Kirkikis

Atlantic Union Bankshares Corporation Earnings (NASDAQ: AUB) will most likely fall this year due to high funding as well as higher operating expenses. On the other hand, strong loan growth will likely support the bottom line through the end of 2023. Earnings will likely get further support from margin expansion. Overall, I expect Atlantic Union Bankshares to post earnings of $2.91 per share for 2022, down 11% year-over-year. Compared to my last report on the company, I have only slightly increased my earnings estimate. For 2023, I expect earnings to rise 23% to $3.57 per share. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on Atlantic Union Bankshares.

Virginia’s economy will drive loan growth

The loan growth rate slowed in the second quarter of 2022 but remained at a moderately high level. Atlantic Union Bankshares reported loan growth of 1.5% in the second quarter, or 5.8% annualized. Management expects high single-digit loan growth for the full year 2022, as mentioned in the earnings presentation. Given annualized loan growth of 7.0% in the first half of 2022, this goal seems achievable.

Additionally, regional economies will likely support loan growth. Atlantic Union Bankshares operates primarily in Virginia, with some presence in Maryland and North Carolina. All three states currently have very strong labor markets with record unemployment rates. Strong labor markets bode well for loan growth, particularly auto finance and consumer loans, which were a large part of the loan portfolio.

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Virginia unemployment rate data from YCharts

Atlantic Union Bankshares’ loan portfolio is well diversified across different segments.

Composition of Atlantic Union Bankshares loans

Filing 2Q 2022 10-Q

For commercial and industrial loans, the PMI is a good indicator of credit demand.

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US Services ISM PMI Data by YCharts

Coincident indices are also good indicators of credit demand across the board. Virginia’s index shows that economic activity is doing well, as shown below.

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Philly Fed Virginia Coincident Index data by YCharts

Management also considers mergers and acquisitions as a complementary strategy, as mentioned in the presentation. Since the company has yet to announce any specific transactions, I have excluded potential acquisitions from my loan estimate. I only included organic growth. Overall, I expect the loan book to grow 8% annualized every quarter through the end of 2023.

Meanwhile, growth in other balance sheet items will likely follow loan growth. Equity values, in particular, will come under pressure due to the accumulation of unrealized losses on the portfolio of available-for-sale securities. As rates rise, the market value of these securities falls, resulting in unrealized losses. These losses will bypass the income statement and flow directly to the equity account through other comprehensive income. The book value per share had already fallen from $33.80 per share at the end of December 2021 to $29.95 per share at the end of June 2022, as mentioned in the 10-Q filing. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 9,675 12,569 13,861 13,096 14,099 15,261
Net loan growth 36.2% 29.9% 10.3% (5.5)% 7.7% 8.2%
Other productive assets 2,486 2,960 3,596 4,829 3,997 4,159
Deposits 9,971 13,305 15,723 16,611 16,780 18,163
Loans and sub-debts 1,756 1,514 841 507 814 847
Common equity 1,925 2,513 2,542 2,544 2,304 2,490
Book value per share ($) 29.2 31.3 32.2 32.9 30.8 33.3
Tangible BVPS ($) 17.4 19.6 19.6 20.2 18.0 20.5

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Well-diversified portfolios only make the margin moderately sensitive to rates

The average return on productive assets is only moderately sensitive to rates. About half of the loan portfolio is based on fixed rates, while 46% of the portfolio is variable. The cost of deposit is also only moderately rate sensitive. Floating rate deposits, namely traded withdrawal order, money market and savings accounts, accounted for 56.2% of total deposits at end-June 2022.

The results of management’s interest rate sensitivity analysis presented in File 10-Q showed that a 200 basis point increase in interest rates could increase net interest income by 12. 81% over twelve months. Given these factors, I expect the margin to increase by 40 basis points in the second half of 2022 and remain stable throughout 2023.

