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Union First Market Bankshares Corp. (UBSH), Stellarone Corp (STEL): How Will This Controversial Play Affect Regional Banks?

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The recent announcement of a merger between two well-respected but decidedly local Virginia banks could have implications for thousands of investors beyond the state’s borders. According to confirmed reports by both companies, Richmond-based Union First Market Bankshares Corp. (NASDAQ:UBSH) has agreed to purchase Stellarone Corp (NASDAQ:STEL) in an all-stock deal. Although the deal has not yet cleared regulatory hurdles or been put forth as the subject of a shareholder vote, these obstacles should not prove difficult to overcome. Both firms have indicated that they expect the deal to close by the end of 2013.

Stellarone Corp (NASDAQ:STEL)

However, there are some legal issues that must be settled before then. Some Stellarone Corp (NASDAQ:STEL) shareholders have taken issue with Union First Market Bankshares Corp. (NASDAQ:UBSH)’s offer price, and several shareholder-rights law firms have jumped on the bandwagon with pre-lawsuit investigations. While it is too early to determine whether any of these cases hold water, the situation certainly warrants watching.

Union First, StellarOne and the Competition

These two companies compete with a number of local and national banks and trusts that do business in their home region. One of the most prominent of these is Atlanta-based SunTrust Banks, Inc. (NYSE:STI). This sprawling provider of money center services is widely regarded as one of the strongest banks in the southeastern United States. A comparison between SunTrust and the two Virginia firms might serve to illustrate some of the strengths and shortcomings of this pending merger.

SunTrust Banks, Inc. (NYSE:STI) has a market capitalization of about $17 billion. Given its geographical reach and deep market penetration, it should not be surprising that its valuation exceeds Union First Market Bankshares Corp. (NASDAQ:UBSH)’s $489 million market cap by a substantial margin. Stellarone Corp (NASDAQ:STEL)’s market capitalization of about $427 million is even smaller. SunTrust Banks, Inc. (NYSE:STI) is also less expensive than its two smaller peers: Its price-to-book ratio of .83 is about .1 lower than that of Stellarone Corp (NASDAQ:STEL) and nearly .3 lower than that of Union First Market Bankshares Corp. (NASDAQ:UBSH).

All three of these companies have solid margins and decent balance sheets. In 2012, Union First Market Bankshares Corp. (NASDAQ:UBSH) earned $36.5 million on revenues of $185.5 million and reported a profit margin of nearly 20 percent. Stellarone Corp (NASDAQ:STEL) earned $22.6 million on revenues of $126.3 million for a buffer of about 18 percent. Meanwhile, SunTrust Banks, Inc. (NYSE:STI) earned $2 billion on $9 billion and reported a 23 percent margin.

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