Business Context and Reporting Period
Company: Union First Market Bankshares Corporation (formerly Union Bankshares Corporation)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Headquarters: Richmond, Virginia (relocated from Bowling Green following acquisition)
Operations: The Company is a multi-bank holding company operating four community bank subsidiaries and three non-bank financial services affiliates (mortgage, investment, insurance) primarily in Virginia. It operates two reportable segments: Community Banks and Mortgage Loan Origination.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income | $8.36 million | $14.51 million |
| Net Income Available to Common Shareholders | $2.87 million | $14.50 million |
| Earnings Per Share (Diluted) | $0.19 | $1.07 |
| Total Assets | $2.59 billion | $2.55 billion |
| Total Loans (Net) | $1.84 billion | $1.85 billion |
| Total Deposits | $1.92 billion | $1.93 billion |
| Net Interest Income | $79.82 million | $77.87 million |
| Net Interest Margin | 3.55% | 3.79% |
| Provision for Loan Losses | $18.25 million | $10.02 million |
| Noninterest Expense | $85.29 million | $79.64 million |
| Return on Average Assets | 0.32% | 0.61% |
| Return on Average Equity | 2.90% | 6.70% |
| Efficiency Ratio | 75.62% | 73.45% |
| Allowance for Loan Losses | $30.48 million | $25.50 million |
| Nonperforming Assets | $44.86 million | $21.55 million |
| Tier 1 Capital Ratio | 13.45% | 13.31% |
| Total Risk-Based Capital Ratio | 14.70% | 14.56% |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 42.4% to $8.36 million. Net income available to common shareholders dropped significantly to $2.87 million due to preferred stock dividends and discount accretion.
- Asset Quality Deterioration: Nonperforming assets more than doubled to $44.86 million, driven by increases in nonaccrual loans ($22.35 million) and other real estate owned ($22.51 million). Net charge-offs rose to $13.26 million (0.71% of average loans) from $3.86 million in 2008.
- Increased Provisions: The provision for loan losses increased 82% to $18.25 million to cover deteriorating asset quality.
- Expense Growth: Noninterest expenses rose 7.1% to $85.29 million. Key drivers included a $3.4 million increase in FDIC insurance assessments (including a $1.2 million special assessment) and $1.5 million in acquisition-related costs for First Market Bank.
- Capital Management: The Company redeemed its $59 million Series A Preferred Stock issued to the Treasury under the Capital Purchase Program in November 2009 and repurchased the associated warrant in December 2009.
- Stock Performance: The closing stock price fell to $12.39 in 2009 from $24.80 in 2008. The Company completed a follow-on equity raise in September 2009, issuing 4.7 million shares at $13.25 per share.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition of First Market Bank: On February 1, 2010, the Company completed the acquisition of First Market Bank, FSB, in an all-stock transaction. This made the Company the largest Virginia-based community banking organization with approximately $4.0 billion in assets and 94 branches. The combined entity will operate as Union First Market Bank.
- Regulatory Capital: The Company and its subsidiary banks are classified as "well-capitalized" under regulatory guidelines. Tier 1 leverage ratio was 10.86%.
- FDIC Assessments: The Company prepaid $12.6 million in risk-based assessments in Q4 2009 covering periods through 2012, which will be expensed over time.
- Legal Proceedings: Union Mortgage Group, Inc. is facing a class-action lawsuit in Maryland regarding secondary mortgage loan fees and disclosures. Management believes the outcome will not have a material adverse effect, but no liability has been accrued as the loss is not estimable.
- Interest Rate Risk: The Company maintained an asset-sensitive position. Management expects net interest margin to remain relatively stable based on the current yield curve.
- Forward-Looking Statements: Management notes that actual results may differ due to economic conditions, interest rate environments, and regulatory changes.
Investor Verification Checklist
- Integration Risks: Verify the progress and cost of integrating First Market Bank, particularly the impact of the sale of Ukrop's Super Markets (where 24 of FMB's 38 branches are located) on branch traffic and deposits.
- Asset Quality Trends: Monitor the trajectory of nonperforming assets and the adequacy of the allowance for loan losses (currently 136.4% of nonperforming loans) given the concentration in real estate loans (82.4% of portfolio).
- FDIC Cost Impact: Track the quarterly expense recognition of the prepaid FDIC assessments and potential future rate increases.
- Preferred Stock Obligations: Confirm the Company's ability to meet dividend obligations on the new Series B Preferred Stock issued to the Treasury in connection with the FMB acquisition, which restricts common stock dividends and repurchases until redeemed.
- Legal Exposure: Review updates on the Maryland Secondary Mortgage Loan Law class-action lawsuit involving Union Mortgage Group.