Atlantic Union Bankshares (US:AUB)2023-08-02 16:00PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Atlantic Union Bankshares Corporation's unaudited consolidated financial statements and notes for periods ending June 30, 2023 Consolidated Balance Sheets Total assets, deposits, and stockholders' equity increased by June 30, 2023, reflecting growth in net loans and deposits Consolidated Balance Sheet Highlights (unaudited) | (In Millions) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $20,602.3 | $20,461.1 | | Cash and cash equivalents | $428.3 | $319.9 | | Securities available for sale, at fair value | $2,182.4 | $2,741.8 | | Loans held for investment, net | $14,946.2 | $14,338.4 | | Total Liabilities | $18,177.9 | $18,088.4 | | Total deposits | $16,412.0 | $15,931.7 | | Total borrowings (short & long-term) | $1,320.3 | $1,708.7 | | Total Stockholders' Equity | $2,424.5 | $2,372.7 | Consolidated Statements of Income Net income decreased in Q2 and the first half of 2023 due to higher interest expenses and increased provision for credit losses, despite growth in interest income Key Income Statement Data (unaudited) | (In Millions, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 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 expenses | $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 earnings per common share | $0.70 | $0.79 | $1.13 | $1.33 | Notes to Consolidated Financial Statements These notes detail accounting policies, financial statement line items, and significant events, including the adoption of ASU 2022-02 and the proposed merger with American National - The company adopted ASU 2022-02 on January 1, 2023, which eliminated accounting guidance for Troubled Debt Restructurings (TDRs) and introduced new disclosure requirements for Troubled Loan Modifications (TLMs)31 - On July 24, 2023, the Company entered into a definitive merger agreement with American National Bankshares Inc., with the transaction expected to close in the first quarter of 2024195 - The Board of Directors declared a quarterly common stock dividend of $0.30 per share, payable on August 25, 2023, and a preferred stock dividend of $171.88 per share (equivalent to $0.43 per depositary share), payable on September 1, 2023196 - The company is in settlement discussions with the Consumer Financial Protection Bureau (CFPB) regarding its overdraft practices and policies, with a probable and estimable liability recorded as of June 30, 2023121 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial performance, condition, and strategic initiatives, covering results of operations, financial condition, asset quality, and capital resources Executive Overview & Recent Events The company highlights strong capital and liquidity amidst industry volatility, detailing the proposed merger with American National, cost-saving measures, and a balance sheet repositioning strategy - Announced a definitive merger agreement with American National Bankshares Inc. on July 24, 2023, with the transaction expected to close in Q1 2024215 - Executed cost-saving measures in Q2 2023, expected to reduce the annual expense run rate by approximately $17 million, resulting in $3.9 million of pre-tax expenses in Q2 2023222 - In Q1 2023, the company executed a balance sheet repositioning, selling AFS securities with a book value of $505.7 million at a pre-tax loss of $13.4 million to reduce FHLB borrowings223 - As of June 30, 2023, the company estimates that approximately 73.5% of its deposits were insured or collateralized, and it maintained available liquidity to cover approximately 133% of uninsured and uncollateralized deposits219 Results of Operations Net interest income increased in Q2 2023 due to margin expansion, while noninterest income decreased and noninterest expenses rose, primarily from higher salaries and benefits Net Interest Income and Margin (FTE, non-GAAP) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income (FTE) | $155.8M | $142.3M | +$13.4M | | Net Interest Margin (FTE) | 3.45% | 3.24% | +21 bps | - Noninterest income for Q2 2023 decreased by $14.1 million (36.8%) YoY, primarily driven by a $9.1 million gain on the sale of DHFB in Q2 2022240 - Noninterest expense for Q2 2023 increased by $6.9 million (7.0%) YoY, mainly due to a $6.7 million rise in salaries and benefits, which included severance charges244 Financial Condition Total assets increased slightly by June 30, 2023, driven by loan growth and deposit increases, while the investment portfolio decreased and borrowings were reduced - Total assets increased by $141.2 million (1.4% annualized) to $20.6 billion from Dec 31, 2022262 - Loans held for investment (net) grew by $617.8 million (8.6% annualized) since