Union Bankshares Corporation (renamed Atlantic Union Bankshares Corporation in 2019) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The filing registrant was Union Bankshares Corporation; it changed its name from Union First Market Bankshares Corporation on April 25, 2014. Dollar amounts below are in millions unless stated otherwise. The interim financial statements received an independent accountant’s review, not an audit.
Business context and major transaction
The company operates community banking and mortgage businesses, principally in Virginia and nearby markets. On January 1, 2014, it completed its all-stock acquisition of StellarOne, issuing 22.15 million shares valued at approximately $549.5 million. The acquired business contributed about $2.96 billion of assets and $2.65 billion of liabilities; preliminary purchase accounting recorded $237.5 million of goodwill. Results include StellarOne for the full quarter, making reported year-over-year comparisons materially affected by the acquisition.
The company expected to combine StellarOne Bank with Union First Market Bank in May 2014 and planned to consolidate 13 overlapping branches during 2014.
Financial performance and condition
| Metric | Q1 2014 | Comparable period / reference |
|---|---|---|
| Net interest income | $63.8 | $37.8 in Q1 2013 |
| Noninterest income | $14.2 | $9.8 in Q1 2013 |
| Net income; diluted EPS | $7.8; $0.17 | $9.0; $0.36 in Q1 2013 |
| Operating earnings, non-GAAP | $16.8; $0.36 diluted EPS | $9.0; $0.36 diluted EPS in Q1 2013 |
| Net interest margin, FTE | 4.14% | 4.23% in Q1 2013 |
| Core net interest margin, FTE | 3.99% | 4.18% in Q1 2013 |
| Operating efficiency ratio, FTE, non-GAAP | 68.4% | 68.6% in Q1 2013 |
| Cash from operating activities | $51.1 | $62.6 in Q1 2013 |
Reported net income fell 13% year over year while diluted EPS declined from $0.36 to $0.17. The company attributed much of the difference between GAAP and operating earnings to $13.2 million of pretax acquisition and conversion expenses, or $9.0 million after tax. Operating measures are company-defined non-GAAP measures and should not be treated as substitutes for GAAP results.
Tax-equivalent net interest income rose $26.7 million, primarily because of the acquired balance sheet. Management said margin pressure reflected lower loan and securities yields and StellarOne’s lower-margin profile. Acquisition accounting added $2.45 million to net interest income in the quarter, according to the filing’s accretion and amortization disclosure.
Cash and cash equivalents were $142.3 million at quarter-end. Investing activities provided $104.6 million, including $50.0 million of cash acquired; financing activities used $86.5 million. Cash increased $69.2 million during the quarter. Management considered liquidity sufficient; disclosed sources included $173.4 million remaining on correspondent-bank federal funds lines and an FHLB collateral-dependent line of up to $1.4 billion.
At March 31, total assets were $7.29 billion, loans $5.27 billion, deposits $5.69 billion, and stockholders’ equity $982.5 million. Total borrowings were $572.7 million, comprising $274.3 million short-term and $298.4 million long-term. Regulatory capital ratios included 13.02% Tier 1 risk-based capital, 13.70% total risk-based capital, and a 10.66% leverage ratio; management said the company exceeded “well capitalized” requirements.
Material changes and credit quality
- Compared with December 31, 2013, assets, loans, and deposits increased substantially, principally due to StellarOne. On a pro forma basis including StellarOne, period-end loans were flat versus year-end; average deposits declined $54.5 million, or 3.8% annualized, from the fourth quarter.
- Noninterest expense increased to $67.8 million from $33.5 million, including $13.2 million of acquisition-related costs and expenses associated with the acquired operation. Mortgage loan sale gains fell 40.4% to $2.3 million; originations declined $119.1 million from $268.2 million in Q1 2013.
- The loan-loss provision was zero versus $2.1 million in Q1 2013. Net recoveries were $772,000, substantially reflecting a $1.2 million recovery on a previously charged-off commercial loan. The allowance was $30.9 million, or 0.59% of loans on a reported basis; the company’s acquisition-adjusted non-GAAP ratio was 1.09%.
- Nonperforming assets were $50.2 million, or 0.95% of loans, down from 1.62% at year-end 2013. Nonaccrual loans were $14.7 million; other real estate owned was $35.5 million. Troubled debt restructurings totaled $44.3 million, of which $37.2 million were performing.
- Real estate loans represented 85.8% of the portfolio. Acquired credit-impaired loans totaled $138.4 million, net of credit mark; acquired performing loans were reported at $2.3 billion at quarter-end.
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.
- Management cited potential StellarOne integration risks, including deposit attrition, higher-than-expected costs, customer loss, business disruption, and difficulty retaining key personnel. Expected savings and synergies, including branch closures, were not reflected in the acquisition pro forma figures.
- The mortgage segment reported a $1.4 million net loss, which management linked to low origination volumes and excess processing capacity, restructuring charges, and project costs. The filing notes that recent mortgage-segment losses prompted additional goodwill and intangible-asset impairment evaluation; no impairment had been recorded through March 31, 2014.
- The company’s interest-rate simulation showed estimated 12-month net interest income increasing 0.72% under a 100-basis-point rate increase and decreasing 1.03% under a 100-basis-point decrease. These are model estimates dependent on assumptions; management cautioned that larger downward shocks were less meaningful given historically low rates.
- A shareholder class action concerning the StellarOne merger had received preliminary settlement approval; final court approval was still required. Management believed other ordinary-course litigation would not have a material adverse effect.
- The company disclosed prior USDA and FHA mortgage-insurance-premium disclosure errors affecting certain borrowers. It had taken remedial action; the mortgage indemnification reserve was $1.1 million at March 31, 2014, compared with $627,000 at year-end. The filing also reported a $966,000 estimated contractual-claims accrual at December 31, 2013.
- The board authorized up to $65.0 million of share repurchases through December 31, 2015. In Q1, the company repurchased 510,515 shares for $13.0 million at an average $25.37 per share; $52.0 million remained available at quarter-end. By April 30, about 901,000 shares had been repurchased and $42.2 million remained.
Most important facts for investors to verify
- Whether StellarOne integration, branch consolidation, and anticipated cost savings proceed as planned, and whether deposit attrition or other integration costs emerge.
- Whether margin pressure continues, including the effect of purchase-accounting accretion and the acquired business’s lower-margin profile.
- Credit trends in the real-estate-heavy portfolio, acquired loans, TDRs, and OREO; assess the allowance using both reported and acquisition-adjusted measures.
- The mortgage segment’s path back to profitability and the outcome of the company’s ongoing goodwill impairment evaluation.
- Final court approval of the merger-related settlement and any developments in mortgage indemnification claims or reserves.
- Capital and liquidity after acquisition-related growth, planned repurchases, and the implementation of new regulatory capital requirements.