ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless the context otherwise requires, the terms “we”, “us” and “our” refer to Virginia
Commerce Bancorp, Inc. and its subsidiaries on a consolidated basis. The following discussion and analysis, the purpose of which is to provide investors and others with information that we believe to be necessary for an understanding of our current
financial condition, changes in financial condition and results of operations, should be read in conjunction with the consolidated financial statements, notes and other information contained in this report.
Cautionary Note Regarding Forward-Looking Statements
This management’s discussion and analysis and other portions of this report, contain forward-looking statements within the meaning of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies, including but not limited to our outlook
on earnings, statements regarding asset quality, concentrations of credit risk, our deposit portfolio and expected future changes in our deposit portfolio, the adequacy of the allowance for loan losses, projected growth, capital position, our plans
regarding and expected future levels of our non-performing assets, the pending merger with United Bankshares, Inc., business opportunities in our markets and strategic initiatives to capitalize on those opportunities, and general economic
conditions. When we use words such as “may,” “will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,”
and similar words or phrases you should consider them as identifying forward-looking statements. These forward-looking statements are not guarantees of future performance. These statements are based upon current and anticipated economic conditions,
nationally and in the Company’s market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of
these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results may differ materially from those indicated herein.
Our forward-looking statements are subject to the following principal risks and uncertainties:
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•
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adverse governmental or regulatory policies may be enacted;
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•
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the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) could increase our regulatory compliance burden and associated costs, place restrictions on certain products and services,
and limit our future capital raising strategies;
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•
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the interest rate environment may compress margins and adversely affect net interest income;
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•
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adverse effects may be caused by changes to credit quality;
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•
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competition from other financial services companies in our markets could adversely affect operations;
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•
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our concentrations of commercial, commercial real estate and construction loans, may adversely affect our earnings and results of operations;
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•
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we may not be able to consummate the proposed merger between us and United Bankshares, Inc. on our anticipated timeline, or at all;
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•
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an economic slowdown could adversely affect credit quality, loan originations and the value of collateral securing the Company’s loans; and
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•
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social and political conditions such as war, political unrest and terrorism or natural disasters could have unpredictable negative effects on our businesses and the economy.
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Other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these
forward-looking statements are discussed under “Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 31, 2012.
31
Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company
disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.
Non-GAAP Presentations
The Company prepares its
financial statements under accounting principles generally accepted in the United States, or “GAAP”. However, this quarterly report on Form 10-Q also refers to certain non-GAAP financial measures that we believe, when considered together
with GAAP financial measures, provide investors with important information regarding our operational performance. An analysis of any non-GAAP financial measures should be used in conjunction with results presented in accordance with GAAP.
Adjusted operating earnings is a non-GAAP financial measure that reflects net income available to common stockholders excluding impairment loss on investment
securities, realized gains and losses on sale of investment securities, merger-related expenses and certain other non-recurring items. These excluded items are difficult to predict and we believe that adjusted operating earnings provides the Company
and investors with a valuable measure of the Company’s operational performance and a valuable tool to evaluate the Company’s financial results. Calculation of adjusted operating earnings for the three and nine months ended
September 30, 2013 and September 30, 2012, is as follows:
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(dollars in thousands)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2013
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2012
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2013
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2012
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Net Income Available to Common Stockholders
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$
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6,953
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$
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7,122
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$
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20,452
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$
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18,258
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Adjustments to net income:
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Realized gain on sale of investment securities available-for-sale
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—
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(2,056
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)
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—
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(5,976
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)
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Merger-related expense
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1,155
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—
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2,021
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—
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Net tax effect adjustments
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(166
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)
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720
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(1,615
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)
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2,092
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Adjusted Operating Earnings
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$
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7,942
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$
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5,786
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$
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20,858
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$
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14,374
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The adjusted efficiency ratio is a non-GAAP financial measure that is computed by dividing non-interest expense by the sum of
net interest income on a tax equivalent basis, and non-interest income excluding merger-related expenses, realized gains and losses on sale of investment securities, and certain other non-recurring items. We believe that this measure provides
investors with important information about our operating efficiency. Comparison of our adjusted efficiency ratio with those of other companies may not be possible because other companies may calculate the adjusted efficiency ratio differently.
Calculation of the adjusted efficiency ratio for the three months and nine months ended September 30, 2013 and September 30, 2012, is as follows:
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(dollars in thousands)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2013
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2012
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2013
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2012
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Summary Operating Results:
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Non-interest expense
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$
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14,865
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$
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15,212
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$
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46,550
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$
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47,396
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Merger-related expenses
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1,155
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—
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2,021
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—
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Adjusted non-interest expense
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$
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13,710
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$
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15,212
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$
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44,529
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$
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47,396
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Net interest income
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$
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25,253
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$
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26,368
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$
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76,839
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$
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80,064
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Non-interest income
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1,822
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4,725
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6,576
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13,095
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Gain on sale of investment securities available-for-sale
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—
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(2,056
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)
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—
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(5,976
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Adjusted non-interest income
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$
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1,822
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$
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2,669
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$
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6,576
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$
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7,119
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Tax equivalent adjustment
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$
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344
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$
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360
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$
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1,053
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$
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1,091
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Total net interest income and non-interest income, adjusted
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$
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27,419
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$
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29,397
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$
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84,468
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$
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88,274
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Efficiency Ratio, adjusted
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50.0
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%
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51.8
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%
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52.7
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%
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53.7
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%
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Efficiency Ratio, GAAP
(1)
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54.9
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%
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48.9
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%
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55.8
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%
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50.9
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%
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(1)
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Computed by dividing non-interest expense by the sum of net interest income and non-interest income.
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32
The tangible common equity ratio is a non-GAAP financial measure representing the ratio of tangible common equity
to tangible assets. Tangible common equity and tangible assets are non-GAAP financial measures derived from GAAP-based amounts. We calculate tangible common equity for the Company by excluding the balance of intangible assets from total
stockholders’ equity. We calculate tangible assets by excluding the balance of intangible assets from total assets. We had no intangible assets for the periods presented. We believe that this is consistent with the treatment by regulatory
agencies, which exclude intangible assets from the calculation of regulatory capital ratios. Accordingly, we believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our
capital position and ratios. However, these non-GAAP financial measures are supplemental and are not substitutes for an analysis based on a GAAP measure. As other companies may use different calculations for non-GAAP measures, our presentation may
not be comparable to other similarly titled measures reported by other companies. Calculation of the Company’s tangible common equity ratio as of September 30, 2013 and December 31, 2012 is as follows:
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(in thousands)
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As of September 30,
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December 31,
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2013
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2012
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Tangible common equity:
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Total stockholders’ equity
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$
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264,253
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$
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245,309
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Less:
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Intangible assets
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—
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—
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Tangible common equity
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$
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264,253
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$
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245,309
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Total tangible assets
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$
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2,756,322
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$
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2,823,692
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Tangible common equity ratio
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9.59
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%
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8.69
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%
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Additional Information
Our common stock is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol “VCBI.” Additional information can
be found through our website at www.vcbonline.com by selecting “About VCB/Investor Relations/SEC Filings”. Electronic copies of our 2012 Annual Report on Form 10-K are available free of charge by visiting the “SEC Filings”
section of our website. Electronic copies of quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”) are also available. These reports are posted as soon as
reasonably practicable after they are electronically filed with the SEC.
Where we have included website addresses in this Report, such as our website
address, we have included those addresses as inactive textual references only. Except if specifically incorporated by reference into this report, information on those websites is not part hereof.
General
The following presents management’s
discussion and analysis of the consolidated financial condition and results of operations of Virginia Commerce Bancorp, Inc. and subsidiaries (the “Company”) as of the dates and for the periods indicated. The purpose of the following
discussion and analysis is to provide investors and others with information that we believe to be necessary in understanding the financial condition, changes in financial condition, and results of operations of our Company. This discussion should be
read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto, and other financial data appearing elsewhere in this report.
The Company is the parent bank holding company for Virginia Commerce Bank (the “Bank”), a Virginia state-chartered bank that commenced operations in
May 1988. The Bank pursues a traditional community banking strategy, offering a full range of business and consumer banking services through twenty-eight branch offices, one residential mortgage office and one wealth management office.
Headquartered in Arlington, Virginia, the Bank serves the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun,
Prince William, Spotsylvania and Stafford Counties and the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park. Its service area also covers, to a lesser extent, Washington, D.C. and the nearby Maryland counties
of Montgomery and Prince Georges. The Bank’s
33
customer base includes small-to-medium sized businesses including firms that have contracts with the U.S. government, associations, retailers and industrial businesses, professionals and their
firms, business executives, investors and consumers.
Merger between the Company and United Bankshares, Inc.
After the close of business on January 29, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Agreement”) with United
Bankshares, Inc. (“United”). In accordance with the Agreement, the Company will merge with and into a wholly-owned subsidiary of United (the “Merger”). At the effective time of the Merger, the Company will cease to exist and the
wholly-owned subsidiary of United shall survive and continue to exist as a Virginia corporation.
The Agreement provides that at the effective time of the
Merger, each outstanding share of common stock of the Company will be converted into the right to receive 0.5442 shares of United common stock, par value $2.50 per share, subject to adjustment as provided in the Agreement.
Pursuant to the Agreement, at the effective time of the Merger the Company’s outstanding stock options will be converted into options to purchase
United’s common stock. In addition, the warrant held by the United States Department of Treasury to purchase common stock of the Company will be converted into a warrant to purchase common stock of United if Treasury’s warrant is
outstanding when the Merger closes.
After the effective time of the Merger, the Bank, will merge with and into United Bank, a wholly-owned indirect
subsidiary of United (the “Bank Merger”). United Bank will survive the Bank Merger and continue to exist as a Virginia banking corporation.
