Union Bankshares Corporation (now Atlantic Union Bankshares Corp.) — Q3 2015 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended September 30, 2015; filed November 5, 2015. The company operated a Virginia-focused community bank and mortgage business. Interim financial statements were reviewed, not audited. The filing notes results for interim periods may not indicate full-year results.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income (GAAP) | $63.4 million | $64.5 million | $189.2 million | $192.0 million |
| Noninterest income | $16.7 million | $16.3 million | $48.0 million | $46.4 million |
| Provision for credit losses | $2.1 million | $1.8 million | $7.6 million | $3.3 million |
| Noninterest expense | $53.3 million | $59.4 million | $162.4 million | $185.7 million |
| Net income | $18.2 million | $14.8 million | $49.3 million | $37.2 million |
| Diluted EPS | $0.40 | $0.32 | $1.09 | $0.80 |
- Q3 net income increased 22.9% year over year; excluding prior-year after-tax acquisition costs, operating earnings rose 14.4%. Nine-month GAAP net income increased 32.4%, but adjusted operating earnings declined about 2.2% from 2014, mainly due to higher credit-loss provision and lower net interest income.
- Tax-equivalent net interest margin was 3.86% in Q3 (down 25 basis points year over year); core margin was 3.77% (down 15 basis points). For the first nine months, tax-equivalent margin was 3.93% (down 18 basis points) and core margin was 3.82% (down 13 basis points). Lower loan yields were the main pressure; funding-cost declines only partly offset them.
- At September 30, total assets were $7.59 billion, up $235.7 million from year-end 2014. Net loans held for investment were $5.51 billion; deposits were $5.82 billion; stockholders’ equity was $995.0 million.
- Cash and cash equivalents were $179.2 million, versus $133.3 million at December 31, 2014. For the nine months, operating cash flow was $79.2 million (prior year $108.2 million), investing cash flow was negative $222.0 million (prior year positive $188.9 million), and financing cash flow was positive $188.8 million (prior year negative $221.4 million).
- Total borrowings were approximately $722.1 million: $431.4 million short-term and $290.7 million long-term. Total capital ratio was 12.69%, Tier 1 ratio 12.16%, common equity Tier 1 ratio 10.75%, and leverage ratio 10.80%. Tangible common equity to tangible assets was 9.29%.
- Liquidity sources included cash, securities, loans and borrowing capacity. Management considered liquidity sufficient; liquid assets and loans maturing or repricing within one year totaled $1.9 billion, or 27.3% of earning assets.
Material changes versus comparable periods
- Loans grew 4.9% from December 31, 2014; excluding the credit-card portfolio transferred to held for sale, loans increased 7.7% from September 2014. Commercial loan growth offset declines in mortgage and equity-line balances. Deposits increased 3.2% from year-end, with growth in noninterest-bearing demand accounts and a continuing shift away from time deposits.
- Nonperforming assets fell to $35.1 million, from $47.4 million at year-end and $58.0 million a year earlier. NPAs were 0.63% of loans, compared with 0.89% and 1.12%, respectively. OREO declined to $22.1 million.
- Credit costs increased: nine-month net charge-offs were $6.4 million versus $1.3 million in 2014, and the nine-month provision rose to $7.6 million. The allowance was $33.3 million, or 0.60% of loans; the company’s acquisition-accounting-adjusted measure was 1.01%.
- Q3 expenses were lower than 2014, particularly OREO valuation expense and acquisition costs. The nine-month comparison also benefited substantially from $19.5 million of acquisition-related costs in 2014; excluding those costs, expenses were broadly flat.
- Mortgage originations declined to $427.1 million for the first nine months, from $522.2 million. The mortgage segment nevertheless improved, reporting a $59,000 Q3 profit and a $113,000 nine-month loss, helped by expense controls.
Outlook, commentary, risks and unusual items
- Management expected net interest margin to decline modestly over the next several quarters as asset yields were expected to fall faster than funding costs. No numeric earnings or revenue guidance was provided.
- In Q2 2015, the company transferred $201.8 million fair value of securities from available for sale to held to maturity to reduce capital volatility and in response to regulatory changes. A $300,000 credit-related impairment on a municipal security was recognized in Q3.
- On October 16, 2015, the company agreed to sell its approximately $26.4 million credit-card portfolio to Elan Financial Services at a premium not expected to materially affect income; it would continue sharing interchange and finance-charge income. On October 29, the board authorized a new share repurchase program of up to $25 million through December 31, 2016.
- Off-balance-sheet commitments totaled $1.77 billion, including $1.57 billion of credit commitments, $142.8 million of standby letters of credit, and $61.0 million of mortgage rate locks. Amounts may not be fully drawn. The company also reported $5.1 million of unfunded affordable-housing investment commitments, expected to be paid from 2015 through 2019.
- Interest-rate sensitivity analysis showed estimated 12-month net interest income rising 1.72% under an immediate +100 bp shock and falling 1.72% under -100 bp. Management considered -200 and -300 bp scenarios implausible at prevailing rates. Key disclosed risks include economic and banking conditions, interest rates, regulation, competition, technology, and credit/real-estate conditions.
- Management said ordinary-course litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth and improving nonperforming-asset trends persist, and whether higher charge-offs require further provision or allowance increases.
- Whether margin pressure develops as management anticipated, including the effect of deposit pricing and loan repricing.
- The realized economics and ongoing fee-sharing terms of the credit-card portfolio sale, and the use and timing of the newly authorized repurchase program.
- Credit quality and concentration within the real-estate-heavy loan portfolio, as well as the sufficiency of reserves and collateral valuations.
- Liquidity and funding dependence, including the level and maturity of borrowings and the amount of off-balance-sheet commitments that could be drawn.
- Capital-ratio comparability: Basel III capital rules took effect for the company in 2015, so some prior-period ratios use different regulatory rules.