Business context and reporting period
Union Bankshares Corporation (the registrant named in this 10-Q; now known as Atlantic Union Bankshares Corporation) reported unaudited results for the quarter and nine months ended September 30, 2018. The Richmond, Virginia-based bank holding company’s results include Xenith from its January 1 acquisition, DHFB from April 1, and OAL from July 1; consequently, year-over-year comparisons are affected by acquisitions and are not fully like-for-like.
Financial results and condition
- Third-quarter earnings: Net income was $38.2 million, up from $20.7 million; diluted EPS was $0.58 versus $0.47. Excluding after-tax merger costs, management reported non-GAAP operating earnings of $39.3 million and operating EPS of $0.60.
- Nine-month earnings: Net income was $102.2 million versus $57.7 million, and diluted EPS was $1.55 versus $1.32. Excluding after-tax merger costs, operating earnings were $132.1 million and operating EPS was $2.01. The operating measures are non-GAAP and exclude merger costs.
- Interest income and margins: Third-quarter net interest income rose to $106.0 million from $70.8 million. Net interest margin was 3.69%, up 25 basis points year over year; fully taxable-equivalent margin was 3.76%, up 17 basis points. Nine-month net interest income was $317.6 million versus $205.9 million, with margin of 3.69% versus 3.47%. Higher average balances from Xenith and acquisition-related accretion contributed to growth.
- Fees and expenses: Noninterest income was $19.9 million for the quarter and $80.8 million for the nine months. The nine-month amount includes a $20.0 million net gain on the Shore Premier sale. Noninterest expense was $76.3 million and $263.2 million, respectively; nine-month expense includes $37.4 million of merger costs. The third-quarter GAAP efficiency ratio improved to 60.67% from 64.13%.
- Balance sheet and funding: At September 30, assets were $13.37 billion, net loans $9.37 billion, deposits $9.83 billion, and stockholders’ equity $1.88 billion. Since December 2017, reported loans grew 31.8% and deposits 40.7%, largely reflecting Xenith. On a pro forma basis, loans grew 5.6% annualized and deposits 4.1% annualized from January 1. Cash and cash equivalents were $282.2 million. Short-term borrowings were $1.06 billion and long-term borrowings $497.8 million.
- Cash flow: For the nine months, operating activities provided $146.6 million; investing activities used $356.8 million; and financing activities provided $293.0 million. Cash and cash equivalents increased $82.8 million.
- Credit quality: The allowance for loan losses was $41.3 million, or 0.44% of loans, versus 0.54% at year-end; the company attributes the lower ratio in part to acquired loans having no carried-over allowance. Nonperforming assets were $34.9 million, or 0.37% of loans, versus $27.0 million at year-end. Nine-month net charge-offs were $6.0 million, down from $7.4 million.
- Capital and liquidity: The company reported a 9.92% common equity Tier 1 ratio, 11.12% Tier 1 ratio, and 12.97% total capital ratio; reported September ratios were estimates pending regulatory filing. Management considered liquidity sufficient; liquid assets were $3.8 billion, or 28.7% of total assets. Available borrowing sources include correspondent-bank lines and FHLB capacity.
Material changes, outlook, and risks
- Xenith added substantial assets, loans, deposits, goodwill, and shares outstanding. Nine-month merger costs were $37.4 million. Management expects additional cost savings and synergies from Xenith, including branch closures, but did not provide quantified forward guidance.
- The company exited its mortgage origination business: UMG stopped originating mortgages on June 1, 2018, and the segment is reported as discontinued operations. It recorded about $3.4 million of exit costs in the second quarter and $199,000 in the third quarter.
- Shore Premier’s marine-loan portfolio was sold for cash and shares. The transaction produced a reported nine-month gain of $20.0 million; the initial estimate was reduced in the third quarter after updated information and wind-down costs. The received shares had a reported fair value of $27.4 million at quarter-end.
- After quarter-end, the company agreed to acquire Access National Corporation in an all-stock transaction, with each Access share to convert into 0.75 Union shares. Closing was expected in the first quarter of 2019, subject to conditions and approvals. Risks include failure or delay to close, regulatory conditions, integration challenges, customer or employee losses, and costs without anticipated merger benefits.
- Other principal risks include interest-rate and economic changes, real-estate and commercial-loan concentrations, credit-loss reserve adequacy, deposit flows, competition, technology and cybersecurity, and execution of growth and integration plans. The company’s interest-rate simulations show higher modeled net interest income in rising-rate scenarios, but lower economic value of equity under rate shocks; model outcomes depend on assumptions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Legal proceedings were described as ordinary-course matters not expected in aggregate to have a material adverse effect. The interim financial statements received an auditor review, not an audit.
Important facts for investors to verify
- Separate acquisition-driven growth and acquisition-accounting accretion from underlying organic performance; assess whether Xenith integration savings materialize.
- Review credit trends, including higher nonperforming assets and past-due balances, the 0.44% allowance-to-loans ratio, and the composition of commercial real-estate exposure.
- Assess funding costs and liquidity as interest-bearing deposit and borrowing costs rose, and as purchased certificates of deposit increased to $176.6 million.
- Check the valuation and liquidity of Shore Premier sale consideration shares and the final sale-related gain.
- Track Access merger approvals, closing timing, integration costs, and the effect of issuing additional shares.
- Consider the distinction between GAAP results and management’s non-GAAP operating measures, which exclude merger costs.