Business context and reporting period
The filing is Union First Market Bankshares Corporation’s Form 10-K for the fiscal year ended December 31, 2012, not a standalone quarterly filing. The company, a Virginia-based bank holding company, operated a community bank and mortgage business, with 90 bank locations in Virginia. The request metadata names Atlantic Union Bankshares Corp, but that is not the registrant name shown in this filing.
Financial performance and condition
Unless stated otherwise, dollar figures are in millions. The filing’s audited financial statements received an unqualified opinion; the auditor also concluded internal control over financial reporting was effective.
| Metric | 2012 | 2011 |
|---|---|---|
| Interest and dividend income | $181.9 | $189.1 |
| Net interest income | $154.4 | $156.4 |
| Noninterest income | $41.1 | $33.0 |
| Net income | $35.4 | $30.4 |
| Diluted earnings per share | $1.37 | $1.07 |
| Return on average assets / equity | 0.89% / 8.13% | 0.79% / 6.90% |
| Net interest margin, FTE | 4.34% | 4.57% |
| Efficiency ratio, FTE | 66.86% | 67.55% |
| Total assets at year-end | $4,095.9 | $3,907.1 |
| Loans, net of unearned income | $2,966.8 | $2,818.6 |
| Deposits | $3,297.8 | $3,175.1 |
Total interest and dividend income plus noninterest income was $222.9 million, compared with $222.0 million in 2011; this is a simple sum of reported income categories, not a separately identified revenue measure. Fourth-quarter 2012 net income was $9.4 million and diluted EPS was $0.37.
Provision for loan losses fell to $12.2 million from $16.8 million. Net charge-offs were $16.8 million, or 0.56% of loans, versus $15.7 million and the same ratio in 2011. The allowance for loan losses ended at $34.9 million, 1.18% of loans. Nonperforming assets declined to $59.0 million from $77.1 million; nonaccrual loans fell to $26.2 million from $44.8 million, while other real estate owned was $32.8 million.
Cash and cash equivalents were $82.9 million at year-end, down from $96.7 million. Operating cash flow was negative $31.7 million, primarily reflecting a $92.9 million increase in mortgage loans held for sale; investing cash flow was negative $132.0 million and financing cash flow positive $149.9 million. The filing describes liquidity as sufficient. Available borrowing included $87.0 million of unused correspondent-bank federal funds lines and $494.0 million available under the FHLB line, against approximately $180.0 million outstanding on that line. Short-term borrowings totaled $132.3 million; long-term borrowings were $136.8 million and trust preferred capital notes $60.3 million.
Regulatory capital remained strong: the company reported total and Tier 1 risk-based capital ratios of 14.57% and 13.14%; the bank reported 14.14% and 12.70%. The bank was categorized as well capitalized. Common dividends declared rose to $0.37 per share from $0.28.
Material changes versus the prior year
- Net income increased 16.3%; diluted EPS rose 28.0%. Higher mortgage-loan sale gains, lower credit-loss provision, reduced FDIC insurance expense and lower acquired-deposit intangible amortization contributed. Lower net interest income and higher personnel costs partly offset these gains.
- Noninterest income increased 24.6%, led by mortgage-loan sale gains, which rose 50.7% to $16.7 million. Mortgage originations rose 66.2% to $1.1 billion, and mortgage-segment net income increased to $2.5 million from $1.6 million.
- Net interest margin declined 23 basis points, to 4.34%, as asset yields fell faster than funding costs. Management expected a modest further decline over the next several quarters.
- Loans grew 5.3% and deposits 3.9%. Mortgage loans held for sale rose to $167.7 million from $74.8 million; short-term borrowings increased, in part to fund that growth.
- Asset quality improved overall, including lower nonaccrual loans and troubled debt restructurings. However, net charge-offs remained level as a percentage of loans, and the allowance-to-loans ratio declined.
- The company repurchased 335,649 shares for $4.4 million and 750,000 shares for $11.6 million, funded with cash on hand. It also incurred a $19.6 million prepayment penalty when converting fixed-rate FHLB advances to floating-rate advances; the penalty is amortized over the modified advances’ lives.
Outlook, risks and unusual items
Management cited a slow recovery, elevated unemployment, low interest rates and a flatter yield curve. It expected net interest margin to decline modestly in the near term. No specific earnings or growth targets were provided. Management emphasized controlling costs, managing nonperforming assets and working with borrowers.
- Credit risk remains significant: 84.2% of loans were real-estate secured, including commercial real estate and construction/development exposures. Management warned that weaker property values or local economic conditions could increase defaults and losses.
- Troubled debt restructurings totaled $63.5 million, down from $112.6 million; $12.0 million were nonperforming. The allowance may prove insufficient, and regulatory examinations could require additional provisions.
- Low rates and yield-curve changes may pressure margins. The company’s 12-month simulation indicated net interest income would rise only 0.48% with a 100-basis-point rate increase and fall 2.11% with a 100-basis-point decrease; modeled economic value of equity declined under both rate-up and rate-down shocks.
- Regulatory reform, including proposed Basel III capital rules, could affect capital, liquidity, costs and distributions; the final requirements and timing were uncertain at filing.
- Mortgage earnings benefited from higher refinancing and originations, which may be sensitive to interest rates and market volumes. Mortgage rate-lock commitments and loans held for sale were supported by best-efforts sale commitments intended to limit rate exposure.
- Subsequent events: in January 2013 the bank accepted approximately $2.6 million in Virginia National Bank shares in partial settlement of a borrower’s debt. In March 2013, after year-end, the company repurchased 500,000 shares from Markel Corporation for $9.5 million under a separate agreement.
- Management said ordinary-course litigation was not expected to have a material adverse effect. A prior mortgage class-action matter was settled in 2011 without material financial impact.
Most important facts for investors to verify
- Whether credit quality continued to improve after year-end, particularly nonperforming commercial real-estate loans, TDR performance, charge-offs and collateral valuations.
- Whether mortgage origination gains and volumes were sustainable, and how quickly mortgage loans held for sale converted to cash.
- Whether net interest margin and funding costs followed management’s stated outlook, including the effect of the FHLB advance modification and its amortized penalty.
- Liquidity and funding capacity, including short-term borrowing levels, deposit stability and availability of collateral-backed FHLB borrowing.
- Capital and dividend capacity under evolving regulatory requirements; bank dividends to the parent were subject to restrictions.
- The cash and per-share effects of the year-end and subsequent share repurchases, and the related-party nature of purchases from directors or affiliated shareholders.