Atlantic Union Bankshares Corporation (then Union Bankshares Corporation) — Q1 2016 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2016, with balance-sheet comparisons to December 31, 2015 and operating comparisons to Q1 2015. The company operated a Virginia-focused community bank and a mortgage origination business. Interim financial statements were reviewed, not audited; management cautioned that quarterly results are not necessarily indicative of full-year results.
Financial results and condition
- Profit: Net income was $17.0 million, up 8.0% year over year; diluted EPS was $0.38 versus $0.35. The declared dividend was $0.19 per share.
- Revenue and margins: Net interest income was $63.7 million, up 2.8%; tax-equivalent net interest income was $66.2 million. Net interest margin declined 13 basis points to 3.82%, while core tax-equivalent margin declined 8 basis points to 3.76%. Noninterest income rose 5.7% to $15.9 million.
- Costs and credit provision: Noninterest expense increased 0.8% to $54.3 million. Provision for credit losses was $2.6 million, versus $1.8 million a year earlier. The community bank efficiency ratio improved to 65.3% from 66.4%.
- Cash flow: Operating activities provided $22.4 million; investing activities used $151.1 million, principally reflecting $110.5 million of loan growth and securities purchases. Financing activities provided $119.4 million, including a $169.0 million increase in short-term borrowings. Cash and cash equivalents ended at $133.3 million, down $9.3 million during the quarter.
- Balance sheet and liquidity: Total assets were $7.83 billion, up $139.3 million from year-end. Loans held for investment were $5.78 billion, up $109.0 million; deposits were $5.95 billion, down $18.0 million. Management considered liquidity sufficient; cash and specified liquid assets, including loans maturing within one year, totaled $1.9 billion, or 27.6% of earning assets.
- Debt and capital: Total borrowings were $849.6 million, including $558.0 million in short-term borrowings, which rose $169.0 million from year-end, primarily due to increased FHLB advances. Total risk-based capital was 12.16%, Tier 1 capital 11.63%, and common equity Tier 1 10.25%; each declined from year-end. Management said capital ratios exceeded regulatory minimums.
- Asset quality: Nonperforming assets were $27.3 million, down 36.2% year over year but slightly above year-end. Nonperforming assets were 0.47% of loans. Net charge-offs were $2.2 million, or 0.15% annualized, versus $3.2 million, or 0.24%, in Q1 2015. The allowance for loan losses was $34.4 million, or 0.60% of loans.
Material changes versus comparable periods
- Year-over-year earnings growth was driven primarily by higher average loan balances. Average loans rose 7.0%; period-end loans grew 7.7% annualized from year-end.
- Asset yields fell 7 basis points and core net interest margin narrowed as lower loan yields outweighed lower funding costs. Interest expense increased $1.4 million year over year, partly reflecting higher borrowing balances and deposit costs.
- Customer fees and bank-owned life insurance income supported higher noninterest income. Mortgage originations fell 29.2% to $98.2 million, and mortgage banking income declined; the mortgage segment nonetheless returned to a small profit after personnel and other cost reductions.
- Share repurchases totaled 1.04 million shares for $23.7 million during the quarter. Stockholders’ equity declined $14.4 million from year-end, and capital ratios decreased, primarily due to repurchases. A new $25 million repurchase authorization was announced; $22.4 million remained available at quarter-end.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management emphasized sound underwriting and community-based lending, while noting a challenging economic environment and continued focus on loan growth.
- Interest-rate sensitivity modeling projected a 2.05% increase in 12-month net interest income under an immediate 100-basis-point rate increase and a 1.77% decrease under a 100-basis-point decline. Management considered shocks down 200 or 300 basis points implausible at prevailing rates. Results depend on model assumptions.
- Real estate represented 82.6% of loans, exposing the portfolio to local real estate and economic conditions. The company also cited interest-rate, competitive, regulatory, technology and information-security risks. It reported no material change to the risk factors in its 2015 Form 10-K.
- Q1 net income included approximately $195,000 after tax of branch-closure costs; the community bank segment reported approximately $300,000 of branch-closure costs before tax. No investment-security OTTI was recognized in the quarter; a previously written-down municipal security was sold, resulting in an additional sale loss.
- On April 5, 2016, the company announced an agreement to acquire Old Dominion Capital Management, with nearly $300 million in assets under management. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective; no material internal-control change was reported.
Important facts for investors to verify
- Whether loan growth can continue without further margin compression, higher funding costs, or deterioration in credit quality.
- Trends in delinquencies, nonaccrual loans, charge-offs, allowance adequacy, and the company’s substantial real-estate loan concentration.
- The effect of higher short-term borrowings and deposit pricing on liquidity, net interest margin, and capital.
- How continued repurchases and dividends affect regulatory capital and the remaining buyback authorization.
- Integration, purchase terms, and financial impact of the announced Old Dominion Capital Management acquisition.