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. The following discussion and analysis 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.
30
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
securities, realized gains and losses on sale of 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 months ended March 31, 2013, and
March 31, 2012, is as follows:
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Three Months
Ended
March 31,
|
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(dollars in thousands)
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2013
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|
|
2012
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|
|
|
|
|
|
Net Income Available to Common Stockholders
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$
|
6,036
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$
|
4,779
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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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|
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|
(2,592
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)
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Merger-related expenses
|
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|
584
|
|
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|
—
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Net tax effect adjustment
|
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(204
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)
|
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|
907
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Adjusted Operating Earnings
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$
|
6,416
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$
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3,094
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The adjusted efficiency ratio is a non-GAAP financial measure that is computed by dividing non-interest expense excluding
merger-related expenses, by the sum of net interest income on a tax equivalent basis, and non-interest income excluding realized gains and losses on sale of securities, merger-related expenses 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 ended March 31, 2013, and 2012, is as follows:
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(dollars in thousands)
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Three Months Ended
March 31,
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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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17,647
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$
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16,627
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Merger-related expenses
|
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584
|
|
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—
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Adjusted non-interest expense
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$
|
17,063
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$
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16,627
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Net interest income
|
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25,794
|
|
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26,779
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Non-interest income
|
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2,558
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4,949
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Gain on sale of investment securities available-for-sale
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—
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|
(2,592
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)
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Adjusted non-interest income
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$
|
2,558
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|
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$
|
2,357
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Total net interest income and non-interest income, adjusted
(1)
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$
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28,352
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$
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29,136
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Efficiency Ratio, GAAP
(2)
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|
|
62.24
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%
|
|
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52.40
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%
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|
Efficiency Ratio, adjusted
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|
|
59.44
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%
|
|
|
56.36
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%
|
|
(1)
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Tax Equivalent Income of $28,708 for 2013, and $29,501 for 2012
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(2)
|
Computed by dividing non-interest expense by the sum of net interest income and non-interest income.
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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
31
from GAAP-based amounts. We calculate tangible common equity for the Company by excluding the balance of intangible assets and outstanding preferred stock issued to the U.S. Treasury from total
stockholders’ equity. We calculate tangible assets by excluding the balance of intangible assets from total assets. The Company had no intangible assets for the periods presented. The Company believes 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 March 31, 2013, March 31, 2012, December 31, 2012, and
September 31, 2012, is as follows:
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(dollars in thousands)
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As of March 31,
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Dec 31,
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Sept 30,
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2013
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2012
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2012
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2012
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Tangible common equity:
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Total stockholders’ equity
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$
|
253,803
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|
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$
|
296,637
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|
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$
|
245,309
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$
|
311,528
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Less:
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Outstanding TARP senior preferred stock
|
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|
—
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|
|
|
67,670
|
|
|
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—
|
|
|
|
68,621
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|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
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—
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Tangible common equity
|
|
$
|
253,803
|
|
|
$
|
228,967
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|
|
$
|
245,309
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|
|
$
|
242,907
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|
|
|
|
|
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Total tangible assets
|
|
$
|
2,883,388
|
|
|
$
|
2,954,226
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|
$
|
2,823,692
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|
|
$
|
3,004,742
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|
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|
|
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|
Tangible common equity ratio
|
|
|
8.80
|
%
|
|
|
7.75
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%
|
|
|
8.69
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%
|
|
|
8.08
|
%
|
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 and current reports on Form 8-K 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 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.
32
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 and trust preferred warrants
will be converted into options to purchase United’s common stock and warrants to purchase United common stock. The Agreement further provides that any outstanding warrant originally issued to 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.
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. Completion of the Merger is subject to approval by the shareholders of each of the Company and United, receipt of applicable
regulatory approvals and 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.
Critical Accounting Policies
For the period ended March 31, 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.
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,
33
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.
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
34
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 three months ended March 31, 2013, the Company recorded net income available to common stockholders of $6.0 million, or $0.17 per diluted common share, compared to net income available to
common shareholders of $4.8 million, or $0.14 per diluted common share, for the three months ended March 31, 2012. The year-over-year 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 a $1.4 million effective dividend on preferred stock for the first quarter of 2013, and a $4.1 million decrease in the provision for loan losses, partially offset by a decrease in
net interest income of $1.0 million, a $2.4 million decrease in non-interest income and a $1.0 million increase in non-interest expense.
Adjusted operating earnings (a non-GAAP measure) for the three months ended March 31, 2013, were $6.4 million, up $3.3 million, or 107.4%, as
compared to $3.1 million for the same period in 2012. The year-over-year increase in the Company’s adjusted operating earnings are mostly due to lower provisioning for loan losses during the first quarter of 2013 as compared to the same period
in 2012.
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, deposits and borrowings. Net interest income was $25.8
million for the first quarter of 2013 and declined $1.0 million, or 3.7%, from the same quarter last year. The net interest margin increased 4 basis points from 3.81% in the first quarter of 2012, to 3.85% for the same period in 2013 The
year-over-year increase in the first quarter net interest margin was due to improvements in the mix of interest-earning assets and interest-bearing deposits, along with a reduction in interest-bearing deposit rates, partially offset by lower yields
received on the average loan portfolio. Average loan yields declined 39 basis points year-over-year, from 5.67% to 5.28%, and average investment security yields declined 2 basis points, from 2.31% to 2.29%, compared to interest-bearing deposits
declining 23 basis points, from 1.03% to 0.80%.
