Atlantic Union Bankshares Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Atlantic Union Bankshares Corporation is a financial holding company with its principal subsidiary being Atlantic Union Bank, and operates as a full-service commercial bank with multiple branches across Virginia, Maryland, and North Carolina.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Atlantic Union Bankshares Corporation (AUB) is a regional bank holding company, primarily operating through its subsidiary, Atlantic Union Bank. AUB’s core business centers around providing traditional commercial and retail banking services, including loans, deposits, and other related services to individuals, businesses, and local governments, primarily in Virginia, Maryland, and North Carolina. It’s notable that AUB is the result of a series of mergers and acquisitions of community banks, allowing it to expand into multiple different regions. This also means that AUB has to integrate various smaller firms into the parent company, sometimes dealing with the loss of staff and some customers.

The revenue breakdown of AUB is a mix of interest and non-interest income.

  • Net Interest Income (NII): This forms the bulk of AUB’s revenue and represents the difference between what they earn on loans and what they pay on deposits. NII is highly dependent on interest rates and economic conditions which influence both the yield on loans and the cost of funding through deposits. A significant portion of AUB’s revenue comes from net interest income.
  • Non-Interest Income: This segment includes various fees, service charges, gains from the sale of securities, and insurance and brokerage-related revenue. It has higher growth potential than NII and has lower risks associated with it.

AUB is affected by several trends:

  • Regional Economic Fluctuations: A regional bank is often highly correlated to its local economy. That means, when times are hard in Virginia and surrounding areas, it will also have less revenue in return, and vice versa.
  • Interest Rate Changes: These changes affect the cost of borrowing, which leads to large swings in Net Interest Income.
  • Digitalization: The increasing adoption of digital banking by consumers changes customer service models and can lead to increased competition.
  • Regulatory Environment: Stringent regulations can impact AUB’s capital adequacy, and compliance costs.
  • Competition: AUB has several smaller banks as their competitors, which can compete on specific product/services or prices that may result in AUB not being as profitable.

AUB’s management strategy primarily revolves around:

  • Disciplined Risk Management: AUB emphasizes strong credit standards and risk analysis on new loans to maintain lower loan defaults. This also means a potential decrease in lending that would affect AUBs revenue.
  • Community Focus: AUB highlights its commitment to local markets with active community engagement and philanthropic giving.
  • Growth Through Acquisitions: AUB has historically pursued growth through acquisitions, which can quickly allow AUB to scale, but would require considerable time and energy to successfully merge different bank cultures, management, and services.
  • Maintaining its financial position: Maintaining a healthy capital ratio and cost structure.
  • Expanding its offerings: AUB continues to explore new products and services in wealth management and other financial areas.

The economic moat of AUB is a narrow moat (rated 2/5), as the company’s competitive advantages, while present, are relatively limited in their ability to fend off competition or ensure long term excess profitability. Here is my analysis:

  • Local/Regional Brand & Customer Loyalty (Narrow): AUB has a moderate degree of local brand recognition and established customer base in specific regions of Virginia, Maryland, and North Carolina. However, these advantages are not unassailable, because customers often switch banks for lower fees or better service offerings.
  • Scale and Efficiency (Low): AUB benefits to a certain extent from economies of scale and the ability to offer services at relatively lower price points than its competitors, because most of its smaller competitors are doing the same thing.
  • Switching Costs (Low-Medium): A large portion of its customer base comes from individuals which have low switching costs to other banking institutions, thereby limiting its power. Some customer segments, especially in the small-business area, have a high dependency on data and may face time-based switching costs, providing a small moat.

These are the main risks to AUB’s moat:

  • Intense Competition: Banks are easy to imitate, and new bank entrants are not unheard of. Competitors can always offer better rates or services, eroding the advantage that AUB has.
  • Macroeconomic Vulnerabilities: Regional banks are highly susceptible to a bad downturn in the economy, which would lower their loan origination and revenue. A bad economy would also increase loan defaults, thereby hurting the bank’s balance sheet.
  • Regulatory Risks: Changes in financial regulations, especially those pertaining to capital adequacy, have considerable negative effect on the bank’s costs, expenses and profitability.
  • Technology Disruption: AUB lags behind the leaders in Fintech and might lose clients to more technology-driven competitors who make online banking easier and more seamless.

The business resilience for AUB is considered average. Although it has a diversified book of clients, it is still heavily reliant on the regional market that its branches are in, so it may not be able to survive a deep, sustained recession. Also, the company has to be agile enough to follow new trends in the market and continue investing in its infrastructure. A lack of innovation or a failure to adapt could drastically affect the company’s finances, and the bank’s ability to keep up with new developments. A major component of this is also that AUB has to constantly worry about new regulations or revisions to existing regulations.

The understandability for AUB is considered low, at 2/5. The nature of banking is such that several intricacies can confuse many and it also requires a deep dive in financial literature to clearly understand. Here are some of the factors that contribute:

  • Complex Financial Statements: Banks are heavily regulated, and their financial statements are very complex. It is hard to understand which factors contribute to the overall revenue and growth of the bank.
  • Interaction of Numerous Factors: Macroeconomic factors, including interest rates, affect its cost of funding and revenue, making understanding the performance of the bank much more complicated.
  • Nuances in Accounting: Accounting rules specific to banks are not easily understood by laypersons. There are several specific items that may require careful understanding of the footnotes and accounting policies to clearly understand the bank’s true performance.
  • Mergers and Acquisitions: AUB has gained significant scale from acquisitions over the years, making it even more difficult to understand, as many of these acquisitions are done by stock options, and have a unique impact on the finances.

The financial health of AUB is rated as average 3/5. Here are a few points that lead to the rating:

  • Positive:
    • Adequate capital ratios
    • Relatively low loan defaults
    • Significant focus on risk management
    • AUB has shown revenue growth in recent years.
  • Negative:
    • High loan-to-deposit ratio
    • A reliance on interest rate changes
    • Heavy exposure to local economies
    • High reliance on goodwill on the balance sheet

Latest results have been largely positive, but some headwinds are also apparent.

  • Interest Rate Sensitivity: AUB is still vulnerable to changes in interest rates, given that a large portion of its revenues are from Net Interest Income, which is dependent on the difference between rates on loans and deposit accounts.
  • Loan Quality: AUB has shown a slight increase in non-performing loans. Also, while the reserves are healthy, they need to be seen with the context of regional and overall economic outlook, which can change quite drastically, and have an unforeseen impact on the loan defaults.
  • Deposit Balances: While deposits continue to grow for AUB, overall deposits have been affected by inflation, with individuals moving their savings into other avenues and accounts. This means a reduction in overall deposits that can hurt their loan funding.
  • Profitability: AUB management has consistently focused on profitability by reducing expenses. However, they should focus on increasing their top-line, instead of only reducing costs to further increase value for shareholders.

In the latest earnings calls and quarterly reports, AUB management has stated that the main focus for the upcoming year is to grow the customer base and to increase and diversify the services being provided. The management also stated that they will continue to focus on risk management, as the banking sector itself is highly risky at the moment. Although, they also stressed the resilience of the bank and their focus on maintaining long-term value for shareholders.