Union First Market Bankshares Reports Fourth Quarter And Full Year Results

RICHMOND, Va., Jan. 23, 2013 /PRNewswire/ -- Union First Market Bankshares Corporation (the "Company") (NASDAQ: UBSH) today reported net income of $9.4 million and earnings per share of $0.37 for its fourth quarter ended December 31, 2012.  The quarterly results represent a decrease of $184,000, or 1.9%, in net income from the most recent quarter and an increase of $1.1 million, or 12.9%, from the same quarter ended December 31, 2011.  Reported earnings per share of $0.37 for the current quarter were unchanged from the most recent quarter and increased $0.09, or 32.1%, from the prior year's fourth quarter.  Net income for the year ended December 31, 2012 was $35.4 million, an increase of $5.0 million, or 16.3%, from 2011 resulting in earnings per share of $1.37, an increase of $0.30, or 28.0%, from $1.07 for the year ended December 31, 2011. Earnings per share for the quarter and the year ended December 31, 2011 included preferred dividends and discount accretion on preferred stock of $1.1 million and $2.7 million, respectively.

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"The fourth quarter and full year results demonstrate the continued success and resilience of our business strategy as Union remains committed to achieving top quartile financial performance nationally and providing our shareholders with above average returns on their investment," said G. William Beale, Chief Executive Officer of Union First Market Bankshares.  "Our disciplined approach to loan and deposit growth and related pricing, focus on increasing revenues through new product and service offerings, our ongoing pursuit to more efficiently deliver best in class service to our customers and to diligently manage expenses, as well as our steadfast focus on asset quality served us well in 2012 and effectively positions us to deliver sustainable top tier financial performance in the future." 

"During the quarter, our growth strategy continued to yield results as the company experienced loan growth for the fifth consecutive quarter, customer deposit levels grew at a strong pace and Union Mortgage continued to increase its contribution to the Company's bottom line.  In addition, asset quality trends remained positive during the quarter as nonperforming assets declined to their lowest levels in three years. As part of our ongoing efforts to improve the Company's efficiency ratio we completed the implementation of several initiatives that will result in increased non-interest income and expense savings in 2013.  Finally, during the quarter we increased the Company's dividend for the third time in 2012 and repurchased 750,000 shares as part of our commitment to shareholder returns and effective capital management.  All in all, it was another solid quarter and year for Union and one that we expect to build upon in the quarters ahead," Beale concluded.

Select highlights:

  • The Company earned a Return on Average Equity ("ROE") of 8.41% for the quarter ended December 31, 2012 compared to ROE of 8.70% and 7.49% for the prior quarter and the same quarter of the prior year.   For the year ended December 31, 2012, ROE was 8.13% compared to 6.90% for the prior year.
  • The Company earned a Return on Average Assets ("ROA") of 0.93% for the quarter ended December 31, 2012 compared to ROA of 0.96% and 0.84% for the prior quarter and the same quarter of the prior year.  For the year ended December 31, 2012, ROA was 0.89% compared to 0.79% for the prior year.
  • Nonperforming assets ("NPAs") decreased $7.6 million, or 11.4%, from the third quarter and decreased $18.1 million, or 23.5%, compared to the same period a year ago.  NPAs as a percentage of total outstanding loans declined 30 basis points to 1.99% from 2.29% last quarter and 75 basis points from 2.74% a year earlier.
  • Loan demand continued to improve with an increase in loans outstanding of $58.3 million, or 2.0% from the prior quarter (8.0% annualized), primarily due to growth in the commercial sector. On an annual basis, loans outstanding increased 5.3%.
  • Deposit balances increased $98.0 million or 3.1% from the prior quarter (12.4 % annualized). On an annual basis, deposit balances increased 3.9%.
  • Results for the quarter included approximately $594,000, or $0.02 per share, in non-recurring costs related to the previously announced closure of four branches and other efficiency initiatives implemented in the fourth quarter.  The completion of these initiatives will result in increased non-interest income and expense savings in 2013.

Fourth quarter net income decreased $184,000, or 1.9%, compared to the third quarter.  The decrease was largely a result of additional provision for loan losses of $900,000, and costs incurred related to branch closures and other efficiency initiatives of $594,000, partially offset by increased gains on sales of mortgage loans, net of commissions, of $544,000 driven by higher loan production volume and increased net interest income. The increase in net interest income was driven by higher earning asset balances offset by the impact of lower net interest margin.

