XNAS:UBSH Union Bankshares Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended June 30, 2012

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 July 27, 2012 was 25,952,035

 

 

 


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-Q

INDEX

 

ITEM    PAGE  
PART I—FINANCIAL INFORMATION   

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets as of June 30, 2012, December 31, 2011 and June 30, 2011

     1   

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011

     2   

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011

     3   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011

     4   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     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

     61   
PART II—OTHER INFORMATION   

Item 1. Legal Proceedings

     61   

Item 1A. Risk Factors

     62   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     62   

Item 6. Exhibits

     62   

Signatures

     63   

 

ii


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     June 30,      December 31,      June 30,  
     2012      2011      2011  
     (Unaudited)      (Audited)      (Unaudited)  

ASSETS

        

Cash and cash equivalents:

        

Cash and due from banks

   $ 57,245       $ 69,786       $ 61,465   

Interest-bearing deposits in other banks

     14,975         26,556         1,583   

Money market investments

     1         155         27   

Federal funds sold

     163         162         159   
  

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

     72,384         96,659         63,234   
  

 

 

    

 

 

    

 

 

 

Securities available for sale, at fair value

     627,543         620,166         568,177   

Restricted stock, at cost

     19,291         20,661         22,883   

Loans held for sale

     100,066         74,823         50,420   

Loans, net of unearned income

     2,887,790         2,818,583         2,859,569   

Less allowance for loan losses

     40,985         39,470         39,631   
  

 

 

    

 

 

    

 

 

 

Net loans

     2,846,805         2,779,113         2,819,938   
  

 

 

    

 

 

    

 

 

 

Bank premises and equipment, net

     91,122         90,589         91,601   

Other real estate owned, net of valuation allowance

     35,802         32,263         36,935   

Core deposit intangibles, net

     18,178         20,714         23,658   

Goodwill

     59,400         59,400         59,400   

Other assets

     111,697         112,699         115,278   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,982,288       $ 3,907,087       $ 3,851,524   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Noninterest-bearing demand deposits

   $ 591,757       $ 534,535       $ 520,511   

Interest-bearing deposits:

        

NOW accounts

     425,188         412,605         378,511   

Money market accounts

     905,739         904,893         842,135   

Savings accounts

     198,728         179,157         175,709   

Time deposits of $100,000 and over

     534,682         511,614         505,993   

Other time deposits

     562,892         632,301         660,194   
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     2,627,229         2,640,570         2,562,542   
  

 

 

    

 

 

    

 

 

 

Total deposits

     3,218,986         3,175,105         3,083,053   
  

 

 

    

 

 

    

 

 

 

Securities sold under agreements to repurchase

     75,394         62,995         77,324   

Other short-term borrowings

     —           —           2,900   

Trust preferred capital notes

     60,310         60,310         60,310   

Long-term borrowings

     155,625         155,381         155,136   

Other liabilities

     38,537         31,657         29,685   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     3,548,852         3,485,448         3,408,408   
  

 

 

    

 

 

    

 

 

 

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 at June 30, 2011 and zero at December 31, 2011 and June 30, 2012.

     —           —           35,595   

Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 25,952,035 shares, 26,134,830 shares, and 26,043,633 shares, respectively.

     34,415         34,672         34,569   

Surplus

     185,733         187,493         186,177   

Retained earnings

     202,278         189,824         178,125   

Discount on preferred stock

     —           —           (1,048

Accumulated other comprehensive income

     11,010         9,650         9,698   
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     433,436         421,639         443,116   
  

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 3,982,288       $ 3,907,087       $ 3,851,524   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2012      2011     2012      2011  
     (Unaudited)      (Unaudited)     (Unaudited)      (Unaudited)  

Interest and dividend income:

          

Interest and fees on loans

   $ 40,299       $ 42,332      $ 80,907       $ 84,335   

Interest on deposits in other banks

     34         28        58         33   

Interest and dividends on securities:

          

Taxable

     3,182         3,627        6,636         7,257   

Nontaxable

     1,789         1,769        3,577         3,523   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     45,304         47,756        91,178         95,148   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Interest on deposits

     5,023         6,166        10,358         12,850   

Interest on Federal funds purchased

     1         —          1         7   

Interest on short-term borrowings

     47         82        91         166   

Interest on long-term borrowings

     2,147         1,885        4,294         3,702   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     7,217         8,133        14,744         16,725   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     38,087         39,623        76,434         78,423   

Provision for loan losses

     3,000         4,500        6,500         10,800   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     35,087         35,123        69,934         67,623   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest income:

          

Service charges on deposit accounts

     2,291         2,216        4,421         4,274   

Other service charges, commissions and fees

     3,627         3,351        7,037         6,275   

Gains (losses) on securities transactions, net

     10         —          5         (16

Gains on sales of mortgage loans

     7,315         4,303        12,611         9,271   

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

     195         (791     137         (1,090

Other operating income

     972         884        2,017         1,796   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     14,410         9,963        26,228         20,510   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest expenses:

          

