2023-10-20 01:33:16 ET
Summary
- A regional bank that has held up well in the face of challenges in the banking industry.
- Atlantic Union Bankshares' Q3 2023 revenue and earnings beat estimates.
- Despite slight pressure on net interest margin, loans and deposits continue to grow, and asset quality metrics remain strong.
- We see margins improving in 2024.
Make no mistake, trying to trade banks in the last few months has been tough. One name that we continue to like in the regional banking space, and reiterate a buy in today's column, is Atlantic Union Bankshares Corporation ( AUB ). While the interest rate situation is wreaking havoc on bank net interest income, and now there are growing concerns over loan demand, so far we have not seen a precipitous decline in lending over the vast coverage and research into the space that we have conducted. Now, if you pull the charts of random banks, for the most part, they are down significantly. But Atlantic Union Bankshares stock has held up reasonably well over the last few months. This stock is a bit of a gem in a sea of pain that has been regional banks, for the most part.
While shares have dipped with the market and the sector since August, they are up since late spring, and that is impressive in this climate. We believe that when interest rates settle down, these regional banks will do well. However, if you believe that rates are going to continue to go up and up into 2024, then avoid them. But we think the Fed's rate hike campaign is coming to an end, and we see rate cuts in late 2024 as possible. As rates have increased, it initially helped margins expand as new loans were issued at higher rates. But then, the competition for deposit dollars heated up and this led to the need to pay depositors a significant sum on their deposits. This has crimped margins for many banks. But we see the rates being paid on deposits coming to a peak, and future loans still being issued at higher rates. Thus, we contend that margins will start to expand again in 2024. This thesis will be wrong if rates continue to be raised, but our base case is for margin expansion in 2024.
The other pressure will be if loan demand really dries up, but we are just not seeing that happen. So, we are standing behind shares of Atlantic Union. We think there is upside because the performance remains strong. Jeep in mind that the bank is indeed shareholder-friendly, as it has previously repurchased many shares, and it pays a dividend with a yield of 4.1% to wait for shares to rebound. The company has made some acquisitions for growth and we believe that offers value. In today's column, we discuss the critical metrics we follow after the just-announced results .
Atlantic Union Bankshares' beats estimates
In Q3 2023, Atlantic Union Bankshares Corporation reported a top-line revenue that beat expectations . With Q3's revenue of $182.8 million, Atlantic Union Bankshares registered a 1.5% increase in this critical metric year-over-year.
That said, given the issues aforementioned, net interest margin was pressured, but net interest income was pretty much flat from Q2, which in this macro climate, is pretty good. Net interest income was $151.9 million vs. $152.1 million in the second quarter of 2023. The net interest margin decreased 10 basis points from the sequential quarter to 3.27%.
Loans saw higher yields, as yields increased by 20 basis points to 5.39% versus the sequential quarter, primarily due to the impact of increases in market interest rates on loans and loan growth. But the cost of funds increased by 30 basis points to 2.04%. We think that the cost of funds will be seeing a peak in Q4 and then hold relatively firm before declining in late 2024. Meanwhile, expect higher yield loans to continue to be issued.
Atlantic Union actually reduced its provision for credit losses. The provision for credit losses was $5.0 million, compared to a provision for credit losses of $6.1 million in Q2 2023, and it was down from a provision for credit losses of $6.4 million in Q3 2022.
Atlantic Union Bankshares' loans and deposits both grow
Loans continue to increase despite this higher rate environment. Total loans held were $15.3 billion, an increase of $0.3 billion from the sequential Q2. Total deposits increased as well, quelling concerns on this front. Total deposits were $16.8 billion, an increase of $374.5 million or approximately 9.1% annualized from the start of the quarter, and were up by $515.5 million from a year ago.
Asset quality
So we saw strong loans and deposits, margins that are looking like they are stabilizing, and strong earnings. The asset quality metrics for Atlantic Union Bankshares in Q3 were strong, another reason to be bullish.
Net charge-offs were $0.294 million or 0.01% of total average loans on an annualized basis down from $1.6 million in Q2, and down from $4.6 million in Q1. This is winning folks. The allowance for credit losses did tick up slightly to $140.9 million, a $4.7 million increase from the prior quarter's $136.2 million, though this was due in large part to the loan growth as well as ongoing uncertainty in the economic outlook. Finally, the efficiency ratio was a strong 60.61%, ticking up slightly from Q2, but a very positive result. All things considered we like what we are seeing here.
Final thoughts
We like the dividend here while you wait for the macro situation to improve. Despite all of the pressure we keep hearing about for banks, the operational metrics of Atlantic Union Bankshares are strong. On top of that, the asset quality metrics also remain pretty favorable. Loans are up, deposits are up, and earnings are growing. While it will be another quarter or two of pressure in the sector we believe, better days are ahead in 2024.
For further details see:
Atlantic Union Bankshares: A Gem In Sea Of Pain