Union First Market Bankshares Reports Third Quarter Results

RICHMOND, Va., Oct. 22, 2012 /PRNewswire/ -- Union First Market Bankshares Corporation (the "Company") (NASDAQ: UBSH) today reported net income of $9.6 million and earnings per share of $0.37 for its third quarter ended September 30, 2012.  The quarterly results represent an increase of $1.2 million, or 14.3%, in net income from the most recent quarter and an increase of $555,000, or 6.1%, from the same quarter of the prior year.  Reported earnings per share of $0.37 for the current quarter represents an increase of $0.05, or 15.6%, from the most recent quarter and $0.04, or 12.1%, from the prior year's third quarter which included preferred dividends and discount accretion on preferred stock of $528,000

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"The third quarter results show the continued success of our business strategy as well as the early results of our teammates efficiency ratio improvement efforts as Union strives to achieve top quartile financial performance nationally and provide our shareholders with above average returns on their investment," said G. William Beale, Chief Executive Officer of Union First Market Bankshares.  "We remain committed to delivering top tier financial performance by increasing revenues through new products and services, with loan and deposit growth and disciplined pricing as well as pursuing opportunities to more efficiently deliver best in class service to our customers, diligently managing our overall expense base and continuing our efforts to improve asset quality." 

"During the quarter, we analyzed our branch network and decided to close 4 branches by the end of the year, which will reduce expenses while maintaining our strong customer relationships.  On the bank side, our growth strategy continues to show results with more than 750 net new households joining Union during the quarter bringing total new households to nearly 3,000 year-to-date.  The company experienced loan growth for the fourth consecutive quarter and continued strong growth at Union Mortgage.  Finally, asset quality trends continue to improve as non-performing loan and OREO balance levels continued to decline in the latest quarter.  All in all, it was another solid quarter for Union and one that we expect to build upon to show even more progress in the quarters ahead," Beale concluded.

Select highlights:

  • The Company earned a Return on Average Equity ("ROE") of 8.70% and Return on Average Assets ("ROA") of 0.96% for the quarter ended September 30, 2012.  This represents continued improvement in ROE and ROA compared to 7.84% and 0.86%, respectively, for the quarter ended June 30, 2012 and 8.02% and 0.93% respectively, for the quarter ended September 30, 2011.
  • Gains on sales of mortgage loans increased $1.6 million from the prior quarter due to a $65.7 million, or 25.5%, increase in origination volume as mortgage rates remain at historic low levels and the additional mortgage loan originators added in 2012 continued to ramp up to full production capacity.
  • Nonperforming assets ("NPAs") decreased $8.4 million, or 11.2%, from the second quarter and decreased $19.8 million, or 22.9%, compared to the same period a year ago.  NPAs as a percentage of total outstanding loans declined 31 basis points to 2.29% from 2.60% last quarter and 78 basis points from 3.07% a year earlier.
  • Loan demand continued to improve modestly with an increase in loans outstanding of $20.7 million, or 0.7% (2.9% annualized rate), from the prior quarter.

Third quarter net income increased $1.2 million, or 14.3%, compared to the second quarter.  The increase was largely a result of gains on sales of mortgage loans, driven by higher loan production volume and increased net interest income. The increase in net interest income was driven by higher earning asset balances partially offset by the impact of lower net interest margin.  In addition, the Company's provision for loan losses was $600,000 lower than the prior quarter. 

Net income for the quarter ended September 30, 2012 increased $555,000, or 6.1%, from the same quarter in the prior year.  The increase was principally a result of higher gains on sales of mortgage loans, increased service charges, commissions and fees and a $1.2 million lower provision for loan losses, partially offset by an increase in commission expense related to mortgage loan origination volume.  In addition, net interest income decreased as interest income declined at a faster pace than interest expense, a result of lower loan yields and investment opportunities in the current low rate environment.

