Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

v2.4.0.8
ACQUISITIONS
9 Months Ended
Sep. 30, 2014
ACQUISITIONS [Abstract]  
ACQUISITIONS

 

2.ACQUISITIONS

 

On January 1, 2014, the Company completed the acquisition of StellarOne, a bank holding company based in Charlottesville, Virginia, in an all stock transaction.  StellarOne’s common shareholders received 0.9739 shares of the Company’s common stock in exchange for each share of StellarOne’s common stock, resulting in the Company issuing 22,147,874 common shares at a fair value of $549.5 million.  As a result of the transaction, StellarOne’s former bank subsidiary, StellarOne Bank, became a wholly owned bank subsidiary of the Company.  On May 9, 2014, StellarOne Bank was merged with and into Union First Market Bank. 

 

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date.  Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.  The following table provides a preliminary assessment of the assets purchased, liabilities assumed, and the consideration transferred (dollars in thousands, except share and per share data):

 

Statement of Net Assets Acquired (at fair value) and consideration transferred:

 

 

 

 

 

Fair value of assets acquired:

 

 

Cash and cash equivalents

$

49,989 

Securities available for sale

 

460,892 

Loans held for sale

 

11,377 

Loans

 

2,238,981 

Bank premises and equipment

 

69,618 

OREO

 

4,319 

Core deposit intangible

 

29,570 

Other assets

 

94,466 

Total assets

$

2,959,212 

 

 

 

Fair value of liabilities assumed:

 

 

Deposits

$

2,479,874 

Short-term borrowings

 

49,227 

Long-term borrowings

 

98,697 

Other liabilities

 

19,367 

Total liabilities

$

2,647,165 

 

 

 

Net identifiable assets acquired

$

312,047 

Preliminary Goodwill (1)

 

237,476 

Net assets acquired

$

549,523 

 

 

 

Consideration :

 

 

Company's common shares issued

 

22,147,874 

Purchase price per share of the Company's common stock (2)

$

24.81 

Value of Company common stock issued

$

549,489 

Value of stock options outstanding

 

34 

Fair value of total consideration transferred

$

549,523 

 

 

 

(1) - No goodwill is expected to be deductible for federal income tax purposes. The goodwill will be primarily allocated to the community bank segment.

(2) - The value of the shares of common stock exchanged with StellarOne shareholders was based upon the closing price of the Company's common stock at December 31, 2013, the last trading day prior to the date of acquisition.

 

 

 

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows: 

 

Loans

 

The acquired loans were recorded at fair value at the acquisition date without carryover of StellarOne’s previously established allowance for loan losses.  The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained regarding facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust in accordance with accounting for business combinations.

 

The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired or PCI) and loans that do not meet this criteria, which are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, (acquired performing).    The fair values of the acquired performing loans were $2.1 billion and the fair values of the acquired impaired loans were $145.5 million.  The gross contractually required principal and interest payments receivable for acquired performing loans was $2.5 billion.  The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $35.4 million.

 

The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):

 

 

 

 

 

Contractually required principal and interest payments

$

214,803 

Nonaccretable difference

 

(34,696)

Cash flows expected to be collected

 

180,107 

Accretable difference

 

(34,653)

Fair value of loans acquired with a deterioration of credit quality

$

145,454 

 

Bank Premises

 

The fair value of StellarOne’s premises, including land, buildings, and improvements, was determined based upon independent third party appraisals performed by licensed appraisers in the market in which the premises are located.  These appraisals were based upon the highest and best use of the underlying asset(s) with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised.  The Company also engaged independent appraisers to value the leasehold interests.  The fair value of the leasehold interest was not material to the consolidated financial statements.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a blended market approach and discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using StellarOnes historical deposit data.

Time Deposits

The fair value adjustment of time deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The premium is being accreted into income using the sum-of-years digits method over the weighted average remaining life.

Long-term Borrowings

The Company assumed long-term borrowings in the form of FHLB advances and trust preferred capital notes.  The fair value of the trust preferred capital notes assumed was valued using an income approach with consideration of the market approach. The contractual cash flows were projected and discounted using a prevailing market rate. The market rate was developed using a third party broker opinion, implied market yields for recent subordinated debt sales, and new subordinated debt issuances for instruments with similar durations and pricing characteristics. The fair value of FHLB advances represents contractual repayments discounted using interest rates currently available on borrowings with similar characteristics and remaining maturities.

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities were established for acquisition accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income.

The following table presents certain pro forma information as if StellarOne had been acquired on January 1, 2013.  These results combine the historical results of StellarOne in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2013.  In particular, no adjustments have been made to eliminate the amount of StellarOne’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2013.  The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 2013

 

September 30, 2013

 

 

(unaudited)

 

(unaudited)

 

Total revenues (net interest income plus noninterest income)

$

82,180

 

$

246,972

 

Net income

$

17,827

 

$

54,834

 

 

 

 

 

 

 

 

 

Acquisition-related expenses associated with the acquisition of StellarOne were $1.7 million and $19.5 million for the three and nine months ended September 30, 2014, and $473,000 and $1.4 million for the three and nine months ended September 30, 2013, respectively.  Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, integrating operations, and employee severances, which have been expensed as incurred. 

 

A summary of acquisition-related expenses associated with the StellarOne acquisition included in the Consolidated Statements of Income is as follows (dollars in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Salaries and employee benefits

$

200 

 

$

 -

 

$

7,878 

 

$

 -

Professional services

 

122 

 

 

473 

 

 

3,717 

 

 

1,393 

Other costs of operations

 

1,373 

 

 

 -

 

 

7,929 

 

 

 -

Total

$

1,695 

 

$

473 

 

$

19,524 

 

$

1,393