Atlantic Union Bankshares Corp annual report, FY2020

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Atlantic Union Bankshares Corporation — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. The company is a Virginia-based bank holding company operating primarily through Atlantic Union Bank, with banking and related financial services in Virginia and parts of Maryland and North Carolina.

Financial performance and condition

  • Earnings: Net income was $158.2 million; net income available to common shareholders was $152.6 million, or $1.93 diluted EPS, versus $193.5 million and $2.41 in 2019. The decline reflected higher credit-loss provisions and other pandemic-related effects. Pre-tax, pre-provision adjusted operating earnings were $294.0 million versus $295.1 million.
  • Revenue and margins: Net interest income rose 3.2% to $555.3 million, while noninterest income edged down 1.0% to $131.5 million. Net interest margin fell 35 basis points to 3.26% (3.32% fully taxable-equivalent). Lower asset yields compressed margin despite reduced funding costs and PPP loan-fee accretion.
  • Credit costs and asset quality: Provision for credit losses increased to $87.1 million from $21.1 million. The year-end allowance for credit losses was $170.5 million, including $160.5 million for loans and $10.0 million for unfunded commitments. Nonperforming assets were $45.2 million, or 0.32% of loans, versus $32.9 million and 0.26% a year earlier. Net charge-offs declined to $11.4 million, or 0.08% of average loans, from $20.9 million and 0.17%.
  • Balance sheet and funding: Total assets increased 11.8% to $19.6 billion. Loans held for investment were $14.0 billion, up $1.4 billion; excluding PPP loans, year-end loans increased $230.9 million, or 1.8%. Deposits rose 18.2% to $15.7 billion, largely reflecting PPP-related deposits and government stimulus. Management cautioned that some elevated deposit balances could be temporary.
  • Debt and capital: Total borrowings declined $673.0 million to $840.7 million, mainly through repayment of FHLB advances and redemption of subordinated debt. The company prepaid $550 million of long-term FHLB advances in 2020, incurring $31.1 million in penalties. Regulatory capital ratios were above minimums: common equity Tier 1 10.26%, Tier 1 11.39%, total capital 14.00%, and leverage 8.95%. The company issued preferred shares for net proceeds of approximately $166.4 million.
  • Liquidity and cash flow: Management described liquidity as sufficient; liquid assets were $6.5 billion, or 32.9% of total assets, at year-end. Cash and cash equivalents were $493.3 million. Cash flow from operations was $231.9 million; investing activities used $1.918 billion, primarily reflecting securities purchases and loan growth; financing activities provided $1.744 billion, mainly from deposit growth. The company reported $1.2 billion of available PPPLF borrowing capacity and substantial unused FHLB and correspondent-bank facilities.
  • Other metrics: Return on average assets was 0.83% versus 1.15%; return on average equity was 6.14% versus 7.89%. The GAAP efficiency ratio improved to 60.19% from 62.37%. Common dividends were $1.00 per share for 2020, and the share-repurchase program remained suspended.

Material changes versus 2019

  • Net income available to common shareholders declined 21.2%, while net interest income increased $17.4 million. Lower funding costs and PPP-related accretion helped, but overall loan and investment yields declined.
  • Credit-loss provision rose by $66.0 million, reflecting CECL adoption and a worsening economic forecast associated with COVID-19. CECL adoption increased the allowance at January 1, 2020 by $51.7 million and reduced retained earnings by $39.1 million.
  • PPP lending materially affected reported growth: the bank originated approximately $1.7 billion across more than 11,000 loans; about $1.2 billion remained recorded at year-end. Approximately $429.3 million of loans were forgiven in the fourth quarter.
  • Noninterest expense decreased 1.2% overall, but adjusted operating expense increased 4.7%. The year included $31.1 million of debt-extinguishment losses and approximately $6.8 million of branch-consolidation and expense-reduction costs. Fifteen branches were consolidated during 2020, with five more consolidated in February 2021.

Outlook, commentary, risks, and unusual items

  • The filing provides no specific earnings or revenue guidance. Management said the pandemic’s duration, economic effects, borrower performance, and pace of recovery remained uncertain, and could not estimate the timing or magnitude of future asset-quality deterioration.
  • COVID-19 risks include borrower repayment difficulties, collateral-value declines, loan-modification effects that may delay recognition of credit deterioration, lower fee income, and very low interest rates. The bank said most expired short-term modifications remained current; $146.1 million remained under modified terms at year-end, primarily in commercial real estate.
  • Credit concentration is a key risk: commercial real estate, construction and development, and commercial and industrial lending form substantial portions of the portfolio. The company also identified cyber threats, competition, regulatory costs associated with exceeding $10 billion in assets, interest-rate sensitivity, and the LIBOR transition as risks.
  • Other notable items include a $14.7 million FHLB prepayment penalty in February 2021 and a quarterly common dividend of $0.25 per share declared in January 2021. Management said ordinary-course litigation was not expected, in aggregate, to have a material adverse effect.
  • Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the allowance for loan losses and goodwill impairment analysis as critical audit matters; no goodwill impairment was recorded.

Important facts for investors to verify

  1. Whether credit losses rise as pandemic support and loan deferrals expire, particularly in commercial real estate and other exposed borrower sectors.
  2. How much reported loan and deposit growth is attributable to PPP activity and temporary stimulus-related balances, and the timing of PPP forgiveness and fee recognition.
  3. Whether the $170.5 million allowance adequately reflects CECL forecasts and the quality of the company’s loan-level and economic assumptions.
  4. Whether net interest margin stabilizes as PPP accretion fades and market rates, deposit costs, and loan yields change.
  5. The ongoing effect of debt-repositioning costs, branch consolidations, preferred dividends, and the suspended buyback on common-shareholder returns and capital.
  6. The detailed cash-flow statement, regulatory-capital disclosures, credit-modification tables, and subsequent-event disclosures in the full filing, including the February 2021 FHLB prepayment.