Business context and reporting period
Union Bankshares Corporation (the registrant named in this 2015 filing; company metadata identifies Atlantic Union Bankshares Corp) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company operated a Virginia community bank and a mortgage origination business. No business acquisition was completed in 2015; the 2014 comparison includes the StellarOne acquisition.
Amounts below are in U.S. dollars. Financial statements are unaudited; the independent accountant performed an interim review, not an audit, and reported no material modifications needed to the 2015 interim statements.
Financial results and key metrics
- Second-quarter earnings: Net income was $15.3 million, up 4.6% from $14.7 million in Q2 2014; diluted EPS was $0.34 versus $0.32. Net income was $31.0 million and diluted EPS $0.69 for the first half, compared with $22.4 million and $0.48 in 2014.
- Revenue and margin: Q2 GAAP net interest income was $63.8 million, nearly flat year over year; noninterest income was $16.2 million, down 0.4%. First-half net interest income was $125.8 million, down 1.3%, while noninterest income was $31.3 million, up 4.0%. Tax-equivalent net interest margin was 3.97% in Q2 and 3.96% for the first half, down 12 and 15 basis points, respectively, year over year. Core margins, excluding purchase-accounting effects, were 3.86% and 3.85%.
- Costs and credit provision: Q2 noninterest expense was $55.2 million, down 6.3% year over year, largely because Q2 2014 included acquisition costs. Excluding those costs, Q2 expense rose 1.7%. First-half expense was $109.1 million, down 13.6%; excluding 2014 acquisition costs, it increased 0.6%. Q2 provision for credit losses was $3.75 million versus $1.50 million; first-half provision was $5.50 million versus $1.50 million.
- Profitability context: The reported year-over-year earnings increases reflect the absence of 2014 merger and conversion costs ($3.0 million after tax in Q2 and $12.1 million after tax in the first half). On the company’s non-GAAP operating basis, EPS was $0.34 versus $0.38 for Q2 and $0.69 versus $0.74 for the first half.
- Balance sheet and funding: Total assets were $7.50 billion at June 30, up $139.1 million from year-end. Loans were $5.51 billion, up $164.4 million from December 31 (6.1% annualized); deposits were $5.78 billion, up $145.7 million (5.2% annualized). Noninterest-bearing deposits were $1.29 billion. Total borrowings were approximately $681.0 million, comprising $380.7 million short-term and $300.3 million long-term.
- Cash flow and liquidity: First-half operating cash flow was $40.1 million, investing cash outflow $160.6 million, and financing cash inflow $124.0 million. Cash and cash equivalents ended at $136.8 million. Management considered liquidity sufficient; available funding sources included correspondent-bank federal funds lines and FHLB capacity.
- Capital: Stockholders’ equity was $988.1 million. At June 30, the total risk-based capital ratio was 12.83%, Tier 1 was 12.31%, and common equity Tier 1 was 10.87%; the leverage ratio was 10.82%. The company stated its capital ratios exceeded minimum regulatory requirements.
- Asset quality: Nonperforming assets were $31.7 million, or 0.58% of loans, down from $47.4 million and 0.89% at year-end. Nonaccrual loans excluding acquired credit-impaired loans were $9.5 million. The allowance for loan losses was $32.3 million, or 0.59% of loans; first-half net charge-offs were $5.3 million versus $0.3 million in 2014. Troubled debt restructurings totaled $22.1 million, down from $26.8 million at year-end.
Material changes versus comparable periods
- Net interest margin continued to contract as loan and securities yields fell; lower asset yields outpaced reduced funding costs. Interest expense rose, including from higher deposit costs and acquisition-related accounting effects.
- Loan growth, particularly in commercial lending, increased balances and contributed to higher credit-loss provisions. First-half charge-offs were also higher, though the company attributed part of the year-over-year comparison to a large commercial-loan recovery in Q1 2014.
- Nonperforming assets, nonaccrual loans, OREO, and TDR balances improved from year-end. OREO declined to $22.2 million, with sales of foreclosed property and former bank premises contributing.
- Mortgage originations weakened: Q2 volume was $140.3 million versus $195.1 million, and first-half volume was $279.0 million versus $344.2 million. Cost reductions improved mortgage-segment results, but it reported a first-half loss of $0.2 million.
- During Q2, the company transferred securities with a transfer-date fair value of $201.8 million from available-for-sale to held-to-maturity to reduce capital volatility and in light of regulatory changes. The transferred securities had $8.1 million of pretax unrealized gains at transfer; $7.8 million remained at June 30.
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.
- Q2 included $1.28 million of branch-closure expenses. Other notable items included higher marketing, technology, professional-service and fraud-related costs; first-half other operating income benefited from loan-swap fees and a gain related to dissolution of a limited partnership.
- Interest-rate simulation showed estimated 12-month net interest income up 1.50% under an immediate 100-basis-point rate increase and down 1.50% under a 100-basis-point decrease. Management described the company as more asset-sensitive than a year earlier; larger downward shocks were considered implausible given already-low rates.
- Real-estate-secured loans represented 83.7% of the loan portfolio, creating exposure to real estate and construction conditions. Management cited underwriting and centralized credit oversight as mitigants. The company also identified general economic conditions, interest rates, regulation, competition, technology, and consumer behavior as factors that could affect results.
- Off-balance-sheet commitments with credit risk totaled $1.69 billion, including $1.50 billion of commitments to extend credit. Management did not expect related credit losses to have a material adverse impact. Ordinary-course litigation was not expected by management to have a material adverse effect.
- The filing provided no specific numeric earnings or full-year financial guidance. It cautioned that interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margin pressure and rising deposit costs continue, and how actual results compare with management’s stated expectation of modest further margin decline.
- Whether loan growth translates into sustainable income without further deterioration in charge-offs, delinquencies, or credit provisions, particularly in the real-estate-heavy portfolio.
- How much of reported earnings improvement reflects the absence of 2014 acquisition costs versus underlying operating performance; review the company’s non-GAAP reconciliations.
- Whether mortgage origination volumes and segment profitability recover, and whether branch-closure and other expense initiatives deliver lasting savings.
- The effects on reported capital and accumulated other comprehensive income of the AFS-to-HTM securities transfer, and the risks from securities valuation and interest-rate movements.
- Deposit trends, borrowing levels, and the availability and terms of contingent funding sources; also monitor capital ratios under the Basel III framework.