Interest and dividend income decreased $2.8 million on average total interest-earnings assets
of $2.75 billion for the three months ended March 31, 2013, compared to interest and dividend income generated by average total interest-earnings assets of $2.87 billion for the same period in 2012. The decline in interest income is mostly
attributable to lower yielding average loans being generated during the first quarter of 2013 in the current low interest rate environment.
Interest expense decreased $1.8 million to $5.4 million generated on an average total interest-bearing liability balance of $2.16 billion for the quarter
ended March 31, 2013, from $7.2 million generated on an average total interest-bearing liability balance of $2.30 billion for the same period in 2012. The average rate paid on total interest-bearing liabilities was 1.01% for the first quarter
of 2013, as compared to 1.26% for the first quarter of 2012. The decrease in the average rate paid on average total interest-bearing liabilities was predominantly the result of a series of interest rate reductions on customer deposits and an
improvement in our funding mix, which included increases in the amount of lower cost average NOW deposits, money market deposits, and securities sold under agreements to repurchase, and reductions in the amount of higher cost average time deposits
and savings deposits in our portfolio. The growth in our average balance of securities sold under agreements to repurchase during the first quarter of 2013, as compared to the same period in 2012, was seen in our lower-cost repurchase agreements
related to customers. Average balances of higher-cost wholesale repurchase agreements have remained constant from the first quarter of 2012 to the first quarter of 2013.
35
The following table provides a comparative average balance sheet and net interest income analysis for the
three months ended March 31, 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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
Income-
Expense
|
|
|
Average
Yields
/Rates
|
|
|
Average
Balance
|
|
|
Interest
Income-
Expense
|
|
|
Average
Yields
/Rates
(1)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(1)
|
|
$
|
493,647
|
|
|
$
|
2,535
|
|
|
|
2.29
|
%
|
|
$
|
604,991
|
|
|
$
|
3,232
|
|
|
|
2.31
|
%
|
|
Restricted investments
|
|
|
11,058
|
|
|
|
113
|
|
|
|
4.15
|
%
|
|
|
11,272
|
|
|
|
101
|
|
|
|
3.61
|
%
|
|
Loans, net of unearned income
(2)
|
|
|
2,194,541
|
|
|
|
28,515
|
|
|
|
5.28
|
%
|
|
|
2,175,016
|
|
|
|
30,621
|
|
|
|
5.67
|
%
|
|
Interest-bearing deposits in other banks
|
|
|
54,257
|
|
|
|
39
|
|
|
|
0.29
|
%
|
|
|
76,384
|
|
|
|
51
|
|
|
|
0.27
|
%
|
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
2,753,503
|
|
|
$
|
31,202
|
|
|
|
4.65
|
%
|
|
$
|
2,867,663
|
|
|
$
|
34,005
|
|
|
|
4.82
|
%
|
|
Other assets
|
|
|
108,862
|
|
|
|
|
|
|
|
|
|
|
|
69,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,862,365
|
|
|
|
|
|
|
|
|
|
|
$
|
2,936,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
441,569
|
|
|
$
|
331
|
|
|
|
0.30
|
%
|
|
$
|
326,990
|
|
|
$
|
298
|
|
|
|
0.37
|
%
|
|
Money market accounts
|
|
|
219,817
|
|
|
|
161
|
|
|
|
0.30
|
%
|
|
|
215,936
|
|
|
|
235
|
|
|
|
0.44
|
%
|
|
Savings accounts
|
|
|
506,023
|
|
|
|
381
|
|
|
|
0.31
|
%
|
|
|
628,298
|
|
|
|
772
|
|
|
|
0.49
|
%
|
|
Time deposits
|
|
|
612,788
|
|
|
|
2,650
|
|
|
|
1.75
|
%
|
|
|
760,745
|
|
|
|
3,637
|
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
1,780,197
|
|
|
$
|
3,523
|
|
|
|
0.80
|
%
|
|
$
|
1,931,969
|
|
|
$
|
4,942
|
|
|
|
1.03
|
%
|
|
Securities sold under agreement to repurchase
(3)
|
|
|
284,174
|
|
|
|
915
|
|
|
|
1.31
|
%
|
|
|
279,803
|
|
|
|
1,037
|
|
|
|
1.49
|
%
|
|
Other borrowed funds
|
|
|
29,544
|
|
|
|
16
|
|
|
|
0.22
|
%
|
|
|
25,000
|
|
|
|
269
|
|
|
|
4.25
|
%
|
|
Trust preferred capital notes
|
|
|
66,856
|
|
|
|
954
|
|
|
|
5.71
|
%
|
|
|
66,602
|
|
|
|
978
|
|
|
|
5.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
2,160,771
|
|
|
$
|
5,408
|
|
|
|
1.01
|
%
|
|
$
|
2,303,374
|
|
|
$
|
7,226
|
|
|
|
1.26
|
%
|
|
Noninterest-bearing demand deposits and other liabilities
|
|
|
451,783
|
|
|
|
|
|
|
|
|
|
|
|
341,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,612,554
|
|
|
|
|
|
|
|
|
|
|
$
|
2,644,754
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
249,811
|
|
|
|
|
|
|
|
|
|
|
|
291,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,862,365
|
|
|
|
|
|
|
|
|
|
|
$
|
2,936,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
Net interest income and margin
|
|
|
|
|
|
$
|
25,794
|
|
|
|
3.85
|
%
|
|
|
|
|
|
$
|
26,779
|
|
|
|
3.81
|
%
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
127.4
|
%
|
|
|
|
|
|
|
|
|
|
|
124.5
|
%
|
|
|
|
|
|
|
|
|
|
(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 $1.3 million and
$1.2 million for the three months ended March 31, 2013 and 2012, respectively.
