AUB

Business Context and Reporting Period

Company: Union Bankshares Corporation (Atlantic Union Bankshares Corp)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and six months ended June 30, 2007

Overview: The Company is a Virginia-based community banking organization operating through five bank subsidiaries and a mortgage loan origination business. It operates 51 retail locations in Virginia and the D.C. metro area. During the period, the Company announced an agreement to acquire six branches of Provident Bank, expected to close in September 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income for the three months ended June 30, 2007, decreased 16.0% ($1.07 million) compared to the same period in 2006. For the six months, net income decreased 17.1% ($2.23 million).
• Net Interest Margin Compression: The net interest margin (tax-equivalent) declined 32 basis points to 4.20% for the quarter and 39 basis points to 4.14% for the six months. This was driven by a 66 basis point increase in the cost of interest-bearing liabilities, which outpaced the 30 basis point increase in yields on earning assets.
• Mortgage Segment Weakness: The mortgage segment reported a net loss of $163,000 for the quarter, compared to net income of $108,000 in the prior year. Loan originations declined 32.6% due to a slumping housing market and tighter secondary market underwriting.
• Loan Growth: Net loans increased 8.4% year-over-year, driven primarily by growth in commercial and construction loan portfolios.
• Provision for Loan Losses: The provision decreased to $190,000 for the quarter from $273,000 in the prior year. For the six months, the Company recorded a recapture of $545,000, largely due to the release of specific reserves on a non-performing credit relationship.

Outlook, Risks, and Management Commentary

• Management Commentary: Management attributes the decline in earnings to funding pressure (higher cost of funds) and a continued slowing in the mortgage banking sector. However, they highlight favorable loan growth in commercial and construction portfolios.
• Acquisition Activity: The Company is proceeding with the acquisition of six Provident Bank branches, which will add approximately $46 million in deposits. A new 70,000 square foot operations center in Caroline County began operations in June 2007, increasing occupancy expenses.
• Asset Quality: Nonperforming assets totaled $8.5 million, or 0.52% of total loans and other real estate. This includes a single credit relationship of $7.5 million which is in a workout agreement; $400,000 of this relationship returned to accrual status in Q2 2007.
• Capital Position: The Company remains "well capitalized" with a Tier 1 risk-based capital ratio of 11.25% and a total risk-based capital ratio of 12.28%.
• Market Risk: Interest rate risk is managed via simulation models. A 200 basis point increase in rates is projected to increase net interest income by 2.73% but decrease the economic value of equity by 4.61%.

Investor Verification Checklist

• Mortgage Segment Viability: Verify the sustainability of the mortgage segment given the 32.6% decline in originations and the shift to a net loss position.
• Cost of Funds Trend: Monitor the trajectory of interest-bearing deposit costs, which rose significantly (66 bps) and compressed margins.
• Non-Performing Asset Resolution: Track the resolution of the $7.5 million single credit relationship to ensure no further reserve releases or charge-offs are required.
• Acquisition Integration: Confirm the closing date and integration costs associated with the Provident Bank branch acquisition.
• Non-GAAP Measures: Review the reconciliation of cash basis earnings ($0.85 diluted EPS for six months) versus GAAP earnings ($0.80) to understand the impact of intangible amortization.