Union Bankshares Reports Second Quarter Results

7/19/17

RICHMOND, Va., July 19, 2017 (GLOBE NEWSWIRE) -- Union Bankshares Corporation (NASDAQ:UBSH) today reported net income of $18.0 million and earnings per share of $0.41 for its second quarter ended June 30, 2017. Excluding after-tax acquisition and conversion costs of $2.4 million, net operating earnings(1) were $20.3 million and operating earnings per share(1) were $0.46 for the second quarter of 2017. The Company's net operating earnings and operating earnings per share for the second quarter of 2017 represent an increase of $1.2 million, or 6.2%, over net income and an increase of $0.02, or 4.5%, over earnings per share, in each case compared to the first quarter of 2017. For the six months ended June 30, 2017, net income was $37.1 million and earnings per share were $0.85. Net operating earnings(1) were $39.4 million and operating earnings per share(1) were $0.90 for the six months ended June 30, 2017. The Company's net operating earnings and operating earnings per share for the six months ended June 30, 2017 represent an increase of 8.7% and 9.8%, respectively, compared to the net income and earnings per share for the six months ended June 30, 2016.

Union continued to generate sustainable, profitable growth for our shareholders in the second quarter,” said John C. Asbury, president and chief executive officer of Union Bankshares Corporation. “Loans grew by 13% and deposits grew by 9% on an annualized basis while profitability metrics on an operating basis continued to improve. Also during the quarter, we announced the signing of a definitive merger agreement to acquire Xenith Bankshares, Inc., creating the preeminent community banking franchise in Virginia and also gaining retail entry points into North Carolina and Maryland. This is exciting news for Union as the strategic combination with Xenith will provide Union with the growth, scale and synergies to continue to deliver a best-in-class customer experience, offer superior financial services and solutions to our clients and provide a rewarding experience for our teammates while also generating top-tier financial performance for our shareholders. We have already started the integration planning work with Xenith and expect to close the transaction on or around January 1, 2018, subject to customary closing conditions, including regulatory and shareholder approvals.

Select highlights for the second quarter of 2017 include:

  • Entry into a definitive merger agreement to acquire Xenith Bankshares, Inc. (“Xenith”), which was announced on May 22, 2017 (the “Pending Merger”).
  • Net income for the community bank segment was $17.4 million, or $0.40 per share, for the second quarter of 2017, compared to $19.1 million, or $0.44 per share, for the first quarter of 2017. Net operating earnings(1) for the community bank segment were $19.8 million, or $0.45 per share, for the second quarter of 2017. Net income for the community bank segment was $36.5 million, or $0.84 per share, for the six months ended June 30, 2017, compared to $35.7 million, or $0.81 per share, for the six months ended June 30, 2016. Net operating earnings(1) for the community bank segment were $38.9 million, or $0.89 per share, for the six months ended June 30, 2017.
  • The mortgage segment reported net income of $551,000, or $0.01 per share, for the second quarter of 2017, compared to $4,000 in the first quarter of 2017. The mortgage segment reported net income of $555,000, or $0.01 per share, for the six months ended June 30, 2017 compared to $593,000, or $0.01 per share, for the six months ended June 30, 2016.
  • Return on Average Assets (“ROA”) was 0.82% and operating ROA(1) was 0.93% for the quarter ended June 30, 2017 compared to ROA of 0.92% for the quarter ended March 31, 2017 and 0.98% for the quarter ended June 30, of 2016.
  • Return on Average Equity (“ROE”) was 7.02% and operating ROE(1) was 7.94% for the quarter ended June 30, 2017 compared to ROE of 7.68% for the quarter ended March 31, 2017 and 7.88% for the quarter ended June 30, 2016. Return on Average Tangible Common Equity (“ROTCE”) was 10.15% and operating ROTCE(1) was 11.48% for the quarter ended June 30, 2017 compared to ROTCE of 11.20% for the prior quarter and 11.60% for the second quarter of 2016.
  • The efficiency ratio (FTE) was 66.8% and the operating efficiency ratio (FTE)(1) was 63.8% for the quarter ended June 30, 2017 compared to the efficiency ratio (FTE) of 65.3% for the prior quarter and 64.1% for the second quarter of 2016.
  • Loans held for investment grew $217.4 million, or 13.3% (annualized), from March 31, 2017 and increased $830.4 million, or 14.0%, from June 30, 2016. Average loans held for investment increased $244.1 million, or 15.3% (annualized), from the prior quarter and increased $765.0 million, or 13.0%, from the same quarter in the prior year.
  • Period-end deposits increased $150.2 million, or 9.1% (annualized), from March 31, 2017 and grew $668.6 million, or 11.0%, from June 30, 2016. Average deposits increased $230.5 million, or 14.4% (annualized), from the prior quarter and increased $612.2 million, or 10.2%, from the same quarter in the prior year.

