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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 March 31, 2011

OR

 

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

Commission File Number: 0-20293

 

 

UNION FIRST MARKET

BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

VIRGINIA   54-1598552

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

111 Virginia Street

Suite 200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

(804) 633-5031

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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, 2011 was 26,033,957

 

 

 


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, 2011, December 31, 2010 and March 31, 2010      1   
   Condensed Consolidated Statements of Income for the three months ended March 31, 2011 and 2010      2   
   Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011 and 2010      3   
   Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010      4   
   Notes to Condensed Consolidated Financial Statements      5   
   Report of Independent Registered Public Accounting Firm      27   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      43   

Item 4.

   Controls and Procedures      44   
   PART II - OTHER INFORMATION   

Item 1.

   Legal Proceedings      45   

Item 1A.

   Risk Factors      45   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      45   

Item 6.

   Exhibits      45   
   Signatures      46   

 

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, except share and per share amounts)

 

     March 31,
2011
    December 31,
2010
    March 31,
2010
 
     (Unaudited)     (Audited)     (Unaudited)  
ASSETS       

Cash and cash equivalents:

      

Cash and due from banks

   $ 54,403      $ 58,951      $ 54,984   

Interest-bearing deposits in other banks

     30,050        1,449        62,918   

Money market investments

     178        158        126   

Other interest-bearing deposits

     —          —          2,598   

Federal funds sold

     175        595        9,887   
                        

Total cash and cash equivalents

     84,806        61,153        130,513   
                        

Securities available for sale, at fair value

     582,394        572,441        529,351   
                        

Loans held for sale

     50,584        73,974        50,633   
                        

Loans, net of unearned income

     2,806,928        2,837,253        2,850,166   

Less allowance for loan losses

     40,399        38,406        34,014   
                        

Net loans

     2,766,529        2,798,847        2,816,152   
                        

Bank premises and equipment, net

     90,594        90,680        92,566   

Other real estate owned

     38,674        36,122        25,082   

Core deposit intangibles, net

     25,171        26,827        32,636   

Goodwill

     57,567        57,567        57,567   

Other assets

     116,381        119,636        115,199   
                        

Total assets

   $ 3,812,700      $ 3,837,247      $ 3,849,699   
                        
LIABILITIES       

Noninterest-bearing demand deposits

   $ 507,565      $ 484,867      $ 488,426   

Interest-bearing deposits:

      

NOW accounts

     381,887        381,512        357,762   

Money market accounts

     827,076        783,431        720,074   

Savings accounts

     174,244        153,724        150,753   

Time deposits of $100,000 and over

     521,940        563,375        597,768   

Other time deposits

     653,904        703,150        757,232   
                        

Total interest-bearing deposits

     2,559,051        2,585,192        2,583,589   
                        

Total deposits

     3,066,616        3,070,059        3,072,015   
                        

Securities sold under agreements to repurchase

     66,225        69,467        73,307   

Other short-term borrowings

     —          23,500        45,000   

Trust preferred capital notes

     60,310        60,310        60,310   

Long-term borrowings

     155,014        154,892        155,462   

Other liabilities

     29,046        30,934        28,804   
                        

Total liabilities

     3,377,211        3,409,162        3,434,898   
                        

Commitments and contingencies

      
STOCKHOLDERS’ EQUITY       

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

     35,595        35,595        35,595   

Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 26,034,989 shares, 26,004,197 shares, and 25,928,956 shares, respectively.

     34,559        34,532        34,440   

Surplus

     185,962        185,763        184,481   

Retained earnings

     173,655        169,801        155,067   

Discount on preferred stock

     (1,113     (1,177     (1,352

Accumulated other comprehensive income

     6,831        3,571        6,570   
                        

Total stockholders’ equity

     435,489        428,085        414,801   
                        

Total liabilities and stockholders’ equity

   $ 3,812,700      $ 3,837,247      $ 3,849,699   
                        

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
March  31
 
     2011     2010  
     (Unaudited)     (Unaudited)  

Interest and dividend income:

    

Interest and fees on loans

   $ 42,003      $ 38,394   

Interest on Federal funds sold

     —          12   

Interest on deposits in other banks

     5        8   

Interest and dividends on securities:

    

Taxable

     3,630        3,539   

Nontaxable

     1,754        1,365   
                

Total interest and dividend income

     47,392        43,318   
                

Interest expense:

    

Interest on deposits

     6,684        7,263   

Interest on Federal funds purchased

     7        14   

Interest on short-term borrowings

     161        598   

Interest on long-term borrowings

     1,740        1,283   
                

Total interest expense

     8,592        9,158   
                

Net interest income

     38,800        34,160   

Provision for loan losses

     6,300        5,001   
                

Net interest income after provision for loan losses

     32,500        29,159   
                

Noninterest income:

    

Service charges on deposit accounts

     2,058        2,171   

Other service charges, commissions and fees

     2,924        2,315   

Gains (losses) on securities transactions, net

     (16     19   

Gains on sales of loans

     4,968        4,491   

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

     (299     39   

Other operating income

     912        704   
                

Total noninterest income

     10,547        9,739   
                

Noninterest expenses:

    

Salaries and benefits

     17,654        15,415   

Occupancy expenses

     2,754        2,635   

Furniture and equipment expenses

     1,662        1,402   

Other operating expenses

     12,697        17,348   
                

Total noninterest expenses

     34,767        36,800   
                

Income before income taxes

     8,280        2,098   

Income tax expense

     2,086        399   
                

Net income

   $ 6,194      $ 1,699   

Dividends paid and accumulated on preferred stock

     462        303   

Accretion of discount on preferred stock

     64        51   
                

Net income available to common shareholders

   $ 5,668      $ 1,345   
                

Earnings per common share, basic

   $ 0.22      $ 0.06   
                

Earnings per common share, diluted

   $ 0.22      $ 0.06   
                

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 CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

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

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Surplus     Retained
Earnings
    Discount
on
Preferred
Stock
    Accumulated
Other
Comprehensive
Income
     Comprehensive
Income
    Total  

Balance - December 31, 2009

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

Comprehensive income:

                   

Net income - 2010

             1,699           $ 1,699        1,699   

Unrealized holding gains arising during the period (net of tax, $1,153)

                    2,138     

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

                    (11  
                         

Other comprehensive income (net of tax, $1,145)

                 2,127         2,127        2,127   
                         

Total comprehensive income

                  $ 3,826     
                         

Issuance of common stock (7,477,273 shares)

        9,945         86,139                 96,084   

Dividends on Common Stock ($.06 per share)

             (1,555            (1,555

Dividends on Preferred Stock

             (73            (73

Issuance costs of Preferred Stock

     35,595                (1,403          34,192   

Accretion of discount on Preferred Stock

             (51     51             —     

Issuance of common stock under Dividend Reinvestment Plan (5,174 shares)

