Atlantic Union Bankshares Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. The company is a Virginia-based bank holding company operating primarily through Atlantic Union Bank. Results reflect the February 1, 2019 acquisition of Access National Corporation (“Access”), so year-over-year comparisons include a significant change in scale.
Financial performance and condition
- Earnings: Net income was $193.5 million, up 32.3% from $146.2 million in 2018. Diluted EPS was $2.41 versus $2.22. Management’s non-GAAP operating earnings were $220.9 million and operating EPS was $2.75; these exclude merger and rebranding costs.
- Revenue and margins: Net interest income increased 26.1% to $537.9 million; noninterest income rose 27.4% to $132.8 million. Net interest margin declined to 3.61% from 3.67% (FTE: 3.69% from 3.74%), as funding costs rose faster than asset yields. The efficiency ratio was 62.37%, compared with 63.62%.
- Expenses and credit costs: Noninterest expense increased 23.9% to $418.3 million. Provision for credit losses was $21.1 million, compared with $13.7 million. Net charge-offs rose to $20.9 million, or 0.17% of average loans, from $11.1 million, or 0.12%.
- Balance sheet: Total assets were $17.6 billion, up $3.8 billion. Loans held for investment were $12.6 billion, up $2.9 billion; deposits were $13.3 billion, up $3.3 billion. Management attributed much of the growth to Access.
- Asset quality: Nonperforming assets were $32.9 million, or 0.26% of loans, down from $33.7 million, or 0.35%. The allowance for loan losses was $42.3 million, or 0.34% of loans, versus $41.0 million, or 0.42%.
- Funding, debt and liquidity: Total borrowings declined to $1.51 billion from $1.76 billion, primarily following repayment of FHLB advances. Cash and cash equivalents were $436.0 million. Management reported liquid assets of $5.5 billion, or 31.1% of assets, and considered liquidity sufficient for depositor and customer needs.
- Cash flows: Operating cash flow was $194.8 million, investing cash outflow was $425.4 million, and financing cash inflow was $405.4 million. Cash and cash equivalents increased $174.8 million during the year.
- Capital and shareholder returns: Company CET1 was 10.24%, total capital was 12.63%, and leverage was 8.79%; the Bank was classified as well capitalized. Dividends were $0.96 per share, up from $0.88. The company repurchased approximately $80.3 million of stock in 2019 and had about $70 million remaining under its authorized program at year-end.
Material changes versus 2018
- Access added substantial loans, deposits and operating scale. The company issued 15.8 million shares as acquisition consideration; preliminary goodwill from the transaction was $208.4 million.
- Net interest income benefited from the larger balance sheet, while higher deposit costs contributed to margin compression.
- Noninterest income included $7.7 million of net securities gains, mortgage banking income from the acquired business, and a recovery related to a Xenith-acquired loan. These gains were partly offset by the absence of the $20.0 million Shore Premier sale gain recorded in 2018. Interchange income also declined following the July 2019 application of the debit-card interchange fee cap.
- Unusual costs included $27.8 million of merger expenses, $6.5 million of rebranding expense and a $16.4 million loss on debt extinguishment. The latter followed repayment of FHLB advances and termination of related cash flow hedges.
- Reported net income included a $0.2 million loss from discontinued mortgage operations, compared with a $3.2 million loss in 2018. The company now reports one segment, community banking; mortgage lending continued through a Bank division.
Outlook, risks and other matters
- No specific earnings, revenue or margin guidance is provided in the supplied filing text. Management described continued focus on growth, asset quality, cost control and borrower risk mitigation.
- CECL became effective for the company January 1, 2020. Management estimated a Day 1 allowance for credit losses within a reasonable range of $95 million, subject to governance and control processes; acquired and consumer loans were expected to drive much of the increase.
- Interest-rate sensitivity modeling indicated that an immediate 100-basis-point increase could raise 12-month net interest income by 4.60%, while a 100-basis-point decline could reduce it by 4.69%. These are model estimates based on assumptions, not forecasts.
- Key risks include commercial real estate and construction lending concentrations, credit losses and allowance estimation, deposit pricing and funding, interest-rate changes, acquisition integration and cost savings, competition, cybersecurity and third-party operations, regulatory costs associated with assets above $10 billion, and the transition from LIBOR.
- The company identified $4.9 billion of commitments to extend credit and standby letters of credit at year-end; these are contingent exposures, not equivalent to funded loans. Management said pending litigation was not expected to have a material adverse effect in aggregate.
- Ernst & Young issued unqualified audit opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How Access integration, revenue synergies and cost savings are progressing, and how much of 2019 earnings growth is attributable to the acquisition.
- Whether loan losses and net charge-offs—especially in consumer and construction lending—remain manageable, and how the CECL allowance compares with the preliminary estimate.
- Whether deposit costs continue to pressure net interest margin, including the effect of changing rates and deposit mix.
- The composition and performance of commercial real estate and construction exposures, including concentrations and acquired loans.
- How much remaining repurchase authorization is used, and the effect of buybacks, dividends and acquisition-related share issuance on per-share results and capital.
- The filing reports a $9.3 million life-insurance recovery in its MD&A discussion, while a note describes approximately $9.8 million in proceeds; verify the precise amount and presentation in the underlying statements.