NET INTEREST INCOME



Three Months Ended




Dollars in thousands




09/30/12


06/30/12


Change



09/30/11


Change















Average interest-earning assets


$       3,671,398


$       3,615,718


$         55,680



$    3,538,752


$       132,646


Interest income


$            46,555


$            46,340


$              215



$         48,673


$          (2,118)


Yield on interest-earning assets


5.04%


5.15%


(11)

bps


5.46%


(42)

bps

Average interest-bearing liabilities


$       2,925,322


$       2,910,987


$         14,335



$    2,873,721


$         51,601


Interest expense


$              6,740


$              7,215


$             (475)



$           8,159


$          (1,419)


Cost of interest-bearing liabilities


0.92%


1.00%


(8)

bps


1.13%


(21)

bps

Net Interest Income (FTE)


$            39,815


$            39,125


$              690



$         40,514


$             (699)


Net Interest Margin (FTE)


4.31%


4.36%


(5)

bps


4.54%


(23)

bps

 

On a linked quarter basis, tax-equivalent net interest income was $39.8 million, an increase of $690,000, or 1.8%, from the second quarter of 2012.  This increase was principally due to higher loan balances offset by the impact of lower net interest margin.  Third quarter tax-equivalent net interest margin declined by 5 basis points to 4.31% from 4.36% in the most recent quarter.  The change in net interest margin was principally attributable to the continued decline in net accretion on the acquired net earning assets (3 bps) and lower investment and loan yields outpacing the reduction in the cost of interest-bearing liabilities (2 bps). Loan yields continue to be negatively affected by competitive pricing and a low rate environment while yields on investment securities were impacted by lower reinvestment rates and faster prepayments related to mortgage-backed securities during the quarter.  The cost of interest-bearing deposits declined during the quarter driven by a shift in mix from time deposits to transaction deposits, reductions in deposit rates and lower wholesale borrowing costs.

For the three months ended September 30, 2012, tax-equivalent net interest income decreased $699,000, or 1.7%, when compared to the same period last year.  The tax-equivalent net interest margin decreased by 23 basis points to 4.31% from 4.54% in the prior year.  This decrease was principally due to the continued decline in accretion on the acquired net earning assets (12 bps) and the decline in interest-earning asset yields exceeding the decrease in interest-bearing liabilities rates (11 bps). Lower interest-earning asset income was principally due to lower yields on loans as new and renewed loans are originated and repriced at lower rates, faster prepayments on mortgage backed securities, and cash flows from securities investments reinvested at lower yields. 

The Company continues to expect that its net interest margin will 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




Nine Months Ended 




09/30/12


09/30/11


Change










Average interest-earning assets


$       3,622,057


$       3,494,013


$       128,044


Interest income


$          139,814


$          146,012


$          (6,198)


Yield on interest-earning assets


5.16%


5.59%


(43)

bps

Average interest-bearing liabilities


$       2,915,082


$       2,864,620


$         50,462


Interest expense


$            21,485


$            24,884


$          (3,399)


Cost of interest-bearing liabilities


0.99%


1.16%


(17)

bps

Net Interest Income (FTE)


$          118,329


$          121,128


$          (2,799)


Net Interest Margin (FTE)


4.36%


4.63%


(27)

bps

 

For the nine months ended September 30, 2012, tax-equivalent net interest income decreased $2.8 million, or 2.3%, when compared to the same period last year.  The tax-equivalent net interest margin decreased by 27 basis points to 4.36% from 4.63% 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 (9 bps) and a decline in income from interest-earning assets outpacing lower costs on interest-bearing liabilities (18 bps). Lower interest-earning asset income was principally due to lower yields on loans and investment securities as new loans and renewed loans are originated and repriced at lower rates, faster prepayments on mortgage backed securities, and cash flows from securities investments are reinvested at lower yields. 

Acquisition Activity – Impact on Net Interest Margin

The favorable impact of acquisition accounting fair value adjustments on net interest income was $752,000 ($627,000 – First Market Bank ("FMB"); $125,000Harrisonburg Branch) and $3.0 million ($2.5 million – FMB; $503,000Harrisonburg Branch) for the three and nine months ended September 30, 2012, respectively.  If not for this favorable impact, the net interest margin for the third quarter would have been 4.23%, compared to 4.25% from the second quarter of 2012 and 4.34% from the third quarter of 2011. 