Net income for the quarter ended December 31, 2012 increased $1.1 million, or 12.9%, from the same quarter in the prior year.  The increase was principally a result of higher gains on sales of mortgage loans, net of commissions, of $2.0 million, an increase in net interest income driven by higher earning asset balances offset by the impact of lower net interest margin as well as lower OREO expenses and lower marketing and advertising costs. These results were partially offset by increased provision for loan losses of $900,000 and higher salaries and benefits expenses due to the addition of mortgage loan originators and support personnel in 2012, increased incentive compensation tied to higher earnings, and severance related costs.  Net income available to common shareholders increased $2.2 million, or 30.0%, from the prior year's fourth quarter, which included preferred dividends and discount accretion on preferred stock of $1.1 million.

Net income for the year ended December 31, 2012 increased $5.0 million, or 16.3%, from the prior year.  The increase was principally a result of higher gains on sales of mortgage loans driven by higher origination volumes, lower provision for loan losses, reductions in FDIC insurance expense due to changes in the assessment base and rate, lower core deposit intangible amortization expense, and an increase in account service charges and net interchange fees.  Partially offsetting these results were higher salaries and benefits related to the addition of mortgage loan originators and support personnel in 2012 and lower net interest income driven by reductions in interest income on interest-earning assets that outpaced the impact of lower costs on interest-bearing liabilities.  Net income available to common shareholders increased $7.6 million, or 27.5%, from the prior year, which included preferred dividends and discount accretion on preferred stock of $2.7 million.


NET INTEREST INCOME

















Three Months Ended





Dollars in thousands





12/31/12


09/30/12


Change



12/31/11


Change

















Average interest-earning assets


$       3,732,684


$       3,671,398


$         61,286



$    3,591,739


$       140,945



Interest income (FTE)


$            46,272


$            46,555


$             (283)



$         47,386


$          (1,114)



Yield on interest-earning assets


4.93%


5.04%


(11)

bps


5.23%


(30)

bps


Average interest-bearing liabilities


$       2,944,086


$       2,925,322


$         18,764



$    2,906,758


$         37,328



Interest expense


$              6,022


$              6,740


$             (718)



$           7,829


$          (1,807)



Cost of interest-bearing liabilities


0.81%


0.92%


(11)

bps


1.07%


(26)

bps


Cost of funds


0.64%


0.73%


(9)

bps


0.86%


(22)

bps


Net Interest Income (FTE)


$            40,250


$            39,815


$              435



$         39,558


$              692



Net Interest Margin (FTE)


4.29%


4.31%


(2)

bps


4.37%


(8)

bps


Net Interest Margin, core (FTE)1


4.22%


4.23%


(1)

bps


4.20%


2

bps
















(1)  The core net interest margin, fully taxable equivalent ("FTE") excludes the impact of acquisition accounting accretion and amortization adjustments in net interest income.

















   

On a linked quarter basis, tax-equivalent net interest income was $40.2 million, an increase of $435,000, or 1.1%, from the third quarter of 2012.  This increase was principally due to higher loan balances offset by the impact of lower net interest margin.  The fourth quarter tax-equivalent net interest margin declined by 2 basis points to 4.29% from 4.31% in the previous quarter.  The change in net interest margin was principally attributable to the continued decline in net accretion on the acquired net earning assets (1 bps) and lower investment and loan yields outpacing the reduction in the cost of interest-bearing liabilities (1 bps). Loan yields continued to be negatively affected by the low rate environment as new and renewed loans were originated and repriced at lower rates while yields on investment securities were impacted by lower average balances, faster prepayments on mortgage-backed securities, and lower reinvestment rates during the quarter.  The cost of interest-bearing deposits declined during the quarter driven by the continued shift in mix from time deposits to transaction deposits, reductions in deposit rates and lower wholesale borrowing costs.

For the three months ended December 31, 2012, tax-equivalent net interest income increased $692,000, or 1.7%, when compared to the same period last year.  The tax-equivalent net interest margin decreased by 8 basis points to 4.29% from 4.37% in the prior year.  The decline in net interest margin was principally due to the continued decline in accretion on the acquired net earning assets (10 bps) partially offset by declines in the cost of interest-bearing liabilities that exceeded the decrease in earning asset yields (2 bps). Lower interest-earning asset income was principally due to lower yields on loans as new and renewed loans were originated and repriced at lower rates, faster prepayments on mortgage backed securities, and cash flows from securities investments reinvested at lower yields.  The cost of interest-bearing deposits declined from the prior year's fourth quarter driven by a shift in mix from time deposits to transaction deposits, reductions in deposit rates, and lower wholesale borrowing costs.

The Company believes that its net interest margin will continue to decline modestly over the next several quarters as decreases in earning asset yields are projected to outpace declines in interest-bearing liabilities rates.