Under the Agreement and subject to certain exceptions, the Company agreed to conduct its business in the ordinary course while the Merger is pending and,
except as permitted under the Agreement, refrain from taking certain specific actions without the consent of United. Shareholders of the Company and of United have approved the Agreement and the Merger, and the Company and United have received
regulatory approval for the Merger from the Virginia State Corporation Commission. The Company and United have not yet received regulatory approval from the Board of Governors of the Federal Reserve System (the “Board of Governors”).
Completion of the Merger remains subject to receipt of regulatory approval from the Board of Governors and certain other customary closing conditions.
For a description of risks related to the Merger and the Bank Merger, see “Risks Related to the Merger with United Bankshares, Inc.
(“UBSI”)” in Item 1A of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2012, and the registration statement filed by United with the SEC on Form S-4 on May 29, 2013 and all
amendments thereof and prospectus supplements thereunder.
Critical Accounting Policies
For the period ended September 30, 2013, there were no changes in the Company’s critical accounting policies as reflected in the Company’s most
recent annual report.
The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within our
statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly
from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our
transactions could change.
The allowance for loan losses is an estimate of the losses that are inherent in our loan portfolio. The allowance is based on
two basic principles of accounting: (i) Accounting for Contingencies (ASC 450, “Contingencies”), which requires that losses be accrued when they are probable of occurring and estimable and (ii) Accounting by Creditors for
Impairment of a Loan (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.
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Our allowance for loan losses has two basic components: the specific allowance and the general allowance. Each of
these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for impaired loans. Impairment testing includes consideration of the
borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses
based on the Company’s calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans, representing 1-4 family residential first and second trusts, including home equity lines-of-credit, are
collectively evaluated for impairment based upon factors such as levels and trends in delinquencies, trends in loss and problem loan identification, trends in volumes and concentrations, local and national economic trends and conditions including
estimated levels of housing price depreciation/homeowners’ loss of equity, competitive factors and other considerations. These factors are converted into reserve percentages and applied against the homogenous loan pool balances. Impaired loans
which meet the criteria for substandard, doubtful and loss are segregated from performing loans within the portfolio. Internally classified loans are then grouped by loan type (commercial, real estate-one-to-four family residential, real
estate-multi-family residential, real estate-non-farm, non-residential, real estate-construction, consumer, and farmland). The general formula is used to estimate the loss of non-classified loans. These un-criticized loans are also segregated by
loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends,
concentrations of credit, quality of the loan review system and the effect of external factors (i.e. competition and regulatory requirements). The factors assigned differ by loan type. The general allowance recognizes potential losses whose impact
on the portfolio has yet to be recognized by a specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights
given to each factor. Further information regarding the allowance for loan losses is provided under the caption “Provision for Loan Losses and Allowance for Loan Losses” later in this report and in Note 5 to the Consolidated Financial
Statements.
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the
date of foreclosure. Subsequent to foreclosure, management performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of like properties, length of time properties have been held, and our
ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further other-than-temporary deterioration in
market conditions.
The Company’s 1998 Stock Option Plan (the “1998 Plan”), which is stockholder approved, permitted the grant of share
options to its directors and officers for up to 2.3 million shares of common stock. The Company’s 2010 Equity Plan (the “2010 Plan”), which is also stockholder approved and replaces the 1998 Plan, permits the grant of share based
awards in the form of stock options, stock appreciation rights, restricted and unrestricted stock, performance units, options and other awards to its directors, officers and employees for up to 1.5 million shares of common stock. To date, the
Company has granted stock options and restricted stock under the 2010 Plan. The Company also has option awards outstanding under its 1998 Plan, but since May 2, 2010, the effective date of the 2010 Plan, no new awards can be granted under the
1998 Plan.
The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted.
Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest in equal
annual installments based on five years of continuous service and have ten-year contractual terms. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that currently uses historical
volatility of the Company’s stock based on a 7.2 year expected term, before exercise, for the options granted, and a risk-free interest rate based on the U.S. Treasury Department (the “Treasury”) curve in effect at the time of the
grant to estimate total stock-based compensation expense. This amount is then amortized on a straight-line basis over the requisite service period, currently five years, to salaries and benefits expense.
Restricted stock awards generally vest in equal installments over five years. The compensation expense associated with these awards is based on the grant date
fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as salaries and benefits expense ratably over the requisite service period, currently five years.
35
See Note 7 to the Consolidated Financial Statements for additional information regarding the plans and related
expense.
On a quarterly basis the Company reviews any securities which are considered to be impaired as defined by accounting guidance, to determine if
the impairment is deemed to be other-than-temporary. If it is determined that the impairment is other-than-temporary, i.e. impaired because of credit issues rather than interest rate, the investment is written down through a reduction in
non-interest income on the Statement of Income in accordance with accounting guidance. With regard to debt securities, if we do not intend to sell a debt security and it is more likely than not that we will not be required to sell the debt security
prior to recovery, we will then evaluate whether a credit loss has occurred. To determine whether a credit loss has occurred, we compare the amortized cost of the debt security to the present value of the cash flows we expect to be collected. If we
expect a cash flow shortfall, we will consider a credit loss to have occurred and will then consider the impairment to be other than temporary. We will recognize the amount of the impairment loss related to the credit loss in the results of
operations, with the remaining portion of the loss recorded through comprehensive income, net of applicable taxes. See Note 3 to the Consolidated Financial Statements for additional information regarding our securities and related impairment
testing.
Results of Operations
Summary
Financial Results
Net Income and Adjusted Operating Earnings
For the nine months ended September 30, 2013, the Company recorded net income available to common stockholders of $20.5 million, or $0.58 per diluted
common share, compared to net income available to common stockholders of $18.3 million, or $0.54 per diluted common share for the same period in 2012. The Company recorded net income available to common stockholders of $7.0 million, or $0.20 per
diluted common share, for the quarter ending September 30, 2013 compared to $7.1 million, or $0.21 per diluted common share, in the third quarter of 2012.
Adjusted operating earnings (a non-GAAP measure) for the three months ended September 30, 2013, were $7.9 million, or $0.23 per diluted common share,
compared to $5.8 million, or $0.17 per diluted common share, for the same period in 2012. The year-over-year improvement in adjusted operating earnings was largely attributable to the Company’s repurchase of all of its TARP preferred stock
during the fourth quarter of 2012, and related elimination of a $1.4 million effective quarterly dividend on preferred stock for the third quarter of 2013, a $1.3 million decrease in provision for loan losses, a $347 thousand decrease in
non-interest expense (which includes $1.2 million of merger-related expenses in the third quarter of 2013) and a decrease in provision for income taxes of $861 thousand (with a related tax effect adjustment of ($886) thousand). These items were
partially offset by a decrease in net interest income of $1.1 million, a $2.9 million decrease in non-interest income (which includes the impact of gains of $2.1 million generated by the sales of investment securities in the third quarter 2012).
Adjusted operating earnings for the nine months ended September 30, 2013, were $20.9 million, compared to $14.4 million for the same period in 2012.
The year-to-date earnings improvement was largely attributable to the Company’s repurchase of all of its TARP preferred stock during the fourth quarter of 2012, and related elimination of $4.1 million of effective quarterly dividends on
preferred stock for the first nine months of 2013, a $6.1 million decrease in provision for loan losses and an $846 thousand decrease in non-interest expense (which includes $2.0 million of merger-related expenses in the first nine months of 2013).
These items were partially offset by a decrease in net interest income of $3.2 million, and a decrease in provision for income taxes of $942 thousand (with a related tax effect adjustment of $1.6 million). The Company calculates adjusted operating
earnings by excluding impairment loss on investment securities, realized gains and losses on sale of investment securities, merger-related expenses, and certain other non-recurring items from net income available to common stockholders.
Net Interest Income
Net interest income is the excess of
interest earned on loans and investments over the interest paid on deposits and borrowings. Net interest income is the most significant component of our total revenue. Net interest income is affected by overall balance sheet growth, changes in
interest rates and changes in the mix of investments, loans,
36
deposits and borrowings. Net interest income was $25.3 million for the third quarter of 2013 and declined $1.1 million, or 4.2%, from the same quarter last year. Net interest income for the nine
months ended 2013 of $76.8 million was down $3.2 million, or 4.0%, from $80.1 million for the nine months ended September 30, 2012. The net interest margin increased 26 basis points from 3.62% in the third quarter of 2012, to 3.88% for the same
period in 2013. The year-over-year increase in the third quarter net interest margin was due to an improvement in the mix of interest-earning assets and interest-bearing deposits and a reduction in average interest-bearing deposit rates, the impact
of which was partially offset by lower average yield on loans. Average loan yields declined 25 basis points, from 5.46% to 5.21%, compared to average rates paid on interest-bearing deposits declining 16 basis points, from 0.91% to 0.75%.
Interest and dividend income decreased $2.5 million on average total interest-earnings assets of $2.62 billion for the three months ended September 30,
2013, compared to interest and dividend income generated by average total interest-earnings assets of $2.94 billion for the same period in 2012. The average rate earned on total interest-earning assets was 4.65% for the third quarter of 2013, as
compared to 4.50% for the third quarter 2012, and 4.58% for the second quarter 2013.
Interest expense decreased $1.4 million to $5.1 million generated on
an average total interest-bearing liability balance of $2.02 billion for the quarter ended September 30, 2013, from $6.5 million generated on an average total interest-bearing liability balance of $2.31 billion for the same period in 2012. The
decline in interest expense is mostly attributable to a series of interest rate reductions on interest-bearing deposit products and the continued repricing and run-off of higher cost deposits in the time deposit portfolio. The average rate paid on
total interest-bearing liabilities was 1.00% for the third quarter of 2013, as compared to 1.12% for the third quarter 2012, and 0.98% for the second quarter of 2013.
For the nine months ended September 30, 2013, interest and dividend income decreased $7.9 million on average total interest-earnings assets of $2.71
billion, compared to interest and dividend income generated by average total interest-earnings assets of $2.90 billion for the same period in 2012. The average rate earned on total interest-earning assets was 4.63% for the nine months ended
September 30, 2013, as compared to 4.68% for the same period in 2012.