        7         85                 92   

Issuance of common stock under Stock Incentive Plan (4,473 shares)

        6         33                 39   

Vesting of restricted stock under Stock Incentive Plan (12,616 shares)

        20         (20              —     

Stock-based compensation expense

           108                 108   
                                                             

Balance - March 31, 2010

   $ 35,595       $ 34,440       $ 184,481      $ 155,067      $ (1,352   $ 6,570         $ 414,801   
                                                             

Balance - December 31, 2010

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

Comprehensive income:

                   

Net income - 2011

             6,194           $ 6,194        6,194   

Change in fair value of interest rate swap

                    193     

Unrealized holding gains arising during the period (net of tax, $1,645)

                    3,057     

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

                    10     
                         

Other comprehensive income (net of tax, $1,651)

                 3,260         3,260        3,260   
                         

Total comprehensive income

                  $ 9,454     
                         

Dividends on Common Stock ($.07 per share)

             (1,814            (1,814

Tax benefit from exercise of stock awards

           1                 1   

Dividends on Preferred Stock

             (462            (462

Accretion of discount on Preferred Stock

             (64     64             —     

Issuance of common stock under Dividend Reinvestment Plan (5,194 shares)

        7         52                 59   

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

        8         68                 76   

Vesting of restricted stock under Stock Incentive Plan (8,659 shares)

        12         (12              —     

Stock-based compensation expense

           90                 90   
                                                             

Balance - March 31, 2011

   $ 35,595       $ 34,559       $ 185,962      $ 173,655      $ (1,113   $ 6,831         $ 435,489   
                                                             

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Dollars in thousands)

(Unaudited)

 

     2011     2010  

Operating activities:

    

Net income

   $ 6,194      $ 1,699   

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

    

Depreciation and amortization of bank premises and equipment

     1,649        1,477   

Amortization, net

     1,571        1,184   

Provision for loan losses

     6,300        5,001   

Increase in loans held for sale, net

     23,390        3,647   

Losses (gains) on the sale of investment securities

     16        (19

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

     299        (39

Stock-based compensation expense

     90        108   

Decrease (increase) in other assets

     4,761        (1,461

(Decrease) increase in other liabilities

     (1,888     4,214   
                

Net cash and cash equivalents provided by operating activities

     42,382        15,811   
                

Investing activities:

    

Purchases of securities available for sale

     (40,971     (38,471

Proceeds from sales of securities available for sale

     —          103,836   

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

     32,841        25,823   

Net decrease (increase) in loans

     19,587        (1,261

Sales of bank premises and equipment and OREO, net

     2,017        3,344   

Cash received in bank acquisition

     —          137,460   
                

Net cash and cash equivalents provided by investing activities

     13,474        230,731   
                

Financing activities:

    

Net increase in noninterest-bearing deposits

     22,698        23,087   

Net decrease in interest-bearing deposits

     (26,141     (75,759

Net decrease in short-term borrowings

     (26,742     (107,444

Net increase (decrease) in long-term borrowings

     122        (327

Cash dividends paid - common stock

     (1,814     (1,555

Cash dividends paid - preferred stock

     (462     (73

Tax benefit from the exercise of equity-based awards

     1        —     

Proceeds from the issuance of common stock

     135        131   
                

Net cash and cash equivalents used in financing activities

     (32,203     (161,940
                

Increase in cash and cash equivalents

     23,653        84,602   

Cash and cash equivalents at beginning of the period

     61,153        45,911   
                

Cash and cash equivalents at end of the period

   $ 84,806      $ 130,513   
                

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 8,795      $ 8,567   

Income taxes

     2,464        —     

Supplemental Schedule of Noncash Activities

    

Unrealized gains on securities available for sale

   $ 4,718      $ 3,272   

Unrealized gain on cash flow hedge

     193        —     

Transfer of loans to other real estate owned, net

     6,431        5,390   

Common stock issued for acquisition

     —          96,083   

Preferred stock issued for acquisition

     —          34,192   

Transactions related to bank acquisitions

    

Increase in assets and liabilities:

    

Loans

   $ —        $ 981,541   

Securities

     —          218,676   

Other Assets

     —          78,542   

Noninterest bearing deposits

     —          171,117   

Interest bearing deposits

     —          1,037,206   

Borrowings

     —          75,789   

Other Liabilities

     —          1,832   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2011

 

1. ACCOUNTING POLICIES

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

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

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

 

2. BUSINESS COMBINATIONS

On February 1, 2010, the Company completed its acquisition of First Market Bank, FSB (“First Market Bank” or “FMB”), in an all stock transaction. First Market Bank’s common shareholders received 6,273.259 shares of the Company’s common stock in exchange for each share of First Market Bank’s common stock, resulting in the Company’s issuing 6,701,478 common shares. The Series A preferred shareholder of First Market Bank received 775,795 shares of the Company’s common stock in exchange for all shares of the FMB Series A preferred stock. In connection with the transaction, the Company issued a total of 7,477,273 common shares with an acquisition date fair value of $96.1 million. The Series B and Series C preferred shareholder of First Market Bank received 35,595 shares of the Company’s Series B FMB preferred stock in exchange for all shares of the Series B and Series C preferred stock.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the acquisition date. Assets acquired totaled $1.4 billion, including $981.5 million in net loans and $218.7 million in investment securities. Liabilities assumed were $1.3 billion, including $1.2 billion of deposits. In connection with the acquisition, the Company recorded $1.1 million of goodwill and $26.4 million of core deposit intangible. The core deposit intangible is being amortized over an average of 4.3 years using an accelerated method. In addition, the Company recorded $1.2 million related to a trademark intangible. This is being amortized over a three year time period and is non-deductible for tax purposes.

In many cases, determining the estimated fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the fair valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carryover of First Market Bank’s previously established allowance for loan losses. Subsequent decreases in the expected cash flows will require the Company to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows will result in the recognition of additional interest income over the then remaining lives of the loans.

 

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The consideration paid for First Market Bank and the amounts of acquired identifiable assets and liabilities and preferred equity assumed as of the acquisition date were as follows (dollars in thousands):

 

Purchase price:

  

Value of:

  

Common shares issued (7,477,273 shares)

   $ 96,083   

U. S. Treasury investment in First Market Bank

     34,192   
        

Total purchase price

     130,275   

Identifiable assets:

  

Cash and due from banks

     137,460   

Investment securities

     218,676   

Loans and leases

     981,541   

Core deposit intangible

     26,400   

Other assets

     51,049   
        

Total assets

     1,415,126   
        

Liabilities and equity:

  

Deposits

     1,208,323   

Short-term borrowings

     60,000   

Long-term borrowings

     15,789   

Other liabilities

     1,832   
        

Total liabilities

     1,285,944   
        

Net assets acquired

     129,182   
        

Goodwill resulting from acquisition

   $ 1,093   
        

Interest income on acquired loans for the first quarter of 2011 was approximately $11.4 million. The outstanding principal balance and the carrying amount of these loans that is included in the consolidated balance sheet at March 31, 2011 are as follows (dollars in thousands):

 

Outstanding principal balance

   $ 766,261   

Carrying amount

   $ 754,170   

Loans obtained in the acquisition of First Market Bank for which there is specific evidence of credit deterioration and for which it was probable that the Company would be unable to collect all contractually required principal and interest payments represent less than 0.31% of the Company’s consolidated assets and, accordingly, are not considered material.

