Merger And Calculated Investments Set To Propel Bank Into A Future Of Growth And Efficiency

Key Takeaways

• The merger with American National Bankshares aims to boost profitability and market share by expanding into new markets and realizing significant cost savings.
  
• Strategic investments in C&I lending and diversification of income streams through new financial products are expected to drive organic loan growth and enhance earnings.
  
• Reliance on a pivotal merger, macroeconomic uncertainties, managing deposit ratios, North Carolina expansion, and credit loss reserves present multifaceted risks to profitability and growth.

Catalysts

Operates as the bank holding company for Atlantic Union Bank that provides banking and related financial products and services to consumers and businesses in the United States.

• The merger with American National Bankshares, which was completed in the second quarter of 2024, is expected to significantly boost net interest margin and bottom-line profitability by expanding the bank's footprint into new markets in North Carolina and Southern Virginia, thereby potentially increasing revenue and market share.
  
• Full realization of the 40% cost savings from the merger starting in the fourth quarter of 2024 is anticipated to enhance the bank's efficiency ratio significantly, impacting overall profitability by reducing noninterest expenses.
  
• The bank's strategic investments in building out commercial and industrial (C&I) lending capabilities in North Carolina, along with a focus on equipment finance and treasury management products, are expected to drive organic loan growth and diversify the bank's income streams.
  
• Expected mid-single-digit annualized loan growth in the latter half of 2024, supported by stable macroeconomic conditions and healthy unemployment rates in the bank’s primary markets, is likely to contribute to revenue growth.
  
• Anticipation of federal funds rate cuts later in the year could reduce the cost of deposits further enhancing the net interest margin, which, combined with the bank's adjusted operating strategies post-merger, could result in improved earnings per share.

Assumptions

• Analysts are assuming Atlantic Union Bankshares's revenue will grow by 21.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.8% today to 40.1% in 3 years time.
• Analysts expect earnings to reach $504.1 million (and earnings per share of $4.96) by about September 2027, up from $174.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, down from 19.2x today. This future PE is greater than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 19.7% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on the merger with American National for future growth and profitability could introduce integration risks and challenges, potentially impacting revenue and net margins if the expected synergies and cost savings are not fully realized.
  
• The mention of an uncertain macroeconomic environment and the expectation of rate cuts by the Federal Reserve suggest a potential impact on net interest margins and overall profitability if the economic conditions deteriorate or if the rate cuts do not materialize as expected.
  
• The company's focus on increasing its loan-to-deposit ratio within a preferred range and its approach to managing deposit costs may face risks in a changing rate environment, possibly affecting net interest income and financial stability.
  
• The strategy to expand and invest in North Carolina for organic growth relies on market acceptance and competitive dynamics, where failure to execute could impact projected loan growth and revenue increases.
  
• The credit loss reserve adjustments and the anticipation of managing through idiosyncratic credit losses highlight underlying risks in the loan portfolio that could lead to higher than expected provisions for credit losses, impacting earnings.

Valuation

• The analysts have a consensus price target of $44.0 for Atlantic Union Bankshares based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $504.1 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 5.8%.
• Given the current share price of $37.21, the analyst's price target of $44.0 is 15.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.