 














Year-over-year results









Dollars in thousands









Twelve Months Ended 







12/31/12


12/31/11


Change












Average interest-earning assets


$       3,649,865


$       3,518,643


$       131,222



Interest income (FTE)


$          186,086


$          193,399


$          (7,313)



Yield on interest-earning assets


5.10%


5.50%


(40)

bps


Average interest-bearing liabilities


$       2,922,373


$       2,875,242


$         47,131



Interest expense


$            27,508


$            32,713


$          (5,205)



Cost of interest-bearing liabilities


0.94%


1.14%


(20)

bps


Cost of funds


0.75%


0.93%


(18)

bps


Net Interest Income (FTE)


$          158,577


$          160,686


$          (2,109)



Net Interest Margin (FTE)


4.34%


4.57%


(23)

bps


Net Interest Margin, core (FTE)1


4.24%


4.37%


(13)

bps











(1)The core net interest margin, fully taxable equivalent ("FTE") excludes the impact of acquisition accounting accretion and amortization adjustments in net interest income.












For the year ended December 31, 2012, tax-equivalent net interest income was $158.6 million, a decrease of $2.1 million, or 1.3%, when compared to the same period last year.  The tax-equivalent net interest margin decreased by 23 basis points to 4.34% from 4.57% in the prior year.  The decline in the net interest margin was principally due to the continued decline in accretion on the acquired net earning assets (10 bps) and a decline in the yield on interest-earning assets that outpaced the reduction in the cost of interest-bearing liabilities (13 bps). Lower interest-earning asset income was principally due to lower yields on loans and investment securities as new loans and renewed loans were originated and repriced at lower rates, faster prepayments on mortgage backed securities, and cash flows from securities investments reinvested at lower yields. 

The Company's fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments that were recorded during 2010 and 2011.   The 2012 and remaining estimated discount/premium and net accretion impact are reflected in the following table (dollars in thousands):

 



















Loan Accretion


Certificates of Deposit


Investment Securities


Borrowings


Total
















For the quarter ended December 31, 2012

$        717


$             2


$           46


$        (122)


$          643


For the year ended December 31, 2012

3,719


233


201


(489)


3,664


For the years ending:












2013




2,059


7


15


(489)


1,592


2014




1,459


4


-


(489)


974


2015




1,002


-


-


(489)


513


2016




557


-


-


(163)


394


2017




172


-


-


-


172


Thereafter



120


-


-


-


120
















ASSET QUALITY/LOAN LOSS PROVISION

Overview
During the fourth quarter, the Company continued to experience improvement in asset quality.  Improving market conditions in the Company's local markets led to a reduction in nonperforming assets, which are at their lowest levels since the fourth quarter of 2009. The Company's reduction in nonperforming assets and impaired loans, lower past due loan levels, stable levels of troubled debt restructurings, and decreased allowance to total loans ratio demonstrate that its diligent efforts to improve asset quality are having a positive impact.  The allowance to nonperforming loans coverage ratio has continued to increase and is at its highest level since the fourth quarter of 2009.  The magnitude of any change in the real estate market and its impact on the Company is still largely dependent upon continued recovery of residential housing and commercial real estate and the pace at which the local economies in the Company's operating markets improve.

Nonperforming Assets ("NPAs")
At December 31, 2012, nonperforming assets totaled $59.0 million, a decline of $7.6 million, or 11.4%, from the third quarter and a decrease of $18.1 million, or 23.5%, from a year ago.  In addition, NPAs as a percentage of total outstanding loans declined 30 basis points to 1.99% from 2.29% last quarter and 75 basis points from 2.74% a year earlier.  The reduction in NPAs from the third quarter related to a net decrease in nonaccrual loans, excluding purchased impaired loans, of $6.0 million as well as a net decrease in OREO of $1.6 million.

Nonperforming assets at December 31, 2012 included $26.2 million in nonaccrual loans (excluding purchased impaired loans), a net decrease of $6.0 million, or 18.6%, from the prior quarter and a reduction of $18.6 million, or 41.5%, from December 31, 2011.  The following table shows the activity in nonaccrual loans for the quarter ended (dollars in thousands): 


December 31,
2012


September 30,
2012


June 30, 2012


March 31, 2012


December 31,
2011


Beginning Balance

$         32,159


$         39,171


$   42,391


$        44,834


$        51,965


Net customer payments

(1,898)


(5,774)


(3,174)


(2,778)


(6,556)


Additions

2,306


2,586


2,568


2,805


5,364


Charge-offs

(3,388)


(3,012)


(561)


(1,549)


(2,304)


Loans returning to accruing status

(840)


(812)


(1,803)


-


(1,950)


Transfers to OREO

(2,133)


-


(250)


