Atlantic Union Bankshares Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Amounts below are in U.S. dollars.
Business context and reporting period
Atlantic Union Bankshares is a Virginia-based bank holding company operating primarily in Virginia, with branches and ATMs in portions of Maryland and North Carolina. On February 1, 2019, it completed its acquisition of Access National Corporation for approximately $500 million in stock and changed its corporate and bank names in May 2019. The acquisition materially expanded the balance sheet and share count.
Financial performance and position
- Q2 earnings: Net income was $48.8 million, versus $47.3 million a year earlier; diluted EPS was $0.59 versus $0.72. Continuing-operations income was $48.9 million versus $49.8 million. Management’s non-GAAP operating net income was $57.1 million and operating EPS was $0.70, excluding after-tax merger and rebranding costs.
- First-half earnings: Net income was $84.5 million versus $64.0 million; diluted EPS was $1.06 versus $0.97. Non-GAAP operating net income was $107.6 million versus $92.7 million, while operating EPS was $1.36 versus $1.41.
- Interest income and margins: Q2 net interest income was $138.6 million, up $30.4 million year over year; net interest margin was 3.71%, down 1 basis point. On a fully taxable-equivalent basis, net interest income was $141.5 million and margin was 3.78%. First-half net interest income was $266.1 million, up $54.5 million; GAAP margin was 3.71%, up 2 basis points.
- Revenue and expenses: Q2 noninterest income was $30.6 million, down from $40.6 million, largely because Q2 2018 included a $20.9 million gain on the Shore Premier sale. Excluding that gain, management reported noninterest income growth. Q2 noninterest expense rose 24% to $105.6 million, reflecting acquisition-related scale, merger costs, $4.0 million of rebranding costs, and other expenses.
- Credit costs and asset quality: Q2 provision for credit losses was $5.3 million versus $2.1 million; MD&A reports loan-loss provision of $5.9 million. First-half net charge-offs were $8.5 million, or 0.15% of average loans annualized, versus $2.9 million, or 0.06%. Nonperforming assets were $34.0 million, or 0.28% of loans; the allowance for loan losses was $42.5 million, or 0.35% of loans.
- Balance sheet: Total assets were $17.2 billion at June 30, up from $13.8 billion at year-end 2018. Loans held for investment were $12.2 billion, up 25.8%; deposits were $12.5 billion, up 25.5%. Stockholders’ equity was $2.5 billion.
- Liquidity and cash flow: Cash and cash equivalents totaled $320.5 million. Management reported liquid assets of $5.0 billion, or 29.4% of assets, and considered liquidity sufficient. For the first half, operating cash flow was $30.0 million, investing cash flow was negative $110.1 million, and financing cash flow was positive $139.3 million.
- Debt and capital: Balance-sheet borrowings, including repurchase agreements, totaled approximately $1.91 billion. The company reported a 10.54% common equity Tier 1 ratio, 13.01% total capital ratio, and 9.00% leverage ratio at June 30; these figures were estimates pending regulatory filing.
- Dividends: The quarterly dividend was $0.23 per share, compared with $0.21 a year earlier.
Material changes versus comparable periods
- Access acquisition drove much of the year-over-year growth in average earning assets, loans, deposits, net interest income, and expenses. The company issued 15.84 million shares for the transaction and recorded preliminary goodwill of $203.3 million.
- Higher funding costs partly offset improved asset yields: Q2 cost of interest-bearing liabilities rose to 1.50% from 1.06%, while interest-earning asset yield rose to 4.84% from 4.55%.
- Q2 GAAP EPS declined despite slightly higher net income, principally alongside a substantially larger weighted-average share count following the acquisition.
- Q2 2018 included the $20.9 million Shore Premier sale gain, making reported noninterest income comparisons less representative of underlying growth.
- Q2 2019 included $6.4 million of merger-related costs and $4.0 million of rebranding costs. First-half merger-related costs were $24.5 million and rebranding costs were $4.4 million.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance was provided. Management expected further cost savings and business synergies from Access, including branch closures; these anticipated benefits were not included in the disclosed pro forma results.
- The company identified risks including interest-rate changes, economic and real-estate conditions, commercial real-estate and other loan concentrations, credit quality, deposit flows, acquisition integration and realization of synergies, competition, cybersecurity, regulation, and funding availability.
- Management expects adoption of the current expected credit loss standard (CECL) to increase credit-loss reserves, but said the quantitative impact could not yet be reasonably estimated. Adoption was scheduled for fiscal years beginning after December 15, 2019.
- Interest-rate modeling indicated net interest income would rise under modeled rate increases and decline under rate decreases. Economic value of equity was more sensitive to rising rates than a year earlier, which management attributed partly to longer-duration assets.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $3.90 billion. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- On July 10, 2019, after quarter-end, the board authorized a share repurchase program of up to $150 million through June 30, 2021.
Important facts for investors to verify
- Whether Access integration delivers expected cost savings and synergies, and how merger, rebranding, and branch-closure costs evolve.
- Underlying earnings and EPS trends after separating acquisition effects, one-time costs, acquisition accounting accretion, and the Shore Premier gain in the prior-year comparison.
- Deposit pricing and funding costs, net interest margin sensitivity, and the effect of changes in market rates.
- Loan growth, commercial real-estate concentration, consumer charge-offs, nonperforming assets, and adequacy of the allowance—particularly as CECL is implemented.
- Final Access purchase-accounting values, regulatory capital ratios, and the timing and execution of the authorized share repurchases.