Atlantic Union Bankshares Corp quarterly report, Q3 FY2020

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Atlantic Union Bankshares Corporation — 2020 Q3 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. The company is a Virginia-based bank holding company operating Atlantic Union Bank, with 135 branches across Virginia and parts of Maryland and North Carolina. Comparative results reflect the prior-year Access acquisition; 2019 included related integration and other unusual costs.

Financial performance and condition

  • Third-quarter earnings: Net income was $61.0 million and net income available to common shareholders was $58.3 million, or $0.74 per diluted share, versus $53.2 million and $0.65 per share in Q3 2019.
  • Nine-month earnings: Net income was $98.8 million and income available to common shareholders was $96.1 million, or $1.22 per diluted share, versus $137.7 million and $1.72 per share in 2019. The decline chiefly reflects the much higher credit-loss provision in 2020 and preferred-stock dividends.
  • Net interest: Q3 net interest income rose to $137.4 million from $136.6 million. Net interest margin fell to 3.08% from 3.57% (fully taxable-equivalent margin: 3.14% versus 3.64%). For nine months, net interest income increased to $409.7 million from $402.7 million, while margin declined to 3.26% from 3.66%.
  • Revenue and costs: Q3 noninterest income decreased 28.5% to $34.4 million, while noninterest expense decreased 16.5% to $93.2 million. For nine months, noninterest income fell 4.2% to $99.2 million and expense fell 10.0% to $291.7 million. Management’s non-GAAP pre-tax, pre-provision operating earnings were $78.6 million for Q3 versus $76.6 million, and $217.3 million year to date versus $214.7 million.
  • Credit costs: Provision for credit losses was $6.6 million in Q3 versus $9.1 million; nine-month provision rose to $101.0 million from $18.2 million. At September 30, the allowance for credit losses was $186.1 million, including a $174.1 million loan allowance and $12.0 million reserve for unfunded commitments. The loan allowance was 1.21% of loans; the total allowance was 1.29%.
  • Asset quality: Nonperforming assets were $43.2 million, or 0.30% of loans, compared with $32.9 million and 0.26% at year-end 2019. Nine-month net charge-offs were $9.7 million, or 0.09% of average loans, versus $16.2 million and 0.18% in 2019. Comparisons are affected by CECL adoption and COVID-related reporting relief.
  • Balance sheet: Total assets were $19.93 billion, up about 18% from year-end 2019. Loans held for investment were $14.38 billion, up $1.77 billion; excluding $1.60 billion of PPP loans, growth was $171.7 million, or 1.8% annualized. Deposits were $15.58 billion, up $2.27 billion, or 22.8% annualized.
  • Liquidity and cash flow: Cash and cash equivalents were $521.0 million, versus $436.0 million at year-end. Nine-month operating cash flow was $177.4 million, investing cash flow was negative $2.21 billion, and financing cash flow was positive $2.11 billion. Management reported $6.2 billion of liquid assets and considered liquidity sufficient, while noting some elevated customer deposits may be temporary.
  • Debt and capital: Short-term borrowings were $266.3 million and long-term borrowings $1.05 billion. Regulatory capital ratios were 10.04% CET1, 11.18% Tier 1, 13.92% total capital, and 8.82% leverage. A June preferred-stock offering raised approximately $166.4 million net; the Series A preferred stock carries a 6.875% rate. The quarterly common dividend remained $0.25 per share.

Material changes and unusual items

  • CECL adoption on January 1, 2020 increased the allowance by $51.6 million and reduced retained earnings by $39.1 million. Management subsequently increased reserves in response to the deteriorating COVID-19 economic outlook.
  • The bank processed more than 11,000 PPP loans totaling $1.7 billion; recorded PPP investment was $1.6 billion at quarter-end. These loans carry a 1% interest rate and are SBA-guaranteed.
  • The company had made $1.8 billion of COVID-related loan modifications; $769.6 million remained under modified terms at September 30. By October 16, the remaining balance had fallen to approximately $522.6 million, with subsequent requests concentrated mainly in hotels.
  • Q3 noninterest income comparisons were affected by approximately $9.3 million of life-insurance proceeds recognized in Q3 2019, lower 2020 securities gains, and increased mortgage banking income from higher origination volumes. For the nine-month comparison, lower deposit and interchange fees also weighed on income.
  • 2020 nine-month expense included a $10.3 million loss on prepaying approximately $200 million of FHLB advances. The company also recorded $6.0 million of year-to-date costs for expense-reduction actions, including consolidation of 14 branches completed in September. The 2019 comparison included $26.9 million of merger costs, $5.6 million of rebranding expense, and a $16.4 million debt-extinguishment loss.
  • The company suspended its share repurchase program in March 2020. It reported no material changes to previously disclosed risk factors, and management concluded disclosure controls were effective. The interim financial statements received an independent accountant’s review, not a full audit.

Outlook, commentary and risks

The filing provides no numerical earnings or revenue guidance. Management expected Federal Reserve rate actions and the low-rate environment to continue pressuring net interest margin. It warned that the timing and severity of COVID-19 effects remain uncertain and that future asset quality could weaken due to bankruptcies, business closures, unemployment, and other pandemic impacts. Management said it had not yet seen deterioration compared with pre-pandemic asset-quality performance, but could not estimate the timing or magnitude of future deterioration.

Key risks include COVID-19’s effects on borrowers and collateral, commercial real estate concentrations, especially hotel exposure, interest-rate changes, deposit outflows, credit-loss estimate uncertainty, liquidity and capital needs, competition, cyber and technology risks, and potential claims or regulatory changes associated with pandemic-response programs. Hospitality was the largest identified disrupted industry exposure and represented less than 5% of total loans. The company reported no significant exposure to energy, cruise, or passenger aviation.

Important facts for investors to verify

  • Track the remaining COVID-modified loans, especially hotel-related requests, and subsequent loan performance after deferrals expire.
  • Assess whether the $186.1 million credit-loss allowance remains adequate as economic forecasts and borrower credit quality evolve; note CECL and PPP effects when comparing ratios.
  • Separate PPP-driven balance-sheet growth from underlying loan growth, and monitor PPP forgiveness, fee recognition, and related PPPLF funding.
  • Evaluate whether deposit growth is durable, given management’s expectation that some pandemic-related balances may leave, and confirm available borrowing capacity and pledged collateral.
  • Monitor net interest margin under prolonged low rates, including asset yields, deposit pricing, and funding mix.
  • Review capital and shareholder distributions, including the preferred-stock cost, common and preferred dividends, and the suspended repurchase authorization.