Atlantic Union Bankshares Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Atlantic Union Bank Shares third quarter 2019 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bill Cimino. Thank you. Please go ahead, sir.

Thank you, Tiffany, and good morning, everyone. I have Atlantic Union Bank Shares President and CEO John Asbury and Executive Vice President and CFO Rob Gorman with me today. We also have other members of our executive management team with us for the question and answer period. Please note that today's earnings release is available to download on our investor website, investors.bank at atlanticunionbank.com. During the call today, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in our earnings release for the third quarter of 2019. Before I turn the call over to John, I would like to remind everyone that on today's call we will make forward-looking statements which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement. Please refer to our earnings release for the third quarter of 2019 and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we will take questions from the research analyst community. And now I'll turn the call over to John Asbury. Thank you, Bill.

Thanks to all for joining us today, and welcome to our second conference call as the newly rebranded Atlantic Union Bank Shares Corporation. We remain pleased that our change in name, signage, and trading symbol has been uneventful, and in fact, we've received a surprising number of compliments about it. I'd like to express my gratitude to our marketing team for leading this very successful effort. I'd like to point out this month marks my three-year anniversary of having joined the company. What a difference I see three years in, and what an exciting transformation we have experienced and continue to experience. Our team checked off the boxes on the prior three-year strategic plan and recently approved a new one that I'll comment on later in my remarks. The current challenges we face in the interest rate environment notwithstanding, I've never been more optimistic, confident, and enthusiastic about the future of the company than now. Turning to current events, Atlantic Union followed its good first half of the year with a solid third quarter. You will recall our stating in prior comments that results would be noisy for the first three quarters of the year as we wind up the Access National Bank integration, rebranding, and a few other undertakings, and that has certainly proven to be the case. As you can see in the earnings release, we did have a number of one-time items in the third quarter and a charge-off of a long-term land development workout, all of which impacted our operating profitability metrics from the prior quarter. For purposes of clarity, Rob Gorman will walk you through nine recurring items in detail during his portion of the comments. But for now, I'll hit the highlights of the quarter. To start, we delivered strong deposit growth while loan growth was seasonally slow in the third quarter. Continue to build out the leadership team with the selection of a seasoned wealth management leader. We will have more detail about this hire in an upcoming official announcement. We also hired another seasoned leader, Allison Holt Fuller, into a new role as head of product management. Both have exemplary backgrounds and are important additions to the company's leadership. We rolled out our new three-year strategic plan to our teammates, and we consolidated four branches. As for operating metrics for the quarter, our operating return on tangible common equity was 15.64%, which is a 94 basis point decrease from the second quarter. Operating return on assets was 1.29%, down six basis points from the last quarter. And operating efficiency ratio was 55.12%, which is a 266 basis point increase from the prior quarter. Since last fall, we've communicated our financial targets on an annualized basis in the fourth quarter of 2019 of an operating ROTCE between 16 and 18%, an operating ROA between 1.4 and 1.6%, and an operating efficiency ratio at 50% or below. Clearly, we're facing headwinds from the current rate environment. At the beginning of the year, we expected there would be Fed Fund increases in 2019 and a steepening yield curve. The rate environment has shown to be worse than our expectations, and there has been a sustained inversion of the yield curve, which continues to negatively impact our net interest margin. Nevertheless, based on what we know today, we expect to be within the targeted ROTCE range in the fourth quarter of 2019 on an annualized basis. and our efficiency ratio should be near the 50% target for the fourth quarter as well. Achieving our ROA target, however, now looks like a 2021 event given our current interest rate modeling. Again, Rob will elaborate on this in his section. Loan growth was 3% annualized for the quarter, point to point, while average loans grew 5%. Q3 is predictably a seasonally slow loan growth quarter for us, further dampened by seasonal paydowns among our government contracting clients, due to the federal government's September 30 fiscal year end. We also saw the persistent trend of CRE paydowns remain at elevated levels. CNI line utilization during the quarter remained stable, while total commitments ticked up from the prior quarter. As a reminder, the access acquisition closed on February 1st, 2019. On a pro forma basis, as if the access balances were included for the full year, our year-to-date annualized loan growth is approximately 5% point-to-point, slightly below year-to-date expectations. Our loan pipelines are well-balanced. They remain strong and are higher than at this point last year. Based on everything we know at this time, we expect full-year 