|
|
(3)
|
The securities sold under agreement to repurchase related to customers had an average balance of $209.2 million at an average rate of 0.16% for the three months ended
March 31, 2013, and $204.8 million at an average rate of 0.38% 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 March 31,
2013, and $75.0 million at an average rate of 4.51% for the same period for 2012.
|
36
Provision for Loan Losses and Allowance for Loan Losses
Provisions for loan losses were $1.8 million for the quarter ended March 31, 2013, down $4.1 million, or 69.2%, compared to $6.0 million in the same
period in 2012. Net charge-offs were $2.6 million for the three months ended March 31, 2013, compared to $9.4 million for the quarter ended March 31, 2012. The decrease in non-accruing loans from $37.9 million at December 31, 2012 to
$35.2 million at March 31, 2013, and the reduction in the allowance for loan losses from $42.8 million at December 31, 2012 to $42.0 million at March 31, 2013, drove changes to the Company’s loan loss reserve and non-performing
loan coverage ratios. As of March 31, 2013, reserves for loan losses represented 1.91% of total loans, down from 1.95% at December 31, 2012, with reserves covering 118.4% of total non-performing loans as of March 31, 2013. The
decreases in the allowance for loan losses as a percentage of total loans from March 31, 2012, to March 31, 2013, is due to charge-offs incurred during 2013 being primarily supported by specific reserves in the allowance for loan losses as
of December 2012. Analysis of the adequacy of the loan loss reserve indicated that loan loss provisioning of $1.8 million during the first quarter of 2013 was sufficient to maintain appropriate coverage. The $6.7 million reduction in net charge-offs
for the three months ended March 31, 2013, compared to the same period in 2012, was primarily due to decreases in net charge-offs in the C&I loan portfolio, decreasing from $4.7 million in 2012, to $455 thousand in 2013 and in the ADC loan
portfolio, decreasing $1.4 million, from $3.6 million in 2012 to $2.2 million in 2013. The Company’s ratio of net charge-offs to average total loans outstanding improved to 0.12% for the first quarter of 2013, compared to 0.43% for the same
period in 2012.
Total non-performing assets and loans 90+ days past due declined $5.2 million sequentially from $50.2 million at
December 31, 2012, to $45.0 million at March 31, 2013. The sequential decrease in non-performing assets and loans 90+ days past due was primarily driven by the sale of an OREO property for $990 thousand, collection from guarantors of
a defaulted real estate loan of $787 thousand, sale of five notes and properties related to a former industrial loan company totaling $763 thousand, a residential property sale of $178 thousand, OREO write-downs of $1.2 million and gross charge-offs
totaling $2.9 million, partially offset by loans moved to non-accrual including a loan to a printing company secured by commercial real estate of $910 thousand and a residential mortgage loan in the amount of $890 thousand. 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 March 31, 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.
37
The following schedule summarizes the changes in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
2013
|
|
|
Twelve
Months
Ended
December 31,
2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance, beginning of period
|
|
$
|
42,773
|
|
|
$
|
48,729
|
|
|
Provision for loan losses
|
|
|
1,847
|
|
|
|
14,826
|
|
|
Charge-Offs
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
464
|
|
|
|
5,904
|
|
|
Real estate-non-farm, non-residential
|
|
|
110
|
|
|
|
6,388
|
|
|
Real estate-construction
|
|
|
2,213
|
|
|
|
7,587
|
|
|
Consumer
|
|
|
18
|
|
|
|
306
|
|
|
Real estate-one-to-four family residential
|
|
|
104
|
|
|
|
4,022
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
$
|
2,909
|
|
|
$
|
24,207
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
9
|
|
|
|
1,035
|
|
|
Real estate-non-farm, non-residential
|
|
|
10
|
|
|
|
1,081
|
|
|
Real estate-construction
|
|
|
39
|
|
|
|
539
|
|
|
Consumer
|
|
|
20
|
|
|
|
55
|
|
|
Real estate-one-to-four family residential
|
|
|
181
|
|
|
|
597
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
118
|
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
$
|
259
|
|
|
$
|
3,425
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
2,650
|
|
|
|
20,782
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance, end of period
|
|
$
|
41,970
|
|
|
$
|
42,773
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charges-offs to average total loans outstanding during period
|
|
|
0.12
|
%
|
|
|
0.95
|
%
|
The following schedule provides a breakdown of the allowance for loan losses by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
Allocation of the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
7,942
|
|
|
$
|
5,455
|
|
|
Real estate-non-farm, non-residential
|
|
|
12,888
|
|
|
|
11,592
|
|
|
Real estate-construction
|
|
|
11,229
|
|
|
|
14,939
|
|
|
Consumer
|
|
|
262
|
|
|
|
167
|
|
|
Real estate-one-to-four family residential
|
|
|
9,380
|
|
|
|
10,420
|
|
|
Real estate-multi-family residential
|
|
|
159
|
|
|
|
78
|
|
|
Farmland
|
|
|
88
|
|
|
|
122
|
|
|
Unallocated
|
|
|
22
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
41,970
|
|
|
$
|
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 three months ended March 31, 2013, total
non-performing assets and loans 90+ days past due and still accruing interest decreased by $5.2 million, from $50.2 million at December 31, 2012, to $45.0 million at March 31, 2013. As a result, the 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 1.56% of total assets at March 31, 2013. The decrease during the first quarter 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
38
an increase in non-performing, non-residential real estate. 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, increased from $134.1 million at
December 31, 2012, to $137.0 million at March 31, 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 March 31,
2013, are loans classified as TDRs totaling $33.9 million, a sequential reduction of $9.5 million from $43.5 million at December 31, 2012. The sequential reduction in TDRs during the first quarter of 2013, was attributable to $231 thousand in
new TDRs, removal from TDR classification of loans based on payment performance of $9.7 million, and principal payments of $64 thousand. Non-farm, non-residential real estate TDRs accounted for $8.0 million of the decrease in TDRs from
December 31, 2012 to March 31, 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 sequential reduction in OREO during the first quarter of 2013, was attributable to $250 thousand in new OREO, sales proceeds of $1.6 million, and write-downs totaling $1.4 million. Write-downs for the quarter 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.