Salaries and benefits

     20,418         17,580        39,925         35,234   

Occupancy expenses

     3,092         2,668        5,739         5,422   

Furniture and equipment expenses

     1,868         1,679        3,631         3,341   

Other operating expenses

     12,386         13,945        24,078         26,642   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expenses

     37,764         35,872        73,373         70,639   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     11,733         9,214        22,789         17,494   

Income tax expense

     3,313         2,394        6,446         4,480   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 8,420       $ 6,820      $ 16,343       $ 13,014   

Dividends paid and accumulated on preferred stock

     —           462        —           924   

Accretion of discount on preferred stock

     —           65        —           129   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income available to common shareholders

   $ 8,420       $ 6,293      $ 16,343       $ 11,961   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per common share, basic

   $ 0.32       $ 0.24      $ 0.63       $ 0.46   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per common share, diluted

   $ 0.32       $ 0.24      $ 0.63       $ 0.46   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2012     2011     2012     2011  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net income

   $ 8,420      $ 6,820      $ 16,343      $ 13,014   

Other comprehensive income:

        

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

     (487     (1,192     (290     (999

Unrealized gains on securities:

        

Unrealized holding gains arising during period (net of tax, $535 and $890 for three and six months ended 2012)

     992        4,059        1,653        7,116   

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

     (6     0        (3     10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     499        2,867        1,360        6,127   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 8,919      $ 9,687      $ 17,703      $ 19,141   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

- 3 -


Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(Dollars in thousands, except share amounts)

(Unaudited)

 

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

Balance—December 31, 2010

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

Net income—2011

            13,014             13,014   

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

                6,127         6,127   

Dividends on Common Stock ($.14 per share)

            (3,637          (3,637

Tax benefit from exercise of stock awards

          1               1   

Dividends on Preferred Stock

            (924          (924

Accretion of discount on Preferred Stock

            (129     129           —     

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

        13        147               160   

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

        8        47               55   

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

        16        (16            —     

Stock-based compensation expense

          235               235   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance—June 30, 2011

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance—December 31, 2011

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

Net income—2012

            16,343             16,343   

Other comprehensive income (net of tax, $888)

                1,360         1,360   

Dividends on Common Stock ($.15 per share)

            (3,632          (3,632

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

        (293     (2,570            (2,863

Issuance of common stock under Dividend Reinvestment Plan (19,028 shares)

        25        232        (257          —     

Vesting of restricted stock under Stock Incentive Plan (9,647 shares)

        13        (13            —     

Net settle for taxes on Restricted Stock Awards (1,818 shares)

        (2     (24            (26

Stock-based compensation expense

          615               615   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance—June 30, 2012

   $ —         $ 34,415      $ 185,733      $ 202,278      $ —        $ 11,010       $ 433,436   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(Dollars in thousands)

 

     2012     2011  

Operating activities:

    

Net income

   $ 16,343      $ 13,014   

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

    

Depreciation of bank premises and equipment

     3,412        3,312   

Amortization, net

     4,835        3,182   

Provision for loan losses

     6,500        10,800   

(Gains) losses on the sale of investment securities

     (5     16   

(Increase) decrease in loans held for sale, net

     (25,243     23,554   

(Gain) loss on sales of other real estate owned and bank premises, net

     (137     1,090   

Stock-based compensation expense

     615        235   

Decrease in other assets

     2,304        3,852   

Increase (decrease) in other liabilities

     6,590        (1,249
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     15,214        57,806   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of securities available for sale

     (95,191     (72,737

Proceeds from sales of securities available for sale

     3,583        —     

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

     83,656        60,904   

Net (increase) decrease in loans

     (84,671     30,469   

Net increase in bank premises and equipment

     (3,602     (2,707

Proceeds from sales of other real estate owned

     7,077        7,271   

Improvements to other real estate owned

     (343     —     

Cash paid in bank acquisition

     —          (26,437

Cash acquired in bank and branch acquisitions

     —          230   
  

 

 

   

 

 

 

Net cash and cash equivalents used in investing activities

     (89,492     (3,007
  

 

 

   

 

 

 

Financing activities:

    

Net increase in noninterest-bearing deposits

     57,222        31,278   

Net increase (decrease) in interest-bearing deposits

     (13,341     (67,153

Net increase (decrease) in short-term borrowings

     12,399        (12,743

Net increase in long-term borrowings

     244        244   

Cash dividends paid—common stock

     (3,632     (3,637

Cash dividends paid—preferred stock

     —          (924

Repurchase of common stock

     (2,863     —     

Taxes paid related to net share settlement of equity awards

     (26     1   

Issuance of common stock

     —          215   
  

 

 

   

 

 

 

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

     50,003        (52,719
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (24,275     2,081   

Cash and cash equivalents at beginning of the period

     96,659        61,153   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 72,384      $ 63,234   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 15,699      $ 16,928   

Income taxes

     2,914        2,464   

Supplemental schedule of noncash investing and financing activities

    

