Atlantic Union Bankshares Corp annual report, FY2011

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Business context and reporting period

Union First Market Bankshares Corporation, the historical registrant identified in this filing, filed this Form 10-K for the fiscal year ended December 31, 2011; it is an annual filing, not a standalone fourth-quarter report. The Virginia-based bank holding company operated a 99-location community bank and financial-services affiliates, with reportable community banking and mortgage segments. The filing describes expansion in the Shenandoah Valley, including the May 2011 Harrisonburg branch acquisition.

Financial performance and condition

Unless stated otherwise, amounts are in U.S. dollars. Selected income-statement and cash-flow figures are for fiscal 2011; balance-sheet figures are as of December 31, 2011.

  • Earnings: Net income was $30.4 million, up 32.8% from $22.9 million. Diluted EPS rose to $1.07 from $0.83; net income available to common shareholders was $27.8 million.
  • Revenue and margins: Interest and dividend income was $189.1 million and noninterest income was $43.8 million. Net interest income was $156.4 million, up 3.2% on a tax-equivalent basis; net interest margin edged up to 4.57% from 4.56%. The efficiency ratio improved to 70.77% from 71.91%.
  • Costs and credit provision: Noninterest expense was $141.6 million, down 1.0%; provision for loan losses was $16.8 million, down from $24.4 million.
  • Cash flow: Operating activities provided $70.5 million; investing activities used $17.4 million and financing activities used $17.7 million. Cash and cash equivalents increased $35.5 million to $96.7 million.
  • Balance sheet and liquidity: Total assets were $3.91 billion, deposits $3.18 billion, net loans $2.78 billion, and securities available for sale $640.8 million. Management said liquidity was sufficient; cash and available-for-sale securities represented 18.9% of assets. The company reported $113 million of unused Federal funds lines and $141 million outstanding under an FHLB line of up to $776.8 million.
  • Debt and capital: Borrowings totaled $278.7 million, including $155.4 million of long-term borrowings and $60.3 million of trust preferred notes. Company Tier 1 and total risk-based capital ratios were 12.85% and 14.51%; the Bank’s were 12.36% and 14.02%. The Bank was categorized as well capitalized.
  • Asset quality: Nonperforming assets were $77.1 million, down from $97.8 million; NPA-to-loans declined to 2.74% from 3.45%. Nonaccrual loans were $44.8 million, OREO was $32.3 million, and net charge-offs were $15.7 million, or 0.56% of average loans. The allowance was $39.5 million, 88.0% of nonaccrual loans.

Material changes versus the prior comparable period

  • Net income increased as net interest income improved, loan-loss provision declined, and prior-year acquisition and merger costs fell. The 2010 comparison includes First Market Bank for only 11 months, limiting direct comparability.
  • Funding costs declined: the cost of interest-bearing liabilities fell to 1.14% from 1.35%, while the yield on earning assets fell to 5.50% from 5.68%. Deposit growth and a shift toward lower-cost transaction and money-market accounts supported margin performance.
  • Noninterest income fell 7.4%, chiefly because mortgage-loan sale gains and gains on OREO and bank-premises sales declined; increased fees and securities gains partly offset the decreases.
  • Mortgage originations fell 18.5% to $659.4 million, and mortgage-segment net income declined to $1.6 million from $3.1 million.
  • Total deposits grew 3.4%; borrowings declined $29.5 million. The company redeemed $35.7 million of preferred stock held by the U.S. Treasury in December 2011, reducing future preferred dividends but using cash.

Outlook, commentary, risks and unusual items

  • Management described the economic and banking environment as challenging, citing weak employment and real estate, low rates, a flatter yield curve, and uncertainty about recovery. It expected continued pressure on net interest margin if low rates persisted.
  • No formal company-wide earnings or revenue guidance is provided. After year-end, the company hired approximately 28 mortgage originators and said resulting production could reach as much as $175 million; timing and volume were uncertain. Four branch consolidations were expected to be completed by the end of the second quarter of 2012.
  • Management highlighted real-estate and construction credit concentration, elevated problem-loan risk, valuation uncertainty in collateral and OREO, interest-rate sensitivity, competition, and the costs and uncertainty of regulatory change, including Dodd-Frank.
  • Year-end TDRs totaled $112.6 million, including $103.8 million identified under newly adopted guidance. Management said the change did not materially affect NPAs, reserves, earnings, or capital; 87.7% of TDRs were considered performing. Four loans totaling $2.2 million that had been restructured in the prior 12 months subsequently defaulted.
  • Unusual items included a $400,000 credit-related impairment charge on a trust preferred security and losses on sales of OREO and bank property. Fair-value accretion from acquired assets and liabilities added $7.0 million to 2011 net interest income. The preferred-stock redemption accelerated approximately $982,000 of discount amortization, reducing common earnings by about $0.02 per share.
  • The filing reports an unqualified audit opinion and effective internal control over financial reporting. Management said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect; a Maryland mortgage-fee class action was settled in 2011 without material financial impact.

Important facts for investors to verify

  1. Whether the improvement in credit quality is sustained, including subsequent trends in nonaccruals, OREO, TDR performance, charge-offs, and allowance coverage.
  2. How much 2011 earnings and net interest margin depended on acquisition-related fair-value accretion, and how that benefit runs off.
  3. Whether lower mortgage originations recover and whether the new loan-originator hires deliver the anticipated production.
  4. How deposit pricing, asset yields, and interest-rate changes affect net interest margin, liquidity, and the value of the securities portfolio.
  5. The effects of the $35.7 million preferred-stock redemption, the February 2012 share repurchase, and regulatory limits on subsidiary dividends and capital distributions.