39
Total non-performing assets as of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,136
|
|
|
$
|
3,317
|
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
2,263
|
|
|
|
3,606
|
|
|
Home equity loans and lines
|
|
|
2,379
|
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
4,642
|
|
|
$
|
6,104
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
2,561
|
|
|
|
1,791
|
|
|
Non-owner-occupied
|
|
|
4,030
|
|
|
|
3,864
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-non-farm, non-residential
|
|
$
|
6,591
|
|
|
$
|
5,655
|
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
7,615
|
|
|
|
16,976
|
|
|
Commercial
|
|
|
13,185
|
|
|
|
5,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-construction:
|
|
$
|
20,800
|
|
|
$
|
22,836
|
|
|
Consumer
|
|
|
16
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
35,185
|
|
|
$
|
37,929
|
|
|
OREO
|
|
|
9,562
|
|
|
|
12,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
44,747
|
|
|
$
|
50,231
|
|
|
|
|
|
|
Loans 90+ days past due and still accruing:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
232
|
|
|
$
|
—
|
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
—
|
|
|
$
|
—
|
|
|
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
|
|
|
22
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90+ days and still accruing
|
|
$
|
254
|
|
|
$
|
—
|
|
|
|
|
|
|
Total non-performing assets and 90+ days past due loans
|
|
$
|
45,001
|
|
|
$
|
50,231
|
|
|
|
|
|
|
Non-performing assets
|
|
|
|
|
|
|
|
|
|
to total loans:
|
|
|
2.04
|
%
|
|
|
2.29
|
%
|
|
to total assets:
|
|
|
1.55
|
%
|
|
|
1.78
|
%
|
|
Non-performing assets and 90+ days past due loans
|
|
|
|
|
|
|
|
|
|
to total loans:
|
|
|
2.05
|
%
|
|
|
2.29
|
%
|
|
to total assets:
|
|
|
1.56
|
%
|
|
|
1.78
|
%
|
|
Allowance for loan losses to total loans
|
|
|
1.91
|
%
|
|
|
1.95
|
%
|
|
Allowance for loan losses to non-performing loans
|
|
|
118.43
|
%
|
|
|
112.77
|
%
|
40
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 March 31, 2013, $20.8 million, or 59.1%, of non-performing loans
represented acquisition, development and construction (“ADC”) loans; $6.6 million, or 18.7%, represented non-farm, non-residential loans; $4.6 million, or 13.2%, represented loans on one-to-four family residential properties; and $3.1
million, or 8.9%, represented commercial and industrial (“C&I”) loans. As of March 31, 2013, specific reserves of $16.1 million have been established for non-performing loans and other loans determined to be impaired. Interest
actually received on non-accrual loans was $127 thousand in the three months ended March 31, 2012, and $133 thousand for the three months ended March 31, 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, with dollars in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
|
Residential, Acquisition, Development and Construction Loans
By County/Jurisdiction of Origination:
|
|
Total
Outstandings
|
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
|
District of Columbia
|
|
$
|
7,273
|
|
|
|
4.4
|
%
|
|
$
|
489
|
|
|
|
0.3
|
%
|
|
|
—
|
|
|
Montgomery, MD
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince Georges, MD
|
|
|
8,153
|
|
|
|
5.0
|
%
|
|
|
3,681
|
|
|
|
2.3
|
%
|
|
|
—
|
|
|
Other Counties in MD
|
|
|
4,920
|
|
|
|
3.0
|
%
|
|
|
62
|
|
|
|
—
|
|
|
|
—
|
|
|
Arlington/Alexandria, VA
|
|
|
30,554
|
|
|
|
18.7
|
%
|
|
|
616
|
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
|
Fairfax, VA
|
|
|
36,103
|
|
|
|
22.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Culpeper/Fauquier, VA
|
|
|
10,550
|
|
|
|
6.4
|
%
|
|
|
200
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Frederick, VA
|
|
|
2,288
|
|
|
|
1.4
|
%
|
|
|
2,288
|
|
|
|
1.4
|
%
|
|
|
—
|
|
|
Henrico, VA
|
|
|
955
|
|
|
|
0.6
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loudoun, VA
|
|
|
15,674
|
|
|
|
9.6
|
%
|
|
|
279
|
|
|
|
0.2
|
%
|
|
|
—
|
|
|
Prince William, VA
|
|
|
22,786
|
|
|
|
13.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Spotsylvania, VA
|
|
|
342
|
|
|
|
0.2
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stafford, VA
|
|
|
20,287
|
|
|
|
12.4
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in VA
|
|
|
1,648
|
|
|
|
1.0
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outside VA, D.C. & MD
|
|
|
2,125
|
|
|
|
1.3
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,658
|
|
|
|
100.0
|
%
|
|
$
|
7,615
|
|
|
|
4.7
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
|
