Atlantic Union Bankshares Corporation (then Union Bankshares Corporation) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing identifies the registrant as Union Bankshares Corporation. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Business context and key financial metrics
The company operated a Virginia-focused community bank, mortgage business, and affiliated financial services businesses. Its community bank had 120 retail locations. On May 31, 2016, Union Bank & Trust acquired Old Dominion Capital Management (ODCM), an investment adviser with nearly $300 million in assets under management.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income, GAAP | $65.8 million | $63.8 million | $129.5 million | $125.8 million |
| Noninterest income | $18.0 million | $16.2 million | $33.9 million | $31.3 million |
| Net income | $19.3 million | $15.3 million | $36.3 million | $31.0 million |
| Diluted EPS | $0.44 | $0.34 | $0.82 | $0.69 |
| Tax-equivalent net interest margin | 3.84% | 3.97% | 3.83% | 3.96% |
| Provision for credit losses | $2.3 million | $3.7 million | $4.9 million | $5.5 million |
- Q2 pretax income was $26.2 million versus $21.0 million; noninterest expense was essentially flat at $55.3 million. Six-month noninterest expense rose 0.4% to $109.5 million.
- At June 30, 2016, assets were $8.10 billion, net loans held for investment were $5.91 billion, deposits were $6.10 billion, and stockholders’ equity was $989.2 million. Since year-end 2015, loans rose $269.6 million and deposits rose $131.9 million.
- Six-month operating cash flow was $43.7 million; investing cash outflow was $326.7 million, including $271.7 million of net loan growth; financing cash inflow was $357.4 million. Cash and cash equivalents ended at $217.0 million.
- Total borrowings were $952.8 million at quarter-end, including $678.3 million in short-term borrowings and $274.5 million in long-term borrowings. Short-term borrowings increased $289.3 million from year-end, primarily from higher FHLB advances.
- Reported regulatory capital ratios were 9.94% common equity Tier 1, 11.27% Tier 1, and 11.79% total risk-based capital. The company reported liquidity resources of $2.1 billion, or 28.5% of earning assets, under its stated measure.
Material changes versus comparable periods
- Q2 net income increased 26.0% and diluted EPS increased 29.4% year over year. For the first six months, net income rose 16.9% and diluted EPS rose 18.8%.
- Management attributed earnings growth primarily to higher average loan balances and noninterest income. Average loans grew 8.1% year over year in Q2, adjusted for the prior-year credit-card portfolio sale; period-end loans increased 9.6% annualized from December 31, 2015.
- Net interest margin contracted 13 basis points in both the quarter and six-month comparison. Management cited lower loan yields as new and renewed loans were made or repriced at lower rates; higher earning-asset yields did not offset that pressure.
- Noninterest income increased 11.0% in Q2, helped by customer fees, mortgage gain-on-sale margins, and loan-related swap fees. Lower securities gains partly offset those increases. Noninterest expense was flat in Q2: higher compensation, professional services, and technology costs were offset by lower OREO costs and prior-year branch-closure costs.
- Credit metrics improved overall: nonperforming assets were $24.2 million, down 11.0% from year-end; net charge-offs were $1.6 million in Q2 versus $2.2 million a year earlier. The allowance for loan losses was $35.1 million, or 0.59% of loans, compared with $34.0 million at year-end.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management described the current economic environment as challenging and emphasized sound underwriting and lending within its principal markets.
- The company closed five branches in Q2 and planned to close five additional in-store branches in the Richmond market on September 30, 2016. It anticipated approximately $400,000 in closure costs in Q3 2016.
- The company repurchased 1.31 million shares in the first half for approximately $30.7 million. A new $25 million repurchase authorization had approximately $15.5 million remaining at June 30. Management said capital ratios had declined from year-end primarily due to share repurchases.
- Interest-rate sensitivity modeling projected that an immediate 100-basis-point increase would raise 12-month net interest income by 3.59%; an immediate 100-basis-point decrease would reduce it by 2.40%. Management cautioned that larger downward shocks were not considered plausible at prevailing low rates.
- Key risks identified include economic and banking conditions, interest rates, regulation, competition, technology and information security, acquisitions, and changes in accounting standards. The filing reported no material change to the risk factors in the 2015 Form 10-K.
- Off-balance-sheet commitments totaled $1.76 billion, including $1.61 billion of commitments to extend credit and $80.6 million of standby letters of credit. Management did not expect related credit losses to have a material adverse impact. Ordinary-course litigation was not expected to have a material adverse effect.
- ODCM acquisition consideration had a stated fair value of $9.1 million, part of which was contingent on performance. Acquisition fair values were preliminary. No securities impairment was recognized in Q2; the company had recorded an additional sale loss in Q1 on a previously impaired municipal security.
- Management stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether loan growth can continue without further pressure on loan yields and net interest margin.
- Credit quality trends by portfolio segment, including nonaccrual loans, charge-offs, OREO, and the allowance relative to acquired-loan marks.
- Funding mix and cost, particularly the increase in short-term FHLB borrowings and the continued runoff of time deposits.
- The effect of share repurchases, dividends, and future capital needs on regulatory capital ratios.
- ODCM’s contribution to fee income and earnings, and the final acquisition fair-value and contingent-consideration amounts.
- Execution and costs of planned branch closures, and performance of the mortgage business given lower origination volume.