 2013. The credit quality indicator information has been updated through March 31, 2013 (dollars in thousands):

 

     5      6      7      8      Total  

Commercial Real Estate - Owner Occupied

   $ —         $ —         $ 221       $ —         $ 221   

Raw Land and Lots

     —           —           2,555         —           2,555   

Single Family Investment Real Estate

     290         —           12         —           302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 290       $ —         $ 2,788       $ —         $ 3,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of December 31, 2012. The credit quality indicator information has been updated through December 31, 2012 (dollars in thousands):

 

     5      6      7      8      Total  

Commercial Real Estate - Owner Occupied

   $ —         $ —         $ 247       $ —         $ 247   

Raw Land and Lots

     —           —           2,942         —           2,942   

Single Family Investment Real Estate

     312         —           14         —           326   

Commercial and Industrial

     —           —           79         —           79   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 312       $ —         $ 3,282       $ —         $ 3,594   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans acquired are originally recorded at fair value, with certain loans being identified as impaired at the date of purchase. The fair values were determined based on the credit quality of the portfolio, expected future cash flows, and timing of those expected future cash flows. The contractually required payments, cash flows expected to be collected, and fair value as of the date of acquisition were $1,080,780, $1,072,726, and $1,052,358, respectively (dollars in thousands).

 

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Table of Contents

The following shows changes in the Company’s acquired loan portfolio and accretable yield for the following periods (dollars in thousands):

 

     For the Three Months Ended     For the Three Months Ended  
     March 31, 2013     March 31, 2012  
     Purchased Impaired     Purchased Nonimpaired     Purchased Impaired     Purchased Nonimpaired  
     Accretable
Yield
    Carrying
Amount of
Loans
    Accretable
Yield
    Carrying
Amount of
Loans
    Accretable
Yield
    Carrying
Amount  of

Loans
    Accretable
Yield
    Carrying
Amount of
Loans
 

Balance at beginning of period

   $ 3,147      $ 4,565      $ 5,350      $ 473,283      $ 5,140      $ 9,897      $ 9,010      $ 663,510   

Accretion

     —          —          (579     —          (18     —          (1,256     —     

Charge-offs

     (11     (96     —          (380     (3     (3     —          (541

Transfers to OREO

     —          (201     —          (207     —          (1,713     —          (2,766

Payments received, net

     —          (249     —          (27,818     —          (41     —          (88,665
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,136      $ 4,019      $ 4,771      $ 444,878      $ 5,119      $ 8,140      $ 7,754      $ 571,538   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

4. INTANGIBLE ASSETS

The Company’s intangible assets consist of core deposits, trademarks, and goodwill arising from previous acquisitions. The Company has determined that core deposit intangibles and trademarks have a finite life and amortizes them over their estimated useful life. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years, using an accelerated method. The trademark intangible acquired through previous acquisitions was amortized over three years using the straight-line method. In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other (“ASC 350”), the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. Based on the annual testing during the second quarter of each year and the absence of impairment indicators subsequent to the evaluation date, the Company has recorded no impairment charges to date for goodwill or intangible assets.

Information concerning intangible assets with a finite life is presented in the following table (dollars in thousands):

 

     Gross Carrying
Value
     Accumulated
Amortization
     Net Carrying
Value
 

March 31, 2013

        

Amortizable core deposit intangibles

   $ 46,615       $ 31,873       $ 14,742   

Trademark intangible

     1,200         1,200         —     

December 31, 2012

        

Amortizable core deposit intangibles

   $ 46,615       $ 30,837       $ 15,778   

Trademark intangible

     1,200         1,167         33   

March 31, 2012

        

Amortizable core deposit intangibles

   $ 46,615       $ 27,212       $ 19,403   

Trademark intangible

     1,200         867         333   

 

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Table of Contents

Amortization expense of core deposit intangibles for the three months ended March 31, 2013 and 2012, and for the year ended December 31, 2012 totaled $1.0 million, $1.3 million, and $4.9 million, respectively. Amortization expense of the trademark intangibles for the three months ended March 31, 2013 and 2012 totaled $33,000 and $100,000, respectively, and for the year ended December 31, 2012 was $400,000. As of March 31, 2013, the estimated remaining amortization expense of core deposit intangibles for the remainder of 2013 and for each of the five succeeding fiscal years is as follows for the years ending (dollars in thousands):