Commercial, Acquisition, Development and Construction Loans
By County/Jurisdiction of Origination:
|
|
Total
Outstandings
|
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-offs
(recoveries) as
a % of
Outstandings
|
|
|
District of Columbia
|
|
$
|
272
|
|
|
|
0.2
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Montgomery, MD
|
|
|
1,974
|
|
|
|
1.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince Georges, MD
|
|
|
6,357
|
|
|
|
4.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in MD
|
|
|
2,080
|
|
|
|
1.6
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Arlington/Alexandria, VA
|
|
|
14,415
|
|
|
|
11.2
|
%
|
|
|
506
|
|
|
|
0.4
|
%
|
|
|
—
|
|
|
Fairfax, VA
|
|
|
8,031
|
|
|
|
6.2
|
%
|
|
|
2,142
|
|
|
|
1.7
|
%
|
|
|
0.2
|
%
|
|
Culpeper/Fauquier, VA
|
|
|
1,688
|
|
|
|
1.3
|
%
|
|
|
1,688
|
|
|
|
1.3
|
%
|
|
|
0.4
|
%
|
|
Frederick, VA
|
|
|
2,000
|
|
|
|
1.5
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Henrico, VA
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loudoun, VA
|
|
|
13,840
|
|
|
|
10.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Prince William, VA
|
|
|
45,990
|
|
|
|
35.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Spotsylvania, VA
|
|
|
1,640
|
|
|
|
1.3
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stafford, VA
|
|
|
25,412
|
|
|
|
19.7
|
%
|
|
|
8,014
|
|
|
|
6.2
|
%
|
|
|
0.6
|
%
|
|
Other Counties in VA
|
|
|
5,377
|
|
|
|
4.2
|
%
|
|
|
835
|
|
|
|
0.6
|
%
|
|
|
—
|
|
|
Outside VA, D.C. & MD
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
129,076
|
|
|
|
100.0
|
%
|
|
$
|
13,185
|
|
|
|
10.2
|
%
|
|
|
1.2
|
%
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
|
Non-Farm/Non-Residential Loans
By County/Jurisdiction of Origination:
|
|
Total
Outstandings
|
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
(1)
|
|
|
District of Columbia
|
|
$
|
82,287
|
|
|
|
7.1
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Montgomery, MD
|
|
|
18,729
|
|
|
|
1.6
|
%
|
|
|
1,738
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Prince Georges, MD
|
|
|
72,084
|
|
|
|
6.2
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in MD
|
|
|
47,781
|
|
|
|
4.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Arlington/Alexandria, VA
|
|
|
182,882
|
|
|
|
15.8
|
%
|
|
|
909
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Fairfax, VA
|
|
|
277,162
|
|
|
|
24.0
|
%
|
|
|
719
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Culpeper/Fauquier, VA
|
|
|
5,197
|
|
|
|
0.4
|
%
|
|
|
2,061
|
|
|
|
0.2
|
%
|
|
|
—
|
|
|
Frederick, VA
|
|
|
7,646
|
|
|
|
0.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Henrico, VA
|
|
|
21,562
|
|
|
|
1.9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loudoun, VA
|
|
|
146,847
|
|
|
|
12.7
|
%
|
|
|
1,164
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Prince William, VA
|
|
|
181,661
|
|
|
|
15.7
|
%
|
|
|
—
|
|
|
|
0.1
|
%
|
|
|
—
|
|
|
Spotsylvania, VA
|
|
|
18,927
|
|
|
|
1.6
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stafford, VA
|
|
|
19,328
|
|
|
|
1.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other Counties in VA
|
|
|
66,001
|
|
|
|
5.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outside VA, D.C. & MD
|
|
|
8,932
|
|
|
|
0.8
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,157,026
|
|
|
|
100.0
|
%
|
|
$
|
6,591
|
|
|
|
0.7
|
%
|
|
|
—
|
|
|
(1)
|
Charge-offs were less than 0.1% of outstanding loans at March 31, 2013.
|
Total TDRs as of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
7,071
|
|
|
$
|
6,875
|
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
2,607
|
|
|
|
4,303
|
|
|
Home equity loans and lines
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
2,607
|
|
|
$
|
4,303
|
|
|
Real estate-multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
9,524
|
|
|
|
9,528
|
|
|
Non-owner-occupied
|
|
|
7,761
|
|
|
|
15,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-non-farm, non-residential
|
|
$
|
17,285
|
|
|
$
|
25,307
|
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
73
|
|
|
|
73
|
|
|
Commercial
|
|
|
6,890
|
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate-construction:
|
|
$
|
6,963
|
|
|
$
|
6,963
|
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
33,926
|
|
|
$
|
43,448
|
|
At March 31, 2013, all TDRs were performing in accordance with their modified terms, and at December 31, 2012,
of the Company’s total TDRs of $43.4 million, all 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.
