Union First Market Bankshares Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing registrant was Union First Market Bankshares Corporation; the company name in the request reflects a later name. Financial amounts below are in millions unless otherwise noted. Interim financial statements are unaudited and were reviewed, not audited.
Business context
The company operated a Virginia community bank and a mortgage origination business. It reported 90 retail locations in Virginia. On June 10, 2013, it announced a definitive agreement to acquire StellarOne Corporation.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income, GAAP | $37.4 | $38.1 | $75.2 | $76.4 |
| Provision for loan losses | $1.0 | $3.0 | $3.1 | $6.5 |
| Noninterest income | $11.3 | $10.3 | $21.1 | $18.7 |
| Noninterest expense | $34.3 | $33.6 | $67.8 | $65.9 |
| Net income | $9.5 | $8.4 | $18.4 | $16.3 |
| Diluted earnings per share | $0.38 | $0.32 | $0.74 | $0.63 |
- Q2 net income rose 12.4% year over year. Excluding $0.9 million in merger and conversion costs, management reported operating earnings of $10.4 million, or $0.42 per diluted share.
- Tax-equivalent net interest margin was 4.18% in Q2, down 18 basis points year over year and 5 basis points sequentially. Management attributed pressure to lower loan and investment yields and declining acquisition-related accretion. It expected modest further margin decline over the next several quarters.
- Q2 noninterest income increased 10.2% year over year, principally from mortgage loan-sale gains and service charges. Expenses rose 2.0% reported; excluding merger-related costs, they declined 0.7%.
- For the six months, operating cash flow was $90.9 million versus $15.2 million a year earlier. The improvement included a $58.3 million decrease in loans held for sale, compared with a $25.2 million increase in the prior-year period. Investing cash use was $53.2 million; financing cash use was $49.0 million. Cash and equivalents ended at $71.5 million, down $11.4 million from year-end.
Financial position, credit and liquidity
- At June 30, total assets were $4.06 billion, loans $3.00 billion, deposits $3.27 billion, and stockholders’ equity $428.4 million. Loans increased 3.9% year over year; deposits increased 1.5% year over year but declined $31.8 million from year-end, mainly as time deposits ran off.
- Total borrowings were $327.6 million: $129.4 million short-term and $198.2 million in long-term borrowings and trust preferred capital notes. The company reported $97.0 million remaining under correspondent-bank federal funds lines and an FHLB collateral-dependent line of up to $807.4 million.
- Management considered liquidity sufficient. Liquid assets, including cash, securities, loans held for sale and loans maturing within one year, totaled $1.2 billion, or 31.8% of earning assets.
- Nonperforming assets were $62.2 million, or 2.07% of loans, up from $58.9 million and 1.98% at March 31, but down from $75.0 million and 2.60% a year earlier. The quarter-over-quarter increase included a $5.5 million relationship placed on nonaccrual.
- Nonaccrual loans were $27.0 million; other real estate owned was $35.2 million. Troubled debt restructurings totaled $53.0 million, of which $39.8 million were performing. Net charge-offs were $1.1 million for Q2 versus $2.2 million a year earlier. The allowance was $34.3 million, or 1.14% of loans, versus $41.0 million and 1.42% a year earlier.
- Regulatory capital ratios were 14.37% total risk-based capital, 13.08% Tier 1 risk-based capital, and 10.47% leverage; the company said it remained well capitalized. It repurchased 500,000 shares for $9.5 million in the first quarter and declared a Q2 dividend of $0.13 per share.
Material changes and unusual items
- Available-for-sale securities were $582.3 million, down from $627.5 million a year earlier. A sharp increase in unrealized securities losses contributed to $10.7 million of other comprehensive loss for the first half and moved accumulated other comprehensive income from $10.1 million at year-end to a $0.6 million loss.
- The company recorded $0.9 million of acquisition and conversion expense in Q2. Mortgage operations also recorded a $186,000 valuation adjustment for aged loans held for sale and severance related to the planned relocation of the mortgage unit’s headquarters to Richmond.
- The StellarOne merger was expected to close around January 1, 2014, subject to shareholder and regulatory approvals; the bank subsidiary merger was expected in May 2014. The proposed exchange was 0.9739 company shares per StellarOne share. Pro forma combined assets, deposits and loans were cited as $7.1 billion, $5.8 billion and $5.2 billion, respectively.
- A StellarOne shareholder class action filed in June seeks, among other relief, to enjoin the merger. The companies said they believed the claims were without merit. The filing identifies integration, employee and customer retention, regulatory approval, deal delay or termination, and possible termination fees of $21.8 million as merger risks.
- Interest-rate sensitivity modeling estimated a 12-month net interest income change of approximately +1.46% under a 300-basis-point rate increase and −5.97% under a 300-basis-point decrease. Management cautioned that large downward shocks were less meaningful given historically low rates.
Investor verification priorities
- Track net interest margin and asset yields against management’s expectation of modest further margin compression.
- Assess the sustainability of earnings growth, including mortgage gains, lower credit provisions, and the $0.9 million merger-cost adjustment.
- Monitor nonperforming assets, the new nonaccrual relationship, TDR performance, OREO balances, and allowance coverage as credit trends evolve.
- Verify StellarOne approval, litigation, closing and integration developments, including potential costs and the stated termination fee.
- Review securities valuation and accumulated other comprehensive loss, as well as capital and liquidity after dividends, repurchases and merger-related activity.