year-end 2022263 - Total deposits increased by $480.3 million (6.1% annualized), with a $1.1 billion increase in interest-bearing deposits offsetting a $572.9 million decrease in demand deposits266 - Total borrowings decreased by $388.4 million (22.7%) from year-end 2022, a result of the balance sheet repositioning strategy267 Asset Quality Asset quality remained strong and stable with nonperforming assets unchanged, while net charge-offs increased and the Allowance for Credit Losses grew due to loan growth and economic uncertainty Asset Quality Metrics | Metric | June 30, 2023 ($M) | December 31, 2022 ($M) | | :--- | :--- | :--- | | Nonperforming assets (NPAs) | $29.2 | $27.1 | | NPAs to total LHFI | 0.19% | 0.19% | | Allowance for Credit Losses (ACL) | $136.2 | $124.4 | | ACL to total LHFI | 0.90% | 0.86% | - Net charge-offs for the six months ended June 30, 2023, were $6.1 million (0.08% of average loans), compared to $935,000 (0.01%) for the same period in 2022303 - The provision for credit losses for the six months ended June 30, 2023 was $17.9 million, an increase from $6.4 million in the prior-year period, driven by economic uncertainty and loan growth304 Capital Resources The company's capital ratios remain strong and exceed regulatory minimums, with the tangible common equity to tangible assets ratio showing improvement Regulatory Capital Ratios (Estimates for Q2 2023) | Ratio | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Common equity Tier 1 capital ratio | 9.86% | 9.95% | | Tier 1 capital ratio | 10.81% | 10.93% | | Total capital ratio | 13.64% | 13.70% | | Leverage ratio | 9.64% | 9.42% | | Tangible common equity to tangible assets (+) | 6.66% | 6.43% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, its primary market risk, and was asset-sensitive as of June 30, 2023, though less so than the prior year Interest Rate Sensitivity Analysis (Change in Net Interest Income) | Rate Shock | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | +300 bps | +7.47% | +11.73% | | +200 bps | +5.25% | +8.25% | | +100 bps | +2.89% | +4.65% | | -100 bps | -2.94% | -3.18% | - From a net interest income perspective, the Company was less asset sensitive as of June 30, 2023, compared to its position as of June 30, 2022340 Item 4. Controls and Procedures The company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting identified - The CEO and CFO concluded that as of June 30, 2023, the Company's disclosure controls and procedures were effective at the reasonable assurance level344 - There were no changes during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting346 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, including ongoing settlement discussions with the CFPB regarding historical overdraft practices - The company is in settlement discussions with the CFPB regarding alleged violations related to its overdraft practices and policies, which began in March 2023 and are ongoing349 Item 1A. Risk Factors This section updates risk factors, primarily focusing on the proposed merger with American National, including completion risks, regulatory challenges, and integration difficulties - Failure to complete the merger with American National could negatively impact the company's stock price and result in significant unrecovered expenses352 - Regulatory approvals for the merger may not be received, may be delayed, or may impose conditions that could adversely affect the combined company353355 - Integrating with American National may be more difficult, costly, or time-consuming than expected, and the company may fail to realize the anticipated benefits and cost savings357358 - The rising interest rate environment could increase the magnitude of negative purchase accounting marks on American National's investment and loan portfolios, diluting tangible book value361 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered equity sales and repurchased 2,985 shares in Q2 2023 for tax withholding, with no active share repurchase program - As of June 30, 2023, the Company does not have an authorized share repurchase program366 Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased (1) | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 1 - April 30, 2023 | 421 | $34.05 | | May 1 - May 31, 2023 | 893 | $25.32 | | June 1 - June 30, 2023 | 1,671 | $26.97 | | Total | 2,985 | $27.48 | (1) Shares were withheld upon vesting of restricted shares to satisfy tax withholding obligations Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the merger agreement with American National and Sarbanes-Oxley certifications - Key exhibits filed include the merger agreement with American National, corporate governance documents, and Sarbanes-Oxley certifications370