 

3. STOCK-BASED COMPENSATION

The Company’s 2003 Stock Incentive Plan provides for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The Company’s 2003 Stock Incentive Plan replaced the 1993 Stock Incentive Plan, and became effective on July 1, 2003, after shareholders approved the plan at the annual meeting of shareholders held in 2003. The Stock Incentive Plan makes available 525,000 shares (adjusted for any stock splits), which may be awarded to employees of the Company and its subsidiaries in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”), non-statutory stock options, and nonvested stock. Under the plan, the option price cannot be less than the fair market value of the stock on the grant date. The stock option’s maximum term is ten years from the date of grant and vests in equal annual installments of twenty percent over a five year vesting schedule. The Company issues new shares to satisfy stock-based awards. As of March 31, 2011, 89,020 shares remained available for issuance under the Company’s 2003 Stock Incentive Plan.

 

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For the three month period ended March 31, 2011, the Company recognized stock-based compensation expense of approximately $74,596 net of tax, and less than $0.01 per common share for the period ended March 31, 2011.

Stock Options

The following table summarizes the stock option activity for the three months ended March 31, 2011:

 

     Number of Stock
Options
    Weighted
Average
Exercise Price
 

Options outstanding, December 31, 2010

     324,776      $ 19.38   

Exercised

     (6,450     8.54   

Forfeited

     (1,000     —     
          

Options outstanding, March 31, 2011

     317,326        19.61   
          

Options exercisable, March 31, 2011

     186,228        21.66   
          

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model. There were no stock options granted during either the first quarter of 2011 or 2010.

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 March 31, 2011 (dollars in thousands, except share and per share amounts):

 

     Stock Options
Vested or
Expected to Vest
     Exercisable  

Stock options

     304,882         186,228   

Weighted average remaining contractual life in years

     5.33         3.04   

Weighted average exercise price on shares above water

   $ 10.67       $ 10.67   

Aggregate intrinsic value

   $ 14       $ 14   

The total intrinsic value for stock options exercised during the three months ended March 31, 2011, was $37,000. The fair value of stock options vested during the three months ended March 31, 2011, was approximately $100,000. Cash received from the exercise of stock options for the three months ended March 31, 2011 was $55,000.

Nonvested Stock

The 2003 Stock Incentive Plan permits the granting of nonvested stock, but is limited to one-third of the aggregate number of total awards granted. This equity component of compensation is divided between restricted (time-based) stock grants and performance-based stock grants. Generally, the restricted stock vests fifty percent on each of the third and fourth anniversaries from the date of the grant. The performance-based stock is subject to vesting on the fourth anniversary of the date of the grant 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).

 

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The following table summarizes the nonvested stock activity for the three months ended March 31, 2011:

 

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

Balance, December 31, 2010

     94,277        15,000      $ 15.93   

Granted

     22,279        —          11.19   

Released

     (8,659     —          26.91   

Forfeited

     (8,915     (9,000     17.42   
                  

Balance, March 31, 2011

     98,982        6,000        13.49   
                  

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2011 that will be recognized in future periods is as follows (dollars in thousands):

 

     Stock Options      Restricted
Stock
     Total  

For the remaining nine months of 2011

   $ 123       $ 357       $ 480   

For year ending December 31, 2012

     146         414         560   

For year ending December 31, 2013

     147         181         328   

For year ending December 31, 2014

     159         70         229   

For year ending December 31, 2015

     73         10         83   
                          

Total

   $ 648       $ 1,032       $ 1,680   
                          

 

4. 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, 2011 and December 31, 2010 (dollars in thousands):

 

     2011      2010  

Commercial:

     

Commercial Construction

   $ 200,227       $ 205,795   

Commercial Real Estate

     782,675         758,034   

Other Commercial

     951,927         975,830   
                 

Total

     1,934,829         1,939,659   

Consumer:

     

Mortgages

     211,513         212,228   

Consumer Construction

     14,792         15,615   

Indirect auto

     174,802         180,778   

Indirect marine

     43,152         46,383   

HELOCs

     269,549         273,025   

Credit Card

     17,095         19,308   

Other Consumer

     141,196         150,257   
                 

Total

     872,099         897,594   
                 

Loans, net of unearned income

   $ 2,806,928       $ 2,837,253   
                 

 

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The following table shows the Company’s class types that are past due, current and greater than 90 days and still accruing at March 31, 2011 (dollars in thousands):

 

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

Commercial:

                    

Commercial Construction

   $ 5,452       $ 440       $ 6,770       $ 12,662       $ 187,565       $ 200,227       $ 340   

Commercial Real Estate

     6,067         2,983         5,602         14,652         768,023         782,675         305   

Other Commercial

     20,909         4,427         22,017         47,353         904,574         951,927         1,688   

Consumer:

                    

Mortgages

     7,654         2,505         4,940         15,099         196,414         211,513         4,874   

Consumer Construction

     711         —           —           711         14,081         14,792         —     

Indirect Auto

     1,963         331         514         2,808         171,994         174,802         514   

Indirect Marine

     278         273         442         993         42,159         43,152         76   

HELOCs

     1,991         371         2,854         5,216         264,333         269,549         1,694   

Credit Card

     208         63         194         465         16,630         17,095         194   

Other Consumer

     2,249         1,411         1,690         5,350         135,846         141,196         1,161   
                                                              

Total

   $ 47,482       $ 12,804       $ 45,023       $ 105,309       $ 2,701,619       $ 2,806,928       $ 10,846   
                                                              

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

 

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

Commercial:

                    

Commercial Construction

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

Commercial Real Estate

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

Other Commercial

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

Consumer:

                    

Mortgages

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

Consumer Construction

     377         —           —           377         15,238         15,615         —     

Indirect auto

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

Indirect marine

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

HELOCs

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

Credit Card

     292         90         199         581         18,727         19,308         199   

Other Consumer

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

Total

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

The following table reflects the Company’s class types that are in nonaccrual status as of March 31, 2011 and excludes purchased impaired loans (dollars in thousands):

 

Commercial:

  

Commercial Construction

   $ 11,489   

Commercial Real Estate

     7,926   

Other Commercial

     39,646   

Consumer:

  

Mortgages

     600   

Consumer Construction

     216   

Indirect Auto

     13   

Indirect Marine

     365   

HELOC

     1,587   

Other Consumer

     801   
        

Total

   $ 62,643   
        

Nonaccrual loans totaled $62.6 million and $38.3 million at March 31, 2011 and 2010, respectively. The increase was principally related to the residential home builder market. There were no non-accrual loans excluded from impaired loan disclosure in 2011 or 2010. Loans past due 90 days or more and accruing interest totaled $10.8 million and $9.0 million at March 31, 2011 and 2010, respectively.