The third quarter and remaining estimated discount/premium are reflected in the following table (dollars in thousands):

 





Harrisonburg Branch


 First Market Bank  
























Loan Accretion


Certificates of Deposit


Loan Accretion


Investment Securities


Borrowings


Certificates of Deposit


Total


















For the quarter ended September 30, 2012

$        122


$             3


$          703


$           46


$        (122)


$            -


$        752

For the remaining three months of 2012

95


2


652


46


(122)


-


673

For the years ending:















2013




148


7


2,142


15


(489)


-


1,823

2014




37


4


1,511


-


(489)


-


1,063

2015




26


-


903


-


(489)


-


440

2016




27


-


345


-


(163)


-


209

2017




23


-


18


-


-


-


41

Thereafter



120


-


-


-


-


-


120

ASSET QUALITY/LOAN LOSS PROVISION

Overview

During the third quarter, the Company continued to experience improvement in asset quality.  Improving market conditions in the Company's local markets led to a reduction in both OREO and nonaccrual loans, which are at their lowest levels since the fourth quarter of 2009. The Company's reduction in nonperforming assets and troubled debt restructurings, favorable trends in provisions for loan losses, 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 significantly 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 commercial real estate and residential housing and the pace at which the local economies in the Company's operating markets improve.

Nonperforming Assets ("NPAs")

At September 30, 2012, nonperforming assets totaled $66.6 million, a decrease of $8.4 million, or 11.2%, from the second quarter and a decrease of $19.8 million, or 22.9%, from a year ago.  In addition, NPAs as a percentage of total outstanding loans declined 31 basis points from 2.60% in the second quarter and 78 basis points from 3.07% in the third quarter of the prior year to 2.29% at September 30, 2012.  The current quarter decrease in NPAs from the second quarter related to a net decrease in nonaccrual loans, excluding purchased impaired loans, of $7.0 million as well as a net decrease in OREO of $1.4 million.

Nonperforming assets at September 30, 2012 included $32.2 million in nonaccrual loans (excluding purchased impaired loans), a net decrease of $7.0 million, or 17.9%, from the prior quarter.  The following table shows the activity in nonaccrual loans for the quarter ended (dollars in thousands): 


September 30,

2012


June 30, 2012


March 31,

2012


December 31,

2011


September 30,

2011

Beginning Balance

$         39,171


$  42,391


$   44,834


$        51,965


$        54,322

Net customer payments

(5,774)


(3,174)


(2,778)


(6,556)


(2,343)

Additions

2,586


2,568


2,805


5,364


1,751

Charge-offs

(3,012)


(561)


(1,549)


(2,304)


(1,268)

Loans returning to accruing status

(812)


(1,803)


-


(1,950)


(497)

Transfers to OREO

-


(250)


(921)


(1,685)


-

Ending Balance

$         32,159


$  39,171


$   42,391


$        44,834


$        51,965

The nonperforming loans added during the quarter were principally related to commercial loans as borrowers continued to experience financial difficulties with the prolonged economic recovery exhausting their cash reserves and other repayment sources. 

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):


September 30,

2012


June 30, 2012


March 31,

2012


December 31,

2011


September 30,

2011

Raw Land and Lots

$          10,995


$  12,139


$   13,064


$        13,322


$          15,997

Commercial Construction

7,846


9,763


9,835


10,276


9,818

Commercial Real Estate

2,752


5,711


6,299


7,993


9,204

Single Family Investment Real Estate

4,081


3,476


4,507


5,048


7,969

Commercial and Industrial

2,678


4,715


5,318


5,297


4,000

Other Commercial

195


231


233


238


259

Consumer

3,612


3,136


3,135


2,660


4,718

Total

$          32,159


$  39,171


$   42,391


$        44,834


$          51,965











Coverage Ratio

124.05%


104.63%


94.84%


88.04%


79.46%

 

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 September 30, 2012 also included $34.4 million in OREO, a net decrease of $1.4 million, or 3.9%, from the prior quarter.  The following table shows the activity in OREO for the quarter ended (dollars in thousands):


September 30, 2012


June 30, 2012


March 31, 2012


December 31, 2011


September 30, 2011

Beginning Balance

$        35,802


$  37,663


$   32,263


$        34,464


$         36,935

Additions

929


3,887


6,593


2,543


449

Capitalized Improvements

16


23


319


197


241

Valuation Adjustments

-


-


-


(530)


-

Proceeds from sales

(2,071)


(5,592)


(1,485)


(3,674)


(3,285)

Gains (losses) from sales

(236)


(179)


(27)


(737)


124

Ending Balance

$        34,440


$  35,802


$   37,663


$        32,263


$         34,464

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

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

 


