Trading banks in recent months has been anything but easy. However, amidst the turmoil, one name shines bright in the regional banking space – Atlantic Union Bankshares Corporation (NYSE:AUB). Despite the challenges posed by interest rate fluctuations and concerns over loan demand, Atlantic Union Bankshares has remained resilient in the face of a declining regional bank sector.
While other banks have taken a hit in the market, Atlantic Union Bankshares has managed to hold up relatively well. It stands out as a gem amidst the pain experienced by the regional banking industry as a whole.
Looking ahead, we believe that regional banks like Atlantic Union will fare well once interest rates stabilize. If you expect rates to continue their upward trajectory into 2024, it may be wise to steer clear. However, our base case is that the Federal Reserve’s rate hike campaign is nearing its end, with potential rate cuts on the horizon. As rates rise, margins initially expand with new loans issued at higher rates. Yet, increased competition for deposit dollars has led to higher payout rates for depositors, impacting bank margins. However, we foresee a peak in payout rates, with future loans still being issued at higher rates, thus leading to margin expansion in 2024.
Furthermore, we don’t see loan demand drying up just yet. This, coupled with the fact that Atlantic Union Bankshares has a strong performance track record, gives us confidence in supporting its shares. The bank has displayed a shareholder-friendly approach with past share repurchases and a dividend yield of 4.1%, making it an attractive investment option as we wait for its shares to rebound. Additionally, Atlantic Union’s recent acquisitions for growth add value to the company.
Atlantic Union Bankshares Corporation reported Q3 2023 revenue that exceeded expectations, with a 1.5% year-over-year increase reaching $182.8 million. Despite the challenging macroeconomic climate, net interest income remained relatively steady, totaling $151.9 million compared to $152.1 million in Q2 2023. The net interest margin decreased by 10 basis points to 3.27% sequentially.
Yields on loans increased by 20 basis points to 5.39% from the previous quarter due to higher market interest rates and loan growth. However, the cost of funds rose by 30 basis points to 2.04%. We anticipate that the cost of funds will peak in Q4 and then stabilize before declining in late 2024. At the same time, we expect higher-yielding loans to continue being issued.
Interestingly, Atlantic Union Bankshares reduced its provision for credit losses to $5.0 million in Q3 2023, compared to $6.1 million in Q2 2023 and $6.4 million in Q3 2022.
Consistent Growth in Loans and Deposits
Despite the challenging rate environment, loans and deposits at Atlantic Union Bankshares have continued to grow. The bank reported a $0.3 billion increase in total loans held, reaching $15.3 billion in Q3 2023 compared to the previous quarter. Total deposits also increased, reaching $16.8 billion, up by $374.5 million or approximately 9.1% annualized from the start of the quarter, and a $515.5 million increase from the prior year.
Strong Asset Quality
Strong loans and deposits, stabilizing margins, and positive earnings signify the robust nature of Atlantic Union Bankshares. The asset quality metrics for Q3 2023 were impressive, reinforcing our bullish stance on the bank. Net charge-offs decreased to $0.294 million or 0.01% of total average loans on an annualized basis, an improvement from $1.6 million in Q2 and $4.6 million in Q1. The allowance for credit losses increased slightly to $140.9 million, reflecting loan growth and ongoing economic uncertainty. Moreover, the efficiency ratio remained strong at 60.61%.
Final Thoughts: A Promising Investment
Atlantic Union Bankshares offers an appealing dividend while waiting for the macroeconomic situation to improve. Despite the challenges faced by the banking industry, the operational and asset quality metrics of Atlantic Union Bankshares remain robust. With increasing loans, expanding deposits, and growing earnings, we believe brighter days lie ahead for the bank in 2024.