Atlantic Union Bankshares Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company is a Virginia-based bank holding company operating Atlantic Union Bank, with 109 branches. Amounts below are in U.S. dollars; financial amounts are generally shown in millions unless stated otherwise. The interim statements were reviewed by Ernst & Young, not audited.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $152.1 | $138.8 | $305.5 | $269.7 |
| Provision for credit losses | $6.1 | $3.6 | $17.9 | $6.4 |
| Noninterest income | $24.2 | $38.3 | $33.8 | $68.4 |
| Noninterest expense | $105.7 | $98.8 | $213.9 | $204.1 |
| Net income | $55.2 | $62.2 | $90.9 | $105.9 |
| Net income available to common shareholders | $52.3 | $59.3 | $85.0 | $100.0 |
| Diluted EPS | $0.70 | $0.79 | $1.13 | $1.33 |
| Net interest margin | 3.37% | 3.15% | 3.39% | 3.06% |
- Q2 total revenue, calculated as net interest income plus noninterest income, was $176.3 million versus $177.1 million a year earlier. Net interest income rose, but lower fee and other income offset most of the increase. Six-month total revenue was $339.4 million versus $338.1 million.
- Q2 diluted adjusted operating EPS, a non-GAAP measure, was $0.74 versus $0.69. Six-month adjusted operating EPS was $1.37 versus $1.28. Adjustments include specified transaction, restructuring, securities-sale, and legal-reserve items; these measures are not GAAP results.
- At June 30, assets were $20.6 billion, loans held for investment were $15.1 billion, deposits were $16.4 billion, and stockholders’ equity was $2.42 billion. Loans increased $617.8 million and deposits increased $480.3 million from year-end 2022.
- Cash and cash equivalents were $428.3 million. For the six months, operating cash flow was $129.9 million, investing activities used $60.3 million, and financing activities provided $38.7 million.
- Total short- and long-term borrowings were approximately $1.32 billion, down $388.4 million from year-end 2022. Short-term borrowings were $929.9 million; long-term borrowings were $390.4 million.
- The allowance for credit losses was $136.2 million, or 0.90% of loans, versus $124.4 million and 0.86% at year-end. Nonaccrual loans were $29.1 million; nonperforming assets were 0.19% of loans. Six-month net charge-offs were $6.1 million versus $0.9 million in 2022.
- Regulatory capital ratios remained above minimum requirements: common equity Tier 1 9.86%, Tier 1 10.81%, total capital 13.64%, and leverage 9.64%. The company reported that it and the Bank were well-capitalized.
Material changes and unusual items
- Interest and dividend income rose sharply year over year as higher rates lifted loan yields, while deposit interest expense increased substantially. Q2 interest expense was $78.2 million versus $10.0 million; the average cost of interest-bearing liabilities rose to 2.42% from 0.35%. Management said deposit competition and funding costs were increasing.
- Noninterest income fell 36.8% in Q2, primarily because Q2 2022 included a $9.1 million gain from the sale of DHFB. Fiduciary and asset-management fees and mortgage banking income also declined. For the first half, noninterest income additionally reflected a $13.4 million loss on securities sales.
- In Q1 2023, the company sold $505.7 million of available-for-sale securities at a pre-tax loss of $13.4 million and used proceeds to repay higher-cost FHLB borrowings. Management said the repositioning improved liquidity and expected the loss to be earned back in approximately two years. AFS securities had $450.1 million of net unrealized losses at quarter-end; HTM securities had $41.8 million.
- Q2 cost-saving actions are expected to reduce the annual expense run rate by approximately $17 million. The company recorded $3.9 million of related pre-tax expense in Q2 and expected another $7.5 million in Q3.
- Credit-loss provisions increased, reflecting loan growth and greater uncertainty in the economic outlook. Management attributed most first-half net charge-offs to two commercial loans.
Liquidity, outlook, risks, and contingencies
- Management reported liquid assets of $6.7 billion, or 32.5% of assets, and estimated available liquidity sufficient to cover approximately 133% of uninsured and uncollateralized deposits. Approximately 73.5% of deposits were insured or collateralized. The company had $485.7 million of brokered deposits at quarter-end, and estimated uninsured deposits of $5.3 billion.
- Additional contingent funding included $5.2 billion of remaining FHLB collateral-dependent credit availability and $539.4 million available under the Federal Reserve Bank Term Funding Program; the company had not drawn on the BTFP at June 30. These sources depend on eligible collateral and other conditions.
- Management anticipated continued net interest margin contraction, citing rising rates, higher deposit costs, and deposit competition. It continued to monitor deposit flows, liquidity, and balance-sheet sensitivity. The filing does not provide a specific earnings or margin forecast.
- The CFPB is investigating alleged violations related to overdraft practices. Settlement discussions were ongoing; the company recorded a probable and estimable liability, but said any loss beyond the accrued amount could not be reasonably estimated. The filing’s adjusted-measure reconciliation identifies a $5.0 million pre-tax legal reserve for the first half. Litigation remains possible.
- On July 24, 2023, after quarter-end, the company agreed to acquire American National Bankshares in a stock transaction at an exchange ratio of 1.35 Atlantic Union shares per American National share. Closing was expected in Q1 2024, subject to regulatory and shareholder approvals and other conditions. Risks include delay or failure to close, integration costs, dilution, and purchase-accounting impacts.
- Management cited risks from economic weakness, inflation, rising rates, deposit outflows, commercial real estate concentration, credit deterioration, securities valuations, operational and cyber events, and merger execution. It also noted that financial-industry volatility and its effects remained uncertain.
Most important facts for investors to verify
- Whether deposit retention and funding costs stabilize, including dependence on brokered deposits and contingent borrowing facilities.
- Whether margin contraction materializes and how asset-liability sensitivity changes as rates and deposit pricing evolve.
- Commercial real estate and other commercial credit trends, including watch-list and criticized loans, charge-offs, nonaccruals, and allowance adequacy.
- The CFPB matter’s settlement terms, final loss, and any effect on operations or reputation.
- Merger approvals, expected closing and integration costs, share dilution, and purchase-accounting effects.
- Progress against the $17 million annual expense reduction target and expected additional restructuring charges.
- Regulatory capital and the effect of unrealized securities losses, liquidity needs, and future market-rate changes.