Atlantic Union Bankshares Corp quarterly report, Q1 FY2012

Business context and reporting period

Union First Market Bankshares Corporation (the registrant identified in this filing; now associated with Atlantic Union Bankshares) reported for the three months ended March 31, 2012. It operated a Virginia community bank and a mortgage origination business. Unless noted otherwise, financial amounts below are in U.S. dollars.

Key financial results and position

Cash from investing activities was negative $36.2 million and cash from financing activities was positive $26.2 million; cash increased $14.5 million during the quarter. Management reported $1.2 billion of liquid assets, or 33.4% of earning assets, and approximately $977 million of loans scheduled to mature within one year.

Regulatory capital ratios were 12.98% for Tier 1 risk-based capital, 14.64% for total risk-based capital, and 10.34% for the leverage ratio. The company said these ratios exceeded applicable requirements and met the definition of “well capitalized.”

Material changes versus comparable periods

• Net income rose $1.7 million, or 27.9%, year over year, chiefly because the loan-loss provision was lower; higher fees and mortgage loan-sale gains also contributed. EPS comparability also reflects preferred-stock dividends and discount accretion in Q1 2011, while preferred stock had been redeemed in December 2011.
• Net interest income declined $0.5 million year over year and the tax-equivalent margin fell 24 basis points. Management attributed pressure to lower loan and securities yields, partly offset by lower funding costs.
• Noninterest income increased $1.3 million year over year, including higher account fees and mortgage loan-sale gains. Noninterest expenses increased $0.8 million, with higher salaries and benefits partly offset by lower FDIC insurance, acquired-deposit amortization, and conversion costs.
• Loans grew $22.4 million from year-end, and deposits grew $40.6 million. Total assets increased $135.1 million year over year.
• Nonperforming assets were $80.1 million, down $21.2 million year over year but up $3.0 million from year-end. Nonaccrual loans declined to $42.4 million; other real estate owned rose to $37.7 million from $32.3 million at year-end.

Outlook, commentary, risks and unusual items

• Management expected net interest margin to decline slightly over the next several quarters, as earning-asset yields were expected to fall faster than funding costs.
• The company announced closure of four branches, expected during Q2 2012; most affected personnel were reassigned. It reported $221,000 of quarterly expenses related to those branches.
• The mortgage segment’s Q1 net income was $234,000, down from $328,000 a year earlier. Mortgage originations rose 23.4% year over year to $184.0 million, but margins were compressed. Management anticipated increased production in Q2 from recently hired originators.
• The allowance for loan losses was $40.2 million, or 1.41% of total loans; coverage of nonaccrual loans was 94.84%. Net charge-offs were $2.8 million, or 0.39% annualized. Management considered the allowance adequate, but noted that future additions could be necessary, particularly if economic conditions or real estate values weaken.
• Troubled debt restructurings totaled $99.8 million, down from $112.6 million at year-end; 86.3% were performing. One previously restructured loan of approximately $453,000 defaulted during the quarter.
• Credit and market risks include commercial real estate and residential property exposure, local economic conditions, interest-rate movements, competition, and regulatory or accounting changes. The company’s rate sensitivity analysis estimated that a 100-basis-point rise would increase 12-month net interest income by 1.31%, while a 100-basis-point decline would reduce it by 1.41%; these are model estimates, not guidance.
• In February, the company repurchased 335,649 shares from a director for $13 per share, or approximately $4.36 million; 115,384 shares went to the employee stock ownership plan and the remainder were retired.
• The filing reported no material expected adverse effect from ordinary-course legal proceedings and no material change in previously disclosed risk factors. Management concluded disclosure controls were effective. The independent accountant performed an interim review, not an audit, and reported no material modifications it believed were needed.

Important facts for investors to verify

• Whether credit quality and collateral values continue to support the allowance, particularly across commercial real estate, land and construction exposures, and the growing OREO balance.
• Whether the reported margin and earnings remain resilient as management’s expected margin pressure develops, including the contribution from acquired-loan accounting accretion.
• Whether mortgage hiring and the four planned branch closures deliver the expected production and expense effects.
• The terms, authorization and accounting presentation of the director share repurchase and transfer of shares to the employee stock ownership plan.
• Whether deposit growth, liquidity sources and capital ratios remain adequate as lending and funding conditions change.