 

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

 

     2010  

Commercial:

  

Commercial Construction

   $ 11,410   

Commercial Real Estate

     9,276   

Other Commercial

     38,908   

Consumer:

  

Mortgages

     261   

Consumer Construction

     218   

Indirect auto

     14   

Indirect marine

     124   

HELOC

     1,329   

Other Consumer

     176   
        

Total

   $ 61,716   
        

The following table shows the Company’s class types that are impaired with a related allowance at March 31, 2011 (dollars in thousands):

 

Class Category

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

Commercial Construction

   $ 17,652       $ 17,821       $ 2,100       $ 19,280       $ 137   

Commercial Real Estate

     3,371         3,422         394         3,423         16   

Other Commercial

     44,490         45,029         7,864         45,849         266   

Consumer Construction

     216         228         94         228         —     

Indirect Marine

     365         365         179         365         —     

HELOC

     1,587         1,589         774         1,862         1   

Other Consumer

     801         813         358         815         1   
                                            

Total

   $ 68,482       $ 69,267       $ 11,763       $ 71,822       $ 421   
                                            

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

 

Class Category

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

Commercial Construction

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

Commercial Real Estate

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

Other Commercial

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

Mortgage

     66         66         —           105         —     

Consumer Construction

     218         228         95         228         —     

Indirect Auto

     14         15         —           17         1   

Indirect Marine

     124         124         —           124         5   

HELOC

     1,329         1,330         606         1,330         29   

Other Consumer

     177         187         —           187         —     
                                            

Total

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

 

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The following table shows the Company’s class types that are impaired without a related allowance at March 31, 2011 (dollars in thousands):

 

Class Category

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

Commercial Construction

   $ 30,335       $ 31,954       $ —         $ 32,101       $ 366   

Commercial Real Estate

     29,556         30,075         —           32,438         386   

Other Commercial

     118,731         119,679         —           127,558         1,390   

Mortgage

     1,583         1,583         —           1,583         23   

Indirect Auto

     119         120         —           127         2   

HELOC

     650         650         —           650         5   

Other Consumer

     1         1         —           —           —     
                                            

Total

   $ 180,975       $ 184,062       $ —         $ 194,457       $ 2,172   
                                            

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

 

Class Category

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

Commercial Construction

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

Commercial Real Estate

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

Other Commercial

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

Mortgage

     2,260         2,274         —           2,291         105   

Indirect Auto

     119         119         —           143         8   

HELOC

     650         650         —           650         22   
                                            

Total

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

 

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The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for credit losses, and loans based on impairment methodology for the quarter ended March 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

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

Recoveries credited to allowance

     111        262          373   

Loans charged off

     (3,151     (1,529       (4,680

Provision charged to operations

     5,075        1,155        70        6,300   
                                

Balance, end of year

   $ 30,991      $ 9,376      $ 32      $ 40,399   
                                

Ending balance: individually evaluated for impairment

     11,369        310        —          11,679   
                                

Ending balance: collectively evaluated for impairment

     19,228        9,376        32        28,636   
                                

Ending balance: loans acquired with deteriorated credit quality

     84        —          —          84   
                                

Total

   $ 30,681      $ 9,686      $ 32      $ 40,399   
                                

Loans:

        

Ending balance

   $ 1,934,829      $ 872,099      $ —        $ 2,806,928   
                                

Ending balance: individually evaluated for impairment

     233,407        5,242        —          238,649   
                                

Ending balance: collectively evaluated for impairment

     1,690,614        866,857        —          2,557,471   
                                

Ending balance: loans acquired with deteriorated credit quality

     10,808        —          —          10,808   
                                

Total

   $ 1,934,829      $ 872,099      $ —        $ 2,806,928   
                                

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

 

     Commercial      Consumer      Unallocated     Total  

Balance, end of year

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

Ending balance: individually evaluated for impairment

     10,065         701         —          10,766   
                                  

Ending balance: collectively evaluated for impairment

     17,699         9,488         (38     27,149   
                                  

Ending balance: loans acquired with deteriorated credit quality

     491         —           —          491   
                                  

Total

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

Loans:

          

Ending balance

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

Ending balance: individually evaluated for impairment

     259,386         1,547         —          260,933   
                                  

Ending balance: collectively evaluated for impairment

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

Ending balance: loans acquired with deteriorated credit quality

     12,800         —           —          12,800   
                                  

Total

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

 

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Activity in the allowance for loan losses for the quarter ended March 31, 2010 is summarized below (dollars in thousands):

 

Beginning balance

   $ 30,484   

Recoveries credited to allowance

     1,041   

Loans charged off

     (2,512

Provision for loan losses

     5,001   
        

Ending balance

   $ 34,014   
        

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

Classified loans include loans with risk ratings of 7 and worse. The following table shows classified loans, excluding purchased impaired loans, classified in the commercial portfolios by class with their related risk rating as of March 31, 2011. The risk rating information has been updated through March 31, 2011 (dollars in thousands):

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 47,379       $ 32,927       $ 167,050       $ 247,356   

Risk rated 8

     —           —           411         411   
                                   

Total

   $ 47,379       $ 32,927       $ 167,461       $ 247,767   
                                   

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

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

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

Risk rated 8

     —           —           376         376   
                                   

Total

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

 

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

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 420       $ 1,314       $ 8,040       $ 9,774   

Risk rated 8

     —           119         915         1,034   
                                   
   $ 420       $ 1,433       $ 8,955       $ 10,808   
                                   

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

 

     Commercial
Construction
     Commercial
Real Estate
     Other
Commercial
     Total  

Risk rated 7

   $ 945       $ 375       $ 8,164       $ 9,485   

Risk rated 8

     225         535         2,556         3,315   
                                   
   $ 1,170       $ 910       $ 10,720       $ 12,800   
                                   

 

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The following table shows purchased impaired commercial and consumer portfolios by class and their delinquency status. The credit quality indicator information has been updated through March 31, 2011 (dollars in thousands):

 

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

Commercial:

           

Commercial Construction

   $ —         $ 420       $ —         $ 420   

Commercial Real Estate

     —           79         1,354         1,433   

Other Commercial

     —           6,684         2,271         8,955   

Consumer:

           

Indirect auto

     22         7         37         66   

HELOCs

     116         12         796         924   

Other Consumer

     81         57         —           138   
                                   

Total

   $ 219       $ 7,259       $ 4,458       $ 11,936   
                                   

The current column represents loans that are less than 30 days past due and on nonaccrual status.

