Business context and reporting period
Filing: Union Bankshares Corporation’s Form 10-K for the fiscal year ended December 31, 2017, filed February 27, 2018. The filing covers the predecessor company named in the report; it does not report a full-year 2018 period. The requested “2017 Q4” is addressed with fourth-quarter figures where available.
The Richmond, Virginia-based financial holding company operated a community bank and mortgage business, with banking, mortgage, wealth-management, and insurance services. At year-end, it had 111 bank branches in Virginia. The January 1, 2018 Xenith acquisition occurred after the reporting date and is not included in 2017 results.
Financial results and condition
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net interest income | $280.2 million | $265.2 million | Up 5.7%; loan growth contributed. |
| Net interest margin | 3.49% | 3.66% | Down 17 basis points, mainly as funding costs rose. |
| Provision for credit losses | $10.8 million | $9.1 million | Higher, primarily reflecting loan growth. |
| Noninterest income | $71.7 million | $70.9 million | Up 1.1%; mortgage income and swap fees declined. |
| Noninterest expense | $234.8 million | $222.7 million | Up 5.4%, including $5.4 million of merger-related costs. |
| Income before taxes | $106.3 million | $104.3 million | Up 2.0%. |
| Net income / diluted EPS | $72.9 million / $1.67 | $77.5 million / $1.77 | Down 5.9% / $0.10 per share. |
| Operating net income / diluted EPS | $83.6 million / $1.91 | $77.5 million / $1.77 | Non-GAAP; excludes merger costs and $6.3 million in nonrecurring Tax Act expense. |
| Fourth-quarter net income / diluted EPS | $15.2 million / $0.35 | $20.8 million / $0.48 | Year-over-year decline; 2017 quarter included the Tax Act charge. |
For 2017, return on average assets was 0.83% (0.95% on management’s operating basis), return on equity was 7.07%, and return on tangible common equity was 10.20% (11.69% operating). The GAAP efficiency ratio was 66.73%; the operating FTE ratio was 63.28%.
At December 31, 2017, assets were $9.32 billion, up 10.5%; loans held for investment were $7.14 billion, up 13.2%; and deposits were $6.99 billion, up 9.6%. Total borrowings were $1.22 billion, up $229.3 million, mainly from increased short-term FHLB advances. Stockholders’ equity was $1.05 billion.
Operating cash flow was $110.3 million, investing cash flow was negative $885.8 million, and financing cash flow was positive $795.6 million. Cash and cash equivalents ended the year at $199.4 million. Management reported $2.8 billion of liquid assets, or 29.7% of total assets, and considered liquidity sufficient for depositor needs and customer credit demand.
Year-end consolidated capital ratios were 9.04% CET1, 10.14% Tier 1, 12.43% total capital, and 9.42% leverage. The bank subsidiary was classified as well capitalized. The company paid $0.81 per share in dividends in 2017, up from $0.77.
Material changes versus the prior comparable period
- Growth in average loans drove higher net interest income, but margin narrowed as funding costs increased 21 basis points and the cost of interest-bearing liabilities rose 27 basis points.
- Asset quality weakened on some measures: nonaccrual loans rose to $21.7 million from $10.0 million, and nonperforming assets increased 41.5% to $28.4 million. Net charge-offs rose to $10.1 million, or 0.15% of average loans, from $5.5 million, or 0.09%. The allowance was $38.2 million, 0.54% of loans, versus 0.59% a year earlier.
- Mortgage originations declined 10.0% to $486.1 million; mortgage banking income fell 15.6% to $9.2 million. Mortgage-segment net income was $1.1 million versus $1.8 million.
- Net income declined despite higher net interest income, reflecting the Tax Act’s $6.3 million preliminary deferred-tax revaluation charge, merger-related expenses, and higher credit and operating costs.
- The Tax Act lowered the federal corporate rate to 21% starting in 2018. Management estimated the 2017 revaluation effect at $5 million to $8 million and said the estimate could be refined for up to one year after enactment.
Outlook, commentary, risks, and unusual items
The filing does not provide specific earnings or revenue guidance. Management cited loan growth, low-cost deposit growth, active credit monitoring, and cost control as business priorities. It also noted gradual increases in short-term rates and continued pressure from lower long-term rates. Its interest-rate model projected 12-month net interest income up 2.11% under an immediate 100-basis-point rate increase and down 2.70% under a 100-basis-point decrease; these are model estimates dependent on assumptions, not guidance.
The Xenith transaction closed January 1, 2018 for an approximate $800 million purchase price, primarily in stock: 21,922,077 shares were issued, and $6.2 million was paid for outstanding options. Management identified integration, realization of cost savings and revenue synergies, customer and employee retention, and execution costs as material uncertainties. The combined company had approximately $13.0 billion in assets and would face additional requirements for institutions above $10 billion, including annual stress testing, CFPB supervision, higher FDIC assessment exposure, and a debit interchange fee cap effective July 1, 2019.
Principal risks include commercial real estate and construction lending concentrations, borrower and collateral deterioration, interest-rate and funding-cost changes, competition, mortgage-market cyclicality, cyber and third-party operational risks, regulatory changes, and acquisition integration. The company also flagged the future CECL credit-loss standard as potentially materially affecting its allowance methodology; it was assessing the impact. Two shareholder suits related to Xenith merger disclosures were dismissed without prejudice. Management said other ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of year-end.
Most important facts an investor should verify
- How the Xenith merger affected 2018 reported assets, capital, share count, earnings, integration costs, and realized synergies; 2017 results exclude the merger.
- Whether nonaccrual loans, charge-offs, and nonperforming assets continued to rise, and whether allowance coverage remains adequate as the loan book grows.
- Whether net interest margin and funding costs stabilized, particularly given greater short-term borrowings and changing interest rates.
- The final tax impact of the Tax Act and any subsequent refinement of the preliminary $6.3 million charge.
- The effect of crossing $10 billion in assets on regulatory compliance costs, deposit assessments, debit interchange revenue, and capital planning.
- Whether operating or other non-GAAP measures reconcile consistently to GAAP results; the filing cautions that these measures may not be comparable across companies.