For the nine months ended September 30, 2013, interest expense decreased
$4.7 million to $15.7 million generated on an average total interest-bearing liability balance of $2.1 billion, from $20.4 million generated on an average total interest-bearing liability balance of $2.3 billion for the same period in 2012. The
average rate paid on total interest-bearing liabilities was 1.00% for the nine months ended September 30, 2013, as compared to 1.19% for the same period in 2012.
37
The following tables provide a comparative average balance sheet and net interest income analysis for the three
and nine months ended September 30, 2013, as compared to the same period in 2012. Average rates are presented on a fully taxable-equivalent (FTE) basis, using a statutory Federal tax rate of 35% for 2013, and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
Income-
Expense
|
|
|
Average
Yields
/Rates
|
|
|
Average
Balance
|
|
|
Interest
Income-
Expense
|
|
|
Average
Yields
/Rates
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
(1)
|
|
$
|
483,096
|
|
|
$
|
2,769
|
|
|
|
2.53
|
%
|
|
$
|
550,210
|
|
|
$
|
2,806
|
|
|
|
2.26
|
%
|
|
Restricted investments
|
|
|
10,800
|
|
|
|
113
|
|
|
|
4.13
|
%
|
|
|
11,272
|
|
|
|
105
|
|
|
|
3.68
|
%
|
|
Loans, net of unearned income
(2)
|
|
|
2,092,844
|
|
|
|
27,429
|
|
|
|
5.21
|
%
|
|
|
2,176,109
|
|
|
|
29,820
|
|
|
|
5.46
|
%
|
|
Interest-bearing deposits in other banks
|
|
|
30,823
|
|
|
|
29
|
|
|
|
0.37
|
%
|
|
|
200,966
|
|
|
|
132
|
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
2,617,563
|
|
|
$
|
30,340
|
|
|
|
4.65
|
%
|
|
$
|
2,938,557
|
|
|
$
|
32,863
|
|
|
|
4.50
|
%
|
|
Other assets
|
|
|
165,054
|
|
|
|
|
|
|
|
|
|
|
|
82,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,782,617
|
|
|
|
|
|
|
|
|
|
|
$
|
3,021,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
416,985
|
|
|
$
|
288
|
|
|
|
0.27
|
%
|
|
$
|
380,623
|
|
|
$
|
357
|
|
|
|
0.37
|
%
|
|
Money market accounts
|
|
|
235,005
|
|
|
|
182
|
|
|
|
0.31
|
%
|
|
|
242,896
|
|
|
|
248
|
|
|
|
0.41
|
%
|
|
Savings accounts
|
|
|
464,945
|
|
|
|
352
|
|
|
|
0.30
|
%
|
|
|
569,339
|
|
|
|
585
|
|
|
|
0.41
|
%
|
|
Time deposits
|
|
|
565,986
|
|
|
|
2,360
|
|
|
|
1.70
|
%
|
|
|
665,193
|
|
|
|
3,071
|
|
|
|
1.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
1,682,921
|
|
|
$
|
3,182
|
|
|
|
0.75
|
%
|
|
$
|
1,858,051
|
|
|
$
|
4,261
|
|
|
|
0.91
|
%
|
|
Securities sold under agreement to repurchase
(3)
|
|
|
236,637
|
|
|
|
933
|
|
|
|
1.56
|
%
|
|
|
365,235
|
|
|
|
1,017
|
|
|
|
1.11
|
%
|
|
Other borrowed funds
|
|
|
37,120
|
|
|
|
20
|
|
|
|
0.21
|
%
|
|
|
22,282
|
|
|
|
242
|
|
|
|
4.25
|
%
|
|
Trust preferred capital notes
|
|
|
66,983
|
|
|
|
952
|
|
|
|
5.56
|
%
|
|
|
66,727
|
|
|
|
975
|
|
|
|
5.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
2,023,661
|
|
|
$
|
5,087
|
|
|
|
1.00
|
%
|
|
$
|
2,312,295
|
|
|
$
|
6,495
|
|
|
|
1.12
|
%
|
|
Noninterest-bearing demand and other liabilities
|
|
|
501,628
|
|
|
|
|
|
|
|
|
|
|
|
401,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,525,289
|
|
|
|
|
|
|
|
|
|
|
$
|
2,713,755
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
257,328
|
|
|
|
|
|
|
|
|
|
|
|
307,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,782,617
|
|
|
|
|
|
|
|
|
|
|
$
|
3,021,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
|
Net interest income and margin
|
|
|
|
|
|
$
|
25,253
|
|
|
|
3.88
|
%
|
|
|
|
|
|
$
|
26,368
|
|
|
|
3.62
|
%
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
129.4
|
%
|
|
|
|
|
|
|
|
|
|
|
127.1
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which are reflected as a component of
stockholders’ equity. Average yields on securities are stated on a tax equivalent basis, using a 35% rate.
|
|
(2)
|
Loans placed on non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $1.1 million and $2.0 million for the three months ended
September 30, 2013 and 2012, respectively.
|
|
(3)
|
The securities sold under agreement to repurchase related to customers had an average balance of $161.6 million at an average rate of 0.19% for the three months ended September 30, 2013, and $290.2 million at an
average rate of 0.23% for the same period 2012. Also, included are wholesale agreements with an average balance of $75.0 million at an average rate of 4.51% for the three months ended September 30, 2013, and $75.0 million at an average rate of
4.52% for the same period for 2012.
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
Income-
Expense
|
|
|
Average
Yields
/Rates
|
|
|
Average
Balance
|
|
|
Interest
Income-
Expense
|
|
|
Average
Yields
/Rates
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(1)
|
|
$
|
490,078
|
|
|
$
|
7,797
|
|
|
|
2.33
|
%
|
|
$
|
581,381
|
|
|
$
|
9,076
|
|
|
|
2.26
|
%
|
|
Restricted investments
|
|
|
10,702
|
|
|
|
340
|
|
|
|
4.24
|
%
|
|
|
11,254
|
|
|
|
310
|
|
|
|
3.68
|
%
|
|
Loans, net of unearned income
(2)
|
|
|
2,157,464
|
|
|
|
84,325
|
|
|
|
5.24
|
%
|
|
|
2,172,353
|
|
|
|
90,868
|
|
|
|
5.60
|
%
|
|
Interest-bearing deposits in other banks
|
|
|
47,165
|
|
|
|
109
|
|
|
|
0.31
|
%
|
|
|
132,897
|
|
|
|
257
|
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
2,705,409
|
|
|
$
|
92,571
|
|
|
|
4.63
|
%
|
|
$
|
2,897,885
|
|
|
$
|
100,511
|
|
|
|
4.68
|
%
|
|
Other assets
|
|
|
121,832
|
|
|
|
|
|
|
|
|
|
|
|
75,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,827,241
|
|
|
|
|
|
|
|
|
|
|
$
|
2,973,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
430,695
|
|
|
$
|
934
|
|
|
|
0.29
|
%
|
|
$
|
354,154
|
|
|
$
|
972
|
|
|
|
0.37
|
%
|
|
Money market accounts
|
|
|
226,830
|
|
|
|
515
|
|
|
|
0.30
|
%
|
|
|
227,301
|
|
|
|
704
|
|
|
|
0.41
|
%
|
|
Savings accounts
|
|
|
484,528
|
|
|
|
1,097
|
|
|
|
0.30
|
%
|
|
|
599,799
|
|
|
|
2,001
|
|
|
|
0.45
|
%
|
|
Time deposits
|
|
|
589,847
|
|
|
|
7,499
|
|
|
|
1.70
|
%
|
|
|
710,515
|
|
|
|
9,991
|
|
|
|
1.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
1,731,900
|
|
|
$
|
10,045
|
|
|
|
0.78
|
%
|
|
$
|
1,891,769
|
|
|
$
|
13,668
|
|
|
|
0.97
|
%
|
|
Securities sold under agreement to repurchase
(3)
|
|
|
281,098
|
|
|
|
2,774
|
|
|
|
1.32
|
%
|
|
|
321,871
|
|
|
|
3,068
|
|
|
|
1.27
|
%
|
|
Other borrowed funds
|
|
|
30,582
|
|
|
|
54
|
|
|
|
0.23
|
%
|
|
|
24,088
|
|
|
|
779
|
|
|
|
4.25
|
%
|
|
Trust preferred capital notes
|
|
|
66,921
|
|
|
|
2,859
|
|
|
|
5.63
|
%
|
|
|
66,663
|
|
|
|
2,932
|
|
|
|
5.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
2,110,501
|
|
|
$
|
15,732
|
|
|
|
1.00
|
%
|
|
$
|
2,304,391
|
|
|
$
|
20,447
|
|
|
|
1.19
|
%
|
|
Noninterest-bearing demand and other liabilities
|
|
|
446,730
|
|
|
|
|
|
|
|
|
|
|
|
369,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,557,231
|
|
|
|
|
|
|
|
|
|
|
$
|
2,673,560
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
270,010
|
|
|
|
|
|
|
|
|
|
|
|
299,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,827,241
|
|
|
|
|
|
|
|
|
|
|
$
|
2,973,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
Net interest income and margin
|
|
|
|
|
|
$
|
76,839
|
|
|
|
3.85
|
%
|
|
|
|
|
|
$
|
80,064
|
|
|
|
3.74
|
%
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
128.2
|
%
|
|
|
|
|
|
|
|
|
|
|
125.8
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Yields on investment securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which are reflected as a component of
stockholders’ equity. Average yields on loans and securities are stated on a fully taxable-equivalent basis, using a 35% rate.
|
|
(2)
|
Loans placed on non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $3.7 million and $3.7 million for the nine months ended
September 30, 2013, and 2012, respectively.