(1) For a reconciliation of the non-GAAP operating measures that exclude acquisition and conversion costs unrelated to the Company’s normal operations, see Alternative Performance Measures (non-GAAP) section of the Key Financial Results.

NET INTEREST INCOME

For the second quarter of 2017, net interest income was $69.0 million, an increase of $2.4 million from the first quarter of 2017. Tax-equivalent net interest income was $71.6 million, an increase of $2.5 million from the first quarter of 2017. The increases in both net interest income and tax-equivalent net interest income were driven by higher earning asset balances. The second quarter net interest margin decreased 3 basis points to 3.49% from 3.52% in the previous quarter, while the tax-equivalent net interest margin decreased 4 basis points to 3.62% from 3.66% during the same periods. Core tax-equivalent net interest margin (which excludes the 8 basis point impact of acquisition accounting accretion in both the current and prior quarters) also decreased by 4 basis points to 3.54% from 3.58% in the previous quarter. The decrease in the core tax-equivalent net interest margin was principally due to the 8 basis point increase in core tax-equivalent cost of funds offset by the 4 basis point increase in the core tax-equivalent yield on earning assets.

The Company’s tax-equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. During the second quarter of 2017, net accretion related to acquisition accounting increased $124,000, or 8.3%, from the prior quarter to $1.6 million for the quarter ended June 30, 2017.

ASSET QUALITY/LOAN LOSS PROVISION

Overview
During the second quarter of 2017, the Company experienced declines in past due loans as a percentage of total loans from the prior quarter and the second quarter of 2016. Nonaccrual loan levels increased in the second quarter of 2017, primarily related to two credit relationships. Net charge-offs increased from the first quarter of 2017, while year-to-date charge-off levels were down from the prior year. The loan loss provision increased from the prior quarter due to loan growth and increased specific reserves related to increases in nonaccrual loans.

All nonaccrual and past due loan metrics discussed below exclude purchased credit impaired (“PCI”) loans totaling $56.2 million (net of fair value mark of $12.7 million).

Nonperforming Assets (“NPAs”)

At June 30, 2017, NPAs totaled $34.1 million, an increase of $2.1 million, or 6.6%, from March 31, 2017 and an increase of $9.8 million, or 40.5%, from June 30, 2016. In addition, NPAs as a percentage of total outstanding loans increased 1 basis point from 0.49% at March 31, 2017 and increased 9 basis points from 0.41% at June 30, 2016 to 0.50% at June 30, 2017.

Past Due Loans
Past due loans still accruing interest totaled $27.4 million, or 0.40% of total loans, at June 30, 2017 compared to $26.9 million, or 0.41%, at March 31, 2017 and $25.3 million, or 0.43%, at June 30, 2016. At June 30, 2017, loans past due 90 days or more and accruing interest totaled $3.6 million, or 0.05% of total loans, compared to $2.3 million, or 0.04%, at March 31, 2017 and $3.5 million, or 0.06%, at June 30, 2016.

Net Charge-offs
For the second quarter of 2017, net charge-offs were $2.5 million, or 0.15% of total average loans on an annualized basis, compared to $788,000, or 0.05%, for the prior quarter and $1.6 million, or 0.11%, for the same quarter last year. Of the net charge-offs in the second quarter of 2017, approximately half were specifically reserved for in the prior quarter. For the six months ended June 30, 2017, net charge-offs were $3.3 million, or 0.10% of total average loans on annualized basis, compared to $3.8 million, or 0.13%, for the same period in 2016.

Provision for Loan Losses
The provision for loan losses for the second quarter of 2017 was $2.3 million, an increase of $290,000 compared to the previous quarter and consistent with the same quarter in 2016. The increase in provision for loan losses was primarily driven by higher loan balances and increases in specific reserves related to nonaccrual loans.

Allowance for Loan Losses
The allowance for loan losses (“ALL”) decreased $200,000 from March 31, 2017 to $38.2 million at June 30, 2017 primarily due to the continued decline in the historical loss rates. The ALL as a percentage of the total loan portfolio was 0.56% at June 30, 2017, 0.59% at March 31, 2017, and 0.59% at June 30, 2016.

