Atlantic Union Bankshares Corporation (AUB) — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2021. Atlantic Union Bankshares is a Richmond-based bank holding company operating Atlantic Union Bank, with 130 branches and approximately 150 ATMs in Virginia and parts of Maryland and North Carolina. The interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and condition
- Q2 earnings: Net income was $85.4 million and net income available to common shareholders was $82.4 million, or $1.05 per diluted share, versus $30.7 million and $0.39 per share in Q2 2020. Six-month common earnings were $135.6 million, or $1.72 per diluted share, versus $37.8 million and $0.48.
- Revenue and margins: Q2 net interest income rose 2.4% to $140.5 million; net interest margin fell 8 basis points year over year to 3.15%. Six-month net interest income was $275.4 million, up 1.2%, while margin declined 23 basis points to 3.12%. Lower asset yields compressed margins, partly offset by lower funding costs. Q2 noninterest income fell 20.8% to $28.5 million, mainly because Q2 2020 included $10.3 million of securities gains; excluding securities gains, management reported adjusted operating noninterest income growth of 11.2%.
- Credit costs and asset quality: The company recorded a $27.4 million provision benefit in Q2 2021, compared with a $34.2 million provision expense in Q2 2020. For the first half, the provision benefit was $41.0 million versus $94.4 million of expense in 2020. Management cited improved economic expectations and benign credit metrics. At June 30, the allowance for credit losses was $128.3 million, or 0.94% of loans; nonperforming assets were $38.1 million, or 0.28% of loans, down from $45.2 million at year-end. Six-month net charge-offs were $1.2 million, or 0.02% of average loans.
- Expenses and unusual items: Q2 noninterest expense declined 10.5% to $92.0 million, in part because Q2 2020 included a $10.3 million debt-extinguishment loss and branch-closure and severance costs. In Q1 2021, the company prepaid a $200 million FHLB advance, recognizing a $14.7 million penalty; the first-half results include that charge. Six-month noninterest expense rose 2.7% to $203.9 million.
- Balance sheet and liquidity: Total assets were $20.0 billion, deposits $16.7 billion, and stockholders’ equity $2.75 billion at June 30. Cash and cash equivalents were $865.2 million. Deposits increased $936.5 million from year-end, while loans held for investment declined $323.4 million to $13.7 billion, largely reflecting PPP forgiveness. Excluding PPP, loans were nearly flat. Liquid assets totaled $6.6 billion, or 33.2% of assets; management said liquidity was sufficient. Six-month operating cash flow was $137.4 million, compared with $122.2 million in 2020.
- Debt and capital: Short- and long-term borrowings totaled $380.1 million, down from $840.7 million at year-end, reflecting debt repayment and reduced wholesale funding. The company reported a 10.56% common equity Tier 1 ratio, 14.05% total capital ratio, and 9.20% leverage ratio. These June 30 figures were estimates pending regulatory filing.
- Shareholder returns: The company repurchased approximately 1.09 million shares for $42.3 million during Q2 under a new $125 million authorization expiring June 30, 2022. It declared a $0.28 common dividend per share. After quarter-end, it repurchased a further 1.5 million shares for $54.0 million through August 3.
Material changes versus comparable periods
- Reported earnings increased substantially year over year, principally reflecting the swing from credit-loss provisions in 2020 to provision releases in 2021 and the absence of the prior-year debt-extinguishment loss. Q2 2020 securities gains partly offset those prior-year expenses.
- Net interest income improved modestly, but net interest margin declined as interest-earning asset yields fell more than funding costs.
- Credit indicators improved: nonperforming assets, past-due loans, and net charge-offs were lower than the cited 2020 and year-end comparisons.
- Deposits and cash grew, while loan balances declined; reported loan contraction was substantially influenced by PPP forgiveness. Borrowings were materially reduced.
Outlook, commentary, risks, and contingencies
- Management expected net interest margin to remain stable through 2021, assuming short-term rates stayed low. Its interest-rate model indicated net interest income would rise 6.81% under an immediate 100-basis-point increase and fall 4.58% under a 100-basis-point decrease; these are model estimates, not guidance on reported earnings.
- Management viewed COVID-19’s ultimate asset-quality impact as likely less severe than initially projected, but cautioned that the pandemic, variants, economic recovery, and borrower performance remained uncertain. It also expected some elevated customer deposits to be temporary and potentially to run off.
- PPP loans totaled approximately $859.4 million at quarter-end, with $1.3 billion of forgiveness processed through June 30. PPP fee accretion contributed to interest income; the timing of further forgiveness and fee recognition may affect results.
- Key exposures include commercial real estate concentrations, interest-rate and deposit sensitivity, credit-loss estimation, liquidity and capital, competition, cybersecurity and third-party risks, COVID-19 effects, and the transition away from LIBOR. The company had $6.10 billion of commitments to extend credit and letters of credit off balance sheet; actual funding needs may be lower because commitments can expire undrawn.
- Management stated that pending legal proceedings were not expected, in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported. The filing provides no specific full-year earnings guidance.
Important facts for investors to verify
- How much of reported earnings growth reflects provision releases and prior-year unusual charges, versus recurring operating performance.
- Whether deposit growth persists or reverses, and the resulting effects on liquidity, funding costs, and net interest margin.
- PPP forgiveness pace, remaining deferred fees, and underlying organic loan growth excluding PPP.
- Credit quality trends, especially commercial real estate risk ratings, nonperforming loans, and the adequacy of the allowance as economic conditions change.
- Repurchase activity and capital ratios after the quarter, including the effect of subsequent buybacks and the scheduled phase-in of CECL regulatory capital impacts.
- Management’s margin outlook and interest-rate sensitivity assumptions against actual rate, prepayment, and deposit behavior.