Business context and reporting period
Union Bankshares Corporation (the registrant named in this filing; the request identifies Atlantic Union Bankshares Corp) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. It operates a Virginia community bank, mortgage business, and related financial services businesses. Comparisons below are primarily with the first quarter of 2016; balance-sheet comparisons are with December 31, 2016.
Financial results and position
- Earnings: Net income was $19.1 million, up 12.8% from $17.0 million. Diluted EPS was $0.44 versus $0.38; dividends declared were $0.20 per share versus $0.19.
- Income: Net interest income was $66.6 million, up $2.8 million. Noninterest income was $18.8 million, up 18.4%; combined, these reported income streams totaled $85.4 million versus $79.6 million. The filing attributes fee-income growth partly to fiduciary fees after the 2016 ODCM acquisition, loan-swap fees, and BOLI death-benefit proceeds.
- Margins and returns: Net interest margin fell 16 basis points to 3.52% (tax-equivalent: 3.66%, down 16 basis points); core tax-equivalent margin declined 18 basis points to 3.58%. ROA was 0.92% versus 0.88%; ROE was 7.68% versus 6.89%; ROTCE was 11.20% versus 10.13%.
- Expenses and credit costs: Noninterest expense rose 5.8% to $57.4 million, including a $4.1 million increase in salaries and benefits. Provision for credit losses was $2.1 million versus $2.6 million. Net charge-offs were $0.8 million, or 0.05% of average loans annualized, versus $2.2 million, or 0.15%.
- Loans and deposits: Loans held for investment were $6.55 billion, up $247.0 million from year-end and 13.4% from a year earlier. Deposits were $6.61 billion, up $234.7 million from year-end and 11.2% year over year. Commercial real estate non-owner-occupied loans were the largest loan category at 24.9% of the portfolio.
- Asset quality: Nonperforming assets increased to $31.9 million from $20.1 million at year-end; NPAs were 0.49% of loans versus 0.32%. Nonaccrual loans rose to $22.3 million, principally from two credit relationships. The allowance for loan losses was $38.4 million, or 0.59% of loans; the allowance-to-nonaccrual-loans ratio fell to 172% from 373% at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $183.8 million, versus $179.2 million at year-end. Management reported liquid assets of $2.2 billion, or 28.3% of earning assets, and considered liquidity sufficient. Operating cash flow was $50.5 million; investing cash outflow was $259.4 million, largely reflecting $246.3 million of net loan growth; financing cash inflow was $213.5 million. Cash increased $4.6 million during the quarter.
- Debt and capital: Short-term borrowings, including repurchase agreements, totaled $567.1 million; long-term borrowings were $413.8 million. Total borrowings on those reported balance-sheet lines were approximately $980.9 million. Regulatory capital ratios remained above stated minimums: total risk-based capital 13.30%, Tier 1 10.77%, and common equity Tier 1 9.55%. These were down from 13.56%, 10.97%, and 9.72%, respectively, at year-end.
Material changes and management commentary
- Management linked earnings growth mainly to higher average loan balances and increased noninterest income. Average loan balances were up 11.8% year over year.
- Margin pressure reflected lower loan yields and fees, alongside higher funding costs. The company said the late-2016 subordinated debt issuance contributed to higher funding costs and interest expense.
- Noninterest income increased partly due to $0.8 million of higher BOLI income, primarily from death-benefit proceeds, and $0.7 million of higher fiduciary and asset-management fees following the ODCM acquisition. These items may not represent recurring run-rate income.
- Noninterest expense growth reflected compensation, growth investments, the ODCM business, and a North Carolina loan production office; lower FDIC insurance and professional fees partly offset the increase.
- The mortgage segment reported $4,000 of net income, down from $54,000. Originations increased 2.0% to $100.2 million, while mortgage banking income declined with lower gain-on-sale margins.
Outlook, risks, and contingencies
The filing provides no specific earnings, revenue, or margin guidance. Management described strong loan and deposit growth and sufficient liquidity, but cautioned that interim results are not necessarily indicative of full-year results. Interest-rate simulation showed estimated 12-month net interest income rising 5.21% under an immediate +100-basis-point shock and falling 5.95% under a -100-basis-point shock; management considered the -200 and -300 basis-point cases less plausible given prevailing rates. Results depend on model assumptions and exclude future management actions.
- Key stated risks include interest-rate and funding changes, economic conditions, real-estate values, loan and commercial real-estate concentrations, credit quality and allowance adequacy, growth execution, competition, technology and cyber risks, counterparties, regulation, and changes in accounting standards.
- Commitments to extend credit and standby letters of credit totaled $2.02 billion. These are off-balance-sheet exposures and do not necessarily represent future cash requirements. The company also disclosed $16.7 million of uninsured deposits at other financial institutions.
- Management said ordinary-course litigation was not expected, in aggregate, to have a material adverse effect. No material risk-factor changes from the 2016 Form 10-K were reported.
- The independent accountant performed an interim review, not an audit, and reported no material modifications needed to the financial statements. Management stated disclosure controls were effective; no material internal-control change was reported.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and NPAs, driven largely by two relationships, leads to additional losses or reserve needs.
- Whether loan growth can continue without further margin compression or deterioration in the commercial real-estate-heavy portfolio.
- How much reported income growth depends on acquisition accretion, BOLI death benefits, securities gains, and other potentially nonrecurring items.
- How funding costs, deposit pricing, and interest-rate movements affect net interest margin and the company’s modeled rate sensitivity.
- Capital and liquidity headroom as assets grow, and the terms and potential drawdown of off-balance-sheet commitments.