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

 

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

Commercial:

           

Commercial Construction

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

Commercial Real Estate

     —           910         —           910   

Other Commercial

     —           9,341         1,379         10,720   

Consumer:

           

Indirect auto

     8         10         63         81   

HELOCs

     20         844         116         980   

Other Consumer

     81         56         1         137   
                                   

Total

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

The current column represents loans that are less than 30 days past due and on nonaccrual status.

 

5. EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS uses as the denominator the weighted average number of common shares outstanding during the period, including the effect of potentially dilutive common shares outstanding attributable to stock awards. Dividends on preferred stock and amortization of discount on preferred stock are treated as a reduction of the numerator in calculating basic and diluted EPS. There were approximately 333,386 and 178,354 shares underlying anti-dilutive stock awards as of March 31, 2011 and 2010, respectively. Dividends paid on nonvested stock awards were approximately $3,000 for both periods ending March 31, 2011 and 2010, respectively.

 

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The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three months ended March 31, 2011 and 2010 (dollars and shares in thousands, except per share amounts):

 

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

For the Three Months ended March 31, 2011

        

Net income

   $ 6,194         25,958       $ 0.24   

Less: dividends paid and accumulated on preferred stock

     462         —           0.02   

Less: accretion of discount on preferred stock

     64         —           —     
                          

Basic

   $ 5,668         25,958       $ 0.22   

Add: potentially dilutive common shares - stock awards

     —           23         —     
                          

Diluted

   $ 5,668         25,981       $ 0.22   
                          

For the Three Months ended March 31, 2010

        

Net income

     1,699         23,197       $ 0.07   

Less: dividends paid and accumulated on preferred stock

     303         —           0.01   

Less: accretion of discount on preferred stock

     51         —           —     
                          

Basic

   $ 1,345         23,197       $ 0.06   

Add: potentially dilutive common shares - stock awards

     —           38         —     
                          

Diluted

   $ 1,345         23,235       $ 0.06   
                          

 

6. TRUST PREFERRED CAPITAL NOTES

During the first quarter of 2004, the Company’s Statutory Trust I, a wholly owned subsidiary, was formed for the purpose of issuing redeemable capital securities in connection with the acquisition of Guaranty Financial Corporation. A Trust Preferred Capital Note of $22.5 million was issued through a pooled underwriting. 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 March 31, 2011 was 3.05%. The capital securities were redeemable at par beginning on June 17, 2009 and each quarterly anniversary of such date until the securities mature on June 17, 2034. The principal asset of the 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, while $696,000 is reflected as the Company’s investment in Statutory Trust I reported as “Other assets” within the consolidated balance sheet.

During the first quarter of 2006, the Company’s Statutory Trust II, a wholly owned subsidiary, was formed for the purpose of issuing redeemable capital securities in connection with the acquisition of Prosperity Bank & Trust Company that was completed on April 1, 2006. A Trust Preferred Capital Note of $36.0 million was issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate (three month LIBOR plus 1.40%) which adjusts and is payable quarterly. The interest rate at March 31, 2011 was 1.70%. The redeemable capital securities may be called at par after five years on March 31, 2011 and each quarterly anniversary of such date until the securities mature in 30 years on March 31, 2036. The principal asset of the Statutory Trust II is $37.1 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital notes, while $1.1 million is reflected as the Company’s investment in Statutory Trust II reported as “Other assets” within the consolidated balance sheet.

 

7. SEGMENT REPORTING DISCLOSURES

The Company has two reportable segments: a traditional full service community bank and a mortgage loan origination business. The community bank business for 2011 includes one bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 91 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.

 

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

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

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

Information about reportable segments and reconciliation of such information to the consolidated financial statements for three months ended March 31, 2011 and 2010 was as follows (dollars in thousands):

 

     Community
Banks
     Mortgage      Eliminations     Consolidated  
Three Months Ended March 31, 2011           

Net interest income

   $ 38,313       $ 487       $ —        $ 38,800   

Provision for loan losses

     6,300         —           —          6,300   
                                  

Net interest income after provision for loan losses

     32,013         487         —          32,500   

Noninterest income

     5,695         4,969         (117     10,547   

Noninterest expenses

     29,956         4,928         (117     34,767   
                                  

Income before income taxes

     7,752         528         —          8,280   

Income tax expense

     1,887         199         —          2,086   
                                  

Net income

   $ 5,865       $ 329       $ —        $ 6,194   
                                  

Total assets

   $ 3,807,228       $ 55,260       $ (49,788   $ 3,812,700   
                                  
Three Months Ended March 31, 2010           

Net interest income

   $ 33,778       $ 382       $ —        $ 34,160   

Provision for loan losses

     5,001         —           —          5,001   
                                  

Net interest income after provision for loan losses

     28,777         382         —          29,159   

Noninterest income

     5,365         4,491         (118     9,739   

Noninterest expenses

     33,011         3,906         (118     36,800   
                                  

Income before income taxes

     1,131         967         —          2,098   

Income tax expense

     11         388         —          399   
                                  

Net income

   $ 1,120       $ 579       $ —        $ 1,699   
                                  

Total assets

   $ 3,843,190       $ 56,877       $ (50,368   $ 3,849,699   
                                  

 

8. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

 

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

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

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

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

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

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

 

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9. GOODWILL AND INTANGIBLE ASSETS

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

Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years. In connection with the First Market Bank acquisition, the Company recorded $26.4 million of core deposit intangible, $1.2 million of trademark intangible and $1.1 million in goodwill. None of the goodwill recognized will be deductible for income tax purposes. The core deposit intangible on that acquisition is being amortized over an average of 4.3 years using an accelerated method and the trademark intangible is being amortized over three years using the straight-line method. Based on the annual testing during the second quarter of each year and the absence of impairment indicators during the quarter ended March 31, 2011 the Company has recorded no impairment charges to date for goodwill or intangible assets.

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

 

     Gross Carrying
Value
     Accumulated
Amortization
     Net Carrying
Value
 

March 31, 2011

        

Amortizable core deposit intangibles

   $ 46,615       $ 21,444       $ 25,171   

Unamortizable goodwill

     57,909         342         57,567   

Trademark intangible

     1,200         467         733   

December 31, 2010

        

Amortizable core deposit intangibles

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

Unamortizable goodwill

     57,909         342         57,567   

Trademark intangible

     1,200         367         833   

March 31, 2010

        

Amortizable core deposit intangibles

   $ 46,615       $ 13,979       $ 32,636   

Unamortizable goodwill

     57,909         342         57,567   

Trademark intangible

     1,200         67         1,133   

Amortization expense of the core deposit intangibles for the three month periods ended March 31, 2011 and 2010 totaled $1.7 million and $1.5 million, respectively. Amortization expense of the trademark intangibles for the three month periods ended March 31, 2011 and 2010 was $100,000 and $67,000, respectively. As of March 31, 2011, the estimated remaining amortization expense of core deposit and trademark intangibles for each of the five succeeding fiscal years is as follows (dollars in thousands):

 

2012

   $ 6,262   

2013

     5,160   

2014

     3,508   

2015

     2,667   

2016

     2,281   

Thereafter

     6,026   
        
   $ 25,904   
        

 

10. COMMITMENTS AND CONTINGENCIES

Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. At March 31, 2011 and 2010, the Company had outstanding loan commitments approximating $758.4 million and $744.9 million, respectively.