The ratio of the ALL to nonaccrual loans was 155.5% at June 30, 2017, compared to 172.0% at March 31, 2017 and 322.9% at June 30, 2016. The current level of the allowance for loan losses reflects specific reserves related to nonperforming loans, current risk ratings on loans, net charge-off activity, loan growth, delinquency trends, and other credit risk factors that the Company considers important in assessing the adequacy of the allowance for loan losses.

NONINTEREST INCOME

Noninterest income decreased $783,000, or 4.2%, to $18.1 million for the quarter ended June 30, 2017 from $18.8 million in the prior quarter, primarily driven by lower bank owned life insurance income due to proceeds from death benefits received in the first quarter of 2017, lower gains on sales of securities, and declines in insurance-related income, which is typically seasonally higher in the first quarter.

Mortgage banking income increased $768,000, or 37.9%, to $2.8 million in the second quarter of 2017 compared to $2.0 million in the first quarter of 2017, related to increased mortgage loan originations. Mortgage loan originations increased by $36.4 million, or 36.3%, in the second quarter to $136.6 million from $100.2 million in the first quarter of 2017. The majority of the increase was related to purchase-money mortgage loans, which seasonally increased by $41.5 million from the prior quarter. Of the mortgage loan originations in the second quarter of 2017, 23.4% were refinances compared with 34.3% in the prior quarter.

NONINTEREST EXPENSE

Noninterest expense increased $2.5 million, or 4.4%, to $59.9 million for the quarter ended June 30, 2017 from $57.4 million in the prior quarter. Excluding acquisition and conversion costs of $2.7 million in the second quarter of 2017, noninterest operating expense decreased $209,000 when compared to noninterest expense during the first quarter of 2017. Salaries and benefits expenses declined by $1.6 million primarily related to decreases in payroll taxes, which are typically seasonally higher in the first quarter, as well as lower group insurance costs and unemployment taxes. This decrease was partially offset by increases in marketing expenses of $539,000, professional fees of $434,000 related to higher consulting costs, and printing and postage costs of $256,000.

BALANCE SHEET

At June 30, 2017, total assets were $8.9 billion, an increase of $245.3 million from March 31, 2017 and an increase of $814.6 million from June 30, 2016. The increase in assets was mostly related to loan growth.

At June 30, 2017, loans held for investment (net of deferred fees and costs) were $6.8 billion, an increase of $217.4 million, or 13.3% (annualized), from March 31, 2017, while average loans increased $244.1 million, or 15.3% (annualized), from the prior quarter. Loans held for investment increased $830.4 million, or 14.0%, from June 30, 2016, while quarterly average loans increased $765.0 million, or 13.0%, from the prior year.

At June 30, 2017, total deposits were $6.8 billion, an increase of $150.2 million, or 9.1% (annualized), from March 31, 2017, while average deposits increased $230.5 million, or 14.4% (annualized), from the prior quarter. Total deposits grew $668.6 million, or 11.0%, from June 30, 2016, while quarterly average deposits increased $612.2 million, or 10.2%, from the prior year.

At June 30, 2017, March 31, 2017, and June 30, 2016, respectively, the Company had a common equity Tier 1 capital ratio of 9.39%, 9.55%, and 9.94%; a Tier 1 capital ratio of 10.57%, 10.77%, and 11.27%; a total capital ratio of 13.00%, 13.30%, and 11.79%; and a leverage ratio of 9.61%, 9.79%, and 10.01%.

The Company’s common equity to total assets ratios at June 30, 2017, March 31, 2017, and June 30, 2016 were 11.56%, 11.71%, and 12.21%, respectively, while its tangible common equity to tangible assets ratio was 8.32%, 8.36%, and 8.59%, respectively.

During the second quarter of 2017, the Company declared and paid cash dividends of $0.20 per common share, consistent with the prior quarter and an increase of $0.01, or 5.3%, compared the same quarter in the prior year.

ABOUT UNION BANKSHARES CORPORATION

Headquartered in Richmond, Virginia, Union Bankshares Corporation (NASDAQ:UBSH) is the holding company for Union Bank & Trust, which has 112 banking offices and approximately 173 ATMs located throughout Virginia. Non-bank affiliates of the holding company include: Union Mortgage Group, Inc., which provides a full line of mortgage products, Old Dominion Capital Management, Inc., which provides investment advisory services, and Union Insurance Group, LLC, which offers various lines of insurance products.

Additional information on the Company is available at http://investors.bankatunion.com

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