Atlantic Union Bankshares Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Interim financial statements are unaudited and were reviewed by the independent auditor. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Atlantic Union Bankshares is a Virginia-based bank holding company operating Atlantic Union Bank, with 149 branches and about 170 ATMs across Virginia and parts of Maryland and North Carolina. The company completed its acquisition of Access National Corporation on February 1, 2019, issuing about 15.8 million shares for approximately $500 million. The company and bank adopted their Atlantic Union names in May 2019.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $136.6 million | $106.0 million | $402.7 million | $317.6 million |
| Provision for credit losses | $9.1 million | $3.3 million | $18.2 million | $9.0 million |
| Noninterest income | $48.1 million | $19.9 million | $103.6 million | $80.8 million |
| Noninterest expense | $111.7 million | $76.3 million | $324.0 million | $263.2 million |
| Net income | $53.2 million | $38.2 million | $137.7 million | $102.2 million |
| Diluted EPS | $0.65 | $0.58 | $1.72 | $1.55 |
| Net interest margin | 3.57% | 3.69% | 3.66% | 3.69% |
For Q3, management reported non-GAAP operating net income of $56.1 million and operating diluted EPS of $0.69, excluding specified merger and rebranding costs. These measures are not GAAP results.
Financial position, liquidity and capital
- At September 30, 2019, total assets were $17.44 billion, loans held for investment were $12.31 billion, deposits were $13.04 billion, and stockholders’ equity was $2.53 billion. Compared with December 31, 2018, assets rose $3.68 billion, loans rose $2.59 billion, and deposits rose $3.07 billion, largely reflecting the Access acquisition.
- Cash and cash equivalents were $591.9 million. For the first nine months, operating cash flow was $109.3 million, investing cash flow was negative $24.4 million, and financing cash flow was positive $245.8 million; cash increased $330.7 million.
- Management reported liquid assets of $5.5 billion, or 31.7% of total assets, and considered overall liquidity sufficient. Available funding sources included correspondent-bank lines and FHLB capacity.
- Short- and long-term borrowings totaled approximately $1.55 billion at quarter-end. Long-term borrowings were $1.14 billion. The company repaid FHLB advances during the quarter and recognized a $16.4 million debt-extinguishment loss.
- Regulatory capital ratios included a 10.48% common equity Tier 1 ratio, 12.93% total capital ratio and 8.94% leverage ratio. Management stated capital exceeded regulatory minimums.
Changes and notable items
- Q3 net interest income increased $30.6 million year over year, mainly from higher average earning assets associated with Access. Net interest margin nevertheless declined 12 basis points to 3.57%, as funding costs rose more than asset yields.
- Q3 noninterest income increased $28.2 million. Key items included approximately $9.3 million of life-insurance proceeds related to a Xenith-acquired loan, $7.1 million of securities gains, increased Access-related wealth and mortgage banking income, and higher loan-swap fees. Debit-card interchange income fell following the Durbin Amendment taking effect for the company on July 1, 2019.
- Q3 noninterest expense increased $35.3 million, including the $16.4 million debt-extinguishment loss, $2.4 million of merger costs and $1.1 million of rebranding costs. Nine-month merger and rebranding expenses were $26.9 million and $5.6 million, respectively.
- Loans grew 26.7% from year-end. The allowance for loan losses was $43.8 million, or 0.36% of loans, versus 0.42% at year-end. Management attributed higher charge-offs and provision expense primarily to consumer lending and a construction and land development loan, as well as loan growth. Nonperforming assets were $36.4 million, or 0.30% of loans; the ratio was lower than at year-end.
- The board authorized a $150 million share-repurchase program through June 30, 2021. The company repurchased 969,265 shares for about $35.3 million in Q3. The declared quarterly dividend was $0.25 per share.
Outlook, risks and contingencies
- The filing gives no specific earnings or revenue guidance. Management expected additional cost savings and other synergies from Access, including branch closures, but the timing and realization are uncertain.
- CECL was scheduled for adoption on January 1, 2020. Assuming economic conditions and portfolio characteristics remained consistent with recent periods, management estimated the allowance for credit losses could increase to approximately $90–$100 million; the eventual amount depends on economic forecasts, model validation and management judgment.
- Principal stated risks include interest-rate and funding-cost changes, economic and real-estate conditions, commercial real-estate and other loan concentrations, credit quality and allowance adequacy, Access integration and realization of synergies, deposit flows, competition, cyber and technology risks, and regulation.
- Off-balance-sheet commitments to extend credit were $4.14 billion and standby letters of credit were $199.9 million at quarter-end. Management said pending legal proceedings were not expected, in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Interest-rate modeling showed estimated 12-month net interest income rising 4.48% under an immediate 100-basis-point rate increase and falling 5.39% under a 100-basis-point decrease. These are model estimates dependent on assumptions, not forecasts.
Important facts for investors to verify
- How much reported earnings growth reflects Access versus continuing organic performance, and whether anticipated integration savings materialize.
- The sustainability of Q3 earnings after the unusual insurance proceeds and securities gains, and the full effect of debt repayment and hedge termination.
- CECL’s eventual allowance increase and resulting impact on earnings, capital and credit-loss coverage.
- Trends in loan charge-offs, nonperforming assets and commercial real-estate concentrations as the acquired portfolio is integrated.
- Whether deposit pricing and funding costs continue to pressure net interest margin, alongside the company’s liquidity and capital position.
- Final Access purchase-accounting fair values; the filing says certain measurements remained preliminary and subject to refinement.