8-K: Atlantic Union Bankshares Reports Mixed Q2 Results Amidst American National Merger

Atlantic Union Bankshares Corporation reported a net income of $22.2 million for the second quarter of 2024, impacted by merger costs and a tax valuation allowance, while adjusted operating earnings showed improvement.

Summary

• Atlantic Union Bankshares Corporation reported a net income available to common shareholders of $22.2 million, or $0.25 per share, for the second quarter of 2024.
• Adjusted operating earnings available to common shareholders were $56.4 million, or $0.63 per share, for the same period.
• The company completed its acquisition of American National Bankshares Inc. on April 1, 2024, which significantly impacted the second quarter results.
• The acquisition added $2.9 billion in total assets, including $2.2 billion in loans, and $2.7 billion in total liabilities, including $2.6 billion in deposits.
• The company incurred pre-tax merger costs of approximately $29.8 million during the second quarter.
• Net interest income increased to $184.5 million, up from $147.8 million in the previous quarter, primarily due to a $2.8 billion increase in average interest-earning assets.
• The net interest margin increased to 3.39%, up 28 basis points from the prior quarter.
• Noninterest income decreased by $1.8 million to $23.8 million, primarily due to losses on the sale of securities.
• Noninterest expense increased by $44.7 million to $150.0 million, mainly due to merger-related expenses.
• The company recorded a $4.8 million valuation allowance on deferred tax assets.
• Total assets reached $24.8 billion, an increase of $3.4 billion from the previous quarter.
• Total deposits were $20.0 billion, an increase of $2.7 billion from the prior quarter.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the merger has brought growth in assets and deposits, the significant merger costs, decreased net income, and tax valuation allowance temper the positive aspects. The company is positioned for future growth, but the current results are mixed.

Positives

• The merger with American National Bankshares Inc. was successfully completed on April 1, 2024.
• The core systems integration was completed over Memorial Day weekend, and the company now operates as one brand.
• Net interest income increased significantly due to the merger, rising to $184.5 million.
• The net interest margin improved to 3.39%, up 28 basis points from the prior quarter.
• Adjusted operating earnings available to common shareholders increased to $56.4 million.
• Total assets grew to $24.8 billion, reflecting the impact of the merger.
• Total deposits increased to $20.0 billion, also reflecting the merger's impact.
• The company's lending pipelines are positioned for mid-single digit annualized loan growth in the second half of 2024.

Negatives

• Reported net income available to common shareholders decreased to $22.2 million, down from $46.8 million in the previous quarter.
• The company incurred significant pre-tax merger costs of $29.8 million.
• Noninterest income decreased by $1.8 million due to losses on the sale of securities.
• Noninterest expense increased substantially by $44.7 million, primarily due to merger-related costs.
• A $4.8 million valuation allowance was recorded on deferred tax assets, impacting the effective tax rate.
• The company experienced a $6.5 million pre-tax loss on the sale of available-for-sale securities.

Risks

• The company faces risks related to market interest rates, inflation, and general economic conditions.
• There are risks associated with the integration of American National, including potential adverse reactions or changes to business or employee relationships.
• The company is exposed to credit risk, particularly in commercial real estate.
• Technological risks, cyber threats, and operational risks could impact the company's performance.
• The company's financial results could be affected by changes in accounting principles and regulatory requirements.
• There is a risk that the anticipated benefits of the American National acquisition may not be fully realized.

Future Outlook

The company expects to achieve cost savings of 40% of American National's non-interest expense by the fourth quarter of 2024. They also anticipate mid-single digit annualized loan growth in the second half of 2024. The company expects the Federal Reserve Bank to cut the fed funds rate by 25 bps two times beginning in September 2024. Full year 2024 outlook includes loans of ~$18.5 $19.0B, deposits of ~$20.0 $20.5B, ACL to loans of ~95-100 bps, net charge-off ratio of 10-15 bps, net interest income (FTE) of ~$730 $740MM, net interest margin (FTE) of ~3.40% 3.50%, adjusted operating noninterest income of ~$115 $120MM, adjusted operating noninterest expense of ~$445 $450MM, and amortization of intangible assets of ~$20MM.

Management Comments

• John C. Asbury, president and chief executive officer of Atlantic Union, stated that the company delivered solid operating metrics in the second quarter, which is the first to include the financial impact of the merger with American National.
• Mr. Asbury also noted that the company successfully completed the core systems integration over Memorial Day weekend and now operates as one brand across its footprint.
• Management believes the combination positions them well to deliver differentiated financial performance and increases their market power.

Industry Context

This announcement reflects a trend of consolidation in the banking industry, with larger regional banks seeking to expand their market presence through acquisitions. The merger with American National is a strategic move by Atlantic Union to increase its density and market power in Virginia and expand into contiguous markets. The results are being released during a period of economic uncertainty and changing interest rates, which are impacting the entire banking sector.

Comparison to Industry Standards

• The net interest margin of 3.39% is within the range of other regional banks, but the increase of 28 basis points is notable and likely due to the acquisition.
• The efficiency ratio of 72.00% is higher than some peers, indicating higher operating costs, which is expected due to the merger related expenses.
• The adjusted operating efficiency ratio of 52.24% is more in line with industry standards, showing the underlying efficiency of the business after excluding merger costs.
• The loan growth of 63.3% is significantly higher than the industry average, driven by the acquisition of American National's loan portfolio.
• The deposit growth of 63.4% is also higher than the industry average, reflecting the addition of American National's deposits.
• The company's capital ratios are well above regulatory well capitalized levels, indicating a strong capital position.
• Compared to peers such as Truist Financial Corporation and Regions Financial Corporation, Atlantic Union's results show a similar trend of increased net interest income but also higher expenses due to merger activities. However, the specific impact of the merger on Atlantic Union is more pronounced due to the size of the acquisition relative to its existing operations.

Stakeholder Impact

• Shareholders will see a decrease in net income and earnings per share in the short term, but the company is positioned for long-term growth.
• Employees have experienced a merger and integration of systems and processes.
• Customers will benefit from a larger branch network and expanded services.
• Suppliers and creditors will see a larger and more stable financial institution.

Next Steps

• The company will focus on realizing cost savings from the merger with American National.
• The company will continue to integrate the operations of the two banks.
• The company will focus on organic growth and performance of the core banking franchise.
• The company will selectively add commercial bankers in North Carolina.

Key Dates

Keywords

merger, acquisition, net interest income, noninterest expense, net income, financial results, bank, loans, deposits, asset quality, capital ratios, operating earnings