Union Bankshares Corporation (now Atlantic Union Bankshares Corporation) — Q1 2015 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The company was a Virginia-based banking holding company, with a community bank and mortgage segment. Its subsidiary bank’s name changed to Union Bank & Trust in February 2015. The interim financial statements were reviewed, not audited.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net interest income (GAAP) | $62.0 million | $63.8 million |
| Noninterest income | $15.1 million | $13.8 million |
| Provision for loan losses | $1.8 million | None |
| Noninterest expense | $53.8 million | $67.3 million |
| Net income | $15.7 million | $7.7 million |
| Diluted EPS | $0.35 | $0.16 |
| Operating efficiency ratio (FTE, non-GAAP) | 68.0% | 68.1% |
- Net income rose 103.7% year over year, primarily because Q1 2014 included $13.2 million of acquisition and conversion costs. Excluding those costs after tax, operating earnings were $15.7 million versus $16.7 million in Q1 2014; operating EPS was $0.35 versus $0.36.
- Tax-equivalent net interest margin fell to 3.95% from 4.14%; core margin, excluding acquisition-accounting effects, was 3.84% versus 3.99%. Management attributed pressure to lower loan and securities yields; interest expense also rose.
- Cash from operating activities was $20.6 million; investing activities used $27.7 million and financing activities provided $11.2 million. Cash and equivalents increased $4.1 million to $137.4 million.
- At March 31, total assets were $7.39 billion, loans held for investment were $5.39 billion, deposits were $5.67 billion, and stockholders’ equity was $986.9 million. Loans grew $41.8 million (3.1% annualized) from year-end; deposits rose $31.5 million.
- Short-term borrowings were $374.4 million and long-term borrowings $299.9 million. Reported total borrowings were $674.3 million. Management said available liquidity was sufficient; liquid assets and loans maturing within a year totaled $1.8 billion.
- Capital ratios included common equity Tier 1 of 10.86%, Tier 1 of 12.32%, and total capital of 12.82%. The quarterly dividend was $0.15 per share.
Material changes and credit quality
- Nonperforming assets declined to $42.8 million from $47.4 million at year-end; NPAs were 0.79% of loans. Nonaccrual loans were $17.4 million and OREO was $25.4 million.
- Net charge-offs were $3.2 million, or 0.24% annualized, compared with a $772,000 net recovery in Q1 2014. The allowance for loan losses fell to $31.0 million; its ratio to loans was 0.57% (1.03% adjusted for acquisition accounting, a company-defined non-GAAP measure).
- Troubled debt restructurings declined to $24.1 million from $26.8 million at year-end. Real-estate-secured loans represented 84.4% of the loan portfolio.
- The mortgage segment recorded a $267,000 net loss, improving from a $1.4 million loss a year earlier, mainly on lower costs. Mortgage originations decreased $10.4 million to $138.7 million.
Outlook, 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 specific full-year earnings guidance was provided.
- Interest-rate sensitivity modeling showed net interest income increasing under rising-rate scenarios and decreasing under falling-rate scenarios. Management cautioned that large downward shocks were not considered plausible at prevailing rates.
- Noninterest income included a $902,000 increase in other operating income, primarily from dissolution of a limited partnership. The quarter also included $193,000 of securities gains.
- After quarter-end, the company reclassified municipal securities with $193.6 million amortized cost and $202.8 million fair value from available-for-sale to held-to-maturity. Management reported no material expected adverse effect from ordinary-course litigation; off-balance-sheet commitments totaled $1.87 billion.
- Management identified economic, interest-rate, regulatory, competitive, technology, and credit risks, including real-estate concentration and potential changes in collateral values. It reported no material change to the risk factors in its 2014 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether margin pressure, deposit pricing, and funding costs evolved as management expected.
- Whether loan growth was accompanied by stable underwriting, credit quality, charge-offs, and allowance adequacy, particularly in real-estate lending.
- How much reported earnings depended on nonrecurring items, including the limited-partnership gain, and how the mortgage segment performed after cost reductions.
- The effects of the April 2015 securities reclassification on liquidity, interest-rate exposure, and reported accumulated other comprehensive income.
- Capital and liquidity trends, including borrowings, deposit mix, remaining share-repurchase authorization, and the company’s ability to meet off-balance-sheet commitments.