Unrealized gain on securities available for sale

   $ 2,538      $ 10,052   

Changes in fair value of interest rate swap

     (290     (999

Transfers from loans to other real estate owned

     10,479        8,546   

Transactions related to bank and branch acquisitions

    

Increase in assets and liabilities:

    

Loans

   $ —        $ 70,817   

Other assets

     —          4,324   

Noninterest bearing deposits

     —          4,366   

Interest bearing deposits

     —          44,503   

Other liabilities

     —          65   

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)

June 30, 2012

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 2011 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

2. BUSINESS COMBINATIONS

Harrisonburg Branch Acquisition

On May 20, 2011, the Company completed the purchase of the former NewBridge Bank branch in Harrisonburg, Virginia, assets and liabilities related to the branch business, and a potential branch site in Waynesboro, Virginia. Under the parties’ agreement, the Company purchased loans of $72.5 million, assumed deposit liabilities of $48.9 million, and purchased the related fixed assets of the branch. The Company operates the acquired bank branch under the name Union First Market Bank (the “Harrisonburg branch”). The acquisition, which allowed the Company to establish immediately a meaningful presence in a new banking market, is consistent with the Company’s secondary growth strategy of expanding operations along the Interstate Route 81 corridor. The Company’s 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 immediately upon completion of the acquisition. The recorded goodwill was allocated to the community banking segment of the Company and is deductible for tax purposes.

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

 

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Table of Contents

In the second quarter, interest income of approximately $692,000 was recorded on loans acquired in the Harrisonburg branch acquisition. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at June 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

June 30, 2012:

  

Outstanding principal balance

   $ 50,869   

Carrying amount

   $ 50,221   

December 31, 2011:

  

Outstanding principal balance

   $ 54,953   

Carrying amount

   $ 53,359   

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 are not considered to be material to the Company’s consolidated assets.

First Market Bank Acquisition In February 2010, the Company completed the acquisition of First Market Bank (“FMB”). Interest income on acquired loans for the second quarter of 2012 was approximately $6.9 million. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at June 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

June 30, 2012:

  

Outstanding principal balance

   $ 498,927   

Carrying amount

   $ 489,002   

December 31, 2011:

  

Outstanding principal balance

   $ 632,602   

Carrying amount

   $ 620,048   

Loans obtained in the acquisition of FMB 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 are not considered to be material to the Company’s consolidated assets.

During the second quarter of 2012, the Company compared the expected prepayments at acquisition to actual payments and anticipated future payments on four purchased performing loan pools. The slower prepayment speed noted on real estate, commercial real estate, land, 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 and had an immaterial impact on the financial statements.

3. STOCK-BASED COMPENSATION

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) and the 2003 Stock Incentive Plan (the “2003 Plan”) provide for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The 2011 Plan 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. Approximately 23,000 shares remain available for grant under the 2003 Plan, which expires in 2013. 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. A stock option’s maximum term is ten years from the date of grant and vests in equal annual installments of 20% over a five year vesting schedule. Collectively, there remain approximately 743,000 shares available as of June 30, 2012 for issuance under the 2011 and 2003 Plans.

 

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For the three month and six month periods ended June 30, 2012 and 2011, the Company recognized stock-based compensation expense of approximately $376,000 and $615,000, and $145,000 and $235,000, respectively. These expenses were less than $0.01 per common share for both periods ended June 30, 2011, and $0.01 and $0.02 for the three and six month periods, respectively, ended June 30, 2012.

Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2012:

 

     Number of Stock
Options
    Weighted
Average
Exercise Price
 

Options outstanding, December 31, 2011

     422,750      $  17.70   

Granted

     131,657        14.40   

Forfeited

     (18,429     14.52   

Expired

     (10,905     21.10   
  

 

 

   

Options outstanding, June 30, 2012

     525,073        16.91   
  

 

 

   

Options exercisable, June 30, 2012

     229,136        20.59   
  

 

 

   

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table for the six months ended June 30, 2012 and 2011:

 

     Six Months Ended June 30,  
     2012     2011  

Dividend yield (1)

     2.47     2.36

Expected life in years (2)

     7.0        7.0   

Expected volatility (3)

     41.53     41.02

Risk-free interest rate (4)

     1.24     2.71

Weighted average fair value per option granted

   $ 4.76      $ 4.31   

 

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

The following table summarizes information concerning stock options issued to the Company’s employees that are vested or are expected to vest and stock options exercisable as of June 30, 2012:

 

     Stock Options
Vested or
Expected to Vest
     Exercisable  

Stock options

     496,967         229,136   

Weighted average remaining contractual life in years

     6.64         4.00   

Weighted average exercise price on shares above water

   $ 13.22       $ 12.17   

Aggregate intrinsic value

   $  294,614       $ 66,268   

 

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There were no stock options exercised during the second quarter of 2012; the total intrinsic value for stock options exercised during both the three and six months ended June 30, 2012 was $0. The fair value of stock options vested during the six months ended June 30, 2012 was approximately $275,000.

