Union Bankshares Reports Third Quarter Results

RICHMOND, Va., Oct. 20, 2016 (GLOBE NEWSWIRE) -- Union Bankshares Corporation (the “Company” or “Union”) (NASDAQ:UBSH) today reported net income of $20.4 million and earnings per share of $0.47 for its third quarter ended September 30, 2016.  The quarterly results represent an increase of $1.1 million, or 5.5%, in net income and an increase of $0.03, or 6.8%, in earnings per share from the second quarter.  For the nine months ended September 30, 2016, net income was $56.7 million and earnings per share was $1.29, an increase of 15.1% and 18.3%, respectively, compared to the results for the nine months ended September 30, 2015.

“Union’s third quarter financial results continued to demonstrate the steady progress we are making toward our strategic growth and profitability objectives with another quarter of double digit loan and deposit growth and net income of $20.4 million,” said G. William Beale, chief executive officer of Union Bankshares Corporation.  “We also continued to make headway towards delivering the top-tier financial performance our shareholders expect as the return on average assets improved to 1.0% and return on tangible common equity increased to 12.0%.

“As John Asbury and I begin the CEO transition plan we recently announced, I want to thank all of you for your interest and investment in Union over the years.  While I’m proud of what the company has accomplished and the significant value the Company has created for our shareholders over the past 25 years, I believe that Union’s best days lie ahead and that John is the right person to lead the company into the future.”

Select highlights for the third quarter include:

• Net income for the community bank segment was $19.6 million, or $0.45 per share, for the third quarter, compared to $18.9 million, or $0.43 per share, for the second quarter.  Net income for the community bank segment for the nine months ended September 30, 2016 was $55.3 million, or $1.26 per share.
• The mortgage segment reported net income of $785,000, or $0.02 per share, for the third quarter, compared to net income of $539,000, or $0.01 per share, in the second quarter.  Net income for the mortgage segment for the nine months ended September 30, 2016 was $1.4 million, or $0.03 per share.
• Return on Average Assets (“ROA”) was 1.00% for the quarter ended September 30, 2016 compared to ROA of 0.98% for the prior quarter and 0.96% for the third quarter of 2015.  Return on Average Tangible Common Equity (“ROTCE”) was 12.00% for the quarter ended September 30, 2016 compared to ROTCE of 11.60% for the prior quarter and 10.70% for the third quarter of 2015. 
• As previously announced, the Company closed five in-store branches in the Richmond market on September 30, 2016 as part of its continuing efforts to become more efficient.  The Company incurred approximately $400,000 in related branch closure costs.
• Loans held for investment grew $207.8 million, or 14.0% (annualized), from June 30, 2016 and increased $605.3 million, or 10.9%, from September 30, 2015.  Average loans increased $170.7 million, or 11.6% (annualized), from the prior quarter and increased $508.6 million, or 9.2%, from the same quarter in the prior year.
• Period-end deposits increased $162.7 million, or 10.7% (annualized), from June 30, 2016 and grew $439.7 million, or 7.6%, from September 30, 2015.  Average deposits increased $179.4 million, or 11.9% (annualized), from the prior quarter and increased $390.8 million, or 6.7%, from the prior year.

NET INTEREST INCOME

Tax-equivalent net interest income was $69.5 million, an increase of $1.2 million from the second quarter, primarily driven by higher earning asset balances.  The third quarter tax-equivalent net interest margin decreased 8 basis points to 3.76% from 3.84% in the previous quarter.  Core tax-equivalent net interest margin (which excludes the 9 and 8 basis point impact of acquisition accounting accretion in the current and prior quarter, respectively) declined by 9 basis points to 3.67% from 3.76% in the previous quarter.  The decrease in the core tax-equivalent net interest margin was principally due to the 7 basis point decline in interest-earning asset yields and the 2 basis point increase in cost of funds.  The decline in interest-earnings asset yields was primarily driven by lower loan yields on new and renewed loans (4 basis points) and lower levels of loans fees recorded in the current quarter (3 basis points).

The Company’s tax-equivalent net interest margin includes the impact of acquisition accounting fair value adjustments.  During the third quarter, net accretion related to acquisition accounting increased $117,000, or 8.3%, from the prior quarter to $1.5 million for the quarter ended September 30, 2016.  The second and third quarters of 2016 and remaining estimated net accretion impact are reflected in the following table (dollars in thousands):

ASSET QUALITY/LOAN LOSS PROVISION

Overview
During the third quarter, the Company experienced declines in nonperforming asset balances as well as in net charge-off levels from the prior quarter.  Nonperforming assets, past due loans, and net charge-offs were also down from the prior year.   The loan loss provision and the allowance for loan loss increased from the prior quarter due to loan growth in the current quarter.

All nonaccrual and past due loan metrics discussed below exclude purchased credit impaired loans (“PCI”) totaling $62.3 million (net of fair value mark of $15.6 million).