Interest Rate Sensitivity Atlantic Union Bankshares

Filing 2Q 2022 10-Q

High inflation, interest rate to maintain high provisioning

Provisions represented 358.39% of outstanding loans at the end of June 2022, which is a comfortable level in normal times. However, I expect borrowers to be more stressed than usual in the coming months due to high inflation and borrowing costs. In addition, banks will want a comfortable buffer of reserve before a possible recession. Management also mentioned in the presentation that it expects the provision to be 0.80% to 0.85% of loans, up from 0.76% at the end of June 2022.

Given these factors, I expect the net provision charge to be slightly above normal in the second half of 2022, before returning to a normal level next year. I expect the net provision charge to be approximately 0.16% of total annualized loans in the second half of 2022 and 0.15% in 2023. By comparison, the net provision charge averaged 0.15 % from 2017 to 2019.

Profits will fall in 2022 before recovering next year

Above-average provisioning is likely to be one of the biggest contributors to lower earnings this year. Additionally, management mentioned on the conference call that they are currently reviewing their minimum wage in order to remain competitive. Consequently, payroll expenses will likely increase in the coming quarters.

On the other hand, projected loan growth and expanding margins will likely boost earnings. Overall, I expect Atlantic Union Bankshares to post earnings of $2.91 per share for 2022, down 11% year-over-year. For 2023, I expect earnings to rise 23% to $3.57 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 427 538 555 551 578 668
Allowance for loan losses 14 21 87 (61) 18 23
Non-interest income 104 133 131 126 123 115
Non-interest charges 338 418 413 419 403 419
Net income – Common Sh. 146 194 153 252 218 267
BPA – Diluted ($) 2.22 2.41 1.93 3.26 2.91 3.57

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

In my last report on Atlantic Union Bankshares, I estimated earnings of $2.85 per share for 2022. I have revised my earnings estimate upwards slightly following the second quarter results. I haven’t made any significant changes to any line item.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

Maintain a purchase note

Given the earnings outlook, I expect Atlantic Union Bankshares to increase its dividend by $0.02 per share in the second quarter of 2023. This will lead to an annual dividend of $1.24 for 2023, which means a payout ratio of 33%. By comparison, the payout ratio has averaged 42% over the past five years. Despite the recent decline in equity book value, Atlantic Union Bankshares is capital adequate. The company reported a total risk-based capital ratio of 13.9% at end-June 2022, as opposed to the minimum regulatory requirement of 10.5%. Therefore, regulatory requirements do not threaten the payment of dividends. My dividend estimate implies a forward dividend yield of 3.9%.

I use historical price/book tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Atlantic Union Bankshares stock. The stock has traded at an average P/TB ratio of 1.79 in the past, as shown below.

EX18 FY19 FY20 FY20 Medium
T. Book value per share ($) 17.4 19.6 19.6 20.2
Average market price ($) 38.0 35.6 26.2 37.1
Historical P/TB 2.18x 1.81x 1.33x 1.84x 1.79x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $18.0 yields a target price of $32.2 for the end of 2022. This price target implies an upside of 0.1% compared to the closing price on September 2. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.59x 1.69x 1.79x 1.89x 1.99x
TBVPS – Dec 2022 ($) 18.0 18.0 18.0 18.0 18.0
Target price ($) 28.6 30.4 32.2 34.0 35.8
Market price ($) 32.2 32.2 32.2 32.2 32.2
Up/(down) (11.1)% (5.5)% 0.1% 5.7% 11.3%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 14.2x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 2.22 2.41 1.93 3.26
Average market price ($) 38.0 35.6 26.2 37.1
Historical PER 17.1x 14.8x 13.5x 11.4x 14.2x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $2.91 yields a price target of $41.4 for the end of 2022. This price target implies a 28.5% upside from at the closing price on September 2. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 12.2x 13.2x 14.2x 15.2x 16.2x
EPS 2022 ($) 2.91 2.91 2.91 2.91 2.91
Target price ($) 35.5 38.4 41.4 44.3 47.2
Market price ($) 32.2 32.2 32.2 32.2 32.2
Up/(down) 10.4% 19.4% 28.5% 37.5% 46.5%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a target price of $36.8, implying a 14.3% upside from the current market price. Adding the forward dividend yield gives an expected total return of 18.1%. Therefore, I maintain a buy rating on Atlantic Union Bankshares.