Atlantic Union Bankshares Corp. (then Union First Market Bankshares Corporation) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing reports full-year results and quarterly results, including Q4. StellarOne was acquired on January 1, 2014, after the reporting period; its results are not included in 2013 actual results.
Business context and reporting period
The company operated a Virginia-focused community banking business and a mortgage origination business, with additional investment and insurance affiliates. At year-end it reported 90 Union First Market Bank branches in Virginia. Its business is sensitive to interest rates, credit conditions, real estate values, and the economic conditions of its Virginia markets.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income (GAAP) | $151.6 million | $154.4 million |
| Noninterest income | $38.7 million | $41.1 million |
| Net income | $34.5 million | $35.4 million |
| Diluted EPS | $1.38 | $1.37 |
| Return on average assets / equity | 0.85% / 7.91% | 0.89% / 8.13% |
| Net interest margin (FTE) | 4.22% | 4.34% |
| Total assets | $4.18 billion | $4.10 billion |
| Loans, net of unearned income | $3.04 billion | $2.97 billion |
| Deposits | $3.24 billion | $3.30 billion |
- Net income fell 2.6%; diluted EPS rose slightly as average shares outstanding declined. Excluding $2.0 million of after-tax acquisition-related expenses, management reported non-GAAP operating earnings of $36.5 million, or $1.46 per share.
- Net interest margin contracted 12 basis points. The yield on earning assets fell more than funding costs, while tax-equivalent net interest income declined 1.1% to $156.9 million.
- Provision for loan losses declined 50% to $6.1 million; net charge-offs were $10.8 million, or 0.36% of loans, versus $16.8 million, or 0.56%, in 2012.
- Cash and cash equivalents were $73.0 million at year-end. Operating cash flow was $157.0 million, investing cash outflow was $218.7 million, and financing cash inflow was $51.8 million. Cash decreased $9.9 million during the year.
- Year-end borrowings included $264.0 million of short-term borrowings, $139.0 million of long-term borrowings, and $60.3 million of trust preferred capital notes. Short-term borrowings rose primarily alongside fourth-quarter securities purchases ahead of the StellarOne merger.
- Management considered liquidity sufficient. Cash, restricted stock, and available-for-sale securities equaled 18.6% of assets. The company reported $93.5 million remaining on correspondent-bank federal funds lines and $635.2 million available under its FHLB facility.
- Capital remained above regulatory minimums: company Tier 1 and total risk-based capital ratios were 13.05% and 14.17%; the bank’s were 12.43% and 13.56%. The bank was categorized as well capitalized.
Q4 results and material changes
In Q4 2013, net income was $8.1 million and diluted EPS was $0.32, compared with $9.4 million and $0.37 in Q4 2012. Q4 net interest income was $38.6 million, provision expense $1.2 million, noninterest income $8.4 million, and noninterest expense $35.4 million.
- Asset quality improved: nonperforming assets declined to $49.2 million from $59.0 million, and the NPA-to-loan ratio fell to 1.62% from 1.99%. Nonaccrual loans declined to $15.0 million; OREO increased to $34.1 million.
- Troubled debt restructurings fell to $41.8 million from $63.5 million. The allowance for loan losses was $30.1 million, 0.99% of loans; coverage of nonaccrual loans rose to 200.4% from 133.2%.
- Mortgage originations fell 14.1% to $941.4 million, and the mortgage segment recorded a $2.7 million net loss versus $2.5 million income in 2012. Lower refinance activity and margins, increased personnel and operating costs, and a $966,000 mortgage-insurance indemnification accrual contributed.
- Deposits declined 1.8%, mainly as time deposits decreased; lower-cost transaction accounts increased. Securities available for sale rose to $677.3 million, while loans held for sale declined to $53.2 million.
- Unrealized securities losses contributed to a $12.3 million other comprehensive loss; accumulated other comprehensive income shifted from $10.1 million to a $2.2 million loss. No securities impairment charge was recorded in 2013.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected net interest margin to decline modestly over the next several quarters as earning-asset yields continued to reset downward faster than funding costs. The filing provides no specific earnings or revenue guidance.
- The January 2014 StellarOne all-stock acquisition issued 22,147,874 shares, with preliminary consideration of approximately $549.5 million and preliminary goodwill of $228.7 million. The acquired company’s results are excluded from 2013 reported results. Management planned to consolidate 13 overlapping branches in 2014 and expected integration costs to be expensed as incurred; anticipated synergies were not quantified.
- Key risks include merger integration and realization of savings, commercial real estate and construction/land loan concentrations, economic weakness and federal spending exposure in Virginia, prolonged low rates or rate changes, funding competition, regulatory costs, cybersecurity and third-party operational risk, and the adequacy of loan-loss estimates.
- A shareholder lawsuit concerning the StellarOne merger was subject to a settlement memorandum; the court granted preliminary approval in February 2014, with final approval still required. Management said other ordinary-course litigation was not expected, in aggregate, to have a material adverse effect.
- The company accrued $966,000 for contractual indemnification claims tied to mortgage-insurance premium disclosure errors on certain previously sold loans. The 2013 results also included $2.1 million in acquisition-related expense and a $363,000 valuation adjustment on aged mortgage loans held for sale.
- The board authorized a share-repurchase program of up to $65 million through December 31, 2015. The company declared $0.54 per share in 2013 dividends, compared with $0.37 in 2012; future dividends remain subject to regulatory and board considerations.
- Basel III capital rules were scheduled to take effect beginning in 2015, with phase-in through 2019. Management stated the company would have remained well capitalized under the new ratios using its year-end 2013 position.
Most important facts for investors to verify
- Whether StellarOne integration, branch consolidations, and cost savings proceed on schedule, and the final acquisition fair values and goodwill.
- Whether margin pressure continues and how loan and deposit pricing, deposit mix, and securities reinvestment affect earnings.
- Credit trends in commercial real estate, construction and land loans, including OREO resolution, TDR performance, and the allowance’s adequacy.
- The mortgage segment’s path back to profitability and any further claims or expenses from the insurance-disclosure issue.
- Liquidity and refinancing needs as short-term borrowings rise, and the effect of interest-rate changes on earnings and economic value.
- The status and final cost of the merger-related shareholder settlement, plus capital and dividend capacity after acquisition and repurchases.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2013.