Atlantic Union Bankshares Corp. (then Union First Market Bankshares Corporation) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Interim statements were reviewed, not audited.
Business context and financial results
The company operated a Virginia-focused community bank and mortgage origination business. It reported 94 Virginia retail locations. The mortgage business originated loans primarily for sale in the secondary market.
| Metric | Q3 2012 | Comparable period |
|---|---|---|
| Net interest income | $38.8 million | $39.4 million in Q3 2011 |
| Noninterest income | $15.6 million | $11.4 million in Q3 2011 |
| Net income | $9.6 million; diluted EPS $0.37 | $9.1 million; diluted EPS $0.33 available to common shareholders in Q3 2011 |
| Net interest margin, taxable-equivalent basis | 4.31% | 4.54% in Q3 2011; 4.36% in Q2 2012 |
| Net income, nine months | $26.0 million; diluted EPS $1.00 | $22.1 million; diluted EPS $0.79 available to common shareholders in 2011 |
Q3 noninterest income growth was led by mortgage loan sale gains, which rose to $8.9 million from $4.9 million a year earlier. Nine-month mortgage loan sale gains rose to $21.5 million from $14.1 million. For the first nine months, reported net income increased about 17.6% year over year.
Balance sheet, cash flow, debt and liquidity
- At September 30, total assets were $4.03 billion, net loans were $2.87 billion, deposits were $3.20 billion, and stockholders’ equity was $442.9 million. Compared with December 31, 2011, assets increased $121.1 million, net loans increased $89.5 million, and deposits increased $24.7 million.
- Cash and cash equivalents were $62.3 million, down from $96.7 million at year-end 2011. Net cash used in operating activities for the nine months was $16.2 million, versus $75.6 million provided in the comparable 2011 period. The 2012 operating cash outflow included a $67.1 million increase in loans held for sale. Investing activities used $105.8 million; financing activities provided $87.7 million.
- Total borrowings on the balance sheet were approximately $350.7 million, including $154.1 million short-term borrowings, $136.3 million long-term borrowings and $60.3 million trust preferred capital notes. Short-term borrowings rose $91.1 million from year-end, primarily to fund loan growth and customer repurchase agreements.
- Management said liquidity was sufficient. Cash, securities, loans held for sale and loans maturing within one year totaled $1.2 billion, or 33.7% of earning assets. The company reported $85.5 million remaining on correspondent Federal funds lines and a collateral-dependent FHLB line of up to $793.2 million.
- Regulatory capital ratios remained above the company’s stated “well capitalized” threshold: Tier 1 risk-based capital was 13.44% and total risk-based capital was 15.00% at quarter-end. Tangible common equity to tangible assets was 9.27%.
Material changes and asset quality
- Q3 net income rose 6.1% year over year. Higher mortgage gains and a $1.2 million lower loan-loss provision more than offset lower net interest income and higher expenses. The nine-month provision for loan losses fell to $8.9 million from $14.4 million.
- Tax-equivalent net interest margin fell 23 basis points year over year. Management attributed margin pressure to lower loan and investment yields and declining accretion from acquired assets, partly offset by lower funding costs.
- Noninterest expense increased 11.1% year over year in Q3 to $38.3 million, principally reflecting mortgage staffing and commissions, occupancy costs, and OREO-related costs. Nine-month expense increased 6.0% to $111.9 million.
- Nonperforming assets were $66.6 million, down 22.9% year over year; the ratio to loans was 2.29%, versus 3.07%. Nonaccrual loans were $32.2 million, versus $52.0 million a year earlier. The allowance was $39.9 million, or 1.37% of loans and 124.05% of nonaccrual loans.
- Troubled debt restructurings totaled $63.8 million, down from $112.6 million at year-end 2011; $51.9 million were performing and $11.9 million nonperforming. Q3 net charge-offs were $3.5 million, or 0.48% annualized, higher than the prior quarter and Q3 2011; nine-month net charge-offs were $8.5 million, below the prior-year $11.5 million.
Outlook, 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.
- On August 23, 2012, the company modified $140 million of fixed-rate FHLB advances to floating-rate advances to reduce borrowing costs. It incurred a $19.6 million prepayment penalty, included in long-term borrowings and to be amortized over the modified advances’ terms; $179,000 was amortized in Q3 and the first nine months.
- Mortgage originations were $323.1 million in Q3, up 84.1% year over year; 57.6% were refinancings. Management linked higher production to historically low mortgage rates and additional originators, while increased volume also raised commissions and staffing costs.
- The company identified proposed Basel III capital rules as a risk: higher capital requirements could constrain lending, pressure profitability, require additional capital and affect common dividends. Management was evaluating the proposals.
- Other disclosed risks include economic and real estate conditions, interest-rate changes, regulation, competition and execution of acquisitions. Management reported no material adverse effect expected from ordinary-course legal proceedings and no material goodwill impairment.
Most important facts for investors to verify
- Whether mortgage origination gains and unusually strong refinance activity persist as interest rates and market conditions change.
- Whether margin pressure continues, and the realized cost savings and amortization schedule from the FHLB refinancing, including the $19.6 million penalty.
- Whether asset-quality improvement is durable, particularly trends in commercial real estate, nonaccrual loans, TDRs, OREO and charge-offs.
- How loan growth is funded and whether cash balances, short-term borrowings and available borrowing lines remain adequate.
- The eventual Basel III requirements and their impact on capital, lending, profitability and dividends.