Business context and reporting period
Union Bankshares Corporation (the filing registrant; company identified in the request as Atlantic Union Bankshares Corp) filed this unaudited Form 10-Q for the quarter ended June 30, 2017. It operates a Virginia-focused community bank and a mortgage business. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions.
The interim financial statements were reviewed by Ernst & Young, not audited. Management said the results for the interim periods are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q2 2017 / June 30, 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $69.0 million | Up $3.2 million from Q2 2016 |
| Noninterest income | $18.1 million | Up 0.4% from Q2 2016 |
| Net income | $18.0 million; diluted EPS $0.41 | Net income $19.3 million and EPS $0.44 in Q2 2016 |
| Net interest margin | 3.49%; tax-equivalent margin 3.62% | Down 21 and 22 basis points, respectively, year over year |
| Assets | $8.92 billion | Up $488.4 million, or 5.8%, from year-end 2016 |
| Loans held for investment | $6.77 billion | Up $464.4 million, or 7.4%, from year-end 2016; 14.7% annualized |
| Deposits | $6.76 billion | Up $384.9 million, or 6.0%, from year-end 2016; 12.1% annualized |
| Cash and cash equivalents | $181.9 million | $179.2 million at year-end 2016 |
| Borrowings | $636.5 million short-term and $434.3 million long-term | Total $1.07 billion, versus $990.1 million at year-end 2016 |
For the six months ended June 30, net income was $37.1 million and diluted EPS was $0.85, versus $36.3 million and $0.82 in 2016. Net interest income rose 4.7% to $135.6 million; noninterest income rose 8.8% to $36.9 million. The six-month net interest margin was 3.51%, down 18 basis points year over year.
Q2 noninterest expense increased 8.5% to $59.9 million, including $2.7 million of acquisition and conversion costs. Excluding those costs, management reported operating earnings of $20.3 million, or $0.46 per diluted share, compared with GAAP net income of $19.3 million and EPS of $0.44 in Q2 2016. For the first six months, adjusted operating earnings were $39.4 million, or $0.90 per diluted share, versus GAAP net income of $36.3 million and EPS of $0.82 a year earlier. These operating figures are non-GAAP measures.
Six-month operating cash flow was $47.9 million, compared with $44.7 million in 2016. Investing cash outflow was $488.9 million, primarily reflecting $464.7 million of net loan growth; financing cash inflow was $443.7 million, mainly from deposit growth and short-term borrowings. Cash and cash equivalents increased $2.7 million during the period.
The allowance for loan losses was $38.2 million, or 0.56% of loans, compared with $37.2 million, or 0.59%, at year-end 2016. Total nonperforming assets were $34.1 million, or 0.50% of loans, up from $20.1 million, or 0.32%, at year-end. Nonaccrual loans rose to $24.6 million, primarily due to three unrelated credit relationships. Six-month net charge-offs were $3.3 million, down from $3.8 million in 2016.
Regulatory capital ratios at June 30 were 9.39% common equity Tier 1, 10.57% Tier 1, and 13.00% total risk-based capital; all were lower than year-end levels, which management attributed primarily to asset growth. Liquid assets were $2.7 billion, or 30.0% of total assets. Management considered liquidity sufficient to meet depositor and customer credit needs.
Material changes and management commentary
- Loan and deposit growth supported higher net interest income, but higher deposit and borrowing costs compressed margins. Management attributed rising funding costs partly to subordinated debt issued in late 2016 and higher deposit and short-term borrowing rates.
- Q2 GAAP earnings fell year over year, while reported non-GAAP operating earnings rose after excluding acquisition and conversion costs. Six-month GAAP net income increased modestly.
- Noninterest income for the first half benefited from higher fiduciary fees, customer fees, bank-owned life insurance income (including death benefit proceeds), swap fees, and securities gains. Mortgage banking income declined amid lower originations and less favorable derivative results.
- The company had a definitive agreement to acquire Xenith Bankshares, Inc.; closing was expected in early January 2018, subject to regulatory and shareholder approvals. No specific forward financial guidance was provided in the supplied filing text.
- Interest-rate sensitivity modeling indicated that an immediate +100 basis-point shock was estimated to increase 12-month net interest income by 3.76%; a -100 basis-point shock was estimated to reduce it by 4.25%. These are model estimates dependent on assumptions, not forecasts.
Outlook, risks and contingencies
The Xenith transaction could bring integration costs, execution challenges, customer or employee attrition, delays, or failure to realize anticipated benefits. If completed, the combined company was expected to exceed $10 billion in assets and face additional regulation, supervision, compliance costs, stress testing, and potential changes to interchange-fee economics. Required regulatory approvals could be delayed, conditioned, or denied. The merger agreement also includes a potential $26.5 million termination fee in specified circumstances.
Other disclosed risks include interest-rate movements, economic and real estate conditions, loan concentrations in commercial real estate and construction, credit quality and adequacy of the loan-loss allowance, deposit flows, funding access, competition, cybersecurity and technology risks, and regulatory or accounting changes. The company reported $2.12 billion of commitments to extend credit and standby letters of credit; these are contractual amounts and do not necessarily represent future cash needs. Management said pending litigation was not expected, in aggregate, to have a material adverse effect.
Management identified loan-loss estimates, acquired loans, and goodwill and intangible assets as critical accounting areas. The second-quarter annual goodwill and intangible impairment test found no impairment. The company was assessing the impact of upcoming lease and expected-credit-loss accounting standards; it did not anticipate a material impact from the revenue-recognition standard based on work performed to date.
Most important facts for investors to verify
- Whether the Xenith acquisition received approvals, closed on the expected schedule, and delivered the anticipated benefits without material integration or regulatory costs.
- Whether the increase in nonaccrual loans and nonperforming assets—particularly the three cited credit relationships—stabilized, and whether reserves remain adequate as loans grow.
- Whether deposit and borrowing costs continue to rise faster than asset yields, putting further pressure on net interest margin.
- Whether reported operating earnings remain comparable after excluding acquisition-related costs; reconcile these non-GAAP measures to GAAP results.
- How loan growth, funding needs, capital ratios, and liquidity evolve, including the effect of the pending merger and commitments to extend credit.