Atlantic Union Bankshares Corporation (then Union Bankshares Corporation) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise stated. The company was headquartered in Richmond, Virginia, and operated Union Bank & Trust. It announced a name change to Atlantic Union Bankshares Corporation and a ticker change from UBSH to AUB, effective May 2019.
Financial results and position
- Earnings: Net income was $35.6 million, or $0.47 per diluted share, versus $16.6 million and $0.25 in Q1 2018. Net income from continuing operations was $35.7 million. Non-GAAP operating earnings, excluding after-tax merger costs, were $50.2 million, or $0.66 per diluted share, versus $38.9 million and $0.59.
- Revenue and margins: Net interest income was $127.5 million, up $24.1 million year over year; fully taxable-equivalent (FTE) net interest margin was 3.80%, up 8 basis points. GAAP net interest margin was 3.72%, up 6 basis points. Noninterest income rose 23% to $24.9 million.
- Expenses and credit costs: Noninterest expense was $106.7 million, up 4.9%, including $18.1 million of merger costs; operating noninterest expense excluding merger costs and intangible amortization was $84.4 million. The income statement reported provision for credit losses of $3.8 million. The MD&A reports $4.0 million of continuing-operations loan-loss provision in the allowance rollforward.
- Assets, loans, and deposits: Total assets were $16.9 billion, up $3.1 billion. Loans held for investment were $12.0 billion, up 23.0%, and deposits were $12.5 billion, up 25.3%. Management attributed much of the growth to the Access acquisition.
- Liquidity and cash flow: Management reported $4.9 billion of liquid assets, or 29.2% of total assets, and considered liquidity sufficient for depositor and customer needs. Cash and cash equivalents were $283.6 million at quarter-end. Operating cash flow was $13.1 million versus $35.8 million in Q1 2018; investing cash flow was $33.1 million and financing cash flow was negative $23.8 million.
- Debt and capital: Short-term borrowings, including repurchase agreements, were $1.0 billion; long-term borrowings were $739.6 million. The estimated common equity Tier 1 ratio was 10.26%, total capital ratio 12.73%, and leverage ratio 9.51%. Capital ratios exceeded regulatory minimums, according to management.
- Credit quality: Nonperforming assets were $32.2 million, or 0.27% of loans, down from 0.35% at year-end. The allowance for loan losses was $40.8 million, or 0.34% of loans, versus 0.42% at year-end. Annualized net charge-offs were 0.15% of average loans versus 0.05% a year earlier.
Material changes and unusual items
- The February 1 acquisition of Access National Corporation was completed for approximately $500 million in stock, with 15.84 million shares issued. Access contributed two months of results to Q1 2019; the filing says its standalone revenue and earnings within the consolidated results were not practicable to determine.
- Access added preliminary fair-value assets of $2.86 billion and liabilities of $2.56 billion, including $2.18 billion of acquired loans and $2.23 billion of deposits. The transaction generated $200.6 million of goodwill and $40.9 million of core deposit intangibles; purchase accounting remains subject to refinement.
- Merger-related costs were $18.1 million in Q1 2019 versus $27.7 million in Q1 2018. Management expects further cost savings and other synergies from the acquisition, but these are not included in the disclosed pro forma results.
- The company exited its mortgage segment in 2018. Discontinued operations recorded a loss of $85,000 in Q1 2019 versus income of $64,000 a year earlier.
- Adoption of the new lease standard recorded a $53.2 million lease liability and $48.9 million right-of-use asset at January 1, 2019, and reduced retained earnings by $1.1 million.
Outlook, risks, and contingencies
- No specific earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management identified interest rates, economic and real-estate conditions, credit quality and commercial real-estate concentrations, deposit flows, competition, technology and cyber risks, regulatory changes, and successful Access integration and synergy realization among the factors that could affect results.
- The company said CECL adoption, expected for fiscal years beginning after December 15, 2019, is expected to increase credit-loss reserves; the impact could not yet be reasonably estimated.
- Interest-rate modeling showed estimated 12-month net interest income increasing 3.45% under an immediate 100-basis-point rate rise and declining 4.65% under a 100-basis-point decline. Economic value of equity was estimated to decline 5.12% under a 300-basis-point rise.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $3.95 billion. Management said pending legal proceedings were not expected, in aggregate, to have a material adverse effect. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Review Access integration progress, realized versus anticipated cost savings, and whether merger expenses or other integration costs persist.
- Assess underlying earnings alongside reported results, including acquisition-related accretion and the company’s non-GAAP adjustments.
- Track loan growth, commercial real-estate exposure, charge-offs, nonperforming assets, and whether the allowance remains adequate as acquired loans are incorporated.
- Monitor deposit pricing, funding costs, liquidity, and the company’s sensitivity to changing interest rates.
- Confirm final acquisition fair values and the prospective impact of CECL on reserves and capital.