Atlantic Union Bankshares Corp quarterly report, Q2 FY2011

Business context and reporting period

Union First Market Bankshares Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2011. The filing describes a Virginia-based banking company with community banking and mortgage segments; it reports 99 retail locations. The interim financial statements received an independent accountant’s review, not an audit. Results are not necessarily indicative of full-year performance.

Key financial metrics

For the six months ended June 30, 2011, net interest income was $78.4 million, provision for loan losses $10.8 million, and diluted EPS $0.46. Management notes that the prior-year six-month comparison excludes First Market Bank results for January 2010.

At June 30, total assets were $3.85 billion, net loans $2.82 billion, deposits $3.08 billion, and stockholders’ equity $443.1 million. Total borrowings were $295.7 million. Cash and cash equivalents were $63.2 million. Common dividends paid in the first half were $3.6 million.

First-half operating cash flow was $57.8 million, investing cash flow was negative $3.0 million, and financing cash flow was negative $52.7 million; cash increased $2.1 million. The prior-year investing cash inflow included substantial acquisition-related cash, limiting direct comparison.

Material changes versus comparable periods

• Q2 net income fell 21.8% year over year, while first-half net income rose 24.8%. Q2 earnings improved $626,000 from Q1, mainly on lower loan-loss provision and higher net interest income, partly offset by foreclosure/workout costs and weaker mortgage-segment income.
• Q2 noninterest income declined 17.7% year over year, primarily from lower mortgage loan-sale gains; it also included a $626,000 loss accrued on a former branch building. Noninterest expense rose 2.1%, including higher OREO carrying costs, professional fees, franchise taxes, and communications costs.
• Q2 net interest margin benefited from $1.8 million of favorable acquisition-accounting accretion. Without it, management says the margin would have been 4.47%, unchanged from Q1.
• Loans increased $22.3 million from year-end 2010. Deposits increased $13.0 million, with growth in noninterest-bearing demand, money market, and savings balances partly offset by declining time deposits.
• Nonperforming assets were $91.3 million, down $10.0 million from Q1 but up $13.9 million year over year. Nonaccrual loans were $54.3 million; OREO was $36.9 million. Management attributed the increase in nonaccrual loans versus the prior year principally to residential home builders.
• Net charge-offs were $5.3 million, or 0.74% of loans on an annualized basis, versus $4.0 million, or 0.57%, in Q2 2010. The allowance for loan losses was $39.6 million, or 1.39% of total loans; management’s non-GAAP allowance-to-legacy-loans ratio was 1.88%.

Outlook, risks, contingencies, and unusual items

• No numeric earnings or revenue guidance was provided. Management described asset quality as modestly improved in Q2, considers NPAs manageable, and said it continues to monitor real estate exposures and work with borrowers. It cautioned that future results depend on economic conditions, interest rates, real estate values, regulation, competition, and other factors.
• On May 20, 2011, the company acquired the NewBridge Bank branch in Harrisonburg, Virginia, for $26.4 million in cash, acquiring approximately $72.5 million of loans and assuming $48.7 million of deposits. It recorded $1.8 million of goodwill and a $9,500 core deposit intangible. Acquisition expenses were $498,000 for the first half; management expected no further expenses from this acquisition.
• The mortgage segment faced lower refinancing activity: refinanced loans were 18.4% of Q2 originations versus 38.1% in Q1. Segment net income was $167,000, down from $797,000 in Q2 2010.
• Liquidity: management considered liquidity sufficient. Cash, specified liquid assets, and loans maturing within one year totaled $1.2 billion, or 33.6% of earning assets. Approximately $1.0 billion, or 35.3% of loans, were scheduled to mature within one year.
• Capital ratios remained above regulatory minimums: total risk-based capital was 14.91%, Tier 1 risk-based capital 13.26%, and leverage 10.90%. Management said the company met the “well-capitalized” definition. It anticipated redeeming the $35.6 million preferred-stock issue in increments or in full before the end of 2012, subject to regulatory approval.
• Interest-rate sensitivity modeling estimated 12-month net interest income declines of 1.58% under an immediate +100-basis-point shock and 0.83% under a −100-basis-point shock. Estimated economic value of equity declined 5.78% under +300 basis points and 18.33% under −300 basis points; management cautioned that large downward shocks are less meaningful given historically low rates.
• Commitments included approximately $773.3 million of loan commitments, $39.7 million of standby letters of credit, and $109.9 million of mortgage rate-lock commitments. Management said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported.

Important facts for investors to verify

• Whether the decline in Q2 earnings and mortgage originations persists, and how much future earnings depend on purchase-accounting accretion.
• Trends in nonaccrual loans, OREO, charge-offs, residential builder exposure, and the adequacy of the allowance for loan losses.
• The quality and concentration of the real-estate-heavy loan portfolio, and any further deterioration in property values or local economic conditions.
• Deposit mix, borrowing needs, liquidity sources, capital ratios, and the timing and regulatory conditions for preferred-stock redemption.
• Accuracy of acquisition-related fair-value estimates and the treatment of the acquired Harrisonburg loan portfolio and deposits.