Nonvested Stock

The 2003 and the 2011 Stock Incentive Plans permit the granting of nonvested stock but are limited to one-third of the aggregate number of total awards granted. This equity component of compensation is divided between restricted (time-based) stock grants and performance-based stock grants. Generally, the restricted stock vests 50% 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 based on the performance of the Company’s stock price. The value of the nonvested stock awards was calculated by multiplying the fair market value of the Company’s common stock on grant date by the number of shares awarded. Employees have the right to vote the shares and to receive cash or stock dividends (restricted stock), if any, except for the nonvested stock under the performance-based component (performance stock).

The following table summarizes the nonvested stock activity for the six months ended June 30, 2012:

 

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

Balance, December 31, 2011

     140,557        6,000      $  12.62   

Granted

     70,061        —          14.21   

Vested

     (7,904     —          15.81   

Forfeited

     (12,904     (1,500     13.12   
  

 

 

   

 

 

   

Balance, June 30, 2012

     189,810        4,500        12.74   
  

 

 

   

 

 

   

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of June 30, 2012 that will be recognized in future periods is as follows (dollars in thousands):

 

     Stock Options      Restricted
Stock
     Total  

For the remaining six months of 2012

   $  180       $  460       $ 640   

For year ending December 31, 2013

     368         687         1,055   

For year ending December 31, 2014

     361         359         720   

For year ending December 31, 2015

     269         91         360   

For year ending December 31, 2016

     155         6         161   

For year ending December 31, 2017

     25         —           25   
  

 

 

    

 

 

    

 

 

 

Total

   $  1,358       $  1,603       $  2,961   
  

 

 

    

 

 

    

 

 

 

 

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4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at June 30, 2012 and December 31, 2011 (dollars in thousands):

 

     June 30,      December 31,  
     2012      2011  

Commercial:

     

Commercial Construction

   $ 190,141       $ 185,359   

Commercial Real Estate—Owner Occupied

     478,804         452,407   

Commercial Real Estate—Non-Owner Occupied

     694,980         655,083   

Raw Land and Lots

     208,460         214,284   

Single Family Investment Real Estate

     210,151         192,437   

Commercial and Industrial

     210,517         212,268   

Other Commercial

     42,494         44,403   

Consumer:

     

Mortgage

     221,063         219,646   

Consumer Construction

     25,778         20,757   

Indirect Auto

     158,813         162,708   

Indirect Marine

     33,729         39,819   

HELOCs

     280,030         277,101   

Credit Card

     19,717         19,006   

Other Consumer

     113,113         123,305   
  

 

 

    

 

 

 

Total

   $ 2,887,790       $ 2,818,583   
  

 

 

    

 

 

 

The following table shows the aging of the Company’s loan portfolio, by class, at June 30, 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

   $ —         $ —         $ —         $ —         $ 9,763       $ 180,378       $ 190,141   

Commercial Real Estate—Owner Occupied

     3,151         50         200         1,234         5,194         468,975         478,804   

Commercial Real Estate—Non-Owner Occupied

     895         1,721         636         —           517         691,211         694,980   

Raw Land and Lots

     57         —           153         3,753         12,139         192,358         208,460   

Single Family Investment Real Estate

     1,059         735         673         372         3,476         203,836         210,151   

Commercial and Industrial

     510         254         140         382         4,715         204,516         210,517   

Other Commercial

     2         262         522         —           231         41,477         42,494   

Consumer:

                    

Mortgage

     4,575         2,078         4,497         —           1,171         208,742         221,063   

Consumer Construction

     408         —           —           —           201         25,169         25,778   

Indirect Auto

     1,905         236         251         27         3         156,391         158,813   

Indirect Marine

     200         191         594         —           26         32,718         33,729   

HELOCs

     1,528         667         1,788         875         900         274,272         280,030   

Credit Card

     129         114         182         —           —           19,292         19,717   

Other Consumer

     1,402         316         1,132         132         835         109,296         113,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,821       $ 6,624       $ 10,768       $ 6,775       $ 39,171       $ 2,808,631       $ 2,887,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

   $ —         $ —         $ 490       $ —         $ 10,276       $ 174,593       $ 185,359   

Commercial Real Estate—Owner Occupied

     520         —           2,482         1,292         5,962         442,151         452,407   

Commercial Real Estate—Non-Owner Occupied

     190         64         2,887         1,133         2,031         648,778         655,083   

Raw Land and Lots

     94         1,124         —           5,623         13,322         194,121         214,284   

Single Family Investment Real Estate

     779         70         3,637         388         5,048         182,515         192,437   

Commercial and Industrial

     601         185         3,369         392         5,297         202,424         212,268   

Other Commercial

     —           25         —           —           238         44,140         44,403   

Consumer:

                    

Mortgage

     6,748         412         3,804         —           240         208,442         219,646   

Consumer Construction

     —           —           —           —           207         20,550         20,757   

Indirect Auto

     2,653         416         443         40         7         159,149         162,708   

Indirect Marine

     189         795         —           —           544         38,291         39,819   

HELOCs

     1,678         547         820         865         885         272,306         277,101   

Credit Card

     245         184         323         —           —           18,254         19,006   

Other Consumer

     1,421         443         1,657         164         777         118,843         123,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,118       $ 4,265       $ 19,912       $ 9,897       $ 44,834       $ 2,724,557       $ 2,818,583   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans totaled $39.2 million and $54.3 million at June 30, 2012 and 2011, respectively. There were no nonaccrual loans excluded from impaired loan disclosure in 2012 or 2011. Loans past due 90 days or more and accruing interest totaled $10.8 million and $9.1 million at June 30, 2012 and 2011, respectively.