The ultimate collectibility 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 March 31, 2013, the Company had $1.53 billion, or 69.6%, 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
42
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 $292.7 million at March 31, 2013, represented 13.3% of total loans, loans secured by multi-family residential properties of $80.0 million represented 3.6% of total loans, and loans secured by non-farm, non-residential
properties of $1.2 billion represented 52.6%.
Construction loans at March 31, 2013, included $147.7 million in loans to commercial
builders of single family residential property and $15.9 million to individuals on single family residential property, together representing 7.4% 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 $129.1 million of construction loans on non-residential commercial property at March 31, 2013, representing 5.9% of total loans. Total construction loans of $292.7 million include $118.6
million in land acquisition and/or development loans on residential property and $63.9 million in land acquisition and/or development loans on commercial property, together totaling $182.5 million, or 8.3% of total loans. These commercial loans
generally represent short term obligations to support working capital needs and/or term loans to finance the purchase of business assets. 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 March 31, 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. In addition, the Bank has commercial loans of $255.5 million, or 11.6% 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.
Institution’s 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 7.6% and 12.7% of total revenue at
March 31, 2013, and March 31, 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.
For the three months ended March 31, 2013, the Company recognized $2.6 million in non-interest income, compared to non-interest income
of $4.9 million for the three months ended March 31, 2012.
43
The following table presents the components of non-interest income for the three months ended March 21,
2013, and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
From the Three Months
Ended March 31, 2012
to the Three Months
Ended March 31,
2013
|
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ change
|
|
|
% change
|
|
|
Service charges and other fees
|
|
$
|
930
|
|
|
$
|
881
|
|
|
$
|
49
|
|
|
|
5.6
|
%
|
|
Non-deposit investment services commissions
|
|
|
282
|
|
|
|
252
|
|
|
|
30
|
|
|
|
11.9
|
%
|
|
Gains on loans held-for-sale
|
|
|
1,022
|
|
|
|
1,001
|
|
|
|
21
|
|
|
|
2.1
|
%
|
|
Gain on sale of securities available-for-sale
|
|
|
—
|
|
|
|
2,592
|
|
|
|
(2,592
|
)
|
|
|
–100.0
|
%
|
|
Bank owned life insurance
|
|
|
301
|
|
|
|
55
|
|
|
|
246
|
|
|
|
447.3
|
%
|
|
Other
|
|
|
23
|
|
|
|
168
|
|
|
|
(145
|
)
|
|
|
–86.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income
|
|
$
|
2,558
|
|
|
$
|
4,949
|
|
|
$
|
(2,391
|
)
|
|
|
(48.3
|
)%
|
Included in the first quarter 2012 non-interest income is a gain on sale of securities of $2.6 million, while the first
quarter of 2013 did not include a gain or loss on sale of securities. Fees and net gains on loans held-for-sale were $1.0 million in the first quarter of 2013 and 2012.
Non-Interest Expense
For the three months ended March 31, 2013, the Company
recognized $17.6 million in non-interest expense, compared to non-interest expense of $16.6 million for the three months ended March 31, 2012. The following table presents the components of non-interest expense for the three months ended
March 31, 2013, and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
From the Three
Months
Ended March 31, 2012 to
the Three Months Ended
March 31, 2013
|
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
$ change
|
|
|
% change
|
|
|
Salaries and employee benefits
|
|
$
|
8,178
|
|
|
$
|
7,785
|
|
|
$
|
393
|
|
|
|
5.1
|
%
|
|
Premises and equipment expense
|
|
|
2,421
|
|
|
|
2,421
|
|
|
|
—
|
|
|
|
—
|
|
|
FDIC insurance
|
|
|
517
|
|
|
|
995
|
|
|
|
(478
|
)
|
|
|
–48.0
|
%
|
|
Loss on other real estate owned
|
|
|
1,248
|
|
|
|
826
|
|
|
|
422
|
|
|
|
51.1
|
%
|
|
OREO Expense
|
|
|
208
|
|
|
|
318
|
|
|
|
(110
|
)
|
|
|
–34.6
|
%
|
|
Franchise tax expense
|
|
|
748
|
|
|
|
750
|
|
|
|
(2
|
)
|
|
|
–0.3
|
%
|
|
Data processing expense
|
|
|
725
|
|
|
|
653
|
|
|
|
72
|
|
|
|
11.0
|
%
|
|
Merger-related expense
|
|
|
584
|
|
|
|
—
|
|
|
|
584
|
|
|
|
100.0
|
%
|
|
Other operating expense
|
|
|
3,018
|
|
|
|
2,879
|
|
|
|
139
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense
|
|
$
|
17,647
|
|
|
$
|
16,627
|
|
|
$
|
1,020
|
|
|
|
6.1
|
%
|
The year-over-year increase was primarily related to an increase of $422 thousand on loss on other real estate owned and
$584 thousand in merger-related expenses.
Provision for Income Taxes
The Company’s income tax provisions are adjusted for non-deductible expenses and non-taxable income after applying the U.S. federal income tax rate of 35%. For the three months ended March 31,
2013, the Company recorded a provision for income taxes of $2.8 million compared to a provision of $3.0 million for the same period in 2012. Our effective tax rate was 31.9% and 32.6% for the three months ended March 31, 2013, and
March 31, 2012, respectively. 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, and decreased year-over-year in part due to slightly lower income before provision for income taxes generated during the first quarter of 2013.
