Business context and reporting period
Union Bankshares Corporation (the filing registrant; now Atlantic Union Bankshares Corporation) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. Results include Xenith Bankshares from its January 1, 2018 acquisition, so year-over-year comparisons reflect a substantially larger company as well as acquisition costs.
Xenith was acquired for approximately $801.0 million, principally through issuance of 21.9 million Union shares, plus $6.2 million cash for outstanding options. Preliminary purchase accounting recorded $425.6 million goodwill and $38.5 million core deposit intangibles; fair values remained subject to refinement for up to one year.
Financial and operating highlights
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest income | $103.7; net interest margin 3.67% | $66.6; 3.52% in Q1 2017 |
| Noninterest income | $22.3 | $18.8 in Q1 2017 |
| Net income and diluted EPS | $16.6; $0.25 | $19.1; $0.44 in Q1 2017 |
| Merger-related costs | $27.7 pretax; $22.2 after tax | None in Q1 2017 |
| Operating net income and diluted EPS (non-GAAP) | $38.9; $0.59 | $19.1; $0.44 in Q1 2017 |
| Total assets | $13.15 billion | $9.32 billion at Dec. 31, 2017 |
| Loans held for investment | $9.81 billion | $7.14 billion at Dec. 31, 2017 |
| Total deposits | $9.68 billion | $6.99 billion at Dec. 31, 2017 |
| Total borrowings | $1.54 billion | $1.22 billion at Dec. 31, 2017 |
| Stockholders’ equity | $1.83 billion | $1.05 billion at Dec. 31, 2017 |
- Net interest margin improved 15 basis points year over year; tax-equivalent margin was 3.72%, versus 3.66%. Management attributed higher net interest income primarily to Xenith’s contribution and higher average earning assets. Acquisition-related net accretion contributed $5.6 million in Q1 2018.
- GAAP noninterest expense was $104.0 million, up from $57.4 million, reflecting the acquisition and merger costs. Excluding merger costs, operating expense was $76.3 million. Noninterest income growth included a $1.4 million gain on the sale of an ownership interest in a payments-related company.
- Cash and cash equivalents ended at $342.5 million, up $143.1 million during the quarter. Operating cash flow was $35.8 million, investing cash flow was negative $37.8 million, and financing cash flow was positive $145.1 million. Acquisition cash acquired was $174.2 million.
- Management reported liquid assets of $3.9 billion, or 29.5% of assets, and considered liquidity sufficient for depositor needs and customer lending. Available funding included correspondent-bank lines and FHLB capacity; the company also had $153.5 million of purchased certificates of deposit at quarter-end.
- Regulatory capital ratios were 9.03% common equity Tier 1, 10.19% Tier 1, 11.97% total capital, and 9.32% leverage. The tangible common equity-to-tangible assets ratio was 8.54% (non-GAAP).
- The allowance for loan losses was $40.6 million, or 0.41% of loans, versus 0.54% at year-end 2017. Management said the lower ratio primarily reflected Xenith acquisition accounting, under which the acquired allowance was not carried over. Net charge-offs were $1.1 million, or 0.05% of average loans annualized, unchanged as a percentage from Q1 2017.
Material changes and asset quality
- On a pro forma basis including Xenith, loans grew $205.2 million, or 8.7% annualized, and deposits grew $136.6 million, or 5.8% annualized, from January 1 through March 31. Reported quarter-end increases from December 31 include the acquired balances.
- Nonperforming assets rose to $35.2 million from $28.4 million at year-end, while NPAs as a percentage of loans improved to 0.36% from 0.40%. Nonaccrual loans were $25.1 million and OREO was $10.1 million; management cited new nonaccrual mortgage and commercial and industrial loans and acquired foreclosed property.
- Total accruing past-due loans increased to $41.6 million, or 0.42% of loans, from $27.8 million, or 0.39%, at year-end. The provision for credit losses rose to $3.5 million from $2.1 million in Q1 2017, which management attributed to loan growth and higher charge-offs.
- Available-for-sale securities had $20.0 million of gross unrealized losses at quarter-end; the company recorded no other-than-temporary impairment. Other comprehensive loss was $11.4 million for the quarter, primarily reflecting unrealized AFS securities losses, and accumulated other comprehensive loss was $12.3 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or financial guidance. Management expected further cost savings and other synergies from Xenith, including branch closures; those anticipated benefits were not reflected in acquisition pro forma figures. The filing cautions that integration, savings, revenue synergies, and customer or employee retention may fall short or take longer than expected.
- The effective tax rate was 10.3%, versus 26.1% in Q1 2017, reflecting the lower federal corporate tax rate under the Tax Act and approximately $1.2 million of excess tax benefits from share-based compensation. The company continued evaluating its Tax Act impact; no additional adjustment was recorded in Q1.
- Interest-rate sensitivity modeling estimated net interest income would increase 1.71% with an immediate 100-basis-point rate rise and decline 3.13% with a 100-basis-point fall. Management described the company as less asset-sensitive than a year earlier and noted model assumptions and rate-floor effects.
- Key disclosed risks include Xenith integration and realization of expected benefits; interest rates and economic conditions; real estate and commercial real estate concentrations; credit quality and adequacy of loan-loss reserves; deposit flows and funding availability; competition, technology and cyber risks; regulation; and the impact of tax-law changes.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $3.08 billion. Management stated that ordinary-course legal proceedings were not expected, in the aggregate, to materially adversely affect the company. A merger-related putative class action was voluntarily dismissed without prejudice in February 2018.
- After quarter-end, the Bank completed its acquisition of DHFB on April 1, a firm with approximately $600 million in assets under management and advisement. On April 12, a subsidiary announced an agreement to acquire Outfitter Advisors, with approximately $400 million in assets under management and advisement.
Important facts for investors to verify
- Track Xenith integration, cost savings, branch closures, and whether pro forma organic loan and deposit growth persists.
- Assess the quality and valuation of acquired loans, preliminary goodwill and intangible valuations, and future acquisition-related accretion.
- Monitor credit trends, especially past-due loans, nonaccrual additions, OREO, commercial real estate exposures, and allowance coverage.
- Review funding mix and costs, including short-term FHLB advances, purchased deposits, and the effect of rising rates on margins and deposit pricing.
- Distinguish GAAP results from management’s non-GAAP operating measures: Q1 GAAP net income was $16.6 million, while operating net income excluding after-tax merger costs was $38.9 million.