The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status through June 30, 2012 (dollars in thousands):

 

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

Commercial:

           

Commercial Real Estate—Owner Occupied

   $ —         $ 1,167       $ 67       $ 1,234   

Raw Land and Lots

     —           91         3,662         3,753   

Single Family Investment Real Estate

     —           —           372         372   

Commercial and Industrial

     —           382         —           382   

Consumer:

           

Indirect Auto

     3         8         16         27   

HELOCs

     —           55         820         875   

Other Consumer

     —           46         86         132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3       $ 1,749       $ 5,023       $ 6,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011 (dollars in thousands):

 

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Table of Contents

 

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

Commercial:

           

Commercial Real Estate—Owner Occupied

   $ 206       $ 50       $ 1,036       $ 1,292   

Commercial Real Estate—Non-Owner Occupied

     —           1,133         —           1,133   

Raw Land and Lots

     —           —           5,623         5,623   

Single Family Investment Real Estate

     —           —           388         388   

Commercial and Industrial

     —           302         90         392   

Consumer:

           

Indirect Auto

     6         11         23         40   

HELOCs

     19         32         814         865   

Other Consumer

     —           77         87         164   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 231       $ 1,605       $ 8,061       $ 9,897   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At June 30, 2012, the Company had $201.3 million in loans considered to be impaired of which $11.9 million were collectively evaluated for impairment and $189.4 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at June 30, 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

   $ 31,097       $ 31,142       $ —         $ 31,278       $ 831   

Commercial Real Estate—Owner Occupied

     14,145         14,963         —           15,034         347   

Commercial Real Estate—Non-Owner Occupied

     29,659         29,730         —           29,977         813   

Raw Land and Lots

     39,400         39,461         —           40,166         710   

Single Family Investment Real Estate

     4,601         4,611         —           5,198         158   

Commercial and Industrial

     5,920         5,964         —           6,189         119   

Other Commercial

     1,046         1,046         —           1,194         34   

Consumer:

              

Mortgage

     2,600         2,600         —           3,199         57   

Indirect Auto

     27         27         —           30         1   

HELOCs

     1,425         1,524         —           1,526         6   

Other Consumer

     904         936         —           948         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans without a specific allowance

   $ 130,824       $ 132,004       $ —         $ 134,739       $ 3,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance

              

Commercial:

              

Commercial Construction

   $ 13,399       $ 13,834       $ 1,378       $ 13,873       $ 108   

Commercial Real Estate—Owner Occupied

     6,641         6,807         1,861         6,855         57   

Commercial Real Estate—Non-Owner Occupied

     8,505         8,536         387         8,553         227   

Raw Land and Lots

     11,542         11,750         2,457         11,834         27   

Single Family Investment Real Estate

     5,250         5,552         1,174         5,617         55   

Commercial and Industrial

     11,455         12,104         3,393         12,068         187   

Consumer:

              

Mortgage

     473         473         59         473         —     

Consumer Construction

     201         225         80         226         —     

HELOCs

     754         811         550         1,017         —     

Other Consumer

     355         355         161         355         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with a specific allowance

   $ 58,575       $ 60,447       $ 11,500       $ 60,871       $ 661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

   $ 189,399       $ 192,451       $ 11,500       $ 195,610       $ 3,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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At December 31, 2011, the Company had $255.1 million in loans considered to be impaired of which $12.3 million were collectively evaluated for impairment and $242.8 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 31, 2011 (dollars in thousands):

 

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

Loans without a specific allowance

              

Commercial:

              

Commercial Construction

   $ 40,475       $ 40,524       $ —         $ 37,835       $ 1,690   

Commercial Real Estate—Owner Occupied

     20,487         21,010         —           23,364         1,183   

Commercial Real Estate—Non-Owner Occupied

     37,799         37,855         —           38,084         2,002   

Raw Land and Lots

     46,791         46,890         —           47,808         1,306   

Single Family Investment Real Estate

     11,285         11,349         —           11,684         637   

Commercial and Industrial

     9,467         9,959         —           10,216         423   

Other Commercial

     1,257         1,257         —           1,269         75   

Consumer:

              

Mortgage

     1,202         1,202         —           1,225         70   

HELOCs

     349         349         —           350         11   

Other Consumer

     —           —           —           1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans without a specific allowance

   $ 169,112       $ 170,395       $ —         $ 171,836       $ 7,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance

              

Commercial:

              

