Atlantic Union Bankshares Corp. (then Union First Market Bankshares Corporation) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited and were reviewed by the independent accountant. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in thousands.
Business context and financial performance
The company operated a Virginia-focused community bank and a mortgage origination business. It completed the purchase of the NewBridge Bank Harrisonburg branch in May 2011, adding a new market presence along the I-81 corridor. Comparative 2010 results include First Market Bank only from its February 2010 acquisition date.
- Q3 earnings: Net income was $9.1 million, up 12.4% from $8.1 million a year earlier. Net income available to common shareholders was $8.5 million; basic and diluted EPS were $0.33, versus $0.29.
- Nine-month earnings: Net income was $22.1 million, up 19.4% from $18.5 million. Common EPS was $0.79, versus $0.68.
- Net interest income and margin: Q3 GAAP net interest income was $39.4 million, versus $38.6 million. On a tax-equivalent basis, it was $40.5 million, up 2.1% year over year; margin was 4.54%, up 7 basis points year over year but down 14 basis points sequentially. Nine-month tax-equivalent net interest income rose 5.0% to $121.1 million and margin was 4.63%, up 7 basis points. Purchase-accounting accretion contributed $1.8 million to Q3 net interest income; management reported a 4.34% core margin excluding those adjustments.
- Revenue and expenses: Q3 noninterest income was $11.5 million, down 6.5% year over year, including $4.9 million in mortgage loan-sale gains, $499,000 in securities gains, and a $400,000 securities impairment loss. Noninterest expense was $34.6 million, up 1.9%. For nine months, noninterest income was $32.1 million, down $2.1 million; noninterest expense was $105.3 million, down $656,000.
- Credit costs: Q3 provision for loan losses was $3.6 million, down $2.3 million year over year. Nine-month provision was $14.4 million, versus $14.9 million. Net charge-offs in Q3 were $1.9 million, or 0.27% of average loans on an annualized basis.
- Cash flow: Operating activities provided $75.6 million in the first nine months, compared with $18.0 million in 2010. Investing activities provided $25.7 million and financing activities used $12.7 million. Cash and cash equivalents increased $88.6 million to $149.8 million; these cash-flow figures reflect bank balance-sheet and transaction activity.
Balance sheet, liquidity, debt, and capital
- Total assets were $3.91 billion at September 30, up $77.2 million from December 31, 2010. Gross loans were $2.82 billion, down $18.9 million from year-end; net loans were $2.78 billion. Available-for-sale securities were $606.5 million.
- Total deposits were $3.13 billion, up $64.8 million from year-end. Noninterest-bearing demand deposits increased to $542.7 million. Total borrowings were $286.0 million, including $70.5 million of repurchase agreements, $60.3 million of trust preferred notes, and $155.3 million of long-term borrowings; no other short-term borrowings were outstanding at quarter-end.
- Management considered liquidity sufficient. Cash, specified liquid assets, and loans maturing within one year totaled $1.3 billion, or 36.7% of earning assets. The filing identifies Federal Reserve correspondent-bank lines, FHLB capacity, and other credit lines as additional funding sources.
- Equity to assets was 11.54%; tangible common equity to tangible assets was 8.74%. The Tier 1 risk-based capital ratio was 13.71% and total risk-based capital was 15.36%. Management stated the company met the regulatory definition of “well capitalized.”
Material changes, outlook, risks, and unusual items
- Q3 earnings improved from both the prior quarter and prior-year quarter, supported by lower loan-loss provision and deposit funding costs, along with securities and mortgage-related gains. Sequential improvement also reflected lower second-quarter branch-closure losses and lower expenses; salary and occupancy costs rose.
- Management reported modest improvement in asset quality but noted continuing economic and real estate uncertainty. Nonperforming assets were $86.4 million, down $4.9 million sequentially but up $8.4 million year over year. Nonaccrual loans were $52.0 million; other real estate owned was $34.5 million. Commercial real estate, construction, and residential real estate exposures are notable portfolio concentrations.
- The allowance for loan losses was $41.3 million, or 1.47% of loans; the company’s adjusted allowance-to-legacy-loans measure was 1.89%. Allowance coverage was 79.5% of nonperforming loans. Management considered the allowance adequate, while cautioning that further additions could be needed if economic conditions or real estate values worsen.
- Adoption of new troubled-debt-restructuring guidance resulted in $116.4 million of loans classified as TDRs at quarter-end; approximately $102 million were considered performing. The company said the accounting change did not materially affect nonperforming assets, reserves, earnings, or capital. It reported no defaults in the three- or nine-month periods among loans restructured in the prior 12 months.
- A single-issuer trust preferred security generated a $400,000 credit-related other-than-temporary impairment charge. Management cited continued interest-payment deferral, weak underlying asset quality, worsening economic conditions, and thin trading; it noted a possibility of selling before full recovery of amortized cost.
- The May Harrisonburg branch acquisition involved a $26.4 million cash purchase price, $72.5 million of acquired loans, $48.9 million of deposits, and $1.8 million of goodwill. Acquisition-related expenses were $426,000 for the first nine months; management expected no further expenses from this acquisition. Mortgage segment nine-month net income fell 57.9% to $958,000 as originations and loan-sale gains declined.
- No quantitative earnings or margin guidance was provided. Management’s outlook emphasized ongoing credit monitoring and workout activity; it expected OREO sales and additions to continue until property markets and the broader economy improved materially. Forward-looking results remain exposed to economic, interest-rate, regulatory, competitive, market, and acquisition-related factors.
- The company reported that disclosure controls were effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the decline in nonperforming assets and charge-offs persists, and how TDRs, commercial real estate exposures, and OREO valuations evolve.
- How much future earnings depend on purchase-accounting accretion, and whether the reported margin trend holds as acquired-loan accretion declines and assets reprice.
- The sustainability of mortgage originations and loan-sale gains, and the sensitivity of earnings to interest rates and deposit mix.
- The status and recoverability of the impaired trust preferred security, and any subsequent sale or additional impairment.
- Capital and funding implications of the $60.3 million trust preferred notes and the company’s stated intention to redeem preferred stock in increments or in full before the end of 2012, subject to regulatory approval.