Atlantic Union Bankshares Corporation — Q3 2023 Form 10-Q
Business context and reporting period
Atlantic Union Bankshares Corporation is a Virginia-based bank holding company operating Atlantic Union Bank, with 109 branches and 123 ATMs in Virginia and parts of Maryland and North Carolina. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are principally with December 31, 2022.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparison |
|---|---|---|
| Net interest income | $151.9 million; net interest margin 3.27% | Income +$1.2 million year over year; margin down 7 basis points |
| Net income / diluted EPS | $54.0 million / $0.68 | Q3 2022: $58.1 million / $0.74 |
| Net income available to common shareholders | $51.1 million | Q3 2022: $55.1 million |
| Noninterest income / expense | $27.1 million / $108.5 million | Income +5.9%; expense +8.6% year over year, with significant one-time items described below |
| Total assets | $20.7 billion | +$275.1 million from year-end 2022 |
| Loans held for investment, net of deferred fees and costs | $15.3 billion | +$834.5 million, or 7.7% annualized, from year-end 2022 |
| Deposits | $16.8 billion | +$854.8 million from year-end 2022; noninterest-bearing demand deposits fell $738.3 million |
| Borrowings | $1.02 billion, including $629.9 million short-term and $390.7 million long-term | Combined borrowings decreased about $688 million from year-end 2022 |
| Stockholders’ equity | $2.39 billion | +$16.1 million from year-end 2022; AOCI loss was $477.9 million |
| Credit allowance and asset quality | ACL $140.9 million, or 0.92% of loans; nonperforming assets $28.8 million, or 0.19% of loans | ACL increased $16.5 million from year-end; nine-month net charge-offs were $6.4 million versus $1.5 million |
| Regulatory capital | CET1 9.94%; total capital 13.70%; leverage 9.62% | Company reported ratios above regulatory well-capitalized standards |
For the first nine months, net income was $144.9 million and diluted EPS was $1.81, versus $164.0 million and $2.07 in 2022. Net interest income was $457.5 million, up $37.1 million; net interest margin was 3.35%, up 19 basis points. Operating cash flow was $215.6 million, compared with $326.9 million in the prior-year period; investing cash outflow was $224.3 million versus $714.9 million, and financing cash inflow was $87.8 million versus an outflow of $23.6 million.
Material changes versus comparable periods
- Q3 net interest margin declined year over year as higher deposit and borrowing costs offset higher loan yields. For the nine-month period, margin increased as asset yields and loan growth more than offset funding-cost increases.
- Interest expense rose to $95.2 million in Q3 from $20.4 million a year earlier. The cost of interest-bearing liabilities increased to 2.80% from 0.68%; the period-end deposit mix also shifted toward interest-bearing products.
- Nine-month noninterest income fell 35.2% to $60.9 million, primarily reflecting $41.0 million of securities-sale losses and lower fiduciary and mortgage banking income. Nine-month noninterest expense rose 6.1% to $322.4 million.
- Commercial and industrial, commercial real estate non-owner occupied, and multifamily loans contributed to loan growth. The company cited two commercial loan charge-offs as the main reason nine-month net charge-offs increased from 2022.
- AFS securities declined to $2.1 billion from $2.7 billion at year-end 2022. Net unrealized AFS losses increased to approximately $523.1 million from $462.5 million; HTM securities had $81.2 million of net unrealized losses, versus $45.8 million at year-end.
Outlook, commentary, risks, contingencies and unusual items
- Management said it anticipates continued net interest margin contraction as deposit competition, repricing and higher funding costs persist. It cited inflation, interest rates, economic uncertainty and banking-industry liquidity concerns as factors under active monitoring.
- The company estimates about 73.2% of deposits were insured or collateralized and available liquidity sources covered about 132% of uninsured and uncollateralized deposits. Liquid assets were $5.6 billion, or 27.2% of assets. It had $5.7 billion of remaining FHLB collateral-dependent line availability and $531 million of BTFP capacity, which it had not used as of September 30, 2023.
- Brokered deposits reached $516.7 million. Management noted that customers were moving funds from lower-yielding demand deposits to higher-yielding products; deposit balances and funding costs remain key watch items.
- On September 20, the Bank sold 27 properties, including 25 branches, for $45.8 million and leased them back under initial 17-year absolute-net leases. The transaction produced a $27.7 million pretax gain and created $38.1 million of lease liabilities.
- The company sold low-yielding AFS securities in Q3 with $228.3 million book value, recording a $27.7 million pretax loss and reinvesting proceeds in higher-yielding securities. It also sold AFS securities in Q1 at a $13.4 million pretax loss, using proceeds to reduce higher-cost FHLB borrowing.
- Strategic cost-saving actions are expected to reduce the annual expense run rate by approximately $17 million. The company recorded $8.7 million of related pretax costs in Q3 and $3.9 million in Q2. Q3 also included $2.0 million of pretax merger-related costs.
- The proposed American National Bankshares merger, announced July 24, 2023, is subject to regulatory and shareholder approvals and other closing conditions; the company expected it to close in Q1 2024. The exchange ratio is 1.35 AUB common shares for each American National share.
- The CFPB is conducting ongoing settlement discussions concerning alleged violations related to overdraft practices. The company recorded a probable and estimable liability, but said it cannot estimate potential losses beyond the amount accrued; litigation remains possible if settlement is not reached.
- Management identified the allowance for loan and lease losses as a significant estimate. Effective September 30, the company shifted to loan-level PD/LGD models for all loan portfolios and national economic variables; it said the methodology changes did not significantly affect the overall allowance estimate. Future credit losses remain sensitive to economic forecasts.
- The filing provides no formal earnings or EPS guidance. Its forward-looking discussion identifies merger execution and benefits, deposit flows and liquidity, interest rates, CRE exposure, loan quality, and effectiveness of expense measures as material uncertainties.
Most important facts for investors to verify
- Progress, approvals, closing timing, integration costs and expected benefits of the American National merger.
- Deposit retention, uninsured and uncollateralized deposit exposure, brokered-deposit reliance, liquidity availability and the trajectory of deposit costs.
- Quarterly net interest margin and whether asset-yield increases continue to offset deposit and borrowing repricing.
- Commercial real estate and commercial loan performance, criticized risk grades, charge-offs, nonperforming assets and the adequacy of the ACL.
- The scale and duration of AFS/HTM unrealized losses, securities repositioning results and related effects on capital and liquidity.
- Final resolution and financial impact of the CFPB overdraft matter, including any restitution or civil money penalty.
- Realization of the stated $17 million annual cost savings, alongside continuing merger, severance, lease and other restructuring expenses.