Commercial Construction

   $ 12,927       $ 13,297       $ 583       $ 13,811       $ 343   

Commercial Real Estate—Owner Occupied

     8,679         8,788         1,961         8,681         267   

Commercial Real Estate—Non-Owner Occupied

     8,858         8,879         1,069         9,010         322   

Raw Land and Lots

     22,188         22,429         991         24,553         973   

Single Family Investment Real Estate

     9,020         9,312         1,140         9,571         321   

Commercial and Industrial

     8,980         9,133         3,320         10,448         369   

Other Commercial

     150         150         3         153         10   

Consumer:

              

Mortgage

     535         535         11         536         32   

Consumer Construction

     207         226         86         228         —     

Indirect Auto

     71         71         —           93         5   

Indirect Marine

     544         547         263         548         9   

HELOCs

     785         825         587         1,034         —     

Other Consumer

     777         804         284         815         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with a specific allowance

   $ 73,721       $ 74,996       $ 10,298       $ 79,481       $ 2,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

   $ 242,833       $ 245,391       $ 10,298       $ 251,317       $ 10,053   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $80.2 million and $112.6 million of loans considered to be troubled debt restructurings as of June 30, 2012 and December 31, 2011, 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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Table of Contents

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 June 30, 2012 and December 31, 2011 (dollars in thousands):

 

     June 30, 2012      December 31, 2011  
     No. of
Loans
     Recorded
Investment
     Outstanding
Commitment
     No. of
Loans
     Recorded
Investment
     Outstanding
Commitment
 

Performing

                 

Commercial:

                 

Commercial Construction

     9       $ 12,566       $ 2,247         14       $ 21,461       $ 3,185   

Commercial Real Estate—Owner Occupied

     11         5,069         —           11         7,996         180   

Commercial Real Estate—Non-Owner Occupied

     10         16,303         —           16         21,777         13   

Raw Land and Lots

     15         27,477         251         15         32,450         1   

Single Family Investment Real Estate

     7         1,101         —           12         8,525         —     

Commercial and Industrial

     9         2,605         —           12         4,991         204   

Other Commercial

     2         302         —           4         864         —     

Consumer:

                 

Mortgage

     7         1,699         —           1         507         —     

Indirect Marine

     1         283         —           —           —           —     

Other Consumer

     2         85         —           2         263         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing

     73       $ 67,490       $ 2,498         87       $ 98,834       $ 3,583   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming

                 

Commercial:

                 

Commercial Construction

     4       $ 5,242       $ —           5       $ 5,353       $ —     

Commercial Real Estate—Owner Occupied

     3         1,182         —           —           —           —     

Commercial Real Estate—Non-Owner Occupied

     1         212         —           2         292         —     

Raw Land and Lots

     3         3,861         —           6         4,342         —     

Single Family Investment Real Estate

     2         443         —           4         1,342         —     

Commercial and Industrial

     7         1,310         —           3         1,134         —     

Consumer:

                 

Mortgage

     1         202         —           5         1,076         —     

Indirect Marine

     1         26         —           —           —           —     

Other Consumer

     1         202         —           1         265         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming

     23       $ 12,680       $ —           26       $ 13,804       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing and nonperforming

     96       $ 80,170       $ 2,498         113       $ 112,638       $ 3,583   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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; the Company identified two restructured loans, totaling approximately $928,000, that went into default in the second quarter that had been restructured during the previous twelve months. These loans included a commercial real estate (owner occupied) loan, totaling approximately $902,000, and an indirect marine loan, totaling approximately $26,000; both of these loans had a term extension at a market rate.

 

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The following table shows, by class and modification type, TDRs that occurred during the three month and six month periods ended June 30, 2012 (dollars in thousands):

 

     Three months ended
June 30, 2012
     Six months ended
June 30, 2012
 
     No. of
Loans
     Recorded
investment at
period end
     No. of
Loans
     Recorded
investment at
period end
 

Modified to interest only

           

Commercial:

           

Raw Land and Lots

     —         $ —           3       $ 327   

Single Family Investment Real Estate

     —           —           2         179   

Consumer:

           

Indirect Marine

     1         283         1         283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest only at market rate of interest

     1       $ 283         6       $ 789   
  

 

 

    

 

 

    

 

 

    

 

 

 

Term modification, at a market rate

           

Commercial:

           

Commercial Real Estate—Owner Occupied

     1       $ 132         3       $ 1,822   

Raw Land and Lots

     —           —           1         604   

Commercial and Industrial

     5         329         6         430   

Consumer:

           

Mortgage

     1         202         2         474   

Other Consumer

     2         85         3         287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan term extended at a market rate

     9       $ 748         15       $ 3,617   
  

 

 

    

 

 

    

 

 

    

 

 

 

Term modification, below market rate

           

Commercial:

           

Commercial Real Estate—Owner Occupied

     3       $ 649         4       $ 658   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan term extended at a below market rate

     3       $ 649         4       $ 658   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate modification, below market rate

           

Commercial:

           

Commercial Real Estate—Non-Owner Occupied

     2       $ 2,390         2       $ 2,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest only at below market rate of interest

