Union Bankshares Corporation (now Atlantic Union Bankshares) — Q3 2017 Form 10-Q
Business context and reporting period. This filing covers the quarter and nine months ended September 30, 2017. The Virginia-based banking holding company operated community banking and mortgage segments, with 111 bank locations. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2017 / September 30, 2017 | Comparable period / prior date |
|---|---|---|
| Net interest income | $71.2; net interest margin 3.46% (FTE 3.59%) | Q3 2016: $67.0; margin 3.63% (FTE 3.76%) |
| Net income | $20.7; diluted EPS $0.47 | Q3 2016: $20.4; diluted EPS $0.47 |
| Nine-month net income and diluted EPS | $57.7; $1.32 | Nine months 2016: $56.7; $1.29 |
| Noninterest income / expense | Q3: $17.5 / $57.5 | Q3 2016: $19.0 / $56.9 |
| Total assets | $9,029 | December 31, 2016: $8,427 |
| Loans held for investment, gross of allowance | $6,899 | December 31, 2016: $6,307 |
| Deposits | $6,882 | December 31, 2016: $6,379 |
| Cash and cash equivalents | $177 | December 31, 2016: $179 |
| Allowance for loan losses | $37.2; 0.54% of loans | December 31, 2016: $37.2; 0.59% of loans |
- Growth and earnings drivers: Average loans rose 13.1% year over year in Q3, supporting higher net interest income. The nine-month net interest income increase was $10.2 million. Deposit growth from year-end was $502 million, or 10.5% annualized.
- Margin and funding costs: Q3 net interest margin fell 17 basis points year over year. The 26-basis-point increase in cost of funds more than offset a 9-basis-point rise in earning-asset yield. Management attributed higher funding costs partly to the subordinated debt issued in late 2016 and repricing of deposits and short-term borrowings.
- Cash flow: For the first nine months, operating cash flow was $95.4 million, investing cash flow was negative $631.0 million, and financing cash flow was positive $533.3 million. Cash and cash equivalents declined $2.3 million from year-end.
- Debt and liquidity: Short-term borrowings, including repurchase agreements, totaled $617 million; long-term borrowings were $435 million. Management reported liquid assets of $2.6 billion, or 29.2% of assets, and said liquidity was sufficient. Additional borrowing capacity included $185 million of correspondent-bank federal funds lines, a $25 million corporate line, and a collateral-dependent FHLB line of up to $2.7 billion.
- Capital: Total risk-based capital was 12.94%, Tier 1 was 10.56%, and common equity Tier 1 was 9.40%. These ratios declined from year-end as assets grew; management said capital remained above regulatory minimums. The quarterly dividend was $0.20 per share.
Material changes versus prior periods
- Q3 GAAP net income increased modestly, while diluted EPS was unchanged. Excluding $661,000 of after-tax merger costs, management reported operating earnings of $21.3 million and operating diluted EPS of $0.49. For nine months, operating earnings were $60.8 million and operating diluted EPS $1.39, excluding $3.0 million of after-tax merger costs. These are non-GAAP measures.
- Q3 noninterest income declined 7.5%, mainly due to lower mortgage banking income and loan-related swap fees. Nine-month noninterest income rose 3.0%, including higher customer fees, fiduciary fees, BOLI income, and securities gains; mortgage banking income declined.
- Noninterest expense increased 1.0% in Q3 and 5.0% for nine months. Excluding merger costs, it declined 0.3% in Q3 and increased 2.9% for nine months. Personnel, technology, and tax-related costs contributed to year-to-date increases.
- Nonperforming assets were $28.9 million, up 44.0% from year-end 2016; the nonperforming-asset ratio rose to 0.42% from 0.32%. Management cited three unrelated credit relationships as the main source of 2017 nonaccrual additions. Q3 net charge-offs were $4.1 million, compared with $0.9 million in Q3 2016.
Outlook, risks, contingencies, and unusual items
- Xenith merger: The pending acquisition was expected to close in early January 2018. Regulatory approval and shareholder approval were announced after quarter-end. Integration, anticipated synergies, costs, and execution timing remain uncertain.
- Litigation: A Xenith shareholder suit naming Union was voluntarily dismissed without prejudice on November 6, 2017. A similar suit against Xenith and its directors remained pending; the filing said its outcome and impact could not be predicted. Management considered the claims without merit. Other proceedings were not expected to have a material adverse effect, based on information then available.
- Credit and concentration risks: Commercial real estate non-owner-occupied loans were the largest loan category at 25.3% of the portfolio. Real estate and construction exposure, economic conditions, collateral values, and the adequacy of the loan-loss allowance are identified risks. TDRs totaled $19.2 million, of which $2.7 million were nonperforming.
- Market and funding risks: Interest-rate changes, deposit pricing and flows, loan prepayments, and reliance on wholesale funding can affect earnings and liquidity. The company’s simulation showed modeled net interest income rising 2.82% under an immediate 100-basis-point rate increase and declining 3.21% under a 100-basis-point decrease; these estimates depend on assumptions and are not forecasts.
- Other items: The company recognized $3.5 million of merger-related costs for the first nine months. No other-than-temporary impairment was recorded on securities in the period. Management expected the January 2018 revenue-recognition standard adoption to have no material impact; lease accounting was expected to increase reported assets and liabilities, with other effects still under assessment.
- The filing provided no formal earnings or financial guidance. Management’s results commentary emphasized loan-led net interest income growth, partially offset by margin compression and lower mortgage activity.
Key facts for investors to verify
- Progress, final terms, closing timing, integration costs, and realized benefits of the Xenith merger.
- Whether nonaccrual loans, charge-offs, and nonperforming assets stabilize, and whether the allowance remains adequate as loans grow.
- Deposit pricing and funding mix, especially the effect of higher rates on net interest margin and borrowing costs.
- Trends in mortgage originations, mortgage banking income, and loan-related swap fees.
- Capital ratios and liquidity after continued balance-sheet growth and the proposed merger.
- Developments in the pending Xenith shareholder litigation and any material change in other contingencies.