 

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Letters of credit written are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $36.0 million and $33.8 million at March 31, 2011, and 2010, respectively.

At March 31, 2011, Union Mortgage Group, Inc. (“Union Mortgage”), a wholly owned subsidiary of Union First Market Bank, a wholly owned subsidiary of Union First Market Bankshares Corporation, had rate lock commitments to originate mortgage loans amounting to $104.7 million and loans held for sale of $50.6 million. Union Mortgage has entered into corresponding commitments on a best-efforts basis to sell loans on a servicing released basis totaling approximately $155.3 million. These commitments to sell loans are designed to mitigate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

 

11. SECURITIES

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

 

            Gross Unrealized        
     Amortized
Cost
     Gains      (Losses)     Estimated
Fair Value
 

March 31, 2011

          

U.S. government and agency securities

   $ 8,915       $ 545       $ —        $ 9,460   

Obligations of states and political subdivisions

     179,960         3,765         (1,569     182,156   

Corporate and other bonds

     15,205         447         (892     14,760   

Mortgage-backed securities

     337,926         9,517         (224     347,219   

Federal Reserve Bank stock - restricted

     6,711         —           —          6,711   

Federal Home Loan Bank stock - restricted

     18,345         —           —          18,345   

Other securities

     3,754         —           (11     3,743   
                                  

Total securities

   $ 570,816       $ 14,274       $ (2,696   $ 582,394   
                                  

December 31, 2010

          

U.S. government and agency securities

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

Obligations of states and political subdivisions

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

Corporate and other bonds

     15,543         380         (858     15,065   

Mortgage-backed securities

     334,696         9,767         (425     344,038   

Federal Reserve Bank stock - restricted

     6,716         —           —          6,716   

Federal Home Loan Bank stock - restricted

     18,345         —           —          18,345   

Other securities

     3,259         32         (7     3,284   
                                  

Total securities

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

 

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

 

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

As of March 31, 2011

               

Obligations of states and political subdivisions

   $ 40,204       $ (872   $ 16,599       $ (697   $ 56,803       $ (1,569

Mortgage-backed securities

     43,674         (224     —           —          43,674         (224

Corporate bonds and other securities

     —           (11     4,029         (892     4,029         (903
                                                   

Totals

   $ 83,878       $ (1,107   $ 20,628       $ (1,589   $ 104,506       $ (2,696
                                                   

As of December 31, 2010

               

U.S. government and agency securities

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

Obligations of states and political subdivisions

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

Mortgage-backed securities

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

Corporate bonds and other securities

     —           (7     4,104         (858     4,104         (865
                                                   
   $ 132,510       $ (2,986   $ 18,866       $ (1,995   $ 151,376       $ (4,981
                                                   

As of March 31, 2011, there were $20.6 million, or 46 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 $1.6 million and consisted corporate and municipal obligations.

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is OTTI if any of the following conditions exists: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the quarter ended March 31, 2011 and in accordance with the guidance, no OTTI was recognized.

 

12. FAIR VALUE MEASUREMENTS

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

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

 

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

 

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Level 3   -   Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

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

Interest rate swap agreement used for interest rate risk management

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

Securities available for sale

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

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

 

     Fair Value Measurements at March 31, 2011 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Interest rate swap - loans

   $ —         $ 156          $ 156   

Securities available for sale:

           

U.S. government and agency securities

     —           9,460         —           9,460   

Obligations of states and political subdivisions

     —           182,156         —           182,156   

Corporate and other bonds

     —           14,760         —           14,760   

Mortgage-backed securities

     —           347,219         —           347,219   

Other securities

     —           3,743         —           3,743   
                                   

Total

   $ —         $ 557,494       $ —         $ 557,494   
                                   

LIABILITIES

           

Interest rate swap - loans

      $ 156          $ 156   

Cash flow hedge - trust

     —           1,281         —           1,281   
                                   

Total

   $ —         $ 1,437       $ —         $ 1,437   
                                   

 

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     Fair Value Measurements at December 31, 2010 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Interest rate swap - loans

   $ —         $ 189       $ —         $ 189   

Securities available for sale:

           

U.S. government and agency securities

     —           9,961         —           9,961   

Obligations of states and political subdivisions

     —           175,032         —           175,032   

Corporate and other bonds

     —           15,065         —           15,065   

Mortgage-backed securities

     —           344,038         —           344,038   

Other securities

     —           3,284         —           3,284   
                                   

Total

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

LIABILITIES

           

Interest rate swap - loans

      $ 189          $ 189   

Cash flow hedge - trust

     —           1,476         —           1,476   
                                   

Total

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

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

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

Loans held for sale

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different from cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the three months ended March 31, 2011. Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. At March 31, 2011, the Company’s Level 3 loans consisted of six relationships secured by residential real estate and lots of $7.4 million with a valuation reserve of $1.0 million; six relationships secured by commercial real estate of $6.5 million with a valuation reserve of $949,000; and two relationships secured by inventory, receivables, or equipment of $4.0 million with a valuation reserve of $846,000.

 

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

 

     Fair Value Measurements at March 31, 2011 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Loans held for sale

   $ —         $ 50,584       $ —         $ 50,584   

Impaired loans

     —           41,582         15,137         56,719   
                                   

Total

   $ —         $ 92,166       $ 15,137       $ 107,303   
                                   
     Fair Value Measurements at December 31, 2010 using  
     Quoted Prices in
Active Markets
for Identical
Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
        
     Level 1      Level 2      Level 3      Balance  

ASSETS

           

Loans held for sale

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

Impaired loans

     —           59,992         7,895         67,887   
                                   

Total

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

The Company’s nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to other real estate owned (“OREO”), goodwill, and intangible assets. In accordance with ASC 360, Property, Plant and Equipment, OREO with a carrying value above fair value is written down to its fair value and results in an impairment charge. The fair value of the real property is generally determined using appraisals or other indicators of value based on recent comparables of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Total valuation expenses related to OREO for the three months ended March 31, 2011 and 2010 were $12,000 and zero, respectively. No impairment charges have been recorded for goodwill or intangible assets.