|
|
(3)
|
The sold under agreement to repurchase related to customers had an average balance of $205.5 million at an average rate of 0.16% for the nine months ended September 30, 2013, and $246.9 million at an average rate
of 0.29% for the same period 2012. Also, included are wholesale agreements with an average balance of $75.0 million at an average rate of 4.51% for the nine months ended September 30, 2013, and $75.0 million at an average rate of 4.52% for the
same period for 2012.
|
39
Provision for Loan Losses and Allowance for Loan Losses
Provision for loan losses was $1.8 million for the quarter ended September 30, 2013, down $1.3 million, or 41.0%, compared to $3.1 million in the same
period in 2012. Net charge-offs were $2.1 million for the three months ended September 30, 2013, compared to $8.5 million for the quarter ended September 30, 2012. For the nine months ended September 30, 2013, provision for loan
losses totaled $6.2 million, compared to $12.3 million for the prior-year period, with 2013 year-to-date net charge-offs amounting to $8.1 million, compared to $19.7 million in the nine months ended September 30, 2012. The decrease in
non-accruing loans from $37.9 million at December 31, 2012 to $28.6 million at September 30, 2013, and the reduction in the allowance for loan losses from $42.8 million at December 31, 2012 to $40.9 million at September 30, 2013,
drove changes to the Company’s loan loss reserve and non-performing loan coverage ratios. As of September 30, 2013, reserves for loan losses represented 1.98% of total loans, up from 1.95% at December 31, 2012, with reserves covering
137.5% of total non-performing loans as of September 30, 2013. The increase in the allowance for loan losses as a percentage of total loans from December 31, 2012, to September 30, 2013, is due to higher specific reserves related to
certain credits, partially offset by the decrease in total loans outstanding. As a result, the third quarter analysis of the adequacy of the loan loss reserve indicated that loan loss provisioning of $1.8 million was sufficient to maintain
appropriate coverage. The $6.4 million decrease in net charge-offs for the three months ended September 30, 2013, compared to the same period in 2012, was primarily due to net charge-offs of non-farm, non-residential real estate loans
decreasing $4.9 million, from $5.5 million in the third quarter of 2012, to $630 thousand in the third quarter of 2013. The Company’s ratio of net charge-offs to average total loans outstanding improved to 0.37% for the nine months ended
September 30, 2013, compared to 0.91% for the same period in 2012.
Total non-performing assets and loans 90+ days past due declined from $50.2
million at December 31, 2012, to $39.7 million at September 30, 2013. Non accruing loans were reduced on a net basis by $9.3 million based on reductions of $23.0 million, partially offset by additions to non-accruing loans of $13.7
million. Reductions to non-accruing loans included note sale proceeds of $2.8 million, payoff of a land loan of $2.3 million, and an upgrade of a $1.6 million residential mortgage loan. New loans placed on non-accrual status include an
owner-occupied commercial real estate loan of $2.7 million and a loan secured by a residential construction project of $1.3 million. The $2.3 million net reduction to OREO was based on reductions of $6.1 million and partially offset by new OREO
properties totaling $3.8 million. Reductions to OREO included the sale of a land project zoned for residential condominium usage for $1.3 million and the sale of a single-family residence for $1.0 million. Additions to OREO included a land
project zoned for hotel use in the amount of $2.1 million. See “Risk Elements and Non-Performing Assets” later in this discussion for more information on non-performing assets and loans 90+ days past due and other impaired loans.
Management believes that the allowance for loan losses is adequate at September 30, 2013. However, there can be no assurance that additional provisions
for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, and the residential real estate
market in particular, on a national basis or in the Company’s market area, or changes in the circumstances of particular borrowers.
The Company
generates a quarterly analysis of the allowance for loan losses, with the objective of quantifying portfolio risk into a dollar figure of inherent losses, thereby translating the subjective risk value into an objective number. Emphasis is placed on
at least semi-annual independent external loan reviews and monthly internal reviews. The determination of the allowance for loan losses is based on applying and summing the results of eight qualitative factors and a historical loss factor to each
category of loans along with any specific allowance for impaired and adversely classified loans within the particular category. Each factor is assigned a percentage weight and that total weight is applied to each loan category. The resulting sum
from each loan category is then combined to arrive at a total allowance for all categories. Factors are different for each loan category. Qualitative factors include: levels and trends in delinquencies and non-accruals, trends in volumes and terms
of loans, effects of any changes in lending policies, the experience, ability and depth of management, national and local economic trends and conditions, concentrations of credit, quality of the Company’s loan review system, and regulatory
requirements. The total allowance required thus changes as the percentage weight assigned to each factor is increased or decreased due to its particular circumstance, as historical loss factors are updated, as the various types and categories of
loans change as a percentage of total loans and as specific allowances are required on impaired loans and charge-offs occur. The decision to specifically reserve for or to charge-off or partially charge-off an impaired loan balance is based upon an
evaluation of that loan’s potential to improve, based upon near term change in financial or market conditions, which would enable collection of the portion of the loan determined to be impaired. If these conditions are determined to be
favorable, a specific reserve would be established as opposed to a charge-off. For further information regarding the allowance for loan losses see Note 5 to the Consolidated Financial Statements.
40
The following schedule summarizes the changes in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
2013
|
|
|
Nine Months
Ended
September 30,
2012
|
|
|
Twelve Months
Ended
December 31,
2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance, beginning of period
|
|
$
|
42,773
|
|
|
$
|
48,729
|
|
|
$
|
48,729
|
|
|
Provision for loan losses
|
|
|
6,207
|
|
|
|
12,267
|
|
|
|
14,826
|
|
|
Charge-Offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,560
|
|
|
|
5,904
|
|
|
|
5,904
|
|
|
Real estate-non-farm, non-residential
|
|
|
1,783
|
|
|
|
6,387
|
|
|
|
6,388
|
|
|
Real estate-construction
|
|
|
4,309
|
|
|
|
5,593
|
|
|
|
7,587
|
|
|
Consumer
|
|
|
72
|
|
|
|
292
|
|
|
|
306
|
|
|
Real estate-one-to-four family residential
|
|
|
568
|
|
|
|
3,613
|
|
|
|
4,022
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
$
|
9,291
|
|
|
$
|
21,789
|
|
|
$
|
24,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
189
|
|
|
|
929
|
|
|
|
1,035
|
|
|
Real estate-non-farm, non-residential
|
|
|
88
|
|
|
|
43
|
|
|
|
1,081
|
|
|
Real estate-construction
|
|
|
601
|
|
|
|
487
|
|
|
|
539
|
|
|
Consumer
|
|
|
34
|
|
|
|
34
|
|
|
|
55
|
|
|
Real estate-one-to-four family residential
|
|
|
308
|
|
|
|
470
|
|
|
|
597
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
118
|
|
|
|
118
|
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
$
|
1,220
|
|
|
$
|
2 ,081
|
|
|
$
|
3,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
8,070
|
|
|
|
19,708
|
|
|
|
20,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance, end of period
|
|
$
|
40,909
|
|
|
$
|
41,288
|
|
|
$
|
42,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charges-offs to average total loans outstanding during period
|
|
|
0.37
|
%
|
|
|
0.91
|
%
|
|
|
0.95
|
%
|
The following schedule provides a breakdown of the allowance for loan loss by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
September 30, 2012
|
|
|
December 31, 2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
Allocation of the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,489
|
|
|
$
|
4,331
|
|
|
$
|
5,455
|
|
|
Real estate-non-farm, non-residential
|
|
|
14,616
|
|
|
|
10,039
|
|
|
|
11,592
|
|
|
Real estate-construction
|
|
|
8,292
|
|
|
|
11,301
|
|
|
|
14,939
|
|
|
Consumer
|
|
|
222
|
|
|
|
237
|
|
|
|
167
|
|
|
Real estate-one-to-four family residential
|
|
|
9,034
|
|
|
|
14,607
|
|
|
|
10,420
|
|
|
Real estate-multi-family residential
|
|
|
141
|
|
|
|
651
|
|
|
|
78
|
|
|
Farmland
|
|
|
111
|
|
|
|
122
|
|
|
|
122
|
|
|
Unallocated
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
40,909
|
|
|
$
|
41,288
|
|
|
$
|
42,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a more detailed allocation of the allowance for loan losses, including general and specific allowances for each segment of
the loan portfolio, see Note 5 to the Consolidated Financial Statements.
Risk Elements and Non-Performing Assets
Non-performing assets consist of non-accrual loans and OREO (foreclosed properties). For the nine months ended September 30, 2013, total
non-performing assets and loans 90+ days past due and still accruing interest decreased by $10.5 million, from $50.2 million at December 31, 2012, to $39.7 million at September 30, 2013. As a result, the
41
ratio of non-performing assets and loans 90+ days past due and still accruing to total assets decreased from 1.78% of total assets at December 31, 2012, to 1.44% of total assets at
September 30, 2013. The decrease during the first nine months of 2013 in non-performing assets and loans 90+ days past due and still accruing as a percent of total assets was primarily due to decreased non-performing assets in the
Company’s real estate construction and residential and one-to-four family residential real estate segments of the loan portfolio and decreased OREO balances, partially offset by an increase in non-performing, non-residential real estate
loans. Loans are placed in non-accrual status when in the opinion of management the collection of additional interest is unlikely or a specific loan meets the criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on non-accrual status until the loan is current as to both principal and interest or the borrower demonstrates the ability to pay and remain current, or both.
Our underwriting for new acquisition, development, and construction loans always includes the interest cost for the loan whether an interest reserve is
approved or not. In other words, the equity requirement in the new loan is established reflecting the amount of interest required to serve the project. We continually monitor the adequacy of reserve requirements, including interest reserves,
during the draw process to ensure the project is being completed on time and within budget. We have restructured loans due to the slow market, re-underwriting each loan based on time and cost to complete. We do not continue funding
interest reserves just to keep the loan from becoming non-performing. We consider whether the loan to value ratio will support current and future advances and whether the project is meeting certain completion criteria necessary to successfully
complete the project. Once a loan becomes non-performing, we do not allow draws on interest reserves.
