Atlantic Union Bankshares Corp annual report, FY2016

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Business context and reporting period

Union Bankshares Corporation (the registrant named in this filing; now associated with Atlantic Union Bankshares) filed this Form 10-K for the fiscal year ended December 31, 2016. The Virginia-based financial holding company operated community banking and mortgage banking businesses, primarily through Union Bank & Trust, with 114 bank locations. This is an annual filing, not a standalone fourth-quarter report.

Key financial results

  • Profitability: 2016 net income was $77.5 million, up 15.5% from $67.1 million; diluted EPS rose to $1.77 from $1.49. Fourth-quarter net income was $20.8 million and diluted EPS was $0.48, versus $17.8 million and $0.40 in fourth-quarter 2015.
  • Revenue and margins: Net interest income was $265.2 million, up 5.3%; noninterest income was $70.9 million, up 9.1%. Net interest margin declined to 3.66% from 3.75% (FTE margin: 3.80% from 3.89%). The efficiency ratio improved to 66.27% from 68.45%.
  • Credit costs and asset quality: Provision for credit losses was $9.1 million, down from $9.6 million. Net charge-offs were $5.5 million, or 0.09% of average loans, versus $7.6 million, or 0.14%. Nonperforming assets fell to $20.1 million from $27.2 million; NPAs were 0.32% of loans versus 0.48%.
  • Balance sheet and funding: Total assets were $8.43 billion, up 9.5%; loans held for investment were $6.31 billion, up 11.2%; deposits were $6.38 billion, up 7.0%. Total borrowings increased 45.6% to $990.1 million. Stockholders’ equity was $1.00 billion.
  • Cash flow: Operating activities provided $93.8 million, investing activities used $715.1 million, and financing activities provided $657.9 million. Cash and cash equivalents ended the year at $179.2 million, up from $142.7 million.
  • Capital and shareholder returns: Consolidated CET1, Tier 1, total risk-based capital, and leverage ratios were 9.72%, 10.97%, 13.56%, and 9.87%, respectively. Dividends paid were $0.77 per share, up from $0.68; the Company repurchased 1.41 million shares for $33.2 million.

Material changes versus 2015

  • Earnings improved on higher net interest income—primarily from loan growth—and increased fee income, including loan-swap fees and mortgage banking income. Net interest margin nevertheless contracted as loan yields softened and funding costs rose.
  • Expenses rose 2.7% to $222.7 million, including higher salaries and benefits, professional services, and technology spending; lower OREO and credit-related costs partly offset those increases.
  • Loans grew faster than deposits, and borrowings rose substantially. The Company issued $150 million of fixed-to-floating subordinated notes in December 2016; the notes qualify as Tier 2 capital.
  • Asset-quality measures improved overall, although recorded troubled debt restructurings increased 21.3% to $15.4 million; $14.0 million were performing.

Outlook, risks, contingencies, and unusual items

The filing provides no specific earnings or revenue guidance. Management described a sluggish but improving economy and continued focus on growth, cost control, asset quality, and borrower support. It expected the $10 billion consolidated-asset threshold—and related regulatory requirements—to become applicable around early 2019 if organic growth continued at the 2016 pace.

  • Material risks include interest-rate and margin sensitivity, real-estate and commercial-real-estate credit concentrations, economic deterioration, cyber and third-party operational risks, competition, and evolving regulation. In the Company’s interest-rate simulation, an immediate +100 basis-point shock was estimated to increase 12-month net interest income 4.10%; a -100 basis-point shock was estimated to reduce it 4.14%. These are model estimates, not forecasts.
  • Off-balance-sheet commitments to extend credit totaled $1.925 billion, with $84.2 million of standby letters of credit. Management said ordinary-course litigation was not expected to have a material adverse effect; ultimate liability could not be determined.
  • The May 2016 ODCM acquisition involved $9.1 million of consideration, including contingent consideration, and added $4.7 million of goodwill and $4.5 million of amortizable intangibles. The Company reported no goodwill impairment.
  • Management changed the allowance methodology’s historical loss look-back from 12 to 20 quarters, concluding the change better reflected a full economic cycle; it said the change had no material impact on the allowance.
  • The CEO transition to John C. Asbury took effect in January 2017. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  1. Whether loan growth, particularly in non-owner-occupied commercial real estate, construction and development, and consumer lending, maintains credit quality; review allowance assumptions and acquired-loan marks.
  2. How continued deposit competition and increased FHLB and subordinated borrowing affect funding costs, liquidity, leverage, and net interest margin.
  3. Whether the modeled benefit from rising rates is realized, given deposit repricing, loan floors, and the filing’s sensitivity assumptions.
  4. The timing and costs of preparing for the $10 billion asset threshold, and any resulting impact on profitability and capital distributions.
  5. ODCM’s performance and contingent purchase consideration, as well as the sustainability of earnings excluding unusually favorable or unfavorable items.
  6. Dividend capacity: the filing reported approximately $37.1 million of unrestricted Bank funds transferable to the parent without prior regulatory approval at year-end.