Business Context and Reporting Period
Company: Union Bankshares Corporation (Atlantic Union Bankshares Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Overview: Union Bankshares is a Virginia-based community banking organization operating through three bank subsidiaries and a mortgage segment. The company operates 58 branch offices in Virginia. In March 2009, the company announced an agreement to acquire First Market Bank, FSB, in an all-stock transaction valued at approximately $105.4 million, expected to close before year-end.
Key Financial Metrics
| Metric | Q2 2009 (3 Months) | Q2 2008 (3 Months) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Net Income | $953,000 | $4,333,000 | $2,706,000 | $7,985,000 |
| Net Income Available to Common | $91,000 | $4,333,000 | $985,000 | $7,985,000 |
| Earnings Per Share (Diluted) | $0.01 | $0.32 | $0.07 | $0.59 |
| Net Interest Income | $18,704,000 | $19,828,000 | $36,418,000 | $38,953,000 |
| Net Interest Margin | 3.30% | 3.92% | 3.26% | 3.89% |
| Provision for Loan Losses | $4,855,000 | $1,676,000 | $7,985,000 | $3,276,000 |
| Total Assets | $2,615,447,000 | $2,395,930,000 | $2,615,447,000 | $2,395,930,000 |
| Total Deposits | $1,997,364,000 | $1,786,847,000 | $1,997,364,000 | $1,786,847,000 |
| Stockholders' Equity | $274,459,000 | $213,475,000 | $274,459,000 | $213,475,000 |
| Cash and Cash Equivalents | $80,377,000 | $66,840,000 | $80,377,000 | $66,840,000 |
Material Changes vs. Prior Period
- Profitability Decline: Net income dropped 78% year-over-year in Q2 2009 ($953k vs $4.3m). This was driven by a 189% increase in the provision for loan losses ($4.9m vs $1.7m) and a decline in net interest income due to lower yields on earning assets.
- Asset Quality Deterioration: Nonperforming assets (NPAs) surged to $52.3 million (2.77% of loans) from $12.9 million a year ago. This increase is primarily attributed to a single residential real estate development project. Net charge-offs for the quarter were $2.9 million.
- Interest Rate Environment: The net interest margin compressed to 3.30% from 3.92% year-over-year. The decline in the Federal funds rate to near zero reduced yields on interest-earning assets faster than the cost of interest-bearing liabilities declined.
- Expense Increases: Noninterest expenses rose 11.6% year-over-year. Significant contributors included a $1.2 million special FDIC insurance assessment, $363,000 in acquisition costs for the First Market Bank merger, and higher legal expenses related to loan workouts.
- Mortgage Segment Growth: Despite the overall decline, the mortgage segment saw net income increase to $1.2 million (from $88k) due to a 71% increase in loan originations driven by low interest rates and refinance volume.
Guidance, Outlook, and Risks
- Merger Outlook: The company expects to close the acquisition of First Market Bank, FSB, by year-end, which will expand its footprint to approximately 97 branches and total assets over $4.0 billion.
- Capital Management: To preserve capital during the economic downturn, the company reduced its common stock dividend to $0.06 per share in Q2 2009. The company maintains a "well-capitalized" status with a Tier 1 risk-based capital ratio of 13.04%.
- Liquidity: Liquidity is considered sufficient. The company eliminated brokered certificates of deposit entirely by February 2009 and has reduced reliance on borrowings. Cash and liquid assets represent 45.0% of total earning assets.
- Risks and Contingencies:
- Credit Risk: Continued deterioration in asset quality is anticipated, particularly in real estate construction and development portfolios.
- Regulatory Assessments: The FDIC may impose an additional special insurance assessment later in 2009 to replenish the Deposit Insurance Fund.
- Interest Rate Risk: The company is asset-sensitive; while low rates benefit borrowing costs, they compress margins until rates rise. Simulation models indicate a negative impact on net interest income if rates rise or fall significantly from current levels.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $29.6 million allowance for loan losses (1.58% of loans) given the sharp rise in nonperforming assets to $52.3 million.
- Merger Integration: Monitor the progress and costs associated with the pending acquisition of First Market Bank, FSB, and potential dilution from the all-stock transaction.
- Real Estate Exposure: Assess the specific impact of the single residential real estate development project driving the increase in nonperforming assets and charge-offs.
- Dividend Sustainability: Evaluate the company's ability to maintain or restore dividends given the reduced earnings and the requirement to pay preferred stock dividends ($1.475 million YTD).
- FDIC Assessments: Track potential additional special FDIC assessments that could further impact noninterest expenses in the remainder of 2009.