     2       $ 2,390         2       $ 2,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15       $ 4,070         27       $ 7,454   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 six months ended June 30, 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

     127        564        —           691   

Loans charged off

     (2,950     (2,726     —           (5,676

Provision charged to operations

     5,485        988        27         6,500   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 30,553      $ 10,324      $ 108       $ 40,985   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

     10,429        850        —           11,279   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

     19,903        9,474        108         29,485   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     221        —          —           221   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 30,553      $ 10,324      $ 108       $ 40,985   
  

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

         

Ending balance

   $ 2,035,547      $ 852,243      $ —         $ 2,887,790   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

     176,919        5,705        —           182,624   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

     1,852,887        845,504        —           2,698,391   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     5,741        1,034        —           6,775   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 2,035,547      $ 852,243      $ —         $ 2,887,790   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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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, 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

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

Recoveries credited to allowance

     924        1,206        —          2,130   

Loans charged off

     (10,891     (6,975     —          (17,866

Provision charged to operations

     9,603        7,078        119        16,800   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     8,982        1,231        —          10,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     18,824        10,267        81        29,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     85        —          —          85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

        

Ending balance

   $ 1,956,241      $ 862,342      $ —        $ 2,818,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

     229,535        3,401        —          232,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

     1,717,878        857,872        —          2,575,750   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

     8,828        1,069        —          9,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,956,241      $ 862,342      $ —        $ 2,818,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 risk;

 

   

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;

 

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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.

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of June 30, 2012. The risk rating information has been updated through June 30, 2012 (dollars in thousands):

 

     1-3      4      5      6      7      8      Total  

Commercial Construction

   $ 15,558       $ 90,320       $ 12,194       $ 34,210       $ 37,749       $ 110       $ 190,141   

Commercial Real Estate—Owner Occupied

     104,138         317,703         20,366         17,309         18,054         —           477,570   

Commercial Real Estate—Non-Owner Occupied

     156,028         416,649         57,512         32,437         32,354         —           694,980   

Raw Land and Lots

     2,240         108,866         11,306         38,740         43,049         506         204,707   

Single Family Investment Real Estate

     33,761         139,779         12,154         13,322         10,024         739         209,779   

Commercial and Industrial

     41,186         122,147         19,607         8,729         18,302         164         210,135   

Other Commercial

     5,904         17,903         11,516         5,271         1,839         61         42,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 358,815       $ 1,213,367       $ 144,655       $ 150,018       $ 161,371       $ 1,580       $ 2,029,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011. The risk rating information has been updated through December 31, 2011 (dollars in thousands):

 

     1-3      4      5      6      7      8      Total  

Commercial Construction

   $ 10,099       $ 84,299       $ 6,079       $ 36,650       $ 48,232       $ —         $ 185,359   

Commercial Real Estate—Owner Occupied

     88,430         296,825         17,604         21,158         26,389         709         451,115   

Commercial Real Estate—Non-Owner Occupied

     149,346         367,244         58,844         38,662         39,854         —           653,950   

Raw Land and Lots

     4,368         99,374         18,767         33,673         52,204         275         208,661   

Single Family Investment Real Estate

     32,741         116,570         11,928         14,358         16,452         —           192,049   

Commercial and Industrial

     35,120         123,872         22,079         11,559         19,066         180         211,876   

Other Commercial

     6,364         15,918         16,739         3,807         1,512         63         44,403   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 326,468       $ 1,104,102       $ 152,040       $ 159,867       $ 203,709       $ 1,227       $ 1,947,413   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of June 30, 2012. The credit quality indicator information has been updated through June 30, 2012 (dollars in thousands):

 

     6      7      8      Total  

Commercial Real Estate—Owner Occupied

   $ —         $ 1,234       $ —         $ 1,234   

Raw Land and Lots

     —           3,753         —           3,753   

Single Family Investment Real Estate

     355         17         —           372   

Commercial and Industrial

     —           88         294         382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 355       $ 5,092       $ 294       $ 5,741   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of December 31, 2011. The credit quality indicator information has been updated through December 31, 2011 (dollars in thousands):

 

     6      7      8      Total  

Commercial Real Estate—Owner Occupied

   $ —         $ 1,292       $ —         $ 1,292   

Commercial Real Estate—Non-Owner Occupied

     —           1,133         —           1,133   

Raw Land and Lots

     —           5,623         —           5,623   

Single Family Investment Real Estate

     369         19         —           388   

Commercial and Industrial

     —           91         301         392   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 369       $ 8,158       $ 301       $ 8,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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).

