Atlantic Union Bankshares Corp. (filing registrant: Union Bankshares Corporation) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing says the company changed its name from Union First Market Bankshares Corporation to Union Bankshares Corporation effective April 25, 2014. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Business context and major transaction
The company operates a Virginia community bank and a mortgage business. It completed its all-stock acquisition of StellarOne on January 1, 2014; StellarOne Bank merged into Union First Market Bank on May 9. The acquisition added substantial assets, loans, deposits, branches, and shares, so year-over-year comparisons are materially affected by the larger combined company. The company consolidated 13 overlapping branches during the first half.
Financial results and balance sheet
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2013 period unless noted.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $63.7 | $37.4 | $127.5 | $75.2 |
| Noninterest income | $16.7 | $11.3 | $30.9 | $21.1 |
| Noninterest expense | $59.5 | $34.3 | $127.3 | $67.8 |
| Net income | $14.8 | $9.5 | $22.6 | $18.4 |
| Diluted EPS | $0.32 | $0.38 | $0.48 | $0.74 |
| Loan-loss provision | $1.5 | $1.0 | $1.5 | $3.1 |
- Q2 tax-equivalent net interest margin was 4.09%, down 9 basis points; core margin, excluding acquisition-accounting effects, was 3.94%, down 20 basis points. For the first half, reported and core margins were 4.11% and 3.97%, down 10 and 19 basis points, respectively.
- Management reported non-GAAP operating earnings of $17.8 million for Q2 and $34.7 million for the first half, excluding after-tax acquisition-related costs of $3.0 million and $12.1 million, respectively. Operating EPS was $0.38 for Q2 and $0.74 for the first half. These are company-defined non-GAAP measures.
- At June 30, total assets were $7.31 billion, gross loans $5.23 billion, deposits $5.73 billion, securities available for sale $1.09 billion, and stockholders’ equity $977.0 million. Since December 31, 2013, assets rose $3.13 billion, loans $2.19 billion, and deposits $2.50 billion, primarily reflecting StellarOne.
- Borrowings totaled approximately $541.1 million: $242.3 million short-term and $298.8 million long-term. Cash and cash equivalents were $158.9 million, up from $73.0 million at year-end.
- For the six months, operating cash flow was $48.9 million versus $90.9 million; investing cash flow was positive $130.8 million versus negative $53.2 million; financing cash flow was negative $93.8 million versus negative $49.0 million. Acquisition-related cash acquired was $50.0 million; the acquisition also involved $2.96 billion of assets and $2.65 billion of liabilities assumed.
Material changes and operating trends
- StellarOne was acquired for total consideration of approximately $549.5 million, including 22.15 million shares issued. Preliminary acquisition accounting recorded $237.5 million of goodwill and $29.6 million of core deposit intangibles. Goodwill is not expected to be tax-deductible.
- Q2 and first-half revenue and net interest income increased substantially with the acquisition, while noninterest expenses also rose sharply. Acquisition-related expenses were $4.7 million in Q2 and $17.8 million in the first half, compared with $0.9 million in each 2013 comparison period.
- Margin pressure continued: management attributed declines to loan and securities yields falling faster than funding costs, as well as StellarOne’s lower margin. It expected net interest margin to decline modestly over the next several quarters.
- The mortgage segment recorded a Q2 loss of $0.6 million and first-half loss of $2.0 million. Lower mortgage originations reduced gains on loan sales; Q2 originations were $195.1 million, down from $298.2 million a year earlier, and first-half originations were $344.1 million, down from $566.3 million.
- Q2 operating efficiency ratio, excluding acquisition costs and on a tax-equivalent basis, was 66.4% versus 66.7%. The company’s Q2 operating return on average tangible common equity was 11.10%, versus 11.54% a year earlier.
Credit quality, liquidity, capital, and risks
- Nonperforming assets were $61.6 million, or 1.18% of loans, at June 30, up from $49.2 million and 1.62% at December 31, but down from $62.2 million and 2.07% a year earlier. The quarterly increase included higher nonaccrual loans and $6.1 million of acquired, closed branch premises transferred to OREO.
- Nonaccrual loans were $23.1 million, up from $15.0 million at year-end; management attributed the Q2 increase primarily to three credit relationships previously identified as impaired. OREO was $38.5 million. Troubled debt restructurings totaled $34.2 million, down from $41.8 million at year-end.
- The allowance for loan losses was $31.4 million, or 0.60% of loans; the company’s adjusted ratio including acquired-loan credit marks was 1.11%. First-half net charge-offs were $0.3 million, aided by a $1.2 million recovery. Management considered the allowance adequate but noted future provisions could be required if economic conditions, particularly real-estate values, deteriorate.
- Management described liquidity as sufficient. Liquid assets and loans maturing within one year totaled $1.8 billion, or 27.4% of earning assets. Available funding included correspondent-bank federal-funds lines, an FHLB line, and other sources. Outstanding off-balance-sheet commitments with credit risk totaled $1.58 billion, including $1.38 billion of commitments to extend credit.
- The company reported a 12.94% Tier 1 risk-based capital ratio, 13.57% total risk-based capital ratio, and 10.48% leverage ratio at June 30; management said it exceeded “well capitalized” requirements and would have remained well capitalized under the new minimum capital rules effective in 2015.
- Interest-rate risk is material. The company’s model estimated 12-month net interest income would rise 1.54% with rates up 100 basis points and fall 1.68% with rates down 100 basis points. Economic value of equity was estimated to fall 1.36% under a 300-basis-point rise and 8.63% under a 300-basis-point decline; management cautioned that large downward-rate shocks are less meaningful because rates were already historically low.
- A previously disclosed issue involving understated mortgage-insurance premium disclosures on certain USDA- and FHA-program loans was remediated. The mortgage-loan indemnification reserve was $1.2 million at June 30 versus $0.6 million at year-end. Management said ordinary-course litigation was not expected to have a material adverse effect; the StellarOne merger class action settlement was approved by the court on May 19, 2014.
- The board authorized up to $65 million of share repurchases through December 31, 2015. The company repurchased 1.34 million shares for $33.9 million during the first half; approximately $31.1 million remained available at June 30. Management reported approximately $24.9 million remaining at July 30.
Most important facts for investors to verify
- Whether StellarOne integration, branch consolidation, and anticipated cost savings progress as planned; the filing says expected additional synergies are not reflected in pro forma results.
- Whether core net interest margin stabilizes or declines further, given management’s outlook and the company’s exposure to changing rates.
- Whether the rise in nonaccrual loans and OREO persists, and whether the allowance and acquired-loan credit marks remain adequate.
- How much reported earnings and EPS depend on acquisition accounting, one-time costs, and the larger share count following the stock-funded acquisition.
- Trends in mortgage originations and mortgage-segment profitability, plus developments in the mortgage indemnification reserve and off-balance-sheet credit commitments.