Union Bankshares to sell $62.5 million in stock

Bowling Green-based Union Bankshares announced Tuesday that it intends to sell $62.5 million in new stock.

Union Bankshares is the holding company of Union Bank and Trust, and has a pending merger agreement to acquire Richmond-based First Market Bank for 7.5 million shares of common stock.

“We want to put ourselves in a position to support future growth and the dislocation of customers that will come from some of the large banks to the combined Union Bank and First Market entity,” said G. William Beale, president and CEO of Union Bankshares.

“We also want to have a strong capital position to help us with whole bank acquisitions and FDIC assisted acquisitions that may take place in the future.”

The company’s market cap is $198 million, which means it aims to sell about 31.5 percent more stock. At Tuesday’s closing share price of $14.52, that would mean selling 4.3 million shares.

The company’s stock price fell after it announced the stock offering. The price had dropped more than 10 percent through the afternoon.

Michael Glotz, a banking consultant and partner at Strategic Risk Associates, said it isn’t unusual for bank stocks to fall upon news of an equity offering.

“Sixty-two million is a pretty significant offering for a bank that size, so existing shareholders are becoming diluted,” said Glotz. “But the institution is raising equity capital for the long-term safety of the institution. From our viewpoint, we generally see that as a positive.”

Glotz said that thousands of banks here and across the country are in the process of raising equity capital. For example, privately-held Virginia Business Bank has been trying to raise as much as $9 million since last fall but has had trouble doing so, raising only about $1.5 million. (You can read more about that here.)

“A lot of banks are raising equity capital because of the softening in the commercial real estate marketing and foreseeing future losses,” Glotz said.

According to information provided to regulators in March, Union Bankshares saw the balance of loans past due for 90 days or more increase nearly 600 percent from the previous year to a total of more than $7 million. The value of real estate owned went from $467,000 to $6.9 million.

Glotz said banks are also raising capital to pay off federal TARP loans. He said they are eager to shed those debts because of the restrictive covenants and additional regulations placed upon them by the Treasury.

“The TARP money is relatively expensive. Equity capital is a much less expensive way of financing an institution,” Glotz said.

That’s another reason for the Union Bankshares offering, said Beale. With the additional capital raised from a stock sale, Union Bankshares will evaluate whether to repay the $59 million it owes the U.S. Treasury, he said.

The sale will bring the bank’s capital funds to $300 million, said Beale. It also will increase the amount of cash available for lending and making other short-term investments.

Beale and other bank executives are spending the next few days doing road show presentations in New York for unnamed institutional investors as it searches for interested parties to buy stock.

Among many other risk factors stated in a recent prospectus filed with the SEC, the company expressed concern that a possible sale of Ukrop’s Super Markets could negatively impact the combined bank.

Twenty-five of First Market Bank’s 39 branches are located inside of the family-owned grocery stores. According to the prospectus, the branches would be able to operate under the terms of their current license agreement if another owner took control of the grocery chain.

It goes on to say that the new bank could be negatively impacted from a possible sale if there is a customer backlash and First Market customers no longer find the branches to be convenient.

As of June 30, Union Bankshares had assets of $2.6 billion, loans of $1.9 billion and deposits of $2 billion.

More details on First Market Bank:

Now that First Market Bank is in the process of becoming part of the publicly-traded Union Bankshares family, its earning are public and included in SEC filings.

FMB earned a profit of $1.5 million for the second quarter of 2009, which ended in June, according to an 8K filing. That’s down from $2.3 million for the same quarter of 2008, which was itself a rough year, and down 81 percent from $8.1 million in 2007. [The bank had profits (net income) of $1.5 million in 2008, which was down 81 percent from $8.1 million the bank earned in 2007.]

At the close of the second quarter of this year, FMB had total assets of $1.4 billion, up from $1.3 billion for the same time in 2008.

But businesses are having a harder time paying loans. And as of June 30, non-performing assets were $20.7 million, up $18 million from a year earlier. Most of that was due to commercial loans, according to the filing. Non performing loans are ones where the borrower is not paying the interest on the loan.

Non-accrual loans are ones that are more than 90 days delinquent, and that total was $18 million as of June 30. Most of those are from nine commercial customers, including one builder that declared bankruptcy, according to the filing.

About 22 percent of the bank’s loans are classified as commercial.

Al Harris covers business for BizSense. Please send news tips to Al@richmondbizsense.com. Editor Aaron Kremer contributed to this story.