Other impaired loans that are currently
performing, and TDRs, performing in accordance with their modified terms, decreased from $134.1 million at December 31, 2012, to $107.3 million at September 30, 2013. These loans have been identified by the Company as having certain
weaknesses as a result of the Company’s specific knowledge about the customer or recent credit events, and are classified as substandard and subject to impairment testing at each balance sheet date.
Included in the loan portfolio at September 30, 2013, are loans classified as TDRs totaling $21.8 million, a reduction of $21.7 million from $43.5
million at December 31, 2012. The reduction in TDRs during the first nine months of 2013, was attributable to $2.4 million in new TDRs, removal from TDR classification of loans based on payment performance of $11.0 million, principal payments
of $5.1 million, charge-offs of $643 thousand, and $7.3 million in loans moved to non-accrual status. Non-farm, non-residential real estate TDRs accounted for $15.4 million of the decrease in TDRs from December 31, 2012 to September 30,
2013. These loans, which have been provided concessions such as rate reductions, payment deferrals, and in some cases forgiveness of principal, are all on accrual status. If the loan was on non-accrual at the time of the concession it is the
Company’s policy that it remain on non-accrual status and perform in accordance with the modified terms for a period of six months. All loans reported as troubled debt restructurings accrue interest. The Company does not report any non-accrual
loans as troubled debt restructurings. If a troubled debt restructuring is on non-accrual status, it is reported as a non-accrual asset and not as a troubled debt restructuring.
Foreclosed real properties (or OREO) include properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt. The
reduction in OREO during the first nine months of 2013 was attributable to sales proceeds of $4.4 million, and write-downs totaling $1.7 million, partially offset by new OREO totaling $3.7 million. Write-downs for the first nine months were
primarily attributable to a single relationship with multiple OREO properties that face certain legal, title, and or maintenance issues. Such properties, which are held for resale, are carried at fair value, including a reduction for the
estimated selling expenses. Reviews and discussions with regard to value and disposition of each foreclosed property are conducted monthly by the Company’s Special Asset Committee. The carrying value of a foreclosed asset is immediately
adjusted down when new information is obtained, including a potentially acceptable offer, the sale of a similar property in the vicinity of one of the Company’s assets, and/or a change in the price the property is being listed for. The Company
also uses the advice of outside consultants and real estate agents with knowledge of the markets the properties are located in. Appraisals are ordered when the property is foreclosed on, but are not routinely updated at each balance sheet date. The
Company confirms that it performed the above noted procedures and made the proper impairment adjustments, if any, at the balance sheet date.
42
Total non-performing assets as of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
September 30, 2012
|
|
|
December 31, 2012
|
|
|
|
|
(In Thousands of Dollars)
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,663
|
|
|
$
|
3,443
|
|
|
$
|
3,317
|
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
2,655
|
|
|
|
5,689
|
|
|
|
3,606
|
|
|
Home equity loans and lines
|
|
|
2,382
|
|
|
|
2,576
|
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
5,037
|
|
|
$
|
8,265
|
|
|
$
|
6,104
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
4,571
|
|
|
|
1,804
|
|
|
|
1,791
|
|
|
Non-owner-occupied
|
|
|
3,239
|
|
|
|
4,731
|
|
|
|
3,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-non-farm, non-residential
|
|
$
|
7,810
|
|
|
$
|
6,535
|
|
|
$
|
5,655
|
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
4,112
|
|
|
|
10,510
|
|
|
|
16,976
|
|
|
Commercial
|
|
|
8,976
|
|
|
|
16,679
|
|
|
|
5,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-construction:
|
|
$
|
13,088
|
|
|
$
|
27,189
|
|
|
$
|
22,836
|
|
|
Consumer
|
|
|
23
|
|
|
|
18
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
28,621
|
|
|
$
|
45,450
|
|
|
$
|
37,929
|
|
|
OREO
|
|
|
9,923
|
|
|
|
14,089
|
|
|
|
12,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
38,544
|
|
|
$
|
59,539
|
|
|
$
|
50,231
|
|
|
|
|
|
|
|
Loans 90+ days past due and still accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
876
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
876
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-owner-occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-non-farm, non-residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-construction:
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90+ days and still accruing
|
|
$
|
1,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Total non-performing assets and loans past due 90+days
|
|
$
|
39,670
|
|
|
$
|
59,539
|
|
|
$
|
50,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
September 30, 2012
|
|
|
December 31, 2012
|
|
|
Non-performing assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to total loans:
|
|
|
1.87
|
%
|
|
|
2.77
|
%
|
|
|
2.29
|
%
|
|
to total assets:
|
|
|
1.40
|
%
|
|
|
1.98
|
%
|
|
|
1.78
|
%
|
|
Non-performing assets and 90+ days past due loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to total loans:
|
|
|
1.92
|
%
|
|
|
2.77
|
%
|
|
|
2.29
|
%
|
|
to total assets:
|
|
|
1.44
|
%
|
|
|
1.98
|
%
|
|
|
1.78
|
%
|
|
Allowance for loan losses to total loans
|
|
|
1.98
|
%
|
|
|
1.92
|
%
|
|
|
1.95
|
%
|
|
Allowance for loan losses to non-performing loans
|
|
|
137.52
|
%
|
|
|
90.84
|
%
|
|
|
112.77
|
%
|
43
Non-performing loans continue to be concentrated in residential and commercial construction and land development
loans in outer sub-markets that continue to be impacted by the downturn in residential real estate markets and current economic and employment conditions. As of September 30, 2013, $13.1 million, or 45.7%, of non-performing loans represented
acquisition, development and construction (“ADC”) loans; $7.8 million, or 27.3%, represented non-farm, non-residential loans; $2.7 million, or 9.3%, represented commercial and industrial (“C&I”) loans; and $5.0 million, or
17.6%, represented loans on one-to-four family residential properties. As of September 30, 2013, specific reserves of $19.8 million have been established for non-performing loans and other loans determined to be impaired. There was no interest
actually received on non-accrual loans in the nine months ended September 30, 2012, and $249 thousand for the nine months ended September 30, 2013. The Company continues to pursue an aggressive campaign to further reduce non-performing
assets and other impaired loans and is implementing and executing various disposition strategies on an ongoing basis. See Note 5 to the Consolidated Financial Statements for additional information regarding the Company’s non-performing loans.
The following provides a breakdown of the construction and non-farm/non-residential loan portfolios by location, including loans on non-accrual status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
Residential, Acquisition, Development and Construction
By County/Jurisdiction of Origination:
(Dollars in
thousands)
|
|
Total
Outstandings
|
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
|
District of Columbia
|
|
$
|
1,146
|
|
|
|
0.7
|
%
|
|
$
|
314
|
|
|
|
0.2
|
%
|
|
|
—
|
|
|
Montgomery, MD
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince Georges, MD
|
|
|
7,122
|
|
|
|
4.4
|
%
|
|
|
3,042
|
|
|
|
1.9
|
%
|
|
|
—
|
|
|
Other Counties in MD
|
|
|
3,542
|
|
|
|
2.2
|
%
|
|
|
56
|
|
|
|
—
|
|
|
|
—
|
|
|
Arlington/Alexandria, VA
|
|
|
41,848
|
|
|
|
26.0
|
%
|
|
|
700
|
|
|
|
0.5
|
%
|
|
|
0.4
|
%
|
|
Fairfax, VA
|
|
|
28,515
|
|
|
|
17.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Culpeper/Fauquier, VA
|
|
|
10,377
|
|
|
|
6.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Frederick, VA
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
-0.1
|
%
|
|
Henrico, VA
|
|
|
943
|
|
|
|
0.6
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loudoun, VA
|
|
|
12,972
|
|
|
|
8.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince William, VA
|
|
|
29,332
|
|
|
|
18.3
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Spotsylvania, VA
|
|
|
611
|
|
|
|
0.4
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stafford, VA
|
|
|
19,412
|
|
|
|
12.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in VA
|
|
|
2,600
|
|
|
|
1.6
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
-0.1
|
%
|
|
Outside VA, D.C. & MD
|
|
|
2,268
|
|
|
|
1.4
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,688
|
|
|
|
100.0
|
%
|
|
$
|
4,112
|
|
|
|
2.6
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
Commercial, Acquisition, Development and Construction
By County/Jurisdiction of Origination:
(Dollars in
thousands)
|
|
Total
Outstandings
|
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
|
District of Columbia
|
|
$
|
1,054
|
|
|
|
1.0
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Montgomery, MD
|
|
|
2,000
|
|
|
|
1.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince Georges, MD
|
|
|
6,333
|
|
|
|
6.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in MD
|
|
|
2,034
|
|
|
|
1.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Arlington/Alexandria, VA
|
|
|
495
|
|
|
|
0.5
|
%
|
|
|
495
|
|
|
|
0.4
|
%
|
|
|
—
|
|
|
Fairfax, VA
|
|
|
1,509
|
|
|
|
1.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
%
|
|
Culpeper/Fauquier, VA
|
|
|
1,348
|
|
|
|
1.3
|
%
|
|
|
1,108
|
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
|
Frederick, VA
|
|
|
2,000
|
|
|
|
1.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Henrico, VA
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loudoun, VA
|
|
|
14,058
|
|
|
|
13.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince William, VA
|
|
|
42,956
|
|
|
|
41.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Spotsylvania, VA
|
|
|
1,580
|
|
|
|
1.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stafford, VA
|
|
|
23,764
|
|
|
|
22.7
|
%
|
|
|
6,538
|
|
|
|
6.3
|
%
|
|
|
2.1
|
%
|
|
Other Counties in VA
|
|
|
5,377
|
|
|
|
5.1
|
%
|
|
|
835
|
|
|
|
0.8
|
%
|
|
|
—
|
|
|
Outside VA, D.C. & MD
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104,508
|
|
|
|
100.0
|
%
|
|
$
|
8,976
|
|
|
|
8.6
|
%
|
|
|
3.3
|
%
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
Non-Farm/Non-Residential
By
County/Jurisdiction of Origination:
(Dollars in thousands)
|
|
Total
Outstandings
|
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
|
District of Columbia
|
|
$
|
64,150
|
|
|
|
5.9