 

For the remaining nine months of 2013

   $ 2,761   

For the year ending December 31, 2014

     2,898   

For the year ending December 31, 2015

     2,463   

For the year ending December 31, 2016

     1,862   

For the year ending December 31, 2017

     1,437   

For the year ending December 31, 2018

     906   

Thereafter

     2,415   
  

 

 

 
   $ 14,742   
  

 

 

 

 

5. BORROWINGS

Short-term Borrowings

Total short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Also included in total short-term borrowings are federal funds purchased, which are secured overnight borrowings from other financial institutions, and short-term FHLB advances. Total short-term borrowings consist of the following as of March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31,     December 31,  
     2013     2012  

Securities sold under agreements to repurchase

   $ 72,047      $ 54,270   

Other short-term borrowings

     —          78,000   
  

 

 

   

 

 

 

Total short-term borrowings

   $ 72,047      $ 132,270   
  

 

 

   

 

 

 

Maximum month-end outstanding balance

   $ 112,164      $ 154,116   

Average outstanding balance during the period

     94,006        91,993   

Average interest rate during the period

     0.30     0.31

Average interest rate at end of period

     0.27     0.28

Other short-term borrowings:

    

Federal Funds purchased

     —          38,000   

FHLB

     —          40,000   

The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $125.0 million and $87.0 million at March 31, 2013 and December 31, 2012, respectively. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is considered to be in compliance with these covenants. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $816.9 million and $802.2 million at March 31, 2013 and December 31, 2012, respectively.

 

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Table of Contents

Long-term Borrowings

In connection with two bank acquisitions, prior to 2006, the Company issued trust preferred capital notes to fund the cash portion of those acquisitions, collectively totaling $58.5 million. The trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.

 

     Principal      Investment(1)      Spread to
3-Month LIBOR
    Rate     Maturity  

Trust Preferred Capital Note - Statutory Trust I

     22,500,000         696,000         2.75     3.03     6/17/2034   

Trust Preferred Capital Note - Statutory Trust II

     36,000,000         1,114,000         1.40     1.68     6/15/2036   
  

 

 

           
     58,500,000             

 

(1) reported as ‘Other Assets’ within the consolidated Balance Sheets

As part of a prior acquisition, the Company assumed subordinated debt with terms of LIBOR plus 1.45% and a maturity date of April 2016. At March 31, 2013, the carrying value of the subordinated debt, net of the purchase accounting discount, was $16.0 million.

On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original advances, which is included as a component of long-term borrowings in the Company’s consolidated balance sheet. In accordance with ASC 470-50, Modifications and Extinguishments, the Company will amortize this prepayment penalty over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings on the Company’s consolidated income statement. Amortization expense for the three months ended March 31, 2013 and 2012 was $426,000 and $0, respectively.

As of March 31, 2013, the advances from the FHLB consist of the following (dollars in thousands):

 

Long Term Type

   Spread to
3-Month LIBOR
    Interest
Rate
    Maturity
Date
     Conversion
Date
   Option
Frequency
   Advance
Amount
 

Adjustable Rate Credit

     0.44     0.72     8/23/2022       n/a    n/a    $ 55,000   

Adjustable Rate Credit

     0.45     0.74     11/23/2022       n/a    n/a      65,000   

Adjustable Rate Credit

     0.45     0.74     11/23/2022       n/a    n/a      10,000   

Adjustable Rate Credit

     0.45     0.74     11/23/2022       n/a    n/a      10,000   
               

 

 

 
                $ 140,000   
               

 

 

 

As of December 31, 2012, the advances from the FHLB consisted of the following (dollars in thousands):

 

Long Term Type

   Spread to
3-Month LIBOR
    Interest
Rate
    Maturity
Date
     Conversion
Date
   Option
Frequency
   Advance
Amount
 

Adjustable Rate Credit

     0.44     0.75     8/23/2022       n/a    n/a    $ 55,000   

Adjustable Rate Credit

     0.45     0.76     11/23/2022       n/a    n/a      65,000   

Adjustable Rate Credit

     0.45     0.76     11/23/2022       n/a    n/a      10,000   

Adjustable Rate Credit

     0.45     0.76     11/23/2022       n/a    n/a      10,000   
               

 

 

 
                $ 140,000   
               

 

 

 

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.0 billion for both periods as of March 31, 2013 and December 31, 2012, respectively.

