Union Bankshares Corporation (now Atlantic Union Bankshares Corporation) — Q3 2014 Form 10-Q
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2014. The registrant identified itself as Union Bankshares Corporation; it changed its corporate name from Union First Market Bankshares Corporation on April 25, 2014. Results include StellarOne from its January 1, 2014 acquisition, so comparisons with 2013 are not like-for-like. The bank merger integration was completed in May 2014. Interim financial statements were reviewed, not audited.
Financial and operating metrics
Dollars are in millions except per-share amounts and ratios. Income-statement comparisons are Q3 2014 versus Q3 2013, and nine months 2014 versus nine months 2013.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $81.2 | $47.1 | $239.6 | $143.4 |
| Net interest income | $64.5 | $37.9 | $192.0 | $113.0 |
| Net income | $14.9 | $7.9 | $37.5 | $26.4 |
| Diluted EPS | $0.33 | $0.32 | $0.81 | $1.06 |
| Provision for loan losses | $1.8 | $1.8 | $3.3 | $4.9 |
| Noninterest expense | $59.9 | $34.1 | $187.2 | $101.9 |
- Tax-equivalent net interest margin was 4.11% in both 2014 comparison periods, down 9 basis points from 4.20% in 2013. Core margin, excluding acquisition accounting effects, was 3.92% for Q3 and 3.95% year to date, versus 4.16% in each 2013 period.
- Management’s non-GAAP operating earnings were $16.0 million for Q3 and $50.7 million year to date, after excluding after-tax acquisition costs of $1.1 million and $13.2 million, respectively. Operating diluted EPS was $0.35 for Q3 and $1.09 year to date. The nine-month GAAP EPS decline reflects, in part, the substantially larger post-acquisition share count.
- Operating efficiency ratio was 69.9% for Q3 and 68.2% year to date, compared with 69.6% and 68.3% in 2013. Operating ROTCE was 9.82% for Q3 and 10.41% year to date.
At September 30, 2014, total assets were $7.19 billion, loans $5.17 billion, deposits $5.63 billion, stockholders’ equity $977.7 million, and cash and cash equivalents $148.7 million. Total borrowings were $527.7 million, comprising $228.5 million short-term and $299.2 million long-term. Regulatory capital ratios included a 13.07% Tier 1 risk-based ratio, 13.71% total risk-based ratio, and 10.55% leverage ratio; the company reported that it exceeded the well-capitalized definition.
For the first nine months, operating cash flow was $108.2 million versus $138.6 million in 2013; investing activities provided $188.9 million versus using $75.6 million, and financing activities used $221.4 million versus $70.8 million. Cash increased $75.7 million to $148.7 million. Management considered liquidity sufficient. Liquid assets as defined in the filing totaled $1.7 billion, or 27.3% of interest-earning assets. The bank also cited borrowing capacity through correspondent-bank lines and an FHLB line.
Material changes versus comparable periods
- StellarOne materially expanded the balance sheet: assets rose $3.0 billion from December 31, 2013; loans rose $2.1 billion and deposits $2.4 billion. The acquisition was an all-stock transaction valued at approximately $549.5 million and added preliminary goodwill of $237.5 million.
- Quarterly and year-to-date net interest income and fee income increased substantially, primarily from the acquisition. However, asset yields and core net interest margin declined; management attributed pressure to lower loan and securities yields and StellarOne’s lower margin profile.
- Noninterest expense increased materially, reflecting the acquired operations, acquisition costs of $19.5 million year to date, and OREO valuation expenses. Q3 OREO valuation adjustments were $6.2 million; year-to-date valuation expenses were $7.3 million.
- Credit indicators were mixed. Nonperforming assets were $58.0 million, or 1.12% of loans, down from 1.62% at year-end 2013 but up 4.3% from September 2013. Nonaccrual loans were $20.3 million, versus $15.0 million at year-end; loans 90 days past due and still accruing were $16.1 million, versus $6.7 million. Net charge-offs were $1.3 million year to date, down from $5.9 million.
- The allowance for loan losses was $32.1 million. Its reported ratio to loans was 0.62%; management’s non-GAAP ratio adjusted for acquisition accounting was 1.12%. TDRs declined to $29.0 million from $41.8 million at year-end 2013.
Outlook, risks, contingencies, and unusual items
- Management expected net interest margin to decline modestly over the next several quarters, as earning-asset yields were projected to fall faster than funding costs.
- Key risks identified include economic and real-estate conditions, interest-rate changes, regulatory and competitive pressures, and StellarOne integration risks such as deposit attrition, higher-than-expected costs, customer loss, business disruption, and retention of key personnel. Management said further cost savings and synergies, including branch closures, were expected but were not reflected in acquisition pro forma results.
- The mortgage segment reported a Q3 net loss of $0.6 million and a nine-month net loss of $2.6 million. Year-to-date mortgage origination volume and related gain-on-sale income declined; management cited excess processing capacity relative to volume.
- The company recorded $6.2 million of Q3 OREO valuation adjustments after changing its strategy to market long-held properties more aggressively. OREO included former bank premises transferred following the acquisition.
- The StellarOne shareholder class action was settled and approved by the court on May 19, 2014. Management stated ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect.
- The company authorized a $65 million share repurchase program through December 31, 2015. It repurchased 1.73 million shares for $43.5 million through September 30, with approximately $21.6 million remaining.
- Interest-rate sensitivity modeling estimated 12-month net interest income would rise 1.75% under an immediate 100-basis-point increase and fall 1.89% under a 100-basis-point decrease. The filing cautions that large downward-rate scenarios are less meaningful given historically low rates.
Most important facts for investors to verify
- How much of revenue and earnings growth is recurring and attributable to acquired scale versus purchase-accounting accretion, acquisition-related items, and other non-GAAP adjustments.
- Whether the expected margin pressure materializes and whether integration synergies and cost savings offset higher operating expenses.
- Trends in nonaccrual and past-due loans, OREO—including former branches—credit costs, and reserve adequacy, particularly for the real-estate-heavy loan portfolio.
- Mortgage segment performance and its ability to align operating costs with lower origination volumes.
- Capital, liquidity, and funding capacity as acquired balances are integrated, and the assumptions behind interest-rate sensitivity estimates.