Atlantic Union Bankshares Corp annual report, FY2014

Full document

Business context and reporting period

This is Union Bankshares Corporation’s Form 10-K for the fiscal year ended December 31, 2014—not a standalone fourth-quarter filing. The request metadata names Atlantic Union Bankshares Corp.; the filing identifies the registrant as Union Bankshares Corporation. Its principal business was community banking in Virginia, supplemented by mortgage, investment, and insurance services.

The year was transformed by the January 1, 2014 all-stock acquisition of StellarOne Corporation. The bank operated StellarOne’s bank separately until its May 2014 merger into the Company’s bank. The Company issued 22.1 million shares for the acquisition and consolidated 13 overlapping branches.

Financial performance and condition

  • Earnings: Net income was $52.6 million, up 52.4% from $34.5 million; diluted EPS was $1.14 versus $1.38. The acquisition substantially increased the share count. Excluding after-tax merger and conversion costs of $13.7 million, management reported non-GAAP operating earnings of $66.3 million and operating EPS of $1.44, versus $36.5 million and $1.46 in 2013.
  • Revenue and margins: Net interest income was $255.0 million, up from $151.6 million; noninterest income was $61.3 million, up from $38.7 million. Fully taxable-equivalent net interest margin declined to 4.09% from 4.22%; core margin, excluding acquisition-accounting effects, fell to 3.93% from 4.18%. The filing attributes much of the revenue growth to StellarOne.
  • Expenses and profitability: Noninterest expense rose 73.8% to $238.6 million, including $20.3 million of acquisition-related expense and costs associated with the enlarged organization. GAAP efficiency ratio was 73.53% versus 70.19%; return on average assets was 0.73% versus 0.85%.
  • Credit quality: Provision for loan losses increased to $7.8 million from $6.1 million; net charge-offs declined to $5.6 million from $10.8 million. Nonperforming assets were $47.4 million and 0.89% of loans, versus $49.2 million and 1.62% a year earlier. The allowance was $32.4 million; its ratio to loans was 0.61% on a GAAP basis and 1.08% adjusted for acquired-loan marks.
  • Balance sheet, debt, and capital: Total assets were $7.36 billion, loans $5.35 billion, deposits $5.64 billion, and stockholders’ equity $978.0 million. Borrowings totaled approximately $686.9 million at year-end, comprising $387.4 million short-term and $299.5 million long-term. Regulatory capital ratios were 12.77% Tier 1 and 13.40% total capital at the Company; the bank’s corresponding ratios were 12.37% and 13.00%. Both were reported above applicable requirements.
  • Cash flow and liquidity: Operating cash flow was $125.2 million, investing cash flow was $6.3 million, and financing cash flow was negative $71.3 million; cash and cash equivalents increased $60.2 million to $133.3 million. Management considered liquidity sufficient. Cash, restricted stock, and available-for-sale securities represented 17.5% of assets. The Company reported $742.0 million available on its collateral-dependent FHLB line at year-end.
  • Shareholder returns: Annual dividends rose to $0.58 per share from $0.54. The Company repurchased 2.13 million shares for $52.6 million during 2014, leaving about $12.5 million under its $65 million authorization.

Material changes versus the prior comparable period

  • The StellarOne acquisition accounts for much of the year-over-year expansion in assets, loans, deposits, revenue, and expenses; reported growth is therefore not solely organic.
  • GAAP net income increased, but diluted EPS declined because of the expanded share count and acquisition costs. On management’s non-GAAP operating basis, earnings increased sharply while operating EPS edged lower.
  • Asset-quality ratios improved overall, but nonaccrual loans rose to $19.3 million from $15.0 million, past-due accruing loans increased, and the allowance-to-nonaccrual-loans coverage ratio fell to 168.2% from 200.4%.
  • Mortgage originations declined 28.0% to $677.4 million, and the mortgage segment’s net loss widened to $3.5 million from $2.7 million.
  • Net interest margin continued to contract. Management said it expected a modest further decline, as earning-asset yields were projected to fall faster than funding costs.

Outlook, commentary, risks, contingencies, and unusual items

  • No quantified earnings or revenue guidance is provided. Management cited uncertain economic and housing conditions, low interest rates, and potential higher long-term rates, while emphasizing asset-quality management, cost control, and integration of StellarOne. Management reported achieving cost-savings targets and lower-than-expected customer attrition from the integration.
  • Key risks include interest-rate and margin sensitivity; concentration in real-estate-secured lending, including commercial real estate and construction; borrower and collateral deterioration; mortgage-volume cyclicality and loan-repurchase exposure; competition; regulatory and capital changes; cyber and third-party operational risks; and acquisition integration and goodwill impairment.
  • The Company recorded $7.6 million of OREO valuation adjustments in 2014, including $6.2 million in the third quarter, after deciding to market certain rural properties more aggressively. No goodwill impairment was recorded after additional year-end testing, but management said continued weakness in the mortgage segment could require further impairment analysis.
  • Off-balance-sheet commitments included $1.60 billion to extend credit, $118.0 million of standby letters of credit, and $49.6 million of mortgage rate-lock commitments. Management said litigation in the ordinary course was not expected, in aggregate, to have a material adverse effect; the StellarOne-related shareholder lawsuit was settled with court approval in May 2014.
  • The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. Basel III capital requirements began taking effect January 1, 2015, with the conservation buffer phased in through 2019.

Important facts for investors to verify

  1. Confirm the registrant and requested entity: this filing is for Union Bankshares Corporation, and covers the full year ended December 31, 2014.
  2. Assess acquisition-adjusted performance separately from GAAP results, including recurring costs, realized integration savings, share dilution, and the effect of purchase-accounting accretion.
  3. Track margin trends, deposit mix and costs, borrowing levels, and the Company’s exposure under changing interest-rate scenarios.
  4. Review commercial real estate and construction credit concentrations, the increase in nonaccrual loans, acquired-loan credit marks, OREO valuations, and allowance adequacy.
  5. Monitor mortgage-segment profitability and origination volumes, potential goodwill impairment, capital-buffer requirements, and remaining share-repurchase authorization.