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

 

     For the Six Months Ended     For the Twelve Months Ended  
     June 30, 2012     December 31, 2011  
     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

   $ 5,140      $ 9,897      $ 9,010      $ 663,510      $ 8,169      $ 13,999      $ 13,589      $ 799,898   

Additions

     —          —          —          —          122        276        1,593        70,524   

Accretion

     (38     —          (2,166     —          (66     —          (6,172     —     

Charged off

     (1,373     (212     —          (1,032     (3,073     (1,329     —          (5,988

Transfers to OREO

     —          (2,371     —          (2,766     (12     (174     —          (2,341

Payments received, net

     —          (539     —          (127,264     —          (2,875     —          (198,583
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,729      $ 6,775      $ 6,844      $ 532,448      $ 5,140      $ 9,897      $ 9,010      $ 663,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

5. EARNINGS PER SHARE

Basic earnings per common share (“EPS”) was computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards. Amortization of discount and dividends on the preferred stock is treated as a reduction of the numerator in calculating basic and diluted EPS. There were approximately 591,124 and 380,657 shares underlying anti-dilutive stock awards as of June 30, 2012 and 2011, respectively.

 

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Table of Contents

The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2012 and 2011 (dollars and shares in thousands, except per share amounts):

 

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

For the Three Months ended June 30, 2012

        

Net income, basic

   $ 8,420         25,868       $ 0.32   

Add: potentially dilutive common shares—stock awards

     —           20         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 8,420         25,888       $ 0.32   
  

 

 

    

 

 

    

 

 

 

For the Three Months ended June 30, 2011

        

Net income

   $ 6,820         25,970       $ 0.26   

Less: dividends paid and accumulated on preferred stock

     462         —           0.02   

Less: accretion of discount on preferred stock

     65         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 6,293         25,970       $ 0.24   

Add: potentially dilutive common shares—stock awards

     —           22         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 6,293         25,992       $ 0.24   
  

 

 

    

 

 

    

 

 

 

For the Six Months ended June 30, 2012

        

Net income, basic

   $ 16,343         25,900       $ 0.63   

Add: potentially dilutive common shares—stock awards

     —           24         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 16,343         25,924       $ 0.63   
  

 

 

    

 

 

    

 

 

 

For the Six Months ended June 30, 2011

        

Net income

   $ 13,014         25,964       $ 0.50   

Less: dividends paid and accumulated on preferred stock

     924         —           0.04   

Less: accretion of discount on preferred stock

     129         —           —     
  

 

 

    

 

 

    

 

 

 

Basic

   $ 11,961         25,964       $ 0.46   

Add: potentially dilutive common shares—stock awards

     —           23         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 11,961         25,987       $ 0.46   
  

 

 

    

 

 

    

 

 

 

6. TRUST PREFERRED CAPITAL NOTES

Statutory Trust I, a wholly owned subsidiary of the Company, issued a Trust Preferred Capital Note of $22.5 million through a pooled underwriting for an acquisition in 2004. The securities have an indexed London Interbank Offer Rate (“LIBOR”) floating rate (three month LIBOR rate plus 2.75%) which adjusts and is payable quarterly. The interest rate at June 30, 2012 was 3.21%. The capital securities were redeemable at par beginning on June 17, 2009 and quarterly thereafter until the securities mature on June 17, 2034. The principal asset of Statutory Trust I is $23.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital notes. Of the above amount, $696,000 is reflected as the Company’s investment in Statutory Trust I and reported as “Other assets” within the consolidated balance sheet.

Statutory Trust II, a wholly owned subsidiary of the Company, issued a Trust Preferred Capital Note of $36.0 million through a pooled underwriting for an acquisition in 2006. The securities have a LIBOR-indexed floating rate (three month LIBOR plus 1.40%) that adjusts and is payable quarterly. The interest rate at June 30, 2012 was 1.86%. The capital securities were redeemable at par on June 15, 2011 and quarterly thereafter until the securities mature on June 15, 2036. The principal asset of Statutory Trust II is $37.1 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital notes. Of this amount, $1.1 million is reflected as the Company’s investment in Statutory Trust II reported as “Other assets” within the consolidated balance sheet.

 

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Table of Contents

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 business for 2012 includes one subsidiary bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 94 retail locations in Virginia. The mortgage segment provides a variety of mortgage loan products principally in Virginia, North Carolina, South Carolina, Maryland and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which subject the Company to only de minimus risk.

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

Both of the Company’s reportable segments are service based. The mortgage business is a fee-based business while the Bank is driven principally by net interest income. The bank segment provides a distribution and referral network through its customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank segment, 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% basis points, floor of 2%. 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.

Information about reportable segments and reconciliation of such information to the consolidated financial statements for three and six months ended June 30, 2012 and 2011 was as follows (dollars in thousands):

 

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Table of Contents

 

<
     Community
Bank
     Mortgage      Eliminations     Consolidated  

Three Months Ended June 30, 2012

          

Net interest income

   $ 37,792       $ 295       $ —        $ 38,087   

Provision for loan losses

     3,000         —           —          3,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     34,792         295         —          35,087   

Noninterest income

     7,212         7,315         (117     14,410   

Noninterest expenses

     31,061         6,820         (117     37,764   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     10,943         790         —          11,733   

Income tax expense

     2,993         320         —          3,313   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 7,950       $ 470       $ —        $ 8,420   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,967,690       $ 110,374       $ (95,776   $ 3,982,288   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended June 30, 2011

          

Net interest income

   $ 39,341       $ 282       $