2019 loan growth to be around 6%. We do think we could outperform this end-of-third-quarter forecast, just as we did at this time last year, especially given our 14% annualized loan growth in last year's fourth quarter and the disruption of the pending BB&T SunTrust merger. However, we think it best to update our expectations based on where we are currently, and then we'll see what happens. Our deposit growth was a bright spot for the quarter, coming in strong at about 17% annualized. In the second quarter, we noted that we had experienced seasonal reductions in deposits from some larger relationships that we expected to return in the second half of the year, and they did. Encouragingly, though, our rebound in deposit growth was broadly based. Year-to-date, deposit growth of approximately 9% point-to-point is at the higher end of our upper single-digit growth guidance. Given the current strength, we continue to believe we'll be in our guidance range of high single-digit deposit growth for the year. Our loan-to-deposit ratio was around 94% at quarter end, which is slightly below our 95% target, and that's a good place to be. Turning to credit, our credit quality remains solid. The economy and our footprint is steady. Unemployment in Virginia ticked down to 2.8%, and we still do not see any evidence of systemic changes to our credit environment. Charge-offs did increase to 25 basis points annualized from 14 basis points in the prior quarter, totaling 18 basis points year-to-date. The increase was primarily from one long-running land development workout that incurred a $3.1 million charge-off during the quarter, accounting for about 40% of total charge-offs. This does not reflect any change in our credit environment, but was rather unique to the borrower whose personal circumstances caused him to negotiate an orderly sale of the property to another developer versus continue to build it out as he's been doing for a very long time. From our standpoint, we decided the best course of action was agree to the sale in bulk, eliminate the exposure, be done with it, versus take it into Oreo and attempt a better outcome. The transaction is expected to close in November. On the other hand, we also had an outsized loan recovery of $9.3 million from the Zunith acquired portfolio not reflected in net charge-offs as the loan was charged off prior to acquisition and therefore was accounted for under non-interest income. As we've seen in prior quarters, a big part of charge-offs, 40% in the third quarter, came from a third-party consumer loan portfolio. While it has served its intended purpose, this is not a strategic focus area and is being wound down over the next year. The remaining 20% of charge-offs for the quarter were well distributed among a handful of smaller borrowers, and we noted nothing out of the ordinary with them. As evidenced by this quarter, charge-offs are typically lumpy quarter to quarter, but we otherwise expect full year 2019 to look about like the past few years in terms of credit quality, barring some unexpected change in the macroeconomic environment. As I've said for nearly three years, I continue to believe that problem asset levels at Atlantic Union and across the industry remain below the long-term trend line. Eventually, we are going to see a return to more normalized credit losses, but we can't tell you when to expect that as we're not yet seeing any evidence of a systemic downturn. Moving away from quarterly results and looking ahead, as I mentioned earlier, we rolled out a new three-year strategic plan to our teammates during the quarter. Our plan is in keeping with how we like to operate Atlantic Union Bank, which is maintain forward progress, press our advantage where we can, and do what we say we're going to do. The new plan will deliver on four overarching objectives that we believe are essential to our future success. First, meet the changing needs of our customers. We must remain nimble and respond to the rapidly evolving business environment. We note with caution any number of formerly well-regarded businesses who took their eye off their customers, failed to respond to a changing environment, and found themselves obsolete. We want to avoid that outcome. Second, optimize, digitize, and automate processes. Our business processes need to be optimized, digitized, and automated in order to improve efficiency, responsiveness, and get things right every single time. This is a multi-year undertaking, but the work is underway now. Third, demonstrate organic growth. We've demonstrated we're a successful acquirer and integrator, but less obvious is the organic growth we've also achieved. We believe we have the platform, scale, markets and capabilities to demonstrate we can meet our objectives through organic growth. This doesn't mean we would not consider acquisitions over the next three years, but for the time being, the best investment for Atlantic Union Bank is Atlantic Union Bank itself. We have an ambitious initiatives agenda inside the company, and we need time without M&A distraction to focus and best position ourselves for growth and future success. And last but not least, at every turn, keep getting better. We have a great opportunity to build the premier mid-Atlantic regional bank, and we can't do that on a status quo footing. As the saying goes, the road to success is always under construction. I love the keep getting better mantra and think it fits nicely with our can-do attitude, and it defines who we have become and what we stand for. For those who know us and know our story, these objectives are a logical progression of what we've been working on for some time. Not surprisingly, our roadmap to achieving these outcomes is very familiar. There are priorities