Business context and reporting period
Union Bankshares Corporation (NASDAQ: UBSH; now identified in the request as Atlantic Union Bankshares Corp) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The Virginia-based bank holding company completed its Xenith acquisition on January 1, 2018, substantially affecting year-over-year comparisons. It also acquired investment adviser DHFB on April 1.
Financial and operating results
Unless otherwise noted, amounts are in U.S. dollars. Comparisons are with the corresponding 2017 period; balance-sheet comparisons are with December 31, 2017.
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net interest income | $108.2 million; +57% year over year | $211.6 million; +57% |
| Net interest margin | 3.72%, up 25 bps | 3.69%, up 20 bps |
| Noninterest income | $40.6 million; +166% | $60.9 million; +90% |
| Noninterest expense | $85.1 million; +48% | $186.9 million; +66% |
| Net income | $47.3 million vs. $18.0 million | $64.0 million vs. $37.1 million |
| Diluted EPS | $0.72 vs. $0.41 | $0.97 vs. $0.85 |
| Operating net earnings and diluted EPS, non-GAAP | $53.9 million; $0.82 | $92.7 million; $1.41 |
The non-GAAP operating figures exclude after-tax merger costs of $6.5 million for Q2 and $28.8 million for the first half. Q2 included a $20.9 million pretax gain on the Shore Premier sale; thus, reported earnings and revenue include a material unusual gain. Excluding that gain, Q2 noninterest income increased 29% year over year. Q2 reported ROA was 1.44%, ROE 10.28%, and return on tangible common equity 17.74%; first-half figures were 0.98%, 7.03%, and 12.18%, respectively.
For the six months, operating cash flow was $53.9 million, investing cash flow was $309.1 million, and financing cash flow was $15.7 million. Cash and cash equivalents increased $378.7 million to $578.1 million. Investing flows included acquisition-related cash and loan and securities transactions.
Financial position, debt and asset quality
- Total assets were $13.07 billion, up $3.75 billion; loans held for investment were $9.29 billion, up 30.1%; deposits were $9.80 billion, up 40.1%. The Xenith acquisition drove much of these increases. Pro forma for Xenith and adjusted for loan sales, management reported annualized loan growth of 5.7% and deposit growth of 5.4% from January 1.
- Stockholders’ equity was $1.86 billion. Regulatory capital ratios were 9.80% CET1, 11.02% Tier 1, 12.89% total capital, and 9.46% leverage. Management said capital ratios exceeded regulatory minimums.
- Short-term borrowings were $793.2 million and long-term borrowings $507.1 million. The company reported $4.1 billion of liquid assets, or 31.1% of total assets, and considered liquidity sufficient. Available borrowing lines and pledged collateral provide additional funding capacity.
- The allowance for loan losses was $41.3 million, or 0.44% of loans, versus $38.2 million and 0.54% at year-end. Nonperforming assets were $33.7 million, 0.36% of loans, compared with $28.4 million and 0.40% at year-end. Six-month net charge-offs were $2.9 million, or 0.06% of average loans on an annualized basis, down from $3.3 million and 0.10% a year earlier.
- Commercial real estate, including construction and land development, was a substantial part of the loan portfolio; commercial real estate non-owner occupied loans alone were 25.0% of loans. Management cited underwriting and credit monitoring as mitigants.
Material changes, outlook and risks
- The Xenith acquisition added approximately $3.25 billion of assets and $2.55 billion of deposits at fair value, and generated preliminary goodwill of $424.1 million. Purchase accounting values remained subject to refinement. Merger-related costs totaled $36.0 million in the first half.
- The company began winding down Union Mortgage Group after agreeing to have a third party offer residential mortgages from certain bank locations. The mortgage segment reported a $2.5 million Q2 loss; the filing recorded approximately $3.4 million of exit costs, including $864,000 of goodwill impairment. Management said no material ongoing obligations were unrecorded.
- Shore Premier sold substantially all assets and certain liabilities, primarily approximately $383.9 million of marine loans, for about $375 million cash and 1.25 million buyer shares. The sale produced an after-tax gain of approximately $16.5 million. The bank also sold $206.3 million of third-party-originated home improvement loans at par.
- Three branches closed in Q2 as part of Xenith integration; seven more were planned for Q3. Approximately $474,000 of after-tax costs for the planned closures was recorded in Q2. Management expected Xenith cost savings and other synergies, including branch closures, but gave no quantified earnings or revenue guidance.
- Net interest margin improvement reflected higher asset yields, partly offset by higher funding costs. The company was asset-sensitive in its modeled rate scenarios: an immediate 100-basis-point increase was estimated to raise 12-month net interest income 3.97%; a 100-basis-point decrease was estimated to reduce it 4.71%. These are model estimates, not guidance.
- Key stated risks include realizing acquisition synergies, integration disruption, interest-rate and deposit-cost changes, loan and commercial real estate concentrations, credit losses, economic conditions, competition, regulation, technology and cyber threats, and the effects of the Tax Act. The company said no material risk-factor changes had occurred since its 2017 Form 10-K. Management assessed disclosure controls as effective; the independent accountant performed a review, not an audit, of the interim financial statements.
Most important facts for investors to verify
- How much of earnings and revenue reflects the $20.9 million Shore Premier gain, acquisition accounting accretion, and merger or branch-closure costs; compare GAAP results with the company’s non-GAAP operating measures.
- Whether post-acquisition loan and deposit growth, expense integration, and expected Xenith synergies develop as management anticipated.
- Credit trends, particularly commercial real estate exposure, nonaccrual additions, acquired-loan performance, allowance adequacy, and the rise in nonperforming assets from year-end.
- Funding mix, deposit pricing, liquidity capacity, and the impact of changing interest rates on net interest income and economic value.
- Completion and financial consequences of the mortgage business wind-down, planned branch consolidations, and final purchase-accounting adjustments.