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

Cash and Cash Equivalents

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

Loans

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

Deposits

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

 

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Borrowings

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

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Cash Flow Hedge

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

Commitments to Extend Credit and Standby Letters of Credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2011, the fair value of loan commitments and standby letters of credit was immaterial and excluded from the table below.

The carrying values and estimated fair values of the Company’s financial instruments as of March 31, 2011 are in the following table (dollars in thousands):

 

     Carrying
Amount
     Fair
Value
 

Financial assets:

     

Cash and cash equivalents

   $ 84,806       $ 84,806   

Securities available for sale

     582,394         582,394   

Loans held for sale

     50,584         50,584   

Net loans

     2,766,529         2,817,175   

Interest rate swap - loans

     156         156   

Accrued interest receivable

     15,728         15,728   

Financial liabilities:

     

Deposits

   $ 3,066,616       $ 3,074,600   

Borrowings

     281,549         296,268   

Accrued interest payable

     1,979         1,979   

Cash flow hedge - trust

     1,281         1,281   

Interest rate swap - loans

     156         156   

 

13. 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 starts 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.

 

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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, 2011, the fair value of the trust swap agreement was an unrealized loss of $1.3 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 Changes in Stockholders’ Equity.

Shown below is a summary of the derivative designated as an accounting hedge at March 31, 2011:

 

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

Pay fixed - receive floating interest rate swaps

     1       $ 36,000         —         $ 1,281         0.30     3.51     6.21   

The Company also acquired two interest rate swap loan relationships (“loan swaps”) as a result of the acquisition of First Market Bank. Upon entering into loan swaps with borrowers to meet their financing needs, offsetting positions with counterparties were entered into 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. The Company had loan swaps with a notional value of $4.2 million and offsetting fair values of $156,000 recorded in other assets and other liabilities with no net effect on other operating income. Shown below is a summary regarding loan swap derivative activities at March 31, 2011 (dollars in thousands):

 

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

Receive fixed - pay floating interest rate swaps

     2       $ 4,160       $ 156         —           6.35     2.75     1.76   

Pay fixed - receive floating interest rate swaps

     2         4,160         —           156         2.75     6.35     1.76   

 

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LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Union First Market Bankshares Corporation

Richmond, Virginia

We have reviewed the accompanying condensed consolidated balance sheets of Union First Market Bankshares Corporation and subsidiaries as of March 31, 2011 and 2010, and the related condensed consolidated statements of income, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2011 and 2010. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Union First Market Bankshares Corporation and subsidiaries as of December 31, 2010, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 9, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

LOGO

Winchester, Virginia

May 10, 2011

 

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union First Market Bankshares Corporation and its subsidiaries (collectively the “Company”). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2010. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three month periods ended March 31, 2011 and 2010 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. More information is available on the Company’s website, http://investors.bankatunion.com and on the Securities and Exchange Commission’s website, www.sec.gov. The information on the Company’s website is not a part of this Form 10-Q. The Company does not intend or assume any obligation to update or revise any forward-looking statements that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

General

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

The more critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses and mergers and acquisitions. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

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The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions, and judgments.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated, and (ii) ASC 310 Receivables, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.

The Company’s allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to applicable GAAP. Management’s estimate of each homogenous pool component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation may include but is not limited to credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments; and results from external bank regulatory examinations. These factors together with historical losses and current economic and business conditions are considered in developing estimated loss factors used in the calculations.

The allowance for loan losses consists of specific, general and unallocated components. The specific component relates generally to commercial loans that are classified as impaired, and on which an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is derived from an estimate of credit losses adjusted for various environmental factors applicable to both commercial and consumer loan segments. The estimate of credit losses is a function of the product of net charge-off historical loss experience to the loan balance of the loan portfolio averaged over a period of time management deems appropriate to adequately reflect the losses inherent in the loan portfolio. The environmental factors consist of national, local, and portfolio characteristics and are applied to both the commercial and consumer segments. The following table shows the types of environmental factors management considers:

 

ENVIRONMENTAL FACTORS

Portfolio

  

National

  

Local

Experience and ability of lending team    Interest rates    Level of economic activity
Depth of lending team    Inflation    Unemployment
Pace of loan growth    Unemployment    Competition
Franchise expansion    Gross domestic product    Rural v. urban market
Execution of loan risk rating process    General market risk and other concerns    Military/government impact
Degree of oversight / underwriting standards    Legislative and regulatory environment   
Value of real estate serving as collateral      
Delinquency levels in portofolio      
Charge-off levels in portfolio      

Credit concentrations / nature and volume of the portfolio

     

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management judges the loan to be uncollectable. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for

 

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loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. These adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

An unallocated component may be used to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Together, the specific, general, and any unallocated allowance for loan loss represents management’s estimate of losses inherent in the current loan portfolio. Though provisions for loan losses may be based on specific loans, the entire allowance for loan losses is available for any loan management deems necessary to charge-off. At March 31, 2011 and 2010, there were no material amounts considered unallocated as part of the allowance for loan losses.

Mergers and Acquisitions

The Company accounts for its business combinations under the purchase method of accounting, a cost allocation process which requires the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will continue to rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions. Costs that the Company expects, but is not obligated to incur in the future, to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. The Company will not recognize these costs as part of applying the acquisition method. Instead, the Company will recognize these costs in its post-combination financial statements in accordance with other applicable accounting guidance.

Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples for the Company include systems conversions, integration planning consultants and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable accounting guidance. These acquisition-related costs are included within the Consolidated Statements of Income classified within the noninterest expense caption.

Latest Acquisition

On February 1, 2010, the Company completed its acquisition of First Market Bank, FSB (“First Market Bank” or “FMB”) in an all stock transaction. First Market Bank’s common shareholders received 6,273.259 shares of the Company’s common stock in exchange for each share of First Market Bank’s common stock, resulting in the Company issuing 6,701,478 common shares. The Series A preferred shareholder of First Market Bank received 775,795 shares of the Company’s common stock in exchange for all shares of the Series A preferred stock. In connection with the transaction the Company issued a total of 7,477,273 common shares with an acquisition date fair value of $96.1 million. The Series B and Series C preferred shareholder of First Market Bank received 35,595 shares of the Company’s Series B preferred stock in exchange for all shares of the FMB Series B and Series C preferred stock.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the acquisition date. Assets acquired totaled $1.4 billion, including $981.5 million in net loans and $218.7 million in investment securities. Liabilities assumed were $1.3 billion, including $1.2 billion of deposits. In connection with the acquisition, the Company recorded $1.1 million of goodwill and $26.4 million of core deposit intangible. The core deposit intangible is being amortized over an average of 4.3 years using an accelerated method. In addition, the Company recorded $1.2 million related to a trademark intangible. This

 

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is being amortized over a three year time period. Based on the annual testing during the second quarter of each year and the absence of impairment indicators during the quarter ended March 31, 2011 the Company has recorded no impairment charges to date for goodwill or intangible assets.

