Union First Market Bankshares: An Undervalued Mini Regional That Yields 3%

| About: Union Bankshares (UBSH)

Large cap financials were a market leader in 2012 after a few extremely difficult years throughout the "Great Recession". Not to be overlooked, though, are smaller, well-capitalized and possibly undervalued community and mini-regional banks. These institutions located in growing markets can be somewhat shielded from the uncertainty surrounding the general economy and positioned to grow moving forward.


Union First Market Bankshares Corporation (NASDAQ:UBSH) is a $2.9B mini-regional, Virginia bank headquartered in Richmond, VA. Union First Market operates more than 90 branches in the eastern, northeastern and northwest regions of Virginia and more than 150 ATMs. The bank is divided into two main segments: 1) a full community banking services division and 2) a mortgage loan application division. UBSH currently trades on the NASDAQ. As of market close on 1/18/2013, USBH was priced at $16.25 and the dividend yield is 2.95%. Average daily volume is relatively thin at 51k. Most importantly, UBSH reports earnings on January 28th and I want readers to be familiar with the company going into what should be a strong earnings report. This article will serve as a "appetizer" to the earnings report next week and will attempt to begin to familiarize readers with this company.

It is well known that the state of Virginia is frequently ranked among the top states to do business in the country. Since UBSH is one of the largest community banks in Virginia, I believe this company is in prime position to take advantage of its home turf. The economy is performing better in most of Virginia relative to the nation as a whole and UBSH should continue to build on a solid last few quarters. In fact, in the period from 2007 to 2011 total revenues have grown by 40.2% as UBSH has grown both its footprint and its balance sheet.

Financial Analysis

A snapshot of recent earnings performance is provided below:

$ '000s 2012* 2011 2010 2009 2008 2007
Revenues 179 233 237 162 166 166
EPS 1 1.07 0.83 0.22 1.07 1.47
NIM 4.57
*through 9/30/2012
Click to enlarge

*I will write another article after 4th quarter earnings are reported on January 28th summarizing full year performance.

Heading into 4Q earnings and from a high level balance sheet perspective, the most recent five quarters are indicating a growing balance sheet while loan losses are holding steady. Unlike many of its competitors, it does not appear that the majority of UBSH earnings are coming purely from increased credit quality.

Net loans at 9/30/2012 totaled $2.77MM which represented an increase of 3.57% over 9/30/2011. Provision for loan losses were relatively flat during this time period as was OREO category on the balance sheet. At 9/30/12, the ROA was .96% while the ROE was 8.70%. While these metrics are not overwhelmingly strong, the trend is certainly heading in a positive direction when one looks back at recent historical performance. It is well known that most banks (especially larger institutions) have experienced NIM compression in recent years. However, UBSH has been able to hold its NIM relatively constant at 4.31% at 9/30/2012 (compared to 4.36%) at the end of the previous quarter.

As mentioned earlier, UBSH is returning capital to shareholders in the form of a nearly 3% dividend that has doubled since the 1Q of 2010. Additionally, this yield is much higher than the current industry average of 2.06%.

During the 4th quarter of 2012, UBSH made a decision to close four branches in Northern VA recognizing a need to closely monitor costs in this low-organic growth environment. Although non-interest expense for the quarter ending 9/30/12 were 11.05% higher than for the quarter ending 9/30/2011, I look for this number to begin to decrease as management works to further control expenses by monitoring fixed and variable (as well as interest and non-interest) expenses. It is clear that management understands that a continued focus on this section of the income statement is imperative in this environment.

At 9/30/2012, UBSH had a strong Tier 1 Capital Ratio of 13.44, showing improvement of 45 bps when compared to the previous quarter.


While many of the financial highlights of UBSH indicate that this might be a company to be long in the near term, the attractive valuation of the company may be the strongest reason to buy. Today, UBSH trades at a P/E ratio of 12.69x (TTM). Furthermore, at 9/30/2012 UBSH had a book value of $17.11 and is currently trading a 5.29% discount to this value.


As many of its larger competitors continue to face regulatory headwinds, UBSH could be in a position to seize market share and cost effectively expand its network.

I hope you have found this introductory article on this company compelling. I eagerly await next week's earnings report and will return to offer my thoughts on the full year performance of 2012. I do believe that the recent trends of earnings beats, a growing balance sheet with a steady NIM and a focus on expenses make this bank one to watch over the next few weeks and months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.