Financial Condition
Total Assets
Total assets increased by $59.7 million, or 2.1%, to $2.88 billion at March 31, 2013, as compared to $2.82 billion at December 31, 2012. The
linked quarter increase was largely the result of an increase in cash and cash equivalents of $62.1 million, including a $79.0 million increase in interest-bearing deposits in other banks, and loans, net of allowance for loan loss, of $9.9 million,
which were partially offset by a decrease in loans held-for-sale of $10.3 million.
44
The primary contributor to the increase in interest-bearing deposits in other banks to $80.0 million at
March 31, 2013, was the growth in funding provided by securities sold under agreements to repurchase. During the first quarter of 2013, securities sold under agreements to repurchase increased $91.7 million, or 36.6%, to $342.4 million at
March 31, 2013. Securities sold under agreement to repurchase are entered into primarily with in market commercial customers that generally maintain a full relationship with the Bank, in the form of lending facilities and other deposit
products. We generally invest these funds in short-term liquid assets, such as interest-bearing deposits held at the Federal Reserve Bank, and investment securities available-for-sale.
Loan growth has been favorable in our ADC portfolio, real estate non-farm, non-residential portfolio, and real estate multi-family residential portfolio, as these portfolios increased sequentially $10.7
million, $1.8 million, and $1.4 million, respectively. The largest decrease in a segment of the loan portfolio during the first quarter of 2013 was a decrease of $5.6 million, or 2.1%, in commercial loans.
Investment securities were up $1.7 million sequentially from December 31, 2012 to March 31, 2013. We held 17.2% of our total assets in the
investment security portfolio at March 31, 2013, compared to 17.5% at December 31, 2012.
Loans held-for-sale decreased $10.3
million, to $4.9 million at March 31, 2013, compared to $15.2 million at December 31, 2012. The level of loans held-for-sale quarter-over-quarter is driven by various market and economic conditions, including mortgage loan demand in our
housing markets, and the interest rate environment.
Investment Securities
Investment securities were $495.1 million representing an increase of $1.7 million sequentially from December 31, 2012. There was no gain on sale of securities during the first quarter 2013. During
the first quarter of 2012, the Company sold $58.6 million of investment securities resulting in a $2.6 million gain on sale of securities. The purchase of investment securities made during the current quarter were predominantly at a premium to book
value in short-term, pass-through securities, with an average life of three to four years or less.
The investment portfolio contains two
pooled trust preferred securities with a book value of $5.1 million, and a market value of $364 thousand at March 31, 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 months
ended March 31, 2013, and March 31, 2012.
Loans
Loans, net of allowance for loan losses, increased $9.9 million, or 0.5%, from $2.14 billion at December 31, 2012, to $2.15 billion at March 31, 2013. The sequential increase in ADC loans
represented increased funding of new and ongoing construction projects, primarily consisting of single family and multi-family residential properties, as well as one new residential development loan and one new multi-family loan. The increase in
owner-occupied non-farm, non-residential loans represented the refinance of several new business and non-profit clients’ operating facilities. The sequential decrease in C&I loans was driven by repayment of credit line borrowings that were
previously used to support year-end tax planning and in anticipation of changes in the tax code. The orientation of loan generation efforts and loan mix continues to be reflective of the Bank’s strategic emphasis on building greater market
share in commercial lending, owner-occupied commercial real estate and residential real estate lending, while focusing ADC lending and non-owner-occupied commercial real estate lending on select transactions in key markets with solid economic
metrics.
Loans held-for-sale
Loans held-for-sale, which are originated by our mortgage division and intended for sale in the secondary market, decreased $10.3 million from $15.2
million at December 31, 2012, to $4.9 million at March 31, 2013. The decrease in loans held-for-sale was related to a slowdown in residential mortgage loan activity, which is the result of weaker mortgage loan demand during the first
quarter due to seasonality and changes in mortgage interest rates. 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 March 31, 2013, and December 31, 2012, and has historically
experienced an insignificant amount of repurchases.
45
Deposits
Total deposits at March 31, 2013, were $2.19 billion, a decrease $58.5 million, or 2.6%, from December 31, 2012 to March 31, 2013 with non-interest bearing demand deposits increasing by
$4.5 million, or 1.1%, savings and interest-bearing demand accounts decreasing $37.0 million, or 3.1%, and time deposits decreasing by $25.9 million, or 4.1%. The reduction in time deposits during the past year has been intentional and resulted from
a series of interest rate reductions that continued throughout 2012 and into the first quarter of 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
1.03% and 0.89% for the quarter ended March 31, 2012, to 0.80% and 0.65% for the quarter ended March 31, 2013, respectively. 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 72.4% of total deposits at March 31, 2013, compared to 72.0% at December 31, 2012. As of March 31, 2013, non-interest bearing demand deposits represented 19.2% of
total deposits, compared to 18.5% at December 31, 2012.
Capital Levels and Stockholders’ Equity
On March 31, 2011, the Company issued 426,000 shares of its common stock at a price of $5.87 per share in a registered direct placement with a
Company director for total gross proceeds of approximately $2.5 million. In addition, the Company issued to the investor, warrants exercisable for shares of common stock, which, if fully exercised, would provide an additional $4.8 million in gross
proceeds to the Company. The warrants each had an exercise price of $5.62 per share. The Series A warrants, exercisable for a total of 426,000 shares of common stock, were exercisable for a period of seven months following the closing date. The
Series B warrants, also exercisable for a total of 426,000 shares of common stock, were exercisable for a period of twelve months following the closing date. The 426,000 Series A warrants were exercised in full before they expired. In March 2012,
the remaining 426,000 Series B warrants were also exercised.
