KBRA Affirms Ratings for Atlantic Union Bankshares Corporation, Revises Outlook to Stable

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred shares rating of BBB-, and the short-term debt rating of K2 for Richmond, Virginia based Atlantic Union Bankshares Corporation (NASDAQ: AUB) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Atlantic Union Bank. The Outlook for the long-term ratings has been revised to Stable from Positive.

Key Credit Considerations

Over the years, AUB has evolved into what we believe to be a leading community/regional bank franchise in the Mid-Atlantic region and, more specifically, in the company’s home state of Virginia. We appreciate AUB’s measured growth strategy since the global financial crisis, highlighting that while many similarly sized peer banks in the Mid-Atlantic/Southeastern U.S. have grown in recent years with a flurry of M&A, making those institutions somewhat of “roll-ups” in nature, AUB’s growth has been more focused and deliberate, in our opinion. Though the company has participated in select M&A at times (the pending American National Bankshares, Inc. deal notwithstanding), AUB has been less acquisitive than most similarly sized institutions, and we therefore consider AUB’s established presence in Virginia to be a durable and entrenched one that was developed mostly organically. Today, the company’s 6% pro forma deposit market share in Virginia is the largest of any bank under $100 billion in assets and is supported by a branch network that spans essentially every sizable Virginia MSA. AUB’s proven track record of solid financial performance across various economic cycles is also supportive of the ratings. The company’s asset quality has been strong in recent periods, in part, benefiting from favorable credit conditions in the U.S. broadly, but also attributable to its strong and consistent underwriting standards and a comparatively granular, well diversified loan portfolio (top 20 loan relationships account for ~6% of total loans). Moreover, the company’s presence in the economically vibrant state of Virginia (an economy that is traditionally less cyclical and buoyed, to a degree, by stable government employment) also contributes to credit stability.

Adjusted ROA of 1.12% in 9M23 marks a decline from cyclically strong earnings seen in the prior two years, though still represents respectable earnings considering the more challenging operating environment, in our view. Similar to essentially all peers, the more competitive (and expensive) funding environment has weighed on AUB’s NIM (-43 bps YTD23), with further pressure expected on the margin in coming quarters before stabilizing in 2024. KBRA views AUB’s capital profile, including a CET1 that has averaged ~10% in recent years, as adequate for its current rating category. However, KBRA also recognizes that AUB’s core capital ratios have been on a steady downward trend since peaking in 2Q21 as a result of both loan growth and, perhaps more impactful, increased shareholder distributions. While we note earnings retention, and therefore core capital generation, at AUB may be stronger in coming quarters (management has characterized buybacks in 2024 as unlikely), we also acknowledge that the company’s capital metrics (3Q23 CET1 ratio of 9.9%) are currently below both the median of its rating peer group as well as the median of the broader KBRA rated bank universe.

Rating Sensitivities

Considering the Outlook revision to Stable, positive ratings movement is unlikely in the short-to-intermediate term. However, the management of capital more aligned with peer group averages, if achieved while maintaining a similar funding and risk profile, could contribute to positive ratings momentum over time. Through-the-cycle credit outperformance and the building of fee income to 25% of operating revenue would also be viewed positively. While not expected, greater than peer asset quality deterioration, including material loss content that impacts earnings, could lead to negative ratings momentum. Additionally, more aggressive capital management would be viewed negatively.

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