September 30, 2012


June 30, 2012


March 31, 2012


December 31, 2011


September 30, 2011


Land

$           6,953


$    6,953


$     6,327


$           6,327


$           8,559


Land Development

11,034


11,313


11,559


11,309


11,824


Residential Real Estate

9,729


10,431


12,482


11,024


11,903


Commercial Real Estate

5,640


6,085


6,275


2,583


1,158


Former Bank Premises (1)

1,084


1,020


1,020


1,020


1,020


Total

$         34,440


$  35,802


$   37,663


$          32,263


$         34,464


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













Included in land development is $9.1 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. 

Accruing Past Due Loans

At September 30, 2012, total accruing past due loans were $39.0 million, or 1.34% of total loans, an increase from 1.15% at June 30, 2012 and but down from 1.61% a year ago.  The increase in past due loans from the prior quarter is attributable to the addition of three large credit relationships previously identified as impaired and evaluated within the Company's allowance for loan losses methodology.

Charge-offs

For the quarter ended September 30, 2012, net charge-offs of loans were $3.5 million, or 0.48% on an annualized basis, compared to $2.2 million, or 0.31%, for the second quarter and $1.9 million, or 0.27%, 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 $3.5 million in net charge-offs, $2.9 million, or 83%, related to impaired loans which had $3.3 million in reserves or credit mark assigned to them.  Net charge-offs in the current quarter included commercial loans of $2.7 million and consumer loans of $800,000

For the nine months ended September 30, 2012, net charge-offs of loans were $8.5 million, or 0.39% on an annualized basis, compared to $11.5 million, or 0.55%, for the nine months ended September 30, 2011.  The decrease in charge-offs is related to the reduced levels of nonperforming loans, as management continues to proactively manage problem credits.

Provision

The provision for loan losses for the current quarter was $2.4 million, a decrease of $600,000 from the second quarter and decline of $1.2 million from the same quarter a year ago.  The lower provision is largely due to the charge off of loans that had been reserved for in earlier periods. 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. 

The allowance for loan losses as a percentage of the total loan portfolio was 1.37% at September 30, 2012, 1.42% at June 30, 2012, and 1.47% at September 30, 2011.  The decrease in the allowance and related ratio was primarily attributable to the charge off of loans specifically reserved for in prior periods.  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, adjusted for loans acquired in the FMB and Harrisonburg Branch acquisitions, was 1.66% at September 30, 2012, a decrease from 1.74% at June 30, 2012 and 1.94% from year ago.    The nonaccrual loan coverage ratio significantly improved, as it increased from 104.63% at June 30, 2012 and from 79.46% the same quarter last year to 124.05% at September 30, 2012.  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. 

Troubled Debt Restructurings ("TDRs")

The total recorded investment in TDRs as of September 30, 2012 was $63.8 million, a decrease of $16.4 million, or 20.5%, from $80.2 million at June 30, 2012 and a decline of $52.6 million, or 45.2%, from $116.4 million at September 30, 2011.  Of the $63.8 million of TDRs at September 30, 2012, $51.9 million, or 81.4%, were considered performing while the remaining $11.9 million were considered nonperforming.  The decline in the TDR balance from the prior quarter is attributable to $11.0 million being removed from TDR status and $6.4 million in net payments, partially offset by additions of $1.0 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):


September 30, 2012


June 30, 2012


March 31, 2012


December 31, 2011


September 30, 2011

Performing










Modified to interest only

$             1,437


$   2,191


$          1,812


$             699


$             839

Term modification, at a market rate

39,195


53,905


75,455


87,920


91,039

Term modification, below market rate

8,911


9,004


8,797


10,215


10,254

Interest rate modification, below market rate

2,390


2,390


-


-


-

Total performing

$           51,933


$  67,490


$        86,064


$         98,834


$       102,132











Nonperforming










Modified to interest only

$               920


$      642


$            649


$           1,190


$             658

Term modification, at a market rate

3,288


3,451


4,290


3,660


4,187

Term modification, below market rate

7,672


8,587


8,804


8,954


9,398

Total nonperforming

$           11,880


$  12,680


$        13,743


$         13,804


$        14,243











Total performing & nonperforming

$           63,813


$  80,170


$        99,807


$       112,638


$       116,375

 