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Montgomery, MD
|
|
|
16,382
|
|
|
|
1.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince Georges, MD
|
|
|
64,249
|
|
|
|
5.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in MD
|
|
|
51,170
|
|
|
|
4.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Arlington/Alexandria, VA
|
|
|
144,508
|
|
|
|
13.3
|
%
|
|
|
910
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Fairfax, VA
|
|
|
272,876
|
|
|
|
25.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
%
|
|
Culpeper/Fauquier, VA
|
|
|
4,793
|
|
|
|
0.5
|
%
|
|
|
1,576
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Frederick, VA
|
|
|
7,567
|
|
|
|
0.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Henrico, VA
|
|
|
18,646
|
|
|
|
1.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loudoun, VA
|
|
|
131,033
|
|
|
|
12.0
|
%
|
|
|
3,661
|
|
|
|
0.3
|
%
|
|
|
—
|
|
|
Prince William, VA
|
|
|
197,854
|
|
|
|
18.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Spotsylvania, VA
|
|
|
21,292
|
|
|
|
2.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stafford, VA
|
|
|
18,930
|
|
|
|
1.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
%
|
|
Other Counties in VA
|
|
|
67,973
|
|
|
|
6.2
|
%
|
|
|
1,663
|
|
|
|
0.2
|
%
|
|
|
—
|
|
|
Outside VA, D.C. & MD
|
|
|
8,764
|
|
|
|
0.8
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,090,187
|
|
|
|
100.0
|
%
|
|
$
|
7,810
|
|
|
|
0.7
|
%
|
|
|
0.2
|
%
|
Total TDRs as of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
September 30, 2012
|
|
|
December 31, 2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,477
|
|
|
$
|
6,910
|
|
|
$
|
6,875
|
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
$
|
1,437
|
|
|
|
4,585
|
|
|
|
4,303
|
|
|
Home equity loans and lines
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
1,437
|
|
|
$
|
4,585
|
|
|
$
|
4,303
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
$
|
7,127
|
|
|
|
3,395
|
|
|
|
9,528
|
|
|
Non-owner-occupied
|
|
|
2,739
|
|
|
|
19,160
|
|
|
|
15,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-non-farm, non-residential
|
|
$
|
9,866
|
|
|
$
|
22,555
|
|
|
$
|
25,307
|
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
—
|
|
|
|
3,622
|
|
|
|
73
|
|
|
Commercial
|
|
|
8,014
|
|
|
|
7,220
|
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-construction:
|
|
$
|
8,014
|
|
|
$
|
10,842
|
|
|
$
|
6,963
|
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
21,794
|
|
|
$
|
44,892
|
|
|
$
|
43,448
|
|
Included in this amount of $21.8 million, the Bank had TDRs that were performing in accordance with their modified terms of
$19.7 million at September 30, 2013. At December 31, 2012, all of the Company’s TDRs were performing in accordance with their modified terms.
Concentrations of Credit Risk
The Bank does general
banking business, serving the commercial and personal banking needs of its customers. The Bank’s market area consists of the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun, Prince William,
Spotsylvania and Stafford Counties, the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park, and, to a lesser extent, certain Maryland suburbs and the city of Washington, D.C. Substantially all of the
Company’s loans are made within its market area.
45
The ultimate collectability of the Bank’s loan portfolio and the ability to realize the value of any
underlying collateral, if needed, are influenced by the economic conditions of the market area. The Company’s operating results are therefore closely related to the economic conditions and trends in the Metropolitan Washington, D.C. area.
At September 30, 2013, the Company had $1.43 billion, or 69.1%, of total loans concentrated in commercial real estate. Commercial real estate for
purposes of this discussion includes all construction loans, loans secured by multi-family residential properties and loans secured by non-farm, non-residential properties. At December 31, 2012, commercial real estate loans were $1.52 billion,
or 69.2%, of total loans. Total construction loans of $265.2 million at September 30, 2013, represented 12.8% of total loans, loans secured by multi-family residential properties of $70.3 million represented 3.4% of total loans, and loans
secured by non-farm, non-residential properties of $1.1 billion represented 52.8%.
Construction loans at September 30, 2013 included $145.3 million
in loans to commercial builders of single family residential property and $15.4 million to individuals on single family residential property, together representing 7.8% of total loans. These loans are made to a number of unrelated entities and
generally have a term of twelve to eighteen months. In addition, the Company had $104.5 million of construction loans on non-residential commercial property at September 30, 2013, representing 5.1% of total loans. Total construction loans of
$265.2 million include $120.3 million in land acquisition and/or development loans on residential property and $53.8 million in land acquisition and/or development loans on commercial property, together totaling $174.1 million, or 8.4% of total
loans. Potential adverse developments in the Northern Virginia real estate market or economy, including substantial increases in mortgage interest rates, slower housing sales, and increased commercial property vacancy rates, could have an adverse
impact on these groups of loans and the Bank’s income and financial position. At September 30, 2013, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio. An industry for this
purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other
conditions. The Bank has commercial loans of $218.2 million, or 10.6% of the Bank’s total loan portfolio, to businesses and organizations, including trade associations, professional corporations, community associations, government contractors,
medical practitioners, property management companies, religious organizations and houses of worship, heavy equipment contractors and others primarily located in the Northern Virginia market.
The Bank has established formal policies relating to the credit and collateral requirements in loan originations including policies that establish limits on
various loan types as a percentage of total loans and total capital. Loans to purchase real property are generally collateralized by the related property with limitations based on the property’s appraised value. Credit approval is primarily a
function of collateral and the evaluation of the creditworthiness of the individual borrower and guarantors and/or the individual project, to include an analysis of cash flows and secondary repayment sources.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant
to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land
which represent in total 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s
commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate
lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in
commercial real estate loans. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened portfolio monitoring and reporting, and strong underwriting criteria with respect to its
commercial real estate portfolio. The Company is well-capitalized. Nevertheless, it is possible that the Company could be required to maintain higher levels of capital as a result of our commercial real estate concentration, which could require us
to obtain additional capital, and may adversely affect stockholder returns.
Non-Interest Income
Non-interest income represented 7.9% and 14.1% of total revenue for the nine months ended September 30, 2013, and September 30, 2012, respectively.
Although interest income is our primary source of revenue, we remain committed to increasing non-interest income as a way to improve profitability and diversify our sources of revenue.
46
For the three months ended September 30, 2013, the Company recognized $1.8 million in non-interest income,
compared to non-interest income of $4.7 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, the Company recognized $6.6 million in non-interest income, compared to non-interest income of
$13.1 million for the nine months ended September 30, 2012.
The following table presents the components of non-interest income for the three and
nine months ended September 30, 2013, and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
From the Nine Months
Ended
September, 2012 to the
Nine Months Ended
September 30, 2013
|
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
$ change
|
|
|
% change
|
|
|
Service charges and other fees
|
|
$
|
900
|
|
|
$
|
882
|
|
|
$
|
2,736
|
|
|
$
|
2,638
|
|
|
$
|
98
|
|
|
|
3.7
|
%
|
|
Non-deposit investment services commissions
|
|
|
248
|
|
|
|
211
|
|
|
|
775
|
|
|
|
705
|
|
|
|
70
|
|
|
|
9.9
|
%
|
|
Gains on loans held-for-sale
|
|
|
321
|
|
|
|
1,082
|
|
|
|
2,018
|
|
|
|
2,913
|
|
|
|
(895
|
)
|
|
|
-30.7
|
%
|
|
Gain on sale of securities available-for-sale
|
|
|
—
|
|
|
|
2,056
|
|
|
|
—
|
|
|
|
5,976
|
|
|
|
(5,976
|
)
|
|
|
-100.0
|
%
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
302
|
|
|
|
50
|
|
|
|
909
|
|
|
|
159
|
|
|
|
750
|
|
|
|
471.7
|
%
|
|
Other
|
|
|
51
|
|
|
|
444
|
|
|
|
138
|
|
|
|
704
|
|
|
|
(566
|
)
|
|
|
-80.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income
|
|
$
|
1,822
|
|
|
$
|
4,725
|
|
|
$
|
6,576
|
|
|
$
|
13,095
|
|
|
$
|
(6,519
|
)
|
|
|
-49.8
|
%
|
Included in the third quarter 2012 non-interest income was a gain on sale of securities of $2.1 million, while the third
quarter of 2013 did not include a gain or loss on sale of securities. For the nine months ended September 30, 2012, non-interest income included a gain on sale of securities of $6.0 million, while non-interest income for the nine months ended
September 30, 2013, did not include a gain or loss on sale of securities.
Fees and net gains on loans held-for-sale decreased in the third quarter
2013, on a year-over-year basis, by $761 thousand, or 70.3%. The decrease can be attributed to a lower volume of mortgage loans originated for sale in the secondary market due to higher interest rates that decreased refinance activity, and the
Company’s focus on holding one-to-four family residential loans held in portfolio due to less competitive rates on mortgage products offered by correspondents in the secondary mortgage market. For the nine months ended September 30, 2013,
fees and net gains on loans held-for-sale decreased $895 thousand, or 30.7%, compared to the nine months ended September 30, 2012.
Income generated
by bank-owned life insurance increased $252 thousand for the three months ended September 30, 2013, and $750 thousand for the nine months ended September 30, 2013, compared to the same periods in the prior year. The increase can be
primarily attributed to $30.0 million in bank-owned life insurance assets purchased during the second half of 2012 that have contributed to earnings during the nine months ended September 30, 2013.
