2024-01-21 03:03:27 ET
Summary
- Loan growth will likely benefit from the upcoming acquisition. Organic growth will also contribute to overall loan growth.
- The acquisition will likely compress the net interest margin.
- The December 2024 target price suggests a small upside from the current market price. Further, AUB is offering a decent dividend yield.
Earnings of Atlantic Union Bankshares Corporation ( AUB ) will likely increase in 2024 on the back of loan growth. The upcoming acquisition of American National and organic means will likely drive loan growth. On the other hand, pressure on the margin will limit earnings growth. Overall, I'm expecting the company to report earnings of $2.50 per share for 2023 and $3.02 per share for 2024. The year-end target price suggests a small upside from the current market price. Based on the total expected return, I'm upgrading Atlantic Union Bankshares to a buy rating.
Acquisition to Boost the Loan Portfolio by 15%
Atlantic Union is set to acquire American National Bankshares ( AMNB ) in the first quarter of 2024, according to details given in the merger presentation . This acquisition will most likely boost Atlantic Union's loan book by around $2.2 billion, or 15%. Moreover, the merger will increase the deposit book by around 16%.
Another benefit of the acquisition is that it will lead to substantial cost savings. Atlantic Union has an efficiency ratio (calculated as operating expenses divided by total revenues) of 61% and American National has an efficiency ratio of 58%. AUB's management estimates that the merger could reduce the combined company's efficiency ratio to around 50%.
The system conversion and other measures to streamline processes following the merger will naturally take some time. As a result, I'm expecting the efficiency ratio to slide gradually downwards to around 50% by the last quarter of 2024. Further, I'm expecting the efficiency ratio to temporarily rise in the first quarter of 2024 because of one-off merger-related expenses. For full-year 2024, I'm expecting an average efficiency ratio of 56%.
Organic Loan Growth Outlook Also Seems Promising
Apart from the acquisition, Atlantic Union Bankshares' earnings will likely also benefit from organic growth. The organic growth of the company is already quite healthy. Like the first nine months of 2022, loan growth in the first nine months of 2023 remained in the high single-digit range. This performance beat my expectations given in my last report on Atlantic Union Bankshares, which was issued before the release of the first quarter's results.
The operating environment appears conducive to loan growth. Atlantic Union operates mostly in Virginia with some presence in portions of Maryland and North Carolina. The unemployment rates of all three of these states are currently well below not only the national average but also the historical average. A low unemployment rate means that the business activity is robust, which bodes well for organic loan growth.
I'm expecting the Federal Reserve to start cutting rates by the middle of 2024, which will also encourage loan growth. Considering these factors, I'm expecting a loan growth of 20% for 2024. The following table shows my balance sheet estimates.
Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net Loans | 12,569 | 13,861 | 13,096 | 14,338 | 15,385 | 18,501 |
Growth of Net Loans | 29.9% | 10.3% | (5.5)% | 9.5% | 7.3% | 20.3% |
Other Earning Assets | 2,960 | 3,596 | 4,829 | 3,817 | 3,237 | 3,835 |
Deposits | 13,305 | 15,723 | 16,611 | 15,932 | 17,038 | 20,667 |
Borrowings and Sub-Debt | 1,514 | 841 | 507 | 1,709 | 1,031 | 1,221 |
Common equity | 2,513 | 2,542 | 2,544 | 2,200 | 2,246 | 2,830 |
Book Value per Share ($) | 31.3 | 32.2 | 32.9 | 29.3 | 29.9 | 31.7 |
Tangible BVPS ($) | 19.6 | 19.6 | 20.2 | 16.6 | 17.3 | 21.1 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
The Upcoming Acquisition and Interest Rate Cuts to Hurt the Margin
Atlantic Union Bankshares' net interest margin has dipped by 35 basis points in the first nine months of 2023. The margin will likely continue to slide in 2024 because of upcoming interest rate cuts. The results of the management's rate-sensitivity analysis given in the 10-Q filing show that rate cuts can reduce net interest income.
Moreover, the upcoming acquisition of American National can shrink the margin. This is because American National has a lower margin compared to Atlantic Union Bankshares. Atlantic had a net interest margin of 3.35% in the third quarter of 2023 while American National had a margin of only 3.04%.
Considering these factors, I'm expecting the margin to decline nine by basis points in 2024. For the last quarter of 2023, I'm expecting the margin to have remained mostly stable.
