Business Context and Reporting Period
Company: Union Bankshares Corporation (Atlantic Union Bankshares Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: The Company is a Virginia-based community banking organization operating through three bank subsidiaries and a mortgage segment. During the quarter, the Company received shareholder approval for its acquisition of First Market Bank, FSB, an all-stock transaction valued at approximately $105.4 million. The Company also completed a follow-on equity raise in September 2009, issuing 4,725,000 shares of common stock for net proceeds of approximately $58.8 million.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Net Income | $2.8 million | $5.5 million | $4.3 million | $12.2 million |
| Net Income Available to Common Shareholders | $1.9 million | $2.9 million | $4.3 million | $12.2 million |
| Earnings Per Share (Diluted) | $0.13 | $0.21 | $0.31 | $0.91 |
| Net Interest Income | $20.8 million | $57.2 million | $20.3 million | $59.2 million |
| Net Interest Margin (Tax-Equivalent) | 3.69% | 3.41% | 3.89% | 3.89% |
| Provision for Loan Losses | $4.5 million | $12.5 million | $3.7 million | $6.9 million |
| Total Assets | $2.58 billion | N/A | $2.45 billion | N/A |
| Total Deposits | $1.97 billion | N/A | $1.81 billion | N/A |
| Allowance for Loan Losses | $32.9 million | N/A | $24.4 million | N/A |
| Cash and Cash Equivalents | $71.3 million | N/A | $84.5 million | N/A |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the three months ended September 30, 2009, decreased by $1.5 million compared to the same period in 2008. This decline was primarily driven by the absence of a $1.8 million nonrecurring gain on the sale of bank property recorded in the prior year, partially offset by improved net interest income and mortgage segment revenue.
- Increased Credit Costs: The provision for loan losses increased by $850,000 year-over-year to $4.5 million, reflecting specific reserves on nonperforming loans and deterioration in asset quality, particularly in real estate development and housing sectors.
- Asset Quality Deterioration: Nonperforming assets increased to $43.4 million (up $26.3 million from a year ago), driven by loans in the real estate development sector. However, nonperforming assets decreased by $8.9 million from the previous quarter due to successful loan workouts and sales of other real estate owned (OREO).
- Capital Strengthening: Stockholders' equity increased to $340.2 million from $213.9 million a year ago, bolstered by the September 2009 common stock offering and the issuance of preferred stock to the U.S. Treasury in late 2008.
- Deposit Growth: Total deposits increased by $151.4 million (8.3%) year-over-year, primarily due to growth in money market accounts following a promotional campaign.
Guidance, Outlook, Risks, and Unusual Items
- Merger Integration: The Company is proceeding with the acquisition of First Market Bank, expected to close in early 2010. Total acquisition costs are estimated at $10.8 million, with $948,000 incurred year-to-date. Risks include integration challenges and potential disruption to operations.
- FDIC Assessments: The Company incurred a $1.2 million special FDIC assessment in the second quarter. Additionally, the FDIC proposed a rule requiring prepayment of assessments for 2010-2012, which the Company estimates could require a prepayment of approximately $12.3 million.
- Legal Proceedings: The Company's mortgage subsidiary, Union Mortgage Group, Inc., was sued in a class action lawsuit in Maryland alleging violations of the Secondary Mortgage Loan Law. The outcome is uncertain and could materially affect financial condition.
- Interest Rate Environment: The Company remains asset-sensitive. While the low interest rate environment has pressured net interest margins, the Company expects improvement as higher-rate certificates of deposit mature and reprice lower. Management anticipates benefits when rates begin to rise.
- Unusual Items: The prior year's third quarter included a $1.8 million gain on the sale of bank property, which is not present in the current period. The current period includes $307,000 in acquisition-related expenses.
Investor Verification Checklist
- Merger Timeline: Verify the status of regulatory approvals and the expected closing date for the First Market Bank acquisition.
- Asset Quality Trends: Monitor the trajectory of nonperforming assets and the adequacy of the allowance for loan losses (currently 1.75% of loans) given the concentration in commercial and construction real estate.
- FDIC Prepayment Impact: Assess the potential cash flow impact of the proposed FDIC prepayment rule for 2010-2012 assessments.
- Legal Exposure: Track developments in the Maryland class action lawsuit regarding secondary mortgage loans.
- Capital Deployment: Confirm the intended use of the $58.8 million raised in the September equity offering, specifically regarding the potential repurchase of Treasury preferred stock.