which remain unchanged, save one, and I'll give you a few updates on our priorities. First, diversify loan portfolio and revenue streams. We continue to make progress on our commercial banking effort, and the commercial loan categories of CNI and owner-occupied real estate are now one-third of our loan balances. To complement this effort, we are standing up an equipment finance team to close a competitive gap in our commercial offerings. This is something we've been exploring for about a year, and we first signaled at our Investor Day presentation last fall. The team is based in Atlanta. They've worked together for some time with a great track record, and they have backgrounds in the super-regional and large national banks. We'll leverage this new capability to take maximum advantage of opportunities across our mid-Atlantic footprint in addition to their independent originations. While it will take a few quarters for the team to get up to speed, we're excited to offer secured equipment finance to include leasing as a specialized commercial and industrial offering for our clients. They generally focus on equipment transaction sizes of $1 million and up. Next, grow core funding. As I mentioned earlier, our loan-to-deposit ratio is currently about 94%. We continue to believe we have opportunities to grow our deposit base and deepen our market share. In the latest FDIC depository market share data, Atlantic Union became what we believe to be the first Virginia bank ever to overtake one of the big four bank competitors in the Richmond MSA, eclipsing BB&T to take the number four position. The coming Truist merger will solidify this position as SunTrust is eliminated, managing to higher levels of performance. As mentioned, we're maintaining our top tier financial metric targets and will aim to stay in the top quartile of our peers by these measures. Next, strengthen digital capabilities. We've already implemented Zelle and Encino this year, which we view as table stakes technology improvements for consumer and commercial clients. On the Middleburg financial or wealth management side, we're in the early stages of adopting a new comprehensive wealth management platform, which will improve the client experience while making us more efficient and scalable. We're also working on a new digital account opening solution and have already simplified the mobile banking enrollment process by eliminating repetitive data entry. Next, make banking easier. We launched an improved digital service functionality for consumer customers, making it easier to update basic personal financial information. In the fourth quarter, we're piloting a project to have temporary instant debit card issuing in our branches. This will not only make banking easier, but it will give customers everything they need to immediately start using our services once opened. Last, we're replacing our priority of Integrate Access National Bank, which will check off at year end with a new priority, and that's capitalize on strategic opportunities. Who knows what the future holds, but as we stated in our strategy, we must be nimble and ready to react to the changing marketplace. The greatest market opportunity we're going to see at Atlantic Union Bank over the next few years is likely the pending combination of BB&T and SunTrust, so I'll give a few updates on where we stand with that. Year to date, we've hired 29 people from these companies in a variety of roles. Anecdotally, we're seeing more traction in the marketplace for Atlantic Union as the alternative bank of choice. As the not-too-large, not-too-small home team alternative, we believe we're well-positioned to take advantage of this disruption and are not simply waiting for this to come to us. We have an organized project team leading a multifaceted strategy focused on maximizing this opportunity. The team analyzed their branch network as well as the BB&T and SunTrust branch network to identify, categorize, and prioritize opportunities for Atlantic Union. We're expecting considerable truest branch closures outside of the required divestitures in our Virginia trade areas, and we want to be ready for the coming disruption. We are accelerating some investment in projects we had slated for 2020 into this year to close competitive gaps and capitalize on what we firmly believe will be a multiyear disruption at the single largest market share competitor operating in Virginia. I realize this has been a lengthy update, but I hope it provides insight into how we think and what we've been up to. In summary, Atlantic Union had another solid quarter. We're making steady progress against our strategic priorities and are positioned to continue to improve our already good financial performance despite the interest rate environment headwinds. We're pleased with the favorable market reception to our new Atlantic Union Bank brand. I remain highly confident in what the future holds for us and the potential we have to deliver long-term, sustainable performance for our customers, communities, teammates, and shareholders. And I'll close as I usually do by reiterating, The Atlantic Union is a uniquely valuable franchise. It's dense and it's compact, in great markets with a story unlike any other in our region. We've assembled the right scale, the right markets, and the right team to deliver high performance in a franchise that can no longer be replicated in Virginia. We have incremental growth opportunities in our North Carolina and Maryland operations, and what we believe will be a multi-year disruption with two of our largest competitors, causing us to believe we have everything we need to accomplish our objectives organically at the present time. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?