(921)


(1,685)


Ending Balance

$         26,206


$         32,159


$   39,171


$        42,391


$        44,834













The following table presents the composition of nonaccrual loans (excluding purchased impaired loans) and the coverage ratio, which is the allowance for loan losses expressed as a percentage of nonaccrual loans, at the quarter ended (dollars in thousands):


December 31, 2012


September 30,
2012


June 30, 2012


March 31, 2012


December 31, 2011


Raw Land and Lots

$            8,760


$         10,995


$   12,139


$       13,064


$          13,322


Commercial Construction

5,781


7,846


9,763


9,835


10,276


Commercial Real Estate

3,018


2,752


5,711


6,299


7,993


Single Family Investment Real Estate

3,420


4,081


3,476


4,507


5,048


Commercial and Industrial

2,036


2,678


4,715


5,318


5,297


Other Commercial

193


195


231


233


238


Consumer

2,998


3,612


3,136


3,135


2,660


Total

$          26,206


$         32,159


$   39,171


$       42,391


$          44,834













Coverage Ratio

133.24%


124.05%


104.63%


94.84%


88.04%













Impairment analyses provided appropriate reserves on these nonperforming loans while appropriate reserves on homogenous pools continue to be maintained.  The increase in the coverage ratio is primarily related to a decline in nonperforming loans.

Nonperforming assets at December 31, 2012 also included $32.8 million in OREO, a net decrease of $1.6 million, or 4.7%, from the prior quarter and an increase of $571,000, or 1.8%, from the prior year.  The following table shows the activity in OREO for the quarter ended (dollars in thousands):


December 31,
2012


September 30,
2012


June 30, 2012


March 31, 2012


December 31,
2011


Beginning Balance

$        34,440


$         35,802


$   37,663


$        32,263


$         34,464


Additions

2,866


929


3,887


6,593


2,543


Capitalized Improvements

22


16


23


319


197


Valuation Adjustments

(301)


-


-


-


(530)


Proceeds from sales

(4,004)


(2,071)


(5,592)


(1,485)


(3,674)


Gains (losses) from sales

(189)


(236)


(179)


(27)


(737)


Ending Balance

$        32,834


$         34,440


$   35,802


$        37,663


$         32,263
























The additions to OREO were principally related to raw land and developed commercial and residential lots; sales from OREO were principally related to residential real estate, land previously held for branch sites, and closed branch property.

The following table presents the composition of the OREO portfolio at the quarter ended (dollars in thousands):


December 31,
2012


September 30,
2012


June 30, 2012


March 31,
2012


December 31,
2011


Land

$           8,657


$           6,953


$     6,953


$    6,327


$           6,327


Land Development

10,886


11,034


11,313


11,559


11,309


Residential Real Estate

7,939


9,729


10,431


12,482


11,024


Commercial Real Estate

5,352


5,640


6,085


6,275


2,583


Former Bank Premises (1)

-


1,084


1,020


1,020


1,020


Total

$         32,834


$         34,440


$   35,802


$  37,663


$         32,263


(1) Includes closed branch property and land previously held for branch sites.















Included in land development is $9.2 million related to a residential community in the Northern Neck region of Virginia, which includes developed residential lots, a golf course, and undeveloped land.  Foreclosed properties were adjusted to their fair values at the time of each foreclosure and any losses were taken as loan charge-offs against the allowance for loan losses at that time.  OREO asset valuations are also evaluated at least quarterly by the Bank's Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment. 

Past Due Loans
At December 31, 2012, total accruing past due loans were $32.4 million, or 1.09% of total loans, a decrease from $39.0 million, or 1.34%, at September 30, 2012 and from $39.3 million, or 1.40%, a year ago.  The favorable trend in decreased past due loans is a result of management's diligence in handling problem loans and an improving economy.

Charge-offs
For the quarter ended December 31, 2012, net charge-offs of loans were $8.3 million, or 1.11% on an annualized basis, compared to $3.5 million, or 0.48%, for the third quarter and $4.2 million, or 0.59%, for the same quarter last year.  The uptick in charge-offs from the prior quarter and prior year quarter relate to loans that were previously considered impaired and specifically reserved for in prior periods.  Of the $8.3 million in net charge-offs in the current quarter, $6.7 million, or 81%, related to impaired loans specifically reserved for in prior periods including two loan relationships totaling $5.6 million that were charged off.  Net charge-offs in the current quarter included commercial loans of $6.8 million and consumer loans of $1.5 million.  

For the year ended December 31, 2012, net charge-offs of loans were $16.8 million, or 0.56%, compared to $15.7 million, or 0.56%, for the year ended December 31, 2011.  The increase in charge-offs relates to impaired loans reserved for in prior periods, as management has continued to work diligently to mitigate risks within the portfolio.

