Atlantic Union Bankshares Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; interim financial statements are unaudited and were reviewed, not audited. The Richmond, Virginia-based bank holding company operates Atlantic Union Bank, with branches in Virginia and parts of Maryland and North Carolina.
Financial performance and condition
- Earnings: Net income was $56.2 million, or $0.67 per diluted share, versus $7.1 million, or $0.09, in Q1 2020. Net income available to common shareholders was $53.2 million after $3.0 million of preferred dividends. Adjusted operating earnings available to common shareholders, a non-GAAP measure, were $64.8 million versus $7.0 million.
- Revenue and net interest: Net interest income was $134.9 million, nearly unchanged from $135.0 million; noninterest income was $31.0 million, up 7.2%. Together, these represent $165.9 million of GAAP net interest income plus noninterest income. Net interest margin declined 40 basis points to 3.09% (3.16% on a fully taxable-equivalent basis).
- Drivers and expenses: Lower interest expense largely offset lower loan and investment yields. Mortgage banking income increased $6.2 million to $8.3 million, while deposit service charges fell $2.1 million and loan-related swap fees fell $2.2 million. Noninterest expense rose 17.0% to $111.9 million, including a $14.7 million loss on debt extinguishment.
- Credit provision and asset quality: The company recorded a $13.6 million negative provision for credit losses, compared with a $60.2 million provision in Q1 2020. Management attributed the release to improved economic forecasts and credit conditions. Allowance for credit losses was $155.7 million, down from $170.5 million at year-end. Nonperforming assets were $44.2 million, or 0.31% of loans; net charge-offs were $1.2 million, or 0.03% of average loans annualized.
- Balance sheet and funding: Total assets were $19.9 billion, up $226.2 million from December 31, 2020. Loans held for investment were $14.3 billion, including $1.5 billion of PPP loans; excluding PPP, loans declined $82.2 million from year-end. Deposits increased $575.3 million to $16.3 billion, including growth in noninterest-bearing balances. Stockholders’ equity was $2.7 billion.
- Cash flow and liquidity: Operating cash flow was $84.4 million; investing activities used $437.4 million and financing activities provided $260.6 million. Cash and cash equivalents fell $92.4 million to $400.9 million. Management reported $6.6 billion of liquid assets, or 33.1% of assets, and considered liquidity sufficient. It noted that some elevated customer deposits may be temporary.
- Debt and capital: Long-term borrowings were $290.1 million at quarter-end, after prepayment of a $200 million FHLB advance; other short-term borrowings were $168.0 million, with $105.5 million of repurchase agreements separately reported. The company’s estimated CET1, Tier 1, total capital, and leverage ratios were 10.56%, 11.70%, 14.25%, and 9.18%, respectively.
Material changes versus comparable periods
- Reported earnings rose sharply from Q1 2020, when the company recorded a $60.2 million credit-loss provision. Q1 2021 instead benefited from a $13.6 million provision release; adjusted pre-tax, pre-provision operating earnings were broadly stable at $68.6 million versus $68.1 million.
- Net interest margin declined 40 basis points year over year as earning-asset yields fell more than funding costs. Interest expense dropped to $12.8 million from $36.3 million.
- Noninterest income increased 7.2%, principally from mortgage banking, while noninterest expense increased 17.0%, principally because of the debt-prepayment penalty.
- Compared with year-end 2020, deposits grew 3.7%, reported loans grew 1.8% (7.3% annualized), and long-term borrowings declined following the FHLB prepayment.
Outlook, risks, and unusual items
- Management expected net interest margin to be stable if short-term rates remained low. Its interest-rate sensitivity model indicated net interest income would rise 4.76% under an immediate 100-basis-point increase and decline 3.92% under a 100-basis-point decrease; these are modeled estimates, not guidance.
- The company identified COVID-19, economic conditions, borrower repayment and collateral values, commercial real-estate concentrations, interest rates, deposit flows, liquidity and capital, competition, cyber risks, and the LIBOR transition as significant uncertainties. Management said asset quality had not materially deteriorated to date but could be adversely affected.
- COVID-19 loan modifications still in effect totaled $68.1 million, down from $146.1 million at year-end; $7.1 million of loans with expired COVID-related modifications were more than 30 days past due. PPP loans were approximately $1.5 billion, largely SBA-guaranteed.
- The $14.7 million pre-tax FHLB prepayment penalty was a notable nonrecurring expense. Five branches were consolidated in February, with approximately $1.1 million of related costs in Q1. Management reported no material adverse effect expected from ordinary-course legal proceedings and no material change to previously disclosed risk factors.
- Subsequent to quarter-end, the board declared a $0.28 common dividend, up 12% from the prior quarter, and authorized a new share repurchase program of up to $125 million through June 30, 2022.
Important facts for investors to verify
- Whether the earnings uplift from lower credit provisions and PPP-related activity is sustainable, and how credit reserves respond to future economic changes.
- Loan quality trends, including commercial real-estate and hospitality exposures, remaining modified loans, and PPP forgiveness and fee recognition.
- Whether elevated deposits persist or leave, and the resulting effects on funding costs, liquidity, and loan growth.
- Net interest margin performance if rates stay low or change, compared with management’s modeled sensitivity.
- Capital and cash available to support the higher dividend and new repurchase authorization after debt repayment and other funding needs.