Atlantic Union Bankshares Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a Richmond, Virginia-based bank holding company operating Atlantic Union Bank, with 130 branches across Virginia and parts of Maryland and North Carolina. Interim financial statements are unaudited; the independent accountant’s review identified no material modifications needed for GAAP conformity.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $137.5 million | $137.4 million | $412.9 million | $409.7 million |
| Provision for credit losses | $(18.9) million | $6.6 million | $(59.9) million | $101.0 million |
| Noninterest income | $29.9 million | $34.4 million | $89.4 million | $99.2 million |
| Noninterest expense | $95.3 million | $93.2 million | $299.3 million | $291.7 million |
| Net income | $74.6 million | $61.0 million | $216.1 million | $98.8 million |
| Net income available to common shareholders | $71.6 million | $58.3 million | $207.2 million | $96.1 million |
| Diluted EPS | $0.94 | $0.74 | $2.66 | $1.22 |
- Margins: Q3 net interest margin was 3.05%, down 3 basis points year over year; FTE margin was 3.12%, down 2 basis points. Nine-month margin was 3.10%, down 16 basis points; FTE margin was 3.17%, down 15 basis points. Lower asset yields, excess liquidity and low market rates weighed on margins; lower deposit and wholesale funding costs partly offset that pressure.
- Balance sheet at September 30: Total assets were $19.94 billion; loans held for investment, net of deferred fees and costs, were $13.14 billion; deposits were $16.62 billion; and stockholders’ equity was $2.69 billion. Cash and cash equivalents totaled $1.06 billion.
- Loans and credit: Loans held for investment declined $881.7 million, or 8.4% annualized, from year-end 2020; excluding PPP loans, the decline was $168.8 million, or 1.8% annualized. Nonperforming assets were $37.2 million, 0.28% of loans. The allowance for credit losses was $109.3 million, 0.83% of loans, down from $170.5 million and 1.22% at year-end.
- Cash flow and liquidity: For the first nine months, operating cash flow was $240.0 million, investing cash flow was $97.4 million, and financing cash flow was $232.6 million. Liquid assets were $6.8 billion, or 34.3% of assets. Management considered liquidity sufficient; available borrowing sources included correspondent-bank lines and an FHLB line.
- Debt and capital: Short- and long-term borrowings totaled $385.8 million, down from $840.7 million at December 31, 2020, including repayment of a $200 million FHLB advance. Regulatory capital ratios at September 30 included CET1 of 10.37%, Tier 1 of 11.49%, total capital of 13.78%, and leverage of 8.97%.
- Shareholder returns: The company repurchased $125 million of common stock under its May 2021 authorization, completing the program. Q3 common dividends were $0.28 per share; the board declared the same quarterly dividend after period-end.
Material changes versus comparable periods
- Q3 net income available to common shareholders increased 23% year over year, while nine-month income more than doubled. The improvement includes substantially lower credit-loss provisions, which were negative in 2021, and should not be read as equivalent growth in underlying operating earnings.
- Q3 net interest income was nearly unchanged despite lower interest income, as interest expense fell. Nine-month net interest income rose modestly, but margin contracted.
- Q3 noninterest income fell 13%, mainly from lower mortgage banking income and loan-related swap fees; higher deposit service charges and wealth-management fees partly offset the declines. Nine-month noninterest income fell 9.9%, including much lower securities gains than in 2020.
- Noninterest expense increased 2.3% in Q3 and 2.6% for the nine-month period. Higher salaries, technology and professional-services costs were partly offset by lower branch-closure, loan-related and other expenses.
- Deposits increased $899.4 million from year-end, while cash and securities also grew. Management attributed elevated customer balances partly to pandemic-related government assistance and cautioned that some deposit growth may be temporary.
Outlook, commentary and risks
- No specific earnings or financial guidance is provided. Management expected economic activity to increase over coming quarters but said the pandemic’s duration, variants, public-health effects and pace of recovery remained uncertain.
- Management said credit trends and the economic outlook had improved, contributing to reserve releases, and reported no material deterioration in asset quality to date. It cautioned that future COVID-19 effects on borrowers, collateral values and credit quality could not be estimated reliably.
- PPP forgiveness continued to reduce reported loans: approximately $1.7 billion of PPP loans had been forgiven through September 30, 2021. Remaining PPP loans had a 1% rate and SBA guarantees; the program’s funding period ended May 31, 2021.
- Interest-rate sensitivity modeling showed estimated 12-month net interest income increasing 7.26% under an immediate 100-basis-point rise and decreasing 6.50% under a 100-basis-point decline. These are model estimates dependent on assumptions, not forecasts.
- Key disclosed risks include interest-rate and market changes, commercial real estate and other loan concentrations, credit-loss reserve adequacy, deposit outflows, COVID-19, competition, cyber and technology threats, vendor performance, liquidity and capital, regulation, and the LIBOR transition. Management reported no material change in previously disclosed risk factors and no material adverse effect expected from ordinary-course litigation.
- Unusual items include a $14.7 million pre-tax penalty in Q1 2021 for prepaying an FHLB advance. The nine-month results also reflect significant credit-reserve releases. Goodwill and intangible asset impairment tests found no impairment.
Important facts for investors to verify
- How much of earnings growth reflects reserve releases versus sustainable net interest and fee income; review both GAAP results and the company’s reconciliations of non-GAAP measures.
- Whether loan balances and deposit levels stabilize as PPP forgiveness continues and pandemic-related customer liquidity potentially runs off.
- Whether credit quality remains strong and the reduced allowance remains adequate, particularly across commercial real estate and commercial and industrial lending.
- How excess liquidity, low-rate asset yields and the modeled sensitivity to changing rates affect future net interest margin and earnings.
- The impact of completing the $125 million repurchase program on capital, per-share results and future capital returns; confirm capital ratios after regulatory filings.