Summary
- Virginia's economic factors will likely drive loan growth through the end of 2023.
- The margin is only moderately sensitive to interest rate changes.
- Provisioning will likely remain elevated in the second half of 2022 due to high interest rates and inflation.
- The December 2022 target price suggests a high upside from the current market price. Further, AUB is offering a good dividend yield.
Earnings of Atlantic Union Bankshares Corporation ( AUB ) will most probably dip this year due to elevated provisioning 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 receive further support from margin expansion. Overall, I'm expecting Atlantic Union Bankshares to report earnings of $2.91 per share for 2022, down 11% year-over-year. Compared to my last report on the company, I've only slightly tweaked upwards my earnings estimate. For 2023, I'm expecting earnings to grow by 23% to $3.57 per share. The year-end target price suggests a high upside from the current market price. Therefore, I’m maintaining a buy rating on Atlantic Union Bankshares.
Virginia’s Economy to Drive Loan Growth
The rate of loan growth 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. The management expects high-single-digit loan growth for the full year of 2022, as mentioned in the earnings presentation . Given the 7.0% annualized loan growth in the first half of 2022, this target seems achievable.
Further, regional economies will likely sustain loan growth. Atlantic Union Bankshares operates mainly in Virginia, with some presence in Maryland and North Carolina. All three states currently have very strong job markets with record low unemployment rates. Strong labor markets bode well for loan growth, especially auto finance and consumer loans which made up a significant portion of the loan book.
Atlantic Union Bankshares’ loan book is well diversified across different segments.
2Q 2022 10-Q Filing
For commercial and industrial loans, the purchasing managers' index is a good gauge of credit demand.
The coincident indices are also good gauges of credit demand across the board. The index for Virginia shows that economic activity is doing well, as shown below.
The management is also considering M&A as a supplemental strategy, as mentioned in the presentation. As the company is yet to announce any specific transactions, I have excluded potential acquisitions from my loan estimate. I've only incorporated organic growth. Overall, I'm expecting the loan portfolio to grow by 8% annualized every quarter till the end of 2023.
Meanwhile, growth of other balance sheet items will likely trail loan growth. Equity value, in particular, will face pressure due to the accumulation of unrealized losses on the available-for-sale securities portfolio. As rates rise, the market value of these securities will drop, leading to unrealized losses. These losses will bypass the income statement and flow directly into the equity account through other comprehensive income. The book value per share had already declined from $33.80 per share at the end of December 2021 to $29.95 per share at the end of June 2022, as mentioned in the 10-Q Filing . The following table shows my balance sheet estimates.
FY18 | FY19 | FY20 | FY21 | FY22E | FY23E | |
Financial Position | ||||||
Net Loans | 9,675 | 12,569 | 13,861 | 13,096 | 14,099 | 15,261 |
Growth of Net Loans | 36.2% | 29.9% | 10.3% | (5.5)% | 7.7% | 8.2% |
Other Earning Assets | 2,486 | 2,960 | 3,596 | 4,829 | 3,997 | 4,159 |
Deposits | 9,971 | 13,305 | 15,723 | 16,611 | 16,780 | 18,163 |
Borrowings and Sub-Debt | 1,756 | 1,514 | 841 | 507 | 814 | 847 |
Common equity | 1,925 | 2,513 | 2,542 | 2,544 | 2,304 | 2,490 |
Book Value per Share ($) | 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 USD million unless otherwise specified) |
Well Diversified Portfolios Make the Margin Only Moderately Rate-Sensitive
The average earning-asset yield is only moderately rate-sensitive. Around half the loan portfolio is based on fixed rates, while 46% of the portfolio is variable. The deposit cost is also only moderately rate-sensitive. Variable rate deposits, namely negotiated order of withdrawal, money market, and savings accounts made up 56.2% of total deposits at the end of June 2022.
The results of the management’s interest-rate sensitivity analysis given in the 10-Q filing showed that a 200-basis points hike in interest rates could boost the net interest income by 12.81% over twelve months. Considering these factors, I'm expecting the margin to increase by 40 basis points in the second half of 2022 and remain stable throughout 2023.