NONINTEREST INCOME 


 For the Three Months Ended  


 Dollars in thousands 


09/30/12

06/30/12

$

%

09/30/11

$

%

Noninterest income:








Service charges on deposit accounts

$      2,222

$      2,291

(69)

-3.0%

$    2,294

$         (72)

-3.1%

Other service charges, commissions and fees

3,655

3,627

28

0.8%

3,254

401

12.3%

Losses (gains) on securities transactions, net

(1)

10

(11)

NM

499

(500)

NM

Other-than-temporary impairment losses

-

-

-

0.0%

(400)

400

NM

Gains on sales of loans

8,918

7,315

1,603

21.9%

4,861

4,057

83.5%

Gains (losses) on bank premises, net

(309)

374

(683)

NM

(16)

(293)

NM

Other operating income

1,067

972

95

9.8%

919

148

16.1%

Total noninterest income

$    15,552

$    14,589

$         963

6.6%

$  11,411

$      4,141

36.3%









NM - Not Meaningful








On a linked quarter basis, noninterest income increased $963,000, or 6.6%, to $15.6 million from $14.6 million in the second quarter.  Of this increase, gains on sales of mortgage loans increased $1.6 million or 21.9% driven by an increase in loan origination volume as mortgage rates remain attractive at historic lows.  Gains on bank premises decreased $683,000 largely due to a sale of a former branch building at a gain in the prior quarter, and a write down on a former branch location in the current quarter.  Service charges on deposit accounts and other account fees were largely unchanged from the prior quarter.  Excluding mortgage segment operations and the impact of current and prior period bank property sales, noninterest income was comparatively unchanged, increasing 0.7%.

For the quarter ended September 30, 2012, noninterest income increased $4.1 million, or 36.3%, to $15.6 million from $11.4 million in the prior year's third quarter.  Gains on sales of mortgage loans increased $4.1 million, or 83.5%, due to higher origination volume, a result of additional loan originators hired in 2012 and historically low interest rates.  Service charges on deposit accounts and other account fees increased $329,000 or 5.9%, driven by higher interchange fee income and higher brokerage commissions.  Gains on securities transactions decreased $500,000 as a result of a gain on the sale of municipal securities in the prior year. Also, an other-than-temporary loss of $400,000 related to a single issuer Trust Preferred security was recorded in the prior year.  Gains on bank premises decreased $309,000 largely due to a write down of a former branch building during the current quarter.  Excluding the mortgage segment operations and the impact of prior period securities transactions and bank premises transactions, noninterest income increased $478,000, or 7.3%, from the same period a year ago.







 For the Nine  Months Ended 


 Dollars in thousands 


09/30/12

09/30/11

$

%

Noninterest income:





Service charges on deposit accounts

$      6,643

$      6,568

75

1.1%

Other service charges, commissions and fees

10,692

9,529

1,163

12.2%

Losses (gains) on securities transactions, net

4

483

(479)

NM

Other-than-temporary impairment losses

-

(400)

400

NM

Gains on sales of loans

21,529

14,132

7,397

52.3%

Gains (losses) on bank premises, net

34

(644)

678

NM

Other operating income

3,084

2,715

369

13.6%

Total noninterest income

$    41,986

$    32,383

$    9,603

29.7%






NM - Not Meaningful





 

For the nine months ending September 30, 2012, noninterest income increased $9.6 million, or 29.7%, to $42.0 million, from $32.4 million a year ago.  Gains on sales of loans in the mortgage segment increased $7.4 million driven by an increase in loan origination volume, a result of additional loan originators hired in 2012 and historically low interest rates.  Service charges on deposit accounts and other account fees increased $1.2 million primarily related to higher interchange fee income, higher brokerage commissions, and higher ATM fee income.  In addition, gains on bank premises increased $678,000 as the Company sold a former branch building and recorded a loss on the sale of $626,000 during 2011.  Gains on securities transactions decreased $479,000 as a result of a gain on the sale of municipal securities in the prior year. Also, an other-than-temporary loss of $400,000 related to a single issuer Trust Preferred security was recorded in the prior year.  Excluding the mortgage segment operations, prior period securities transactions, and the impact of the bank premises related transactions, noninterest income increased $1.6 million or 8.4%, from the same period a year ago.