 

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As of March 31, 2013, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):

 

     Subordinated
Debt
     FHLB
Advances
     Prepayment
Penalty
    Total Long-term
Borrowings
 

Remaining nine months in 2013

   $ —         $ —         $ (1,318   $ (1,318

2014

     —           —           (1,787     (1,787

2015

     —           —           (1,831     (1,831

2016

     15,992         —           (1,882     14,110   

2017

     —           —           (1,923     (1,923

2018

     —           —           (1,969     (1,969

Thereafter

     —           140,000         (7,918     132,082   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term borrowings

   $ 15,992       $ 140,000       $ (18,628   $ 137,364   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

6. COMMITMENTS AND CONTINGENCIES

Litigation Matters

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

Financial Instruments with off-balance sheet risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

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

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 payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

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.

Union Mortgage Group, Inc., a wholly owned subsidiary of Union First Market Bank, uses rate lock commitments during the origination process and for loans held for sale. These commitments to sell loans are designed to mitigate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

 

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The following table presents the balances of commitments and contingencies (dollars in thousands):

 

     March 31,      December 31,  
     2013      2012  

Commitments with off-balance sheet risk:

     

Commitments to extend credit (1)

   $ 888,856       $ 844,766   

Standby letters of credit

     53,690         45,536   

Mortgage loan rate lock commitments

     135,360         133,326   
  

 

 

    

 

 

 

Total commitments with off-balance sheet risk

   $ 1,077,906       $ 1,023,628   
  

 

 

    

 

 

 

Commitments with balance sheet risk:

     

Loans held for sale

   $ 127,106       $ 167,698   
  

 

 

    

 

 

 

Total other commitments

   $ 1,205,012       $ 1,191,326   
  

 

 

    

 

 

 

 

(1) Includes unfunded overdraft protection.

The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the periods ended March 31, 2013 and December 31, 2012, the aggregate amount of daily average required reserves was approximately $15.2 million and $14.2 million, respectively.

The Company has approximately $7.5 million in deposits in other financial institutions of which $4.2 million serves as collateral for the cash flow hedge further discussed in Note 7 “Derivatives”. The Dodd-Frank Act, which was signed into law on July 21, 2010, provided unlimited deposit insurance coverage for transaction accounts through December 31, 2012. The Company had approximately $2.5 million in deposits in other financial institutions that were uninsured at March 31, 2013.

For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify the interest rate characteristics of various balance sheet accounts. See Note 7 “Derivatives” in these “Notes to the Consolidated Financial Statements” for additional information.

 

7. DERIVATIVES

During the second quarter of 2010, the Company entered into an interest rate swap agreement (the “trust swap”) as part of the management of interest rate risk. The Company designated the trust swap as a cash flow hedge intended to protect against the variability of cash flows associated with the aforementioned Statutory Trust II preferred capital securities. The trust swap hedges the interest rate risk, wherein the Company receives interest of LIBOR from a counterparty and pays a fixed rate of 3.51% to the same counterparty calculated on a notional amount of $36.0 million. The term of the trust swap is six years with a fixed rate that started June 15, 2011. The trust swap was entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with ASC 815, Derivatives and Hedging, the trust swap is designated as a cash flow hedge, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. There was no hedge ineffectiveness for this trust swap. At March 31, 2013, the fair value of the trust swap agreement was an unrealized loss of $4.2 million, the amount the Company would have expected to pay if the contract was terminated. The below liability is recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

 

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Shown below is a summary of the derivative designated as a cash flow hedge at March 31, 2013 and December 31, 2012 (dollars in thousands):

 

            Notional                    Receive     Pay     Life  
     Positions      Amount      Asset      Liability      Rate     Rate     (Years)  

As of March 31, 2013

                  

Pay fixed - receive floating interest rate swaps

     1       $ 36,000       $ —         $ 4,203         0.28     3.51     4.21   
            Notional                    Receive     Pay     Life  
     Positions      Amount      Asset      Liability      Rate     Rate     (Years)  

As of December 31, 2012

                  

Pay fixed - receive floating interest rate swaps

     1       $ 36,000       $ —         $ 4,489         0.31     3.51     4.46   

During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values reported in other assets and other liabilities. Shown below is a summary regarding loan swap derivative activities at March 31, 2013 and December 31, 2012 (dollars in thousands):