47
Non-Interest Expense
For the three months ended September 30, 2013, the Company recognized $14.9 million in non-interest expense, compared to non-interest expense of $15.2
million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, the Company recognized $46.6 million in non-interest expense, compared to non-interest expense of $47.4 million for the nine months ended
September 30, 2012. The following table presents the components of non-interest expense for the three and nine months ended September 30, 2013, and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
From the Nine Months
Ended
September, 2012 to the
Nine Months Ended
September 30, 2013
|
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
$ change
|
|
|
% change
|
|
|
Salaries and employee benefits
|
|
$
|
6,436
|
|
|
$
|
7,493
|
|
|
$
|
21,327
|
|
|
$
|
22,517
|
|
|
$
|
(1,190
|
)
|
|
|
-5.3
|
%
|
|
Premises and equipment expense
|
|
|
2,314
|
|
|
|
2,380
|
|
|
|
7,038
|
|
|
|
7,142
|
|
|
|
(104
|
)
|
|
|
-1.5
|
%
|
|
FDIC insurance
|
|
|
504
|
|
|
|
660
|
|
|
|
1,536
|
|
|
|
2,488
|
|
|
|
(952
|
)
|
|
|
-38.3
|
%
|
|
(Gain) loss on other real estate owned
|
|
|
(71
|
)
|
|
|
(141
|
)
|
|
|
1,712
|
|
|
|
1,566
|
|
|
|
146
|
|
|
|
9.3
|
%
|
|
OREO expense
|
|
|
406
|
|
|
|
322
|
|
|
|
879
|
|
|
|
902
|
|
|
|
(23
|
)
|
|
|
-2.5
|
%
|
|
Franchise tax expense
|
|
|
752
|
|
|
|
935
|
|
|
|
2,247
|
|
|
|
2,435
|
|
|
|
(188
|
)
|
|
|
-7.7
|
%
|
|
Data processing expense
|
|
|
705
|
|
|
|
664
|
|
|
|
2,104
|
|
|
|
1,992
|
|
|
|
112
|
|
|
|
5.6
|
%
|
|
Merger-related expense
|
|
|
1,155
|
|
|
|
—
|
|
|
|
2,021
|
|
|
|
—
|
|
|
|
2,021
|
|
|
|
100.0
|
%
|
|
Other operating expense
|
|
|
2,664
|
|
|
|
2,899
|
|
|
|
7,686
|
|
|
|
8,354
|
|
|
|
(668
|
)
|
|
|
-8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense
|
|
$
|
14,865
|
|
|
$
|
15,212
|
|
|
$
|
46,550
|
|
|
$
|
47,396
|
|
|
$
|
(846
|
)
|
|
|
-1.8
|
%
|
Non-interest expense decreased $347 thousand, or 2.3%, from $15.2 million in the third quarter of 2012, to $14.9 million in
the third quarter of 2013. The year-over-year decrease was primarily related to a decrease of $1.1 million in salaries and employee benefits, a decrease of $156 thousand in FDIC insurance premiums, a $235 thousand decrease in other operating
expense, partially offset by $1.2 million in merger-related expenses during the third quarter of 2013. The decrease for the nine months ended September 30, 2012, to the nine months ended September 30, 2013, of $846 thousand was primarily
related to a decrease of $1.2 million in salaries and employee benefits, a decrease of $952 thousand in FDIC insurance premiums, and a $668 thousand decrease in other operating expense, partially offset by $2.0 million in merger-related expenses.
Provision for Income Taxes
The Company’s
income tax provisions are adjusted for non-deductible expenses and non-taxable income before applying the U.S. federal income tax rate of 35%. For the nine months ended September 30, 2013, the Company recorded an income tax provision of $10.2
million compared to a provision of $11.1 million for the same period in 2012. Our effective tax rate was 33.3% for both the nine months ended September 30, 2013 and September 30, 2012. Our provision for income taxes was positively impacted
by non-taxable income generated by the bank-owned life insurance earnings, and earnings from tax-exempt investment securities, which provided the greatest benefit to our effective tax rate.
Financial Condition
Total Assets
Total assets decreased by $67.4 million, or 2.4%, to $2.76 billion at September 30, 2013, as compared to $2.82 billion at December 31, 2012. The
decrease was largely the result of a decrease in loans, net of allowance for loan loss, of $123.9 million, a decrease of $14.3 million in loans held-for-sale, a decrease of $12.2 million in investment securities and a decrease of $10.6 million in
cash and due from banks, partially offset by an increase in interest-bearing deposits in other banks of $100.0 million from December 31, 2012 to September 30, 2013.
Loans, net of allowance for loan losses, declined in our commercial portfolio, ADC portfolio, real estate non-farm, non-residential portfolio, and real estate
multi-family residential portfolio, as these portfolios decreased $42.8 million, $16.8 million, $65.0 million, and $8.1 million, respectively during the first nine months of 2013.
Investment securities were down $12.2 million from December 31, 2012 to September 30, 2013. We held 17.5% of our total assets in the investment
security portfolio at September 30, 2013 and December 31, 2012.
Loans held-for-sale decreased $14.3 million, to $847 thousand at
September 30, 2013, compared to $15.2 million at December 31, 2012. The level of loans held-for-sale is driven by various market and economic conditions, including mortgage loan demand in our housing markets, and the interest rate
environment.
48
Investment Securities
Investment securities were $481.2 million representing a decrease of $12.2 million from December 31, 2012. There was no gain on sale of securities during
the third quarter 2013. During the third quarter of 2012, the Company sold $26.0 million of investment securities resulting in a $1.6 million realized gain on sale of securities, and PreTSL VI was redeemed resulting in a gain of $436 thousand. The
purchase of investment securities made during the first nine months of 2013 were predominantly of U.S. Government Agency obligations at a discount or modest premium to book value in pass-through securities, with an average expected life of three to
seven years.
The investment portfolio contains two pooled trust preferred securities with a book value of $5.1 million, and a market value of $1.6
million at September 30, 2013, for which the Company performs a quarterly analysis to determine whether any other-than-temporary impairment exists. The analysis includes stress tests on the underlying collateral and cash flow estimates based on
the current and projected future levels of deferrals, defaults, and prepayments within each pool. There was no recorded impairment loss for the three or nine months ended September 30, 2013 and September 30, 2012.
Loans
Loans, net of allowance for loan losses, decreased
$123.9 million, or 5.8%, from $2.14 billion at December 31, 2012, to $2.02 billion at September 30, 2013. The decreases in non-farm, non-residential real estate and multi-family real estate loans were driven by a highly competitive loan
origination environment which drove increased refinancing activity and strategic loan sales, and by problem loan workouts initiated to improve asset quality. The decrease in C&I loans was attributable to lower borrowing activity due to the
impact of sequestration on the level of borrowing by government contracting sector borrowers and pay downs resulting from problem loan resolution activities.
Loans held-for-sale
Loans held-for-sale, which are
originated by our mortgage division and intended for sale in the secondary market, decreased $14.3 million from $15.2 million at December 31, 2012, to $847 thousand at September 30, 2013. The decrease in loans held-for-sale was mostly
driven by various market and economic conditions, including mortgage loan demand in our housing markets, and the interest rate environment. Loans sold to correspondent banks are subject to repurchase as a result of specific events outlined in the
correspondent purchase agreements. The repurchase events include but are not limited to, deficiencies in documentation standards, and defaults or pay-offs within a specified period of time. The Company did not maintain a reserve for repurchases at
September 30, 2013, and December 31, 2012, and has historically experienced an insignificant amount of repurchases.
Deposits
Total deposits at September 30, 2013 were $2.10 billion, a decrease of $149.8 million, or 6.7%, from December 31, 2012 to September 30, 2013
with non-interest bearing demand deposits increasing by $29.2 million, or 7.0%, savings and interest-bearing demand accounts decreasing $97.2 million, or 8.1%, and time deposits decreasing by $81.7 million, or 13.0%. The reduction in
interest-bearing and time deposits has been intentional, resulting from a series of interest rate reductions that continued throughout 2012 and into 2013. As a result of deposit rate decreases and an improving deposit mix, the cost of total
interest-bearing deposits and total deposits declined from 0.91% and 0.76%, respectively, for the quarter ended September 30, 2012, to 0.75% and 0.60% for the quarter ended September 30, 2013. The Company’s deposit mix continues to be
weighted heavily in lower cost non-interest bearing demand deposits, savings and interest-bearing demand deposits, which comprised 73.9% of total deposits at September 30, 2013, compared to 72.0% at December 31, 2012. As of
September 30, 2013, non-interest bearing demand deposits represented 21.3% of total deposits, compared to 18.5% at December 31, 2012.
Capital Levels and Stockholders’ Equity
Stockholders’ equity increased $18.9 million, or 7.7%, from $245.3 million at December 31, 2012, to $264.3 million at September 30, 2013, with
approximately $8.2 million in net proceeds from stock issuances, net income to common stockholders of $20.5 million for the first nine months of 2013, partially offset by a decrease of $9.7 million in other comprehensive income related to the
decline in the fair market value of the investment securities portfolio, net of tax. The Company’s Tier 1 and total qualifying capital ratios are both up 233 basis points, from December 31, 2012, to September 30, 2013.
49
Liquidity
The Company’s principal source of liquidity and funding is its customer deposit base. The level of deposits necessary to support the Company’s
lending and investment activities is determined through monitoring loan demand. Considerations in managing the Company’s liquidity position include, but are not limited to, scheduled cash flows from existing loans and investment securities,
anticipated deposit activity including the maturity of time deposits, pricing and dollar amount of in-market customer deposits, use of wholesale funding such as Certificate of Deposit Account Registry Service (“CDARS”) reciprocal deposits,
borrowing capacity at the FHLB, and projected needs from anticipated extensions of credit. The Company’s liquidity position is monitored daily by management to maintain a level of liquidity that can efficiently meet current needs and is
evaluated for both current and longer term needs as part of the asset/liability management process. On a monthly basis, the Asset/Liability Committee (“ALCO”) of the board of directors reviews a comprehensive liquidity analysis and updates
the Company’s liquidity strategy as necessary.