Nonperforming Assets (“NPAs”)
At September 30, 2016, NPAs totaled $23.3 million, a decrease of $11.8 million, or 33.7%, from September 30, 2015 and a decline of $984,000, or 4.1%, from June 30, 2016.  In addition, NPAs as a percentage of total outstanding loans declined 25 basis points from 0.63% a year earlier and decreased 3 basis points from 0.41% last quarter to 0.38% in the current quarter.  The following table shows a summary of asset quality balances at the quarter ended (dollars in thousands):

The following table shows the activity in nonaccrual loans for the quarter ended (dollars in thousands):

The following table shows the activity in other real estate owned ("OREO") for the quarter ended (dollars in thousands):

During the third quarter, the majority of sales of OREO were related to land and residential real estate.

Past Due Loans
Past due loans still accruing interest totaled $26.9 million, or 0.44% of total loans, at September 30, 2016 compared to $27.5 million, or 0.50%, a year ago and $25.3 million, or 0.43%, at June 30, 2016.  At September 30, 2016, loans past due 90 days or more and accruing interest totaled $3.5 million, or 0.06% of total loans, compared to $5.2 million, or 0.09%, a year ago and $3.5 million, or 0.06%, at June 30, 2016.

Net Charge-offs
For the third quarter, net charge-offs were $929,000, or 0.06% on an annualized basis, compared to $1.0 million, or 0.07%, for the same quarter last year and $1.6 million, or 0.11%, for the prior quarter.  For the nine months ended September 30, 2016, net charge-offs were $4.7 million, or 0.11% on an annualized basis, compared to $6.4 million, or 0.15%, for the same period last year.

Provision
The provision for loan losses for the current quarter was $2.4 million, an increase of $435,000 compared to the same quarter a year ago and a slight increase of $97,000 compared to the previous quarter.  The increase in provision for loan losses in the current quarter compared to the prior periods was primarily driven by higher loan balances.  Additionally, a $75,000 provision was recognized during the current quarter for unfunded loan commitments, resulting in a total of $2.5 million in provision for credit losses for the quarter.

Allowance for Loan Losses
The allowance for loan losses (“ALL”) increased $1.5 million from June 30, 2016 to $36.5 million at September 30, 2016 primarily due to loan growth during the quarter.  The allowance for loan losses as a percentage of the total loan portfolio was 0.59% at September 30, 2016, 0.59% at June 30, 2016, and 0.60% at September 30, 2015.  The ALL as a percentage of the total loan portfolio, adjusted for purchase accounting (non-GAAP), was 0.90% at September 30, 2016, a decrease from 0.92% from the prior quarter and a decrease from 1.01% from the quarter ended September 30, 2015.  In acquisition accounting, there is no carryover of previously established allowance for loan losses, as acquired loans are recorded at fair value.

The nonaccrual loan coverage ratio was 288.3% at September 30, 2016, compared to 322.9% at June 30, 2016 and 256.6% at September 30, 2015.  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 important in assessing the adequacy of the allowance for loan losses.

NONINTEREST INCOME

Noninterest income increased $957,000, or 5.3%, to $19.0 million for the quarter ended September 30, 2016 from $18.0 million in the prior quarter, primarily driven by higher fiduciary and asset management fees of $511,000, or 21.9%, due to the Old Dominion Capital Management acquisition, higher mortgage banking income of $235,000, and higher customer-related fee income of $190,000.  Increases in customer-related fee income were primarily driven by higher overdraft and letter of credit fees.

Mortgage banking income increased $235,000, or 7.9%, to $3.2 million in the third quarter compared to $3.0 million in the second quarter, related to increased mortgage loan originations.  Mortgage loan originations increased by $16.6 million, or 11.8%, in the current quarter to $156.7 million from $140.1 million in the second quarter.  Of the mortgage loan originations in the current quarter, 33.8% were refinances, which was consistent with 33.6% in the prior quarter.

NONINTEREST EXPENSE

Noninterest expense increased $1.7 million, or 3.0%, to $56.9 million for the quarter ended September 30, 2016 from $55.3 million in the prior quarter.  Salaries and benefits expenses increased $2.0 million primarily due to increases in incentive compensation and profit sharing expenses tied to the Company's financial performance as well as costs incurred related to the CEO succession plan announced during the quarter.  Other increases in noninterest expense included branch closure costs of approximately $400,000 related to the five branches closed on September 30, 2016, higher loan volume driven expenses of $302,000, and higher transaction driven data processing fees of $309,000. These increases were partially offset by declines in professional fees of $653,000 due to lower project-related consulting expenses and lower OREO and credit-related costs of $391,000 primarily due to gains on sales of OREO property compared to losses in the prior quarter and lower real estate tax expenses on foreclosed properties.

In addition, the Company realized franchise tax credits related to the Company's investment in a historic rehabilitation project that was recently completed which reduced expenses by approximately $900,000 during the quarter.  The Company also earned federal historic tax credits of approximately $780,000 associated with this investment which reduced its effective tax rate to 23.3% during the quarter.

BALANCE SHEET

At September 30, 2016, total assets were $8.3 billion, an increase of $157.7 million from June 30, 2016 and an increase of $663.9 million from September 30, 2015.  The increase in assets was mostly related to loan growth.

