Business Context and Reporting Period
Company: Union First Market Bankshares Corporation (Note: Metadata referenced "Atlantic Union," but the filing text identifies the registrant as Union First Market Bankshares Corporation).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Overview: The Company is a Virginia-based bank holding company operating a community bank segment and a mortgage loan origination segment. The quarter reflects the ongoing integration of the First Market Bank (FMB) acquisition completed in February 2010 and continued stress in the residential home builder market.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Q4 2010 |
|---|---|---|---|
| Net Income | $6.19 million | $1.70 million | $4.39 million |
| Diluted EPS | $0.22 | $0.06 | $0.15 |
| Net Interest Income | $38.80 million | $34.16 million | $39.20 million |
| Net Interest Margin (TE) | 4.68% | 4.59% | 4.55% |
| Provision for Loan Losses | $6.30 million | $5.00 million | $9.50 million |
| Noninterest Income | $10.55 million | $9.74 million | $13.05 million |
| Noninterest Expense | $34.77 million | $36.80 million | $37.07 million |
| Total Assets | $3.81 billion | $3.85 billion | $3.84 billion |
| Total Loans (Net) | $2.77 billion | $2.82 billion | $2.80 billion |
| Total Deposits | $3.07 billion | $3.07 billion | $3.07 billion |
| Allowance for Loan Losses | $40.40 million | $34.01 million | $38.41 million |
| Stockholders' Equity | $435.49 million | $414.80 million | $428.09 million |
Material Changes vs. Prior Periods
- Profitability Surge: Net income increased 265% year-over-year (from $1.70M to $6.19M) and 41% sequentially. This was driven by a significant reduction in the provision for loan losses ($6.3M vs $9.5M in Q4 2010) and the absence of nonrecurring acquisition costs present in Q1 2010.
- Asset Quality Deterioration: Nonperforming assets (NPAs) rose to $101.3 million (up $3.5M from Q4 2010), primarily due to stress in the residential home builder market. Nonaccrual loans increased to $62.6 million.
- Mortgage Segment Decline: The mortgage segment's net income dropped 61.6% sequentially to $329,000 due to a 37% decline in loan originations and a shift in refinancing volume.
- Deposit Mix Shift: The funding mix continued to shift from higher-cost certificates of deposit to lower-cost money market and checking accounts, contributing to a lower cost of funds (1.22% vs 1.42% YoY).
Guidance, Outlook, and Risks
- Outlook: Management expects net interest margin to remain stable, dependent on interest rates and loan demand. The Company anticipates redeeming its Series B Preferred Stock (held by the Treasury) prior to the end of 2012.
- Acquisition Activity: The Company announced the acquisition of the Harrisonburg, Virginia branch of NewBridge Bank (approx. $73.5M in loans), expected to close in Q2 2011. Total acquisition costs for this transaction are estimated at $457,000.
- Key Risks:
- Credit Risk: Continued softness in the housing market and commercial real estate sectors, specifically affecting residential home builders and developers.
- Interest Rate Risk: Economic value simulation indicates sensitivity to rising rates; a +300 basis point shock results in a 3.94% decrease in the economic value of equity.
- Asset Quality: Net charge-offs were $4.3 million for the quarter (0.62% annualized), with significant charge-offs in commercial construction and residential builder loans.
Investor Verification Checklist
- Allowance Adequacy: Verify the coverage ratio of the allowance for loan losses to nonperforming loans (64.5% at March 31, 2011) against the rising trend in nonaccrual loans.
- Acquisition Accounting Impact: Review the $1.8 million boost to net interest income derived from purchase accounting accretion on the FMB acquisition to understand "core" earnings.
- Mortgage Volume Trends: Monitor the mortgage segment's origination volumes and refinancing mix, as this segment is highly sensitive to interest rate fluctuations.
- OREO Portfolio: Track the $38.7 million Other Real Estate Owned (OREO) portfolio, which increased by $2.6 million in the quarter, and the associated valuation write-downs.
- Preferred Stock Redemption: Confirm the timeline and regulatory approval status for the redemption of the Series B Preferred Stock held by the U.S. Treasury.