Union Bankshares Corporation (now identified in the request as Atlantic Union Bankshares Corp.) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The filing is for Union Bankshares Corporation. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated. Interim results are unaudited and are not necessarily indicative of full-year results.
Business context and reporting period
The company was a Virginia-based community banking organization, with banking, mortgage, insurance, wealth management and investment-advisory activities. It reported community bank and mortgage segments and operated 115 retail locations in Virginia. In May 2016, it acquired Old Dominion Capital Management (ODCM), which had nearly $300 million in assets under management at acquisition.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $67.0 | $63.4 | $196.5 | $189.2 |
| Provision for credit losses | $2.5 | $2.1 | $7.4 | $7.6 |
| Noninterest income | $19.0 | $16.7 | $52.9 | $48.0 |
| Noninterest expense | $56.9 | $53.3 | $166.4 | $162.4 |
| Net income | $20.4 | $18.2 | $56.7 | $49.3 |
| Diluted EPS | $0.47 | $0.40 | $1.29 | $1.09 |
| Dividends per share | $0.19 | $0.17 | $0.57 | $0.49 |
- Profitability and margins: Q3 net income rose 12.0%; nine-month net income rose 15.1%. Return on average assets was 1.00% for Q3 and 0.95% for the nine-month period, versus 0.96% and 0.88%, respectively, in 2015. Return on average tangible common equity was 12.00% and 11.25%, versus 10.70% and 9.86%. Tax-equivalent net interest margin was 3.76% for Q3 and 3.80% for nine months, down 10 and 13 basis points year over year.
- Revenue and expense drivers: Management attributed earnings growth primarily to loan growth and higher noninterest income. Q3 fee growth included higher mortgage banking and fiduciary fees; the latter benefited from ODCM. Salaries and benefits rose $4.6 million in Q3, while noninterest expenses overall increased 6.7%.
- Cash flow: For the first nine months, operating cash flow was $70.1 million (versus $79.2 million); investing cash flow was negative $539.1 million (versus negative $222.0 million), largely reflecting loan growth and securities activity; financing cash flow was positive $482.6 million (versus $188.8 million). Cash and cash equivalents ended the period at $156.2 million.
- Balance sheet and funding: Total assets were $8.26 billion, up $564.9 million from year-end 2015. Loans held for investment were $6.15 billion, up $477.5 million; deposits were $6.26 billion, up $294.6 million. Short-term borrowings were $665.7 million and long-term borrowings $259.9 million, for $925.6 million in total borrowings, including repurchase agreements in short-term borrowings. Management described liquidity as sufficient; liquid assets and loans maturing within one year totaled $2.1 billion, or 27.8% of earning assets.
- Credit and capital: The allowance for loan losses was $36.5 million, 0.59% of loans. Nonperforming assets were $23.3 million, or 0.38% of loans, compared with $27.2 million and 0.48% at year-end 2015. Nine-month net charge-offs were $4.7 million, down from $6.4 million. The company reported total risk-based capital of 11.60%, common equity Tier 1 of 9.78%, and a leverage ratio of 9.89%.
Material changes versus comparable periods
- Q3 and nine-month earnings and EPS improved year over year, supported by higher average loan balances and noninterest income. Loan balances grew 10.9% from September 2015; deposits grew 7.6%.
- Net interest margin contracted as loan yields fell with new and renewed loans repricing at lower rates; funding costs also rose modestly. Tax-equivalent NIM declined 10 basis points in Q3 and 13 basis points year to date.
- Asset quality improved overall: nonperforming assets declined 33.7% from September 2015, and nine-month net charge-offs fell. The allowance increased from year-end 2015, mainly reflecting loan growth.
- Capital ratios decreased from year-end 2015, which management attributed primarily to asset growth and share repurchases. The company repurchased 1.41 million shares for $33.2 million during the first nine months and had approximately $13.0 million remaining under its current repurchase authorization.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no quantified earnings, revenue, margin or credit-loss guidance. Management said it remained focused on sound underwriting and community-based lending and considered liquidity sufficient. It reported asset sensitivity: its model estimated that a 100-basis-point upward rate shock would increase 12-month net interest income by 3.91%, while a 100-basis-point downward shock would reduce it by 3.30%. These are modeled scenarios, not forecasts.
- Risks: Forward-looking results could be affected by economic and banking conditions, interest rates, regulation, competition, technology and information security, markets, acquisitions, accounting changes, and customer behavior. The loan portfolio is concentrated in real estate, which represented 81% of loans; management cited underwriting, monitoring and geographic focus as mitigants. The filing reported no material change in previously disclosed risk factors.
- Unusual items and transactions: The ODCM acquisition involved $9.1 million of fair-value consideration, including contingent consideration, and resulted in $4.7 million of goodwill and $4.5 million of amortizable assets. The company closed five in-store branches in Q3 and incurred about $0.4 million in related costs. A completed historic rehabilitation project generated tax credits that contributed to a lower effective tax rate (23.3% in Q3 versus 26.5%). No securities impairment was recognized in Q3 2016; the prior-year comparison included a $0.3 million impairment loss.
- Contingencies and review: Management said pending ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect. Off-balance-sheet commitments totaled $1.95 billion, including $1.79 billion of commitments to extend credit. The interim financial statements received an independent accountant’s review, not an audit opinion.
Important facts for investors to verify
- Confirm whether the current issuer’s legal name and corporate history correspond to the filing registrant, Union Bankshares Corporation.
- Review the pace and composition of loan growth, especially commercial real estate and construction lending, and track delinquencies, nonperforming assets, charge-offs and reserve adequacy.
- Assess whether margin pressure from lower loan yields and changing deposit or wholesale funding costs persists.
- Check the effect of borrowings, share repurchases and asset growth on capital ratios, liquidity and future shareholder distributions.
- Monitor ODCM integration and contingent consideration, branch-closure savings, and the sustainability of mortgage and fee income.