At September 30, 2016, loans held for investment were $6.1 billion, an increase of $207.8 million, or 14.0% (annualized), from June 30, 2016, while average loans increased $170.7 million, or 11.6% (annualized), from the prior quarter.  Loans held for investment increased $605.3 million, or 10.9%, from September 30, 2015, while quarterly average loans increased $508.6 million, or 9.2%, from the prior year.

At September 30, 2016, total deposits were $6.3 billion, an increase of $162.7 million, or 10.7% (annualized), from June 30, 2016, while average deposits increased $179.4 million, or 11.9% (annualized), from the prior quarter. Total deposits grew $439.7 million, or 7.6%, from September 30, 2015, while average deposits increased $390.8 million, or 6.7%, from the prior year.

At September 30, 2016, June 30, 2016, and September 30, 2015, respectively, the Company had a common equity Tier 1 capital ratio of 9.78%, 9.94%, and 10.75%; a Tier 1 capital ratio of 11.07%, 11.27%, and 12.16%; a total capital ratio of 11.60%, 11.79%, and 12.69%; and a leverage ratio of 9.89%, 10.01%, and 10.80%.

The Company’s common equity to asset ratios at September 30, 2016, June 30, 2016, and September 30, 2015 were 12.12%, 12.21%, and 13.10%, respectively, while its tangible common equity to tangible assets ratio was 8.57%, 8.59%, and 9.29%, respectively.  The decrease in capital ratios from prior periods is primarily due to share repurchases and asset growth.

During the third quarter, the Company declared and paid cash dividends of $0.19 per common share, consistent with the dividend paid in the prior quarter and an increase of $0.02, or 11.8%, compared to the same quarter in the prior year.

On February 25, 2016, the Company’s Board of Directors authorized a share repurchase program to purchase up to $25.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions.  The Company repurchased approximately 100,000 shares during the quarter ended September 30, 2016 and had approximately $13.0 million available for repurchase under the current program.

ABOUT UNION BANKSHARES CORPORATION

Headquartered in Richmond, Virginia, Union Bankshares Corporation (NASDAQ:UBSH) is the holding company for Union Bank & Trust, which has 115 banking offices and approximately 190 ATMs located throughout Virginia. Non-bank affiliates of the holding company include: Union Mortgage Group, Inc., which provides a full line of mortgage products, Old Dominion Capital Management, Inc., which provides investment advisory services, and Union Insurance Group, LLC, which offers various lines of insurance products.

Additional information on the Company is available at http://investors.bankatunion.com.

Union Bankshares Corporation will hold a conference call on Thursday, October 20th, at 9:00 a.m. Eastern Time during which management will review earnings and performance trends.  Callers wishing to participate may call toll-free by dialing (877) 668-4908.  The conference ID number is 94252786.

NON-GAAP MEASURES

In reporting the results of the quarter ended September 30, 2016, the Company has provided supplemental performance measures on a tangible basis.  Tangible common equity is used in the calculation of certain capital and per share ratios. The Company believes tangible common equity and the related ratios are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which the Company believes will assist investors in assessing the capital of the Company and its ability to absorb potential losses.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures.  In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies.

FORWARD-LOOKING STATEMENTS

Certain statements in this press release may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events.  Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any projected future results, performance, or achievements expressed or implied by such forward-looking statements.  Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic and bank industry conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, stock and bond markets, accounting standards or interpretations of existing standards, mergers and acquisitions, technology, information security, and consumer spending and saving habits.  More information is available on the Company’s website, http://investors.bankatunion.com. The information on the Company’s website is not a part of this press release. The Company does not intend or assume any obligation to update or revise any forward-looking statements that may be made from time to time by or on behalf of the Company.

(1)  The core metrics, FTE, exclude the impact of acquisition accounting accretion and amortization adjustments in net interest income.

(2) All ratios at September 30, 2016 are estimates and subject to change pending the Company’s filing of its FR Y9-C. All other periods are presented as filed.

(3) Tangible common equity is used in the calculation of certain capital and per share ratios.  The Company believes tangible common equity and the related ratios are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which the Company believes will assist investors in assessing the capital of the Company and its ability to absorb potential losses.

(4) The allowance for loan losses ratio, adjusted for acquisition accounting (non-GAAP), includes an adjustment for the fair value mark on purchased performing loans. The purchased performing loans are reported net of the related fair value mark in loans, net of deferred fees, on the Company’s Consolidated Balance Sheet; therefore, the fair value mark is added back to the balance to represent the total loan portfolio. The adjusted allowance for loan losses, including the fair value mark, represents the total reserve on the Company’s loan portfolio. The PCI loans, net of the respective fair value mark, are removed from the loans, net of deferred fees, as these PCI loans are not covered by the allowance established by the Company unless changes in expected cash flows indicate that one of the PCI loan pools are impaired, at which time an allowance for PCI loans will be established. GAAP requires the acquired allowance for loan losses not be carried over in an acquisition or merger. The Company believes the presentation of the allowance for loan losses ratio, adjusted for acquisition accounting, is useful to investors because the acquired loans were purchased at a market discount with no allowance for loan losses carried over to the Company, and the fair value mark on the purchased performing loans represents the allowance associated with those purchased loans. The Company believes that this measure is a better reflection of the reserves on the Company’s loan portfolio.