2Q 2022 10-Q Filing
High Inflation, Interest Rates to Keep Provisioning Elevated
Allowances were 358.39% of nonaccrual loans at the end of June 2022, which is a comfortable level in normal times. However, I'm expecting borrowers to be more stressed than usual in the months ahead due to high inflation and borrowing costs. Further, banks will want a comfortable reserve cushion ahead of a possible recession. The management also mentioned in the presentation that it expects allowance to be 0.80% to 0.85% of loans, up from 0.76% at the end of June 2022.
Considering these factors, I'm expecting the net provision expense to be slightly above normal in the second half of 2022, before declining to a normal level next year. I'm expecting the net provision expense to make up around 0.16% of total loans annualized in the second half of 2022, and 0.15% in 2023. In comparison, the net provision expense averaged 0.15% from 2017 to 2019.
Earnings to Dip in 2022 Before Recovering Next Year
The above-average provisioning will likely be one of the biggest contributors to an earnings decline this year. Further, the management mentioned in the conference call that it is currently evaluating its minimum wage in order to remain competitive. As a result, salary expenses will likely surge in the coming quarters.
On the other hand, anticipated loan growth and margin expansion will likely drive earnings. Overall, I’m expecting Atlantic Union Bankshares to report earnings of $2.91 per share for 2022, down 11% year-over-year. For 2023, I'm expecting earnings to grow by 23% to $3.57 per share. The following table shows my income statement estimates.
FY18 | FY19 | FY20 | FY21 | FY22E | FY23E | |
Income Statement | ||||||
Net interest income | 427 | 538 | 555 | 551 | 578 | 668 |
Provision for loan losses | 14 | 21 | 87 | (61) | 18 | 23 |
Non-interest income | 104 | 133 | 131 | 126 | 123 | 115 |
Non-interest expense | 338 | 418 | 413 | 419 | 403 | 419 |
Net income - Common Sh. | 146 | 194 | 153 | 252 | 218 | 267 |
EPS - Diluted ($) | 2.22 | 2.41 | 1.93 | 3.26 | 2.91 | 3.57 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
In my last report on Atlantic Union Bankshares, I estimated earnings of $2.85 per share for 2022. I’ve slightly tweaked upwards my earnings estimate following the second quarter’s results. I haven't made any significant changes in any line item.
Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.
Maintaining a Buy Rating
Given the earnings outlook, I'm expecting Atlantic Union Bankshares to increase its dividend by $0.02 per share in the second quarter of 2023. This will lead to a full-year dividend of $1.24 for 2023, which means a payout ratio of 33%. In comparison, the payout ratio averaged 42% in the last five years. Despite the recent dip in equity book value, Atlantic Union Bankshares’ capital is adequate. The company reported a total risk-based capital ratio of 13.9% at the end of June 2022, as opposed to the minimum regulatory requirement of 10.5%. Therefore, there is no threat to the dividend payout from regulatory requirements. My dividend estimate implies a forward dividend yield of 3.9%.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Atlantic Union Bankshares. The stock has traded at an average P/TB ratio of 1.79 in the past, as shown below.
FY18 | FY19 | FY20 | FY20 | Average | |
T. Book Value per Share ($) | 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 with the forecast tangible book value per share of $18.0 gives a target price of $32.2 for the end of 2022. This price target implies a 0.1% upside from the September 2 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.59x | 1.69x | 1.79x | 1.89x | 1.99x |
TBVPS - Dec 2022 ($) | 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 |
Upside/(Downside) | (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.
FY18 | FY19 | FY20 | FY21 | Average | |
Earnings per Share ($) | 2.22 | 2.41 | 1.93 | 3.26 | |
Average Market Price ($) | 38.0 | 35.6 | 26.2 | 37.1 | |
Historical P/E | 17.1x | 14.8x | 13.5x | 11.4x | 14.2x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $2.91 gives a target price of $41.4 for the end of 2022. This price target implies a 28.5% upside from the September 2 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 12.2x | 13.2x | 14.2x | 15.2x | 16.2x |
EPS 2022 ($) | 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 |
Upside/(Downside) | 10.4% | 19.4% | 28.5% | 37.5% | 46.5% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $36.8 , which implies a 14.3% upside from the current market price. Adding the forward dividend yield gives a total expected return of 18.1%. Hence, I’m maintaining a buy rating on Atlantic Union Bankshares.
For further details see:
Atlantic Union Bankshares: Earnings Likely To Increase Next Year On The Back Of Loan Growth