The Company has taken a very prudent and disciplined approach to wholesale funding as a source of
liquidity. Our successful strategy in gathering in-market customer deposits to fund loan growth has limited our reliance on wholesale funding. Wholesale funding sources include, but are not limited to, Federal funds, public funds (such as state and
local municipalities), FHLB advances, securities sold under agreement to repurchase, and brokered deposits. We have set limits on the use of wholesale funding sources, which includes limiting brokered deposits to no more than $50.0 million maturing
in any one-month and to no more than 10.0% of total deposits maturing within one-year.
As of September 30, 2013, and September 30, 2012, we did
not have any brokered deposits, other than CDARS reciprocal deposits, on our balance sheet. CDARS reciprocal deposits are deposits that have been placed into a deposit placement service which allows us to place our customers’ funds in
FDIC-insured time deposits at other banks and at the same time, receive an equal sum of funds from customers of other banks within the deposit placement service. CDARS reciprocal deposits of $37.4 million and $49.0 million are included in our time
deposit portfolio and account for 1.8% and 2.2% of our total deposits at September 30, 2013 and December 31, 2012, respectively. Time deposits comprise approximately $547.2 million, or 26.1%, of our total deposit liabilities at
September 30, 2013, and $628.9 million, or 28.0% of our total deposit portfolio at December 31, 2012. At September 30, 2013 and December 31, 2012, we had customer securities sold under agreement to repurchase of $210.4 million
and $175.7 million, respectively. We also had wholesale securities sold under agreement to repurchase of $75.0 million as of September 30, 2013 and December 31, 2012.
The Company measures total liquidity through cash and cash equivalents, investment securities available-for-sale, mortgage loans held-for-sale, other loans
and investment securities maturing within one year, less securities pledged as collateral for repurchase agreements, public deposits and other purposes, and less any outstanding Federal funds purchased. These liquidity sources decreased $62.6
million, or 9.1%, from $690.6 million at December 31, 2012, to $628.0 million at September 30, 2013, primarily due to a $100.0 million increase in interest-bearing deposit accounts at other banks and an $18.4 million increase in securities
pledged as collateral for repurchase agreements, partially offset by a $107.1 million decrease in loans maturing within one year. Total liquidity as a percentage of total deposits was 29.97% at September 30, 2013, compared to 30.76% at
December 31, 2012. Additional sources of liquidity available to the Bank include the capacity to borrow funds through established short-term lines of credit with various correspondent banks and the Federal Home Loan Bank of Atlanta. See Note 9
to the Consolidated Financial Statements for further information regarding these additional liquidity sources.
It is our opinion that our liquidity
position at September 30, 2013, is adequate to respond to fluctuations “on” and “off” balance sheet. In addition, we know of no trends, demands, commitments, events or uncertainties that may result in, or that are reasonably
likely to result in our inability to meet anticipated or unexpected liquidity needs.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance
sheet arrangements include unfunded lines of credit, commitments to extend credit, standby letters of credit and financial guarantees, totaling $608.9 million and $610.8 million as of September 30, 2013, and December 31, 2012,
respectively. These arrangements would impact the Company’s liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, and the Company’s obligations in
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connection with its trust preferred securities, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.
Unfunded lines of credit and commitments to extend credit totaled $537.3 million at September 30, 2013, and $550.1 million at December 31, 2012.
These represent legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unfunded lines of credit and commitments to extend credit were $527.3 million and $10.0 million,
respectively, at September 30, 2013, and were $533.3 million and $16.8 million at December 31, 2012. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. At September 30, 2013, and December 31, 2012, the Company had $71.6 million and $60.8 million, respectively, in outstanding standby letters of credit.
Contractual Obligations
Since December 31, 2012,
there have been no significant changes in the Company’s contractual obligations.
Capital
The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and
economic forces, and the overall level of growth. The adequacy of the Company’s current and future capital is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of
capital to support anticipated asset growth and to absorb potential losses.
We are subject to various regulatory capital requirements administered by
banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on our financial condition and the consolidated financial statements. Both the Company’s and the
Bank’s capital levels continue to meet regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier 1 risk-based capital, total risk-based capital, and leverage ratios. Tier 1
capital consists of common and qualifying preferred stockholders’ equity, less goodwill, and for the Company includes certain minority interests relating to bank subsidiary issued securities, and a limited amount of restricted core capital
elements. Restricted core capital elements include qualifying cumulative preferred stock interests, certain minority interests in subsidiaries and qualifying trust preferred securities. Total risk-based capital consists of Tier 1 capital, qualifying
subordinated debt, and a portion of the allowance for loan losses, and for the Company, a limited amount of excess restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weighted assets. The leverage ratio
compares Tier 1 capital to total average assets. The Bank’s Tier 1 risk-based capital ratio was 14.93% at September 30, 2013, compared to 12.82% at December 31, 2012, and its total risk-based capital ratio was 16.19% at
September 30, 2013, compared to 14.08% at December 31, 2012. These ratios are in excess of the minimum regulatory requirement of 4.00% and 8.00%, respectively. The Bank’s leverage ratio was 11.80% at September 30, 2013, compared
to 10.03% at December 31, 2012, and in excess of the minimum regulatory requirement of 4.00%. The Company’s Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 15.58%, 16.84%, and 12.07%, respectively,
at September 30, 2013, compared to 13.25%, 14.51%, and 10.29% at December 31, 2012. In addition the Company’s and the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in
applicable banking regulations. The increases in these capital ratios during the nine months ended September 30, 2013 are primarily due to net income generated by operations, proceeds from issuance of common stock on exercise of stock options
and warrants, and lower levels of risk-weighted assets.
The ability of the Company to continue to maintain its overall asset size, or to grow, is
dependent on its earnings and the ability to obtain additional funds for contribution to the Bank’s capital, through earnings, borrowing, the sale of additional common stock, or the issuance of additional other qualifying securities. In the
event that the Company is unable to obtain additional capital for the Bank on a timely basis, the growth of the Company and the Bank may be curtailed, and the Company and the Bank may be required to reduce their level of assets in order to maintain
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compliance with regulatory capital requirements. In addition, in connection with the pending Merger with United, under the Agreement and Plan of Merger the Company is restricted from pursuing
many capital-raising strategies until the Merger closes. If the Company cannot maintain sufficient capital or is forced to restrict growth or shrink its balance sheet, net income and stockholders’ equity may be adversely affected.
Guidance by the federal banking regulators provides that banks which have concentrations in construction, land development or commercial real estate loans
(other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that we may be required to maintain higher levels of capital than we
would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans.
Pursuant to the
Basel III Final Rules adopted by the federal bank regulatory agencies in July 2013, trust preferred securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion of total assets can be counted as Tier 1 capital at
the holding company level, together with other restricted core capital elements, up to 25% of total capital (net of goodwill), and any excess as Tier 2 capital, subject to limitation. At September 30, 2013, trust preferred securities
represented 19.4% of the Company’s Tier 1 capital and 17.9% of its total risk-based capital. See Note 10 to the Consolidated Financial Statements for further information regarding trust preferred securities.
Capital Issuances.
As noted above, during 2008, the Company accepted an investment by Treasury under the Capital Purchase Program. In connection
with that investment, the Company entered into and consummated a Securities Purchase Agreement with the Treasury, pursuant to which the Company issued 71,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A
(“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $71.0 million. The Series A Preferred Stock paid cumulative dividends at a rate of 5% per year for the first five
years, and thereafter would have paid dividends at a rate of 9% per year. The Series A Preferred Stock was non-voting, except in limited circumstances. Prior to the third anniversary of issuance, unless the Company has redeemed all of the
Series A Preferred Stock or the Treasury has transferred all of the Series A Preferred Stock to a third party, the consent of the Treasury was required for the Company to commence paying a cash common stock dividend or repurchase its common stock or
other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement. On December 11, 2012, the Company announced that it had
repurchased all of the $71.0 million in preferred stock that was issued to the Treasury under the Capital Purchase Program.
In connection with the
purchase of the Series A Preferred Stock, the Treasury was issued a warrant (the “Warrant”) to purchase 2,696,203 shares of the Company’s common stock at an initial exercise price of $3.95 per share. The Warrant provides for the
adjustment of the exercise price and the number of shares of the common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the common
stock, and upon certain issuances of the common stock (or securities exercisable or exchangeable for, or convertible into, common stock) at or below 90% of the market price of the common stock on the trading day prior to the date of the agreement on
pricing such securities. The Warrant expires ten years from the date of issuance. The Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. As of September 30, 2013, the
warrant issued to the Treasury to purchase shares of the Company’s common stock remains outstanding.
Please refer to Note 10 to the Consolidated
Financial Statements for additional information regarding the issuance in 2008 of $25 million of trust preferred securities and warrants to purchase shares of the Company’s common stock to certain directors and executive officers of the
Company.
Recent Accounting Pronouncements
In
December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments
and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or
after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the new guidance did not have a
material impact on the Company’s consolidated financial statements.
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In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide
an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency
of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset
for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of the new guidance did not have a material impact on
the Company’s consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope
of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase
agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods
within those years, beginning on or after January 1, 2013. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified
out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same
reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the consolidated
financial statements.
In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap
Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this ASU permit the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate) to be used as a U.S.
benchmark interest rate for hedge accounting purposes under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using
different benchmark rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The amendments are effective prospectively for qualifying new or redesignated
hedging relationships entered into on or after July 17, 2013. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this Update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax
credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any
additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the
unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning
after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of the new guidance did
not have a material impact on the Company’s consolidated financial statements.
