Business context and reporting period
Union Bankshares Corporation (the registrant named in this 10-K) reported for the fiscal year ended December 31, 2018. It operated a Virginia-centered community banking business, with banking and wealth-management services in Virginia and portions of Maryland and North Carolina. The 2018 results include Xenith, acquired January 1, 2018, and advisory firms DHFB and OAL; they do not include Access, acquired February 1, 2019. The filing metadata identifies Atlantic Union Bankshares Corp, while the filing itself names Union Bankshares Corporation.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $426.7 million | $279.0 million |
| Provision for credit losses | $13.7 million | $10.8 million |
| Noninterest income | $104.2 million | $62.4 million |
| Noninterest expense | $337.8 million | $225.7 million |
| Net income | $146.2 million | $72.9 million |
| Diluted EPS | $2.22 | $1.67 |
| Net interest margin | 3.67% | 3.48% |
| Return on average assets | 1.11% | 0.83% |
| Efficiency ratio | 63.62% | 66.09% |
- Management reported non-GAAP operating earnings of $178.3 million, or $2.71 per diluted share, excluding after-tax merger-related costs. GAAP noninterest expense included $39.7 million of merger-related costs.
- Fourth-quarter 2018 net income was $44.1 million and diluted EPS was $0.67. Net interest income was $109.1 million; provision for credit losses was $4.7 million.
- Total assets were $13.8 billion; loans held for investment were $9.7 billion and deposits were $10.0 billion at year-end. Loans and deposits rose substantially from 2017, primarily due to Xenith. Excluding acquisition effects, management reported loan growth of $683.9 million and deposit growth of $429.6 million from January 1, 2018.
- Cash and cash equivalents were $261.2 million. 2018 cash flows were $216.8 million provided by operations, $770.0 million used in investing, and $615.1 million provided by financing.
- Total borrowings were $1.76 billion, up $536.9 million, primarily due to increased FHLB borrowings. Liquid assets were $4.1 billion, or 29.7% of total assets; management considered liquidity sufficient. Additional funding sources included FHLB capacity and correspondent-bank lines.
- Consolidated capital ratios were 9.93% CET1, 11.09% Tier 1, 12.88% total capital, and 9.71% leverage. The Bank was classified as well capitalized.
- Net charge-offs were $11.1 million, or 0.12% of average loans. Nonperforming assets were $33.7 million (0.35% of loans); nonaccrual loans rose to $27.0 million. Allowance for loan losses was $41.0 million, or 0.42% of loans, versus 0.54% in 2017.
Material changes and unusual items
- Xenith drove much of the year-over-year increase in balance-sheet size and earnings. The acquisition added approximately $3.2 billion in assets and $423.8 million in goodwill; the company issued 21.9 million shares as consideration.
- Noninterest income included a $20.0 million gain on the Shore Premier loan sale. The transaction involved approximately $383.9 million of marine loans and generated an initial reported after-tax gain of $16.5 million, later reduced by $737,000; the notes report an after-tax gain of approximately $15.8 million.
- The company wound down its UMG mortgage operation in 2018, reporting a $3.2 million net loss from discontinued operations, including approximately $3.7 million in exit costs and $864,000 of goodwill impairment. The filing cites the investment needed to reach competitive scale as a reason for exiting.
- Three branches were closed in the second quarter and seven more were selected for consolidation; related after-tax costs were approximately $850,000.
- The effective tax rate fell to 16.7% from 31.2%, primarily reflecting the Tax Act’s lower corporate rate; 2017 included $6.1 million of additional tax expense from revaluing deferred tax balances.
- Cash dividends increased to $0.88 per share from $0.81. The year-end share price declined to $28.23 from $36.17.
Outlook, risks and contingencies
The filing gives no specific earnings, growth, or margin guidance. Management described a focus on managing credit quality, controlling costs, and working with borrowers. It expected to continue evaluating the effects of regulatory changes and the implementation of CECL; the quantitative impact of CECL was still being assessed. The February 2019 Access acquisition was a subsequent event, not part of 2018 results: it added 15.8 million shares and brings integration, synergy, expense, customer-retention, and execution risks.
Key disclosed risks include interest-rate and funding sensitivity, real-estate and commercial-real-estate credit concentration, cybersecurity and third-party operational exposures, acquisition integration, increased regulatory costs associated with crossing $10 billion in assets, and mortgage repurchase or indemnification claims. The company was asset-sensitive for net interest income in its modeling, but its economic value of equity was more adversely affected by rising-rate shocks. Commitments to extend credit and standby letters of credit totaled $3.33 billion. Management said pending legal proceedings were not expected, in aggregate, to materially adversely affect the company. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Investor facts to verify
- How much of 2018’s earnings and growth is sustainable apart from Xenith, the Shore Premier gain, acquisition accretion, and other nonrecurring items?
- Whether higher nonaccrual loans, past-due balances, and TDRs lead to increased provisions or charge-offs; assess the 0.42% allowance ratio and real-estate exposures.
- Access integration progress, realized cost savings and revenue benefits, customer and deposit retention, and post-merger capital, expenses, and share dilution.
- Funding costs, FHLB borrowing reliance, deposit repricing, and sensitivity to interest-rate changes; confirm liquidity capacity under stress.
- The timing and impact of the July 2019 debit interchange-fee cap and other costs of operating above $10 billion in assets.
- Reconcile the company name in the request metadata with the registrant name in the 10-K and confirm which issuer’s securities and reporting history are being analyzed.