Earnings Likely to Trend Upwards
The earnings of Atlantic Union Bankshares will likely benefit from loan growth through the upcoming acquisition. Further, organic loan growth will support earnings. On the other hand, margin pressure will restrict earnings growth. Overall, I'm expecting the company to report earnings of $3.02 per share for 2024.
Atlantic Union is scheduled to announce the fourth-quarter 2023 results on Tuesday, January 23, 2024. I'm expecting earnings for the quarter to remain almost unchanged from the third quarter's results. As a result, I'm expecting the company to report earnings of $2.50 per share for 2023. The following table shows my income statement estimates.
Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net interest income | 538 | 555 | 551 | 584 | 610 | 691 |
Provision for loan losses | 21 | 87 | (61) | 19 | 27 | 28 |
Non-interest income | 133 | 131 | 126 | 119 | 89 | 137 |
Non-interest expense | 418 | 413 | 419 | 404 | 433 | 464 |
Net income - Common Sh. | 194 | 153 | 252 | 223 | 187 | 270 |
EPS - Diluted ($) | 2.41 | 1.93 | 3.26 | 2.97 | 2.50 | 3.02 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Risks Appear to be Subdued
In my opinion, Atlantic Union's risk level is low, as discussed below.
- An overwhelming majority of Atlantic Union's deposit book is insured. Uninsured deposits amounted to $46.1 million at the end of September 2023, which is just 0.3% of the total deposit book. However, around 39% of American National's deposit book was uninsured, which means the proportion of AUB's uninsured deposits can rise to 5% after the merger.
- The Available-for-Sale securities portfolio does not carry much risk. On September 30, 2023, total net unrealized losses on the AFS securities portfolio were $523.1 million, or 24% of the total equity balance. Further, American National had unrealized losses of $75 million, which is 23% of its total equity balance, according to details given in the company's 10-Q filing .
Upgrading to a Buy Rating
Atlantic Union Bankshares is offering a dividend yield of 3.7% at the current quarterly dividend rate of $0.32 per share. The earnings and dividend estimates suggest a payout ratio of 40.6% for 2024, which is in line with the five-year average of 39.6%. Therefore, I'm not expecting an increase in the dividend level.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Atlantic Union Bankshares. The stock has traded at an average P/TB ratio of 1.78 in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 19.6 | 19.6 | 20.2 | 16.6 | |
Average Market Price ($) | 35.6 | 26.2 | 37.1 | 35.6 | |
Historical P/TB | 1.81x | 1.33x | 1.84x | 2.14x | 1.78x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $21.1 gives a target price of $37.5 for the end of 2024. This price target implies a 7.2% upside from the January 19 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.58x | 1.68x | 1.78x | 1.88x | 1.98x |
TBVPS - Dec 2024 ($) | 21.1 | 21.1 | 21.1 | 21.1 | 21.1 |
Target Price ($) | 33.3 | 35.4 | 37.5 | 39.6 | 41.7 |
Market Price ($) | 35.0 | 35.0 | 35.0 | 35.0 | 35.0 |
Upside/(Downside) | (4.9)% | 1.1% | 7.2% | 13.2% | 19.2% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 12.9x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 2.41 | 1.93 | 3.26 | 2.97 | |
Average Market Price ($) | 35.6 | 26.2 | 37.1 | 35.6 | |
Historical P/E | 14.8x | 13.5x | 11.4x | 12.0x | 12.9x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $3.02 gives a target price of $39.1 for the end of 2024. This price target implies an 11.6% upside from the January 19 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 10.9x | 11.9x | 12.9x | 13.9x | 14.9x |
EPS 2024 ($) | 3.02 | 3.02 | 3.02 | 3.02 | 3.02 |
Target Price ($) | 33.0 | 36.0 | 39.1 | 42.1 | 45.1 |
Market Price ($) | 35.0 | 35.0 | 35.0 | 35.0 | 35.0 |
Upside/(Downside) | (5.7)% | 2.9% | 11.6% | 20.2% | 28.8% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $38.3 , which implies a 9.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 13.0%.
In my last report , which was issued before the first quarter's results, I adopted a hold rating. Since then, the company's outlook has significantly changed because of the merger announcement. Based on the updated total expected return, I'm upgrading Atlantic Union Bankshares to a buy rating.
For further details see:
Atlantic Union Bankshares: Acquisition To Help Lift Earnings