Business context and reporting period
Atlantic Union Bankshares Corporation, a Richmond-based bank holding company operating primarily in Virginia, reported results for the three months ended March 31, 2020. The interim financial statements were reviewed by the independent auditor, not audited. Results were affected by the COVID-19 economic shock and the January 1 adoption of CECL; prior-year credit measures use the prior accounting method and are not fully comparable.
Financial performance and condition
- Revenue and earnings: Net interest income was $135.0 million, up 5.9% from $127.5 million. Noninterest income was $28.9 million, up 15.9%; combined GAAP net interest and noninterest income was $163.9 million versus $152.5 million. Net income fell to $7.1 million from $35.6 million, and diluted EPS was $0.09 versus $0.47.
- Credit provision and margins: Provision for credit losses was $60.2 million versus $3.8 million, reflecting CECL and deteriorating COVID-19 economic forecasts. Net interest margin declined to 3.49% from 3.72% (FTE margin: 3.56% from 3.80%). The effective tax rate was 12.2%, compared with 14.9%.
- Cash flow: Operating cash flow was $48.4 million; investing cash flow was negative $157.1 million and financing cash flow was positive $177.7 million. Cash and cash equivalents ended the quarter at $505.0 million, up $68.9 million from year-end.
- Balance sheet and liquidity: Total assets were $17.85 billion. Loans held for investment were $12.77 billion, up $157.9 million from December 31; deposits were $13.55 billion, up $248.1 million. Management reported $5.8 billion in liquid assets, or 32.4% of total assets, and considered liquidity sufficient.
- Credit quality: Allowance for credit losses (ACL) was $150.0 million, comprising a $141.0 million loan allowance and $9.0 million reserve for unfunded commitments. The loan allowance equaled 1.10% of loans, versus 0.34% at year-end. Nonperforming assets were $48.5 million, or 0.38% of loans; the company attributed much of the increase to CECL’s treatment of acquired loans. Net charge-offs were $5.0 million, or 0.16% annualized.
- Debt and capital: Short-term borrowings, including repurchase agreements, were $436.8 million; long-term borrowings were $1.08 billion. Regulatory capital ratios were 9.74% common equity Tier 1, 12.36% total capital, and 8.44% leverage. The company suspended its share repurchase program on March 20, with approximately $20 million of authorization remaining, and paid a $0.25 per-share dividend.
Material changes versus the prior comparable period
- Net income and diluted EPS declined substantially, primarily as the credit-loss provision rose sharply. Pre-tax, pre-provision earnings, a company-defined non-GAAP measure, increased to $68.3 million from $64.2 million.
- Net interest income grew with higher average loan balances and increased acquisition-related loan discount accretion, but lower market rates reduced asset yields and compressed net interest margin.
- Noninterest income increased, including higher swap fees, securities gains, and fiduciary fees; interchange fees fell $3.4 million, primarily following the Durbin Amendment’s application to the company.
- Noninterest expense declined 10.4% to $95.6 million, mainly because 2019 included $18.1 million of merger costs. Excluding specified merger, rebranding, and intangible-amortization items, operating expenses increased 8.6%.
- CECL adoption reduced opening retained earnings by $39.1 million and increased the opening allowance for credit losses by $51.6 million. Subsequent deterioration in economic forecasts increased the allowance further.
Outlook, commentary, risks, and unusual items
- Management said COVID-19 was expected to affect business, financial condition, and results throughout 2020; the duration and severity were uncertain. The filing provides no specific earnings or revenue guidance.
- Management expected Federal Reserve rate cuts to continue putting downward pressure on net interest margin. Interest-rate modeling showed higher net interest income under rising-rate scenarios and lower net interest income under falling-rate scenarios.
- As of May 7, the company had approved approximately $1.9 billion in COVID-19-related loan modifications; about $75 million of such modifications were made during Q1. The bank also reported SBA approval for more than 10,000 PPP loans totaling approximately $1.8 billion and anticipated participating in the Main Street Lending Program.
- Key risks include recession and unemployment, borrower repayment capacity, commercial real estate and other loan concentrations, collateral values, adequacy of credit-loss reserves, very low interest rates, deposit flows, liquidity and capital needs, and operational, cyber, fraud, vendor, and regulatory risks. Management stated that pending legal proceedings were not expected, in aggregate, to have a material adverse effect.
- Other notable items: a $1.8 million loss was recognized after terminating a cash-flow hedge; no goodwill impairment was identified at March 31; and the share repurchase program was suspended amid the pandemic.
Important facts for investors to verify
- How subsequent economic conditions, borrower deferrals, and PPP activity affect delinquency, charge-offs, credit reserves, and loan growth.
- Whether CECL’s large reserve increase and the non-comparability of prior-period credit metrics obscure underlying portfolio trends.
- Deposit stability, available borrowing capacity, and liquidity needs if approved loan modifications or PPP funding change cash demands.
- Net interest margin and earnings sensitivity as near-zero policy rates persist, including the realization of acquisition-related discount accretion.
- Capital ratios, dividend capacity, and any resumption or further suspension of share repurchases as the economic outlook develops.