Atlantic Union Bankshares Corp quarterly report, Q1 FY2013

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Atlantic Union Bankshares Corp. (then Union First Market Bankshares Corporation) — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. The company operated a community bank and a mortgage origination business, with 90 Virginia branches. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.

Financial performance and condition

  • Earnings: Net income was $9.0 million, up 13.4% from $7.9 million in Q1 2012. Diluted EPS was $0.36 versus $0.31. Income before taxes was $12.0 million; income tax expense was $3.1 million.
  • Interest income and margins: Interest and dividend income was $43.3 million and interest expense was $5.5 million, producing GAAP net interest income of $37.8 million, down 1.5% year over year. Tax-equivalent net interest income was $39.0 million, down 1.0%; net interest margin was 4.23%, down 21 basis points year over year. Core tax-equivalent margin was 4.18%.
  • Other income and expenses: Noninterest income was $9.8 million, up 16.0%, including $3.9 million of net gains on mortgage loan sales. Noninterest expense was $33.5 million, up 3.8%. Provision for loan losses was $2.1 million, down from $3.5 million.
  • Cash flow: Operating cash flow was $62.6 million versus $24.5 million in Q1 2012; investing activities used $10.3 million and financing activities used $58.3 million. Cash and equivalents ended the quarter at $76.9 million, down $6.0 million during the quarter. Operating cash flow benefited substantially from a $40.6 million decrease in loans held for sale.
  • Balance sheet: Total assets were $4.05 billion, down $44.7 million from year-end 2012 but up $103.3 million year over year. Gross loans were $2.97 billion, up 4.6% year over year; deposits were $3.31 billion, up 3.0%. Available-for-sale securities were $583.2 million.
  • Debt and liquidity: Borrowings totaled $269.7 million at quarter-end, including $72.0 million of repurchase agreements, $60.3 million of trust preferred capital notes, and $137.4 million of long-term borrowings; no other short-term borrowings remained outstanding. Management considered liquidity sufficient. Cash and other specified liquid assets, including loans maturing within one year, totaled $1.2 billion, or 32.5% of earning assets; available correspondent-bank federal funds lines were $125 million.
  • Capital and shareholder returns: The company reported a 13.02% Tier 1 risk-based capital ratio, a 14.44% total risk-based capital ratio, and an 8.97% tangible common equity-to-tangible assets ratio; it stated it exceeded “well capitalized” thresholds. It repurchased and retired 500,000 shares from Markel Corporation for $9.5 million ($19 per share) and paid a $0.13-per-share dividend.

Material changes and credit quality

  • Compared with Q1 2012, average loans grew 4.8% and average deposits grew 3.7%, while lower loan and securities yields and declining acquisition-related accretion reduced net interest margin. Management attributed lower funding costs to deposit repricing and a shift from time deposits toward lower-cost accounts.
  • Credit indicators improved year over year: nonperforming assets were $58.9 million, down 26.5%; nonaccrual loans were $23.0 million, down 45.8%; and loans at least 90 days past due but still accruing were $6.2 million, down from $12.3 million. Net charge-offs were $2.6 million, or 0.35% annualized, versus $2.8 million, or 0.39%, a year earlier.
  • The allowance for loan losses was $34.4 million, or 1.16% of loans (1.36% excluding acquired loans, a company-defined non-GAAP measure). The allowance-to-nonaccrual-loan ratio rose to 149.4%. Impaired loans were $145.7 million, down from $242.7 million a year earlier. Troubled debt restructurings were $54.7 million, of which $42.6 million were performing and $12.0 million nonperforming.
  • Other real estate owned increased to $35.9 million from $32.8 million at year-end, though it was below the prior-year $37.7 million. Real-estate-secured loans represented 84.0% of the loan portfolio.

Outlook, commentary, risks and unusual items

  • Management expected net interest margin to decline modestly over the next several quarters, as earning-asset yields were expected to fall faster than funding costs.
  • Mortgage segment net income was $177,000, down 23.5% year over year. Originations rose 45.8% year over year to $268.2 million, but fell 19.2% from the prior quarter amid seasonal weakness and increased mortgage rates. Management cited lower sequential volume and gain-on-sale margins, as well as costs of expanding operating capabilities.
  • Key risks include real-estate concentration and continued dependence on recovery in residential and commercial property markets; interest-rate changes; competition; regulatory and legislative changes; and broader economic conditions. A 100-basis-point rate increase was modeled to increase 12-month net interest income by 0.79%, while a 100-basis-point decrease was modeled to reduce it by 2.30%. Economic value of equity was modeled to decline under both scenarios.
  • Unusual or notable items included a $296,000 loss on bank premises, largely from writing down a former branch location; the related-party share repurchase from Markel, whose vice chairman sat on the company’s board at the time; and continuing amortization of a $19.6 million prepayment penalty incurred when FHLB advances were modified in 2012. No securities other-than-temporary impairment was recognized in the quarter.
  • Management said litigation in the ordinary course was not expected, in aggregate, to have a material adverse effect. It reported no material change in previously disclosed risk factors and concluded disclosure controls were effective at a reasonable-assurance level.

Important facts for investors to verify

  1. Whether loan yields and net interest margin continue to decline, and how much acquisition-related accretion remains.
  2. Whether improving delinquency, nonaccrual, impaired-loan and TDR trends persist, particularly in commercial real estate, construction and land exposures; also assess allowance adequacy against charge-offs and collateral values.
  3. Whether deposit mix remains favorable and liquidity and borrowing capacity remain sufficient as time deposits mature and funding needs change.
  4. Whether mortgage origination volumes and margins can support the expanded mortgage cost base after the sequential decline in production.
  5. The impact of interest-rate movements on both earnings and economic value, including the assumptions underlying management’s sensitivity models.
  6. The terms, governance and capital effects of the Markel repurchase, and the implications of the company’s dividend and share-repurchase activity.