In many cases, determining the estimated fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the fair valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carryover of First Market Bank’s previously established allowance for loan losses. Subsequent decreases in the expected cash flows (credit deterioration) will require the Company to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows will result in the recognition of additional interest income over the then remaining lives of the loans.

The estimated fair value of liabilities assumed was based on the discounted value of contractual cash flows and compared to other securities with similar characteristics and remaining maturities. Specifically, First Market Bank’s Federal Home Loan Bank of Atlanta (“FHLB”) advances, subordinated debt and certificates of deposit were assumed at a net premium.

ABOUT UNION FIRST MARKET BANKSHARES CORPORATION

Headquartered in Richmond, Virginia, Union First Market Bankshares Corporation is the holding company for Union First Market Bank, which has 91 branches and more than 160 ATMs throughout Virginia. Non-bank affiliates of the holding company include: Union Investment Services, Inc., which provides full brokerage services; Union Mortgage Group, Inc., which provides a full line of mortgage products; and Union Insurance Group, LLC, which offers various lines of insurance products. Union First Market Bank also owns a non-controlling interest in Johnson Mortgage Company, LLC.

On March 21, 2011, Union First Market Bank announced that it has opened a new branch in Stafford, Virginia. Located at 1044 Warrenton Road, the Berea Marketplace branch is the 91st branch of Union First Market Bank.

On February 8, 2011, Union First Market Bank and MARTIN’S® Food Markets announced that Union First Market Bank will add in-store bank branches to seven MARTIN’S stores in the western part of Virginia. Union First Market Bank currently operates in-store bank branches in 22 MARTIN’S Food Markets.

On December 21, 2010, the Company announced it will acquire approximately $73.5 million of loans and assume approximately $59.3 million in deposits at book value through the acquisition of the Harrisonburg, Virginia branch of NewBridge Bank. The closing date is expected to be in the second quarter of 2011.

Additional information is available on the Company’s website at http://investors.bankatunion.com. The information contained on the Company’s website is not a part of this report. Shares of the Company’s common stock are traded on the NASDAQ Global Select Market under the symbol UBSH.

 

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RESULTS OF OPERATIONS

Net Income

The Company reported net income of $6.2 million and earnings per share of $0.22 for its first quarter ended March 31, 2011. The quarterly results represent an increase of $1.8 million in net income and $0.07 in earnings per share from the prior year’s fourth quarter and an increase of $4.5 million in net income and a $0.16 increase in earnings per share from the quarter ended March 31, 2010.

The increase in quarterly net income from the prior year is largely a result of improvements in net interest income, the absence of prior year nonrecurring acquisition costs partially offset by increased provisions for loan losses. Comparative results to the first quarter of the prior year exclude FMB results for the month of January 2010. For the first quarter of 2011, net income available to common shareholders, which deducts dividends and discount accretion on preferred stock from net income, was $5.7 million compared to $1.3 million for the prior year’s first quarter.

First quarter 2011 net income increased $1.8 million from the fourth quarter of 2010 and was largely attributable to a reduction in the provision for loan losses and lower nonrecurring costs. These improvements were partially offset by lower income from the mortgage segment.

NET INTEREST INCOME

On a linked quarter basis, tax-equivalent net interest income was $39.9 million, a decrease of $395,000, or 0.98%, from the fourth quarter of 2010. The linked quarter decrease was principally due to a greater decrease in earning asset volumes compared to interest-bearing liabilities. First quarter tax-equivalent net interest margin increased 13 basis points to 4.68% from 4.55% in the most recent quarter. The net interest margin increase was primarily the result of the increase of investment security yields and lower costs of interest-bearing deposits. Additionally, the funding mix continued to shift from higher cost certificates of deposit to lower cost money market accounts and checking accounts. The following table shows average interest-earning assets, interest-bearing liabilities, the related income/expense and change for the periods shown:

 

     Linked quarter results  
     Dollars in thousands  
     Three Months Ended  
     03/31/11     12/31/10     Change  

Average interest-earning assets

   $ 3,459,834      $ 3,514,367      $ (54,533

Interest income

   $ 48,490      $ 49,834      $ (1,344

Yield on interest-earning assets

     5.68     5.63     5 bps 

Average interest-earning liabilities

   $ 2,858,406      $ 2,895,213      $ (36,807

Interest expense

   $ 8,591      $ 9,540      $ (949

Cost of interest-bearing liabilities

     1.22     1.31     (9 )bps 

 

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The first quarter tax-equivalent net interest income increased $4.8 million, or 13.67%, when compared to the same period last year. This increase was related to increased interest-earning asset volumes resulting from the acquisition of FMB. The tax-equivalent net interest margin increased 9 basis points to 4.68% from 4.59% in the prior year. The improvement in the cost of funds related to the declining costs on certificates of deposit. Another favorable factor driving the increase in the net interest margin was the increase in demand deposits. The decrease in the interest-earning asset yield was related to lower loan yields and lower yields on investment securities. The Company’s ability to maintain the net interest margin at current levels is largely dependent upon future interest rates, loan demand, and deposit competition. The following table shows average interest-earning assets, interest-bearing liabilities, the related income/expense and change for the periods shown:

 

     Year-over-year results  
     Dollars in thousands  
     Three Months Ended  
     03/31/11     03/31/10     Change  

Average interest-earning assets

   $ 3,459,834      $ 3,103,964      $ 355,870   

Interest income

   $ 48,490      $ 44,256      $ 4,234   

Yield on interest-earning assets

     5.68     5.78     (10 )bps 

Average interest-earning liabilities

   $ 2,858,406      $ 2,621,815      $ 236,591   

Interest expense

   $ 8,591      $ 9,159      $ (568

Cost of interest-bearing liabilities

     1.22     1.42     (20 )bps 

Acquisition Activity – net interest margin

Net interest income increased $1.8 million for the three months ended March 31, 2011 as a result of acquisition accounting fair value adjustments. If not for this impact, the net interest margin for the first quarter would have been 4.47%, an 18 basis point improvement from the fourth quarter of last year.

The acquired loan and investment security portfolios of FMB were marked-to-market with a fair value discount to market rates. Performing loan and investment security discount accretion is recognized as interest income over the estimated remaining life of the loans and investment securities. The Company also assumed borrowings (Federal Home Loan Bank of Altanta (“FHLB”) and subordinated debt) and certificates of deposit. These liabilities were marked-to-market with estimates of fair value on acquisition date. The resulting discount/premium to market is accreted/amortized as an increase (or decrease) to interest expense over the estimated lives of the liabilities and reduced by provisions for loan losses.

The first quarter and remaining estimated discount/premium is reflected in the following table (dollars in thousands):

 

     Loan
Accretion
     Investment
Securities
     Borrowings