On September 29, 2010, the Company issued 1,904,766 shares of its common
stock at a price of $5.25 per share in a registered direct placement with several institutional investors for total gross proceeds of $10.0 million. In addition, the Company issued to the investors warrants exercisable for shares of common stock.
The warrants each had an exercise price of $6.00 per share, which represented a 14.3% premium to the offering price of the shares of common stock sold in the registered direct placement. The Series A warrants were exercisable through April 30,
2011, and 130,851 were exercised as of that date. The 952,383 Series B warrants originally were to expire on September 29, 2011, but on September 27, 2011, the expiration date of 904,764 of the Series B Warrants was extended to
January 27, 2012, with 47,619 warrants having been exercised prior to the warrant extension. Following the extension, during the fourth quarter of 2011, an additional 47,619 Series B warrants were exercised. During January 2012, the remaining
857,155 Series B warrants were exercised.
Stockholders’ equity increased $8.5 million, or 3.5%, from $245.3 million at December 31,
2012, to $253.8 million at March 31, 2013, with approximately $3.3 million in net proceeds from stock issuances, net income to common stockholders of $6.0 million for the first quarter 2013, partially offset by a decrease of $903 thousand in
other comprehensive income related to the investment securities portfolio. Sequentially, the Company’s Tier 1 and total qualifying capital ratios are up 42 and 41 basis points, respectively.
The Company’s tangible common equity ratio increased from 8.69% at December 31, 2012, to 8.80% at March 31, 2013. The 11 basis point
increase in tangible common equity ratio is primarily related to $6.0 million in retained net income available to common stockholders for the first quarter of 2013, partially offset by increase of $59.7 million in total tangible assets and a
decrease of $903 thousand in other comprehensive income.
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
46
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 March 31, 2013, and December 31, 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 $54.2 million and $49.0 million are included in our time deposit portfolio and account for 2.5% and 2.2% of our total deposits at March 31, 2013, and
December 31, 2012, respectively. Time deposits comprise approximately $603.0 million, or 27.6%, of our total deposit liabilities at March 31, 2013.
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 $53.7 million, or 7.8%, from $690.6 million at
December 31, 2012, to $636.9 million at March 31, 2013, primarily due to a $40.7 million increase in securities pledged as collateral for repurchase agreements, partially offset by a $79.0 million increase in interest-bearing deposit
accounts at other banks. 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 March 31, 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 $624.3 million and $610.8 million as of March 31, 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 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 amounted to
$553.0 million at March 31, 2013, and $550.1 million at December 31, 2012, 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 $531.5 million and $21.5 million at March 31, 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 March 31, 2013, and December 31, 2012, the Company had $71.3 million and $60.8 million, respectively, in outstanding standby letters of credit.
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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 13.15% at March 31,
2013, compared to 12.82% at December 31, 2012, and its total risk-based capital ratio was 14.41% at March 31, 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 10.69% at March 31, 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 13.67%, 14.92%, and 11.06%, respectively, at March 31, 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 year-over-year are due to additional capital raised, net income generated by
operations 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
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 Dodd-Frank Wall Street Reform and
Consumer Protection Act, the Federal Reserve has revised the capital treatment of trust preferred securities to provide that, beginning in 2011, such securities 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 March 31, 2013, trust preferred securities represented 20.5% of the Company’s Tier 1 capital and
18.8% of its total risk-based capital. See Note 10 to the Consolidated Financial Statements for further information regarding trust preferred securities.
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Capital Issuances.
On March 31, 2011, the Company issued 426,000 shares of its
common stock at a price of $5.87 per share in a registered direct placement with a Company director for total gross proceeds of approximately $2.5 million. In addition, the Company issued to the investor, warrants exercisable for shares of common
stock, which, if fully exercised, would provide an additional $4.8 million in gross proceeds to the Company. The warrants each had an exercise price of $5.62 per share. The Series A warrants, exercisable for a total of 426,000 shares of common
stock, were exercisable for a period of seven months following the closing date. The Series B warrants, also exercisable for a total of 426,000 shares of common stock, were exercisable for a period of twelve months following the closing date. The
426,000 Series A warrants were exercised in full before they expired. In March 2012, the remaining 426,000 Series B warrants were also exercised.
On September 29, 2010, the Company issued 1,904,766 shares of its common stock at a price of $5.25 per share in a registered direct placement with several institutional investors for total gross
proceeds of $10.0 million. In addition, the Company issued to the investors warrants exercisable for shares of common stock. The warrants each had an exercise price of $6.00 per share, which represented a 14.3% premium to the offering price of the
shares of common stock sold in the registered direct placement. The Series A warrants were exercisable through April 30, 2011, and 130,851 were exercised as of that date. The 952,383 Series B warrants originally were to expire on
September 29, 2011, but on September 27, 2011, the expiration date of 904,764 of the Series B Warrants was extended to January 27, 2012, with 47,619 warrants having been exercised prior to the warrant extension. Following the
extension, during the fourth quarter of 2011, an additional 47,619 Series B warrants were exercised. During January 2012, the remaining 857,155 Series B warrants were exercised.
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 March 31, 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 1.5 million 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.