Atlantic Union Bankshares Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The Richmond-based bank holding company operates Atlantic Union Bank, with 149 branches in Virginia, Maryland and North Carolina. Financial figures below are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $137.3 | $138.6 | $272.3 | $266.1 |
| Net interest margin | 3.23% | 3.71% | 3.35% | 3.71% |
| Noninterest income | $35.9 | $30.6 | $64.8 | $55.5 |
| Provision for credit losses | $34.2 | $5.3 | $94.4 | $9.1 |
| Net income available to common shareholders | $30.7 | $48.8 | $37.8 | $84.5 |
| Diluted EPS | $0.39 | $0.59 | $0.48 | $1.06 |
| Noninterest expense | $102.8 | $105.6 | $198.5 | $212.3 |
Q2 net interest margin fell 48 basis points year over year as lower asset yields—including on PPP loans—and reduced acquisition-related loan discount accretion outweighed lower funding costs. For the six-month period, net interest income increased, supported by loan growth and higher acquisition-related accretion, but margin compressed. Q2 noninterest income benefited from a $10.3 million securities gain and higher mortgage banking and loan-swap income; lower deposit service charges and interchange fees partly offset these gains.
Six-month operating cash flow was $123.2 million; investing cash flow was negative $1.694 billion, primarily reflecting loan growth; financing cash flow was positive $1.976 billion, principally from deposit growth. Cash and cash equivalents ended the period at $842.0 million.
Balance sheet, funding and capital
- Total assets were $19.75 billion at June 30, up from $17.56 billion at year-end 2019. Loans held for investment before the allowance were $14.31 billion, including $1.60 billion of PPP loans; excluding PPP, loans increased $99 million from year-end.
- Deposits were $15.61 billion, up $2.30 billion from year-end, reflecting PPP-related and stimulus-related deposits. Management said some of the deposit increase may be temporary. Cash and cash equivalents were $842 million; management reported liquid assets of $6.9 billion.
- Long-term borrowings were $1.05 billion; short-term borrowings were $77 million, largely repurchase agreements. The company reported $189.9 million outstanding under the Federal Reserve’s PPP Liquidity Facility and $1.5 billion of available PPPLF capacity.
- The company raised $166.4 million net through a June offering of Series A preferred stock carrying a 6.875% stated rate. At June 30, regulatory capital ratios were 9.81% common equity Tier 1, 10.95% Tier 1, 13.71% total capital and 8.82% leverage. Common dividends were $0.25 per share for the quarter.
Material changes, outlook and risks
- Credit reserves: The allowance for credit losses was $181.0 million at June 30, comprising a $170.0 million loan allowance and an $11.0 million reserve for unfunded commitments. The increase reflected CECL adoption and a more adverse economic forecast tied to COVID-19. The six-month provision was $94.4 million. Management cited elevated forecast unemployment and added reserves for industries particularly exposed to the pandemic.
- COVID-19 support: The bank originated more than 11,000 PPP loans totaling approximately $1.7 billion; recorded investment was $1.6 billion at quarter-end. PPP loans earn 1% and are generally forgivable subject to program requirements. The bank had made $1.8 billion of COVID-related loan modifications, with about $1.6 billion still under modified terms at June 30; most were three-month payment deferrals.
- Credit quality: Nonperforming assets were $44.0 million, or 0.31% of loans, versus $32.9 million at year-end. The filing cautions that CECL and COVID-related modification rules affect comparability. Management also warned that deferrals could mask deterioration and that borrower stress, collateral values, charge-offs and future provisions could worsen.
- Unusual items and cost actions: Q2 included a $10.3 million loss from prepaying about $200 million of long-term FHLB advances, alongside a $10.3 million securities gain. Expense-reduction actions included planned consolidation of 14 branches, expected in September, with approximately $1.6 million of real-estate write-downs and $1.8 million of severance costs in Q2. The company suspended its share repurchase program in March.
- Outlook: No specific earnings or financial guidance is provided. Management expected the pandemic to affect business, financial condition and results through 2020, with duration and severity uncertain. It anticipated continued downward pressure on net interest margin from the low-rate environment. The bank had not registered as a Main Street Lending Program lender. Management considered liquidity sufficient; it expected some pandemic-driven deposits to flow out in later quarters.
- Other matters: Goodwill testing in Q2 found no impairment. Management said pending legal proceedings, in aggregate, were not expected to have a material adverse effect. The independent accountant’s interim review reported no material modifications needed for GAAP conformity; it was a review, not an audit.
Important facts for investors to verify
- Whether COVID-19 loan deferrals resume or expire successfully, and whether PPP forgiveness and related fee recognition proceed as expected.
- Whether the elevated credit-loss allowance adequately reflects changing borrower conditions, unemployment forecasts and commercial real-estate exposure.
- How much of the unusually rapid deposit growth is retained, and the resulting effects on funding costs, liquidity and net interest margin.
- Execution and savings from the planned branch consolidations, and the continuing effect of the FHLB prepayment and securities sale.
- Capital and dividend capacity under regulatory requirements, including the effects of CECL transition provisions and the new preferred-stock obligation.