Provision
The provision for loan losses for the current quarter was $3.3 million, an increase of $900,000 from both the third quarter and from the same quarter a year ago.  The higher provision was due to the increased levels of charge offs, which negatively impacted the historical loss factor used in the Company's allowance for loan losses model, and higher period end loan balances.  The provision to loans ratio for the quarter ended December 31, 2012 was 0.44% on an annualized basis compared to 0.33% last quarter and 0.34% the same quarter a year ago.

Allowance for Loan Losses
The allowance for loan losses ("ALLL") as a percentage of the total loan portfolio, adjusted for acquired loans (non-GAAP), was 1.40% at December 31, 2012, a decrease from 1.66% at September 30, 2012 and 1.83% from a year ago.  In acquisition accounting, there is no carryover of previously established allowance for loan losses.  The allowance for loan losses as a percentage of the total loan portfolio was 1.18% at December 31, 2012, 1.37% at September 30, 2012, and 1.40% at December 31, 2011.  The decrease in the allowance and related ratios was primarily attributable to the charge off of impaired loans specifically reserved for in prior periods as shown in the following table:



December 31,

September 30,

June 30,

March 31,

December 31,

December 31,




2012

2012

2012

2012

2011

2010


Loans individually evaluated for impairment

142,415

161,196

189,399

230,789

242,833

274,932


Related allowance

6,921

11,438

11,500

11,288

10,298

11,257


ALLL to loans individually evaluated for impairment

4.86%

7.10%

6.07%

4.89%

4.24%

4.09%











The Company continued to see favorable trends in both past due loans and impaired loans during the current quarter.  Past due loans have decreased, as previously described, and impaired loans (individually and collectively evaluated for impairment) have declined from $177.9 million at September 30, 2012 and from $255.1 million at December 31, 2011 to $155.4 million at December 31, 2012.  The nonaccrual loan coverage ratio also improved, as it increased to 133.24% at December 31, 2012 from 124.05% at September 30, 2012 and from 88.04% the same quarter last year.  The rise in the coverage ratio, which is at the highest level since the fourth quarter of 2009, further shows that management's proactive diligence in working through problem credits is having a positive impact on asset quality.  The current level of the allowance for loan losses reflects specific reserves related to nonperforming loans, current risk ratings on loans, net charge-off activity, loan growth, delinquency trends, and other credit risk factors that the Company considers in assessing the adequacy of the allowance for loan losses. 

Troubled Debt Restructurings ("TDRs")
The total recorded investment in TDRs as of December 31, 2012 was $63.5 million, a decrease of $300,000, or 0.5%, from $63.8 million at September 30, 2012 and a decline of $49.1 million, or 43.6%, from $112.6 million at December 31, 2011.  Of the $63.5 million of TDRs at December 31, 2012, $51.5 million, or 81.1%, were considered performing while the remaining $12.0 million were considered nonperforming.  The decline in the TDR balance from the prior quarter is attributable to $1.8 million being removed from TDR status, $3.1 million in net payments, and $300,000 in charge-offs, partially offset by additions of $4.9 million.  The decline in the TDR balance from the prior year is attributable to $42.2 million being removed from TDR status, $19.9 million in net payments, and $300,000 in charge-offs, partially offset by additions of $13.3 million.  Loans removed from TDR status represent restructured loans with a market rate of interest at the time of the restructuring, which were performing in accordance with their modified terms for a consecutive twelve month period and that were no longer considered impaired. 

The following table shows the Company's performing and nonperforming TDRs by modification type for the quarter ended (dollars in thousands):

 


December 31,
2012


September 30,
2012


June 30,
2012


March 31,
2012


December 31,

2011


Performing











Modified to interest only

$             1,877


$           1,437


$  2,191


$    1,812


$            699


Term modification, at a market rate

38,974


39,195


53,905


75,455


87,920


Term modification, below market rate

8,227


8,911


9,004


8,797


10,215


Interest rate modification, below market rate

2,390


2,390


2,390


-


-


Total performing

$           51,468


$         51,933


$ 67,490


$  86,064


$        98,834













Nonperforming











Modified to interest only

$               672


$             920


$     642


$      649


$          1,190


Term modification, at a market rate

3,653


3,288


3,451


4,290


3,660


Term modification, below market rate

7,666


7,672


8,587


8,804


8,954


Total nonperforming

$           11,991


$         11,880


$ 12,680


$  13,743


$        13,804













Total performing & nonperforming

$           63,459


$         63,813


$ 80,170


$  99,807


$      112,638