Atlantic Union Bankshares Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

ACQUISITIONS

3 Months Ended

Mar. 31, 2018

On January 1, 2018, the Company completed its acquisition of Xenith, a bank holding company based in Richmond, Virginia. Xenith's common stockholders received 0.9354 shares of the Company's common stock in exchange for each share of Xenith's common stock, resulting in the Company issuing 21,922,077 shares of the Company's common stock at a fair value of $794.8 million. In addition, the Company paid $6.2 million in exchange for Xenith's outstanding stock options.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):



Purchase Price:
Fair value of shares of Union common stock issued & warrants converted			$	794,809
Cash paid for Xenith options			6,170
Total purchase price			$	800,979

Fair value of assets acquired:
Cash and cash equivalents	$	174,218
Securities available for sale	295,782
Restricted stock, at cost	27,569
Net loans	2,458,981
Premises and equipment	45,520
OREO	5,412
Core deposit intangibles	38,470
Other assets	203,468
Total assets	$	3,249,420

Fair value of liabilities assumed:
Deposits	$	2,549,683
Other short-term borrowings	235,000
Borrowings	55,542
Other liabilities	33,793
Total liabilities	$	2,874,018

Net assets acquired			$	375,402
Preliminary goodwill			$	425,577

The acquired loans were recorded at fair value at the acquisition date without carryover of Xenith’s previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained about facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust fair values in accordance with accounting for business combinations.

The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired) and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, (acquired performing). The fair values of the acquired performing loans were $2.4 billion and the fair values of the acquired impaired loans were $68.5 million. The gross contractually required principal and interest payments receivable for acquired performing loans was $2.7 billion. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $22.2 million.

The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):



Contractually required principal and interest payments	$	97,123
Nonaccretable difference	(16,422		)
Cash flows expected to be collected	80,701
Accretable difference	(12,225		)
Fair value of loans acquired with a deterioration of credit quality	$	68,476

The following table presents certain pro forma information as if Xenith had been acquired on January 1, 2017. These results combine the historical results of Xenith in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017. In particular, no adjustments have been made to eliminate the amount of Xenith’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2017. Pro forma adjustments below include the net impact of accretion for 2017 and the elimination of merger-related costs for 2018. The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):



	Pro forma for the three months ended
	March 31,
	2018		2017
	(unaudited)		(unaudited)
Total revenues ⁽¹⁾	$	126,056	$	116,733
Net income	$	38,875	$	25,921
Earnings per share	$	0.59	$	0.40

(1) Includes net interest income and noninterest income.

Merger-related costs associated with the acquisition of Xenith were $27.7 million for the three months ended March 31, 2018; no merger-related costs were incurred for the three months ended March 31, 2017. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, and employee severances, which have been expensed as incurred.