Atlantic Union Bankshares Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Atlantic Union Bank Shares' fourth quarter and full year 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 the session, you will need to press star 1 on your telephone. I would now like to hand the conference over to your speaker today, Mr. Bill Cimino. You may begin.

Thank you, Kyle, and good morning, everyone. While I hope you enjoyed the brief bit of news with this program, I do want to say that we'll probably next time go with music instead of the news on the hold. I have Atlantic Union Bank Share's President and CEO, John Asbury, with me today, and Executive Vice President and CFO, Rob Foreman. 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.AtlanticUnionBank.com. During the call today, we will comment on our financial performance using both gap metrics and non-gap financial measures. Important information about these non-gap financial measures, including reconciliations to comparable gap measures, is included in our earnings release for the fourth quarter and full year 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 statements. Please refer to our earnings release for the fourth quarter and full year 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 the State Farber 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 Happy New Year from Atlantic Union Bank Shares Corporation. I do want to point out I'm fighting a cold, so I apologize in advance for the rough voice and occasional cough. We closed out an eventful 2019 solid fourth quarter by continuing to execute on our strategic plan and hitting the loan deposit growth targets we revised last quarter. As we begin 2020, we continue to believe we have a great opportunity before us to create something uniquely valuable for our shareholders and the communities we serve and remain keenly focused on the full potential of this powerful franchise. Atlantic Union accomplished much in 2019. To start, we closed the Access National Bank acquisition on February 1st and converted their core systems in May. Successfully and uneventfully rebranded the company to Atlantic Union and changed the stock trading symbol to AUB. Delivered 8% deposit growth while on growth was 6% for the year. The year-end loan-to-deposit ratio was in line with our 95% target, right where it should be. We completed the transformation of the executive leadership team with the hiring of David Zimmerman in the fourth quarter to head up our wealth management group, Middleburg Financial. Approved and rolled out our new three-year strategic plan to our team base. Added staffers to the equipment financing team to close the commercial banking product gap. Lost Zelle and added a C-network to the product gaps. won a number of customer experience awards, including the most coveted number one ranking for the J.D. Power. We took that status for the Mid-Atlantic region in 2019. With the Mid-Atlantic region defined by J.D. Power as Virginia to New York State, there was none better. It was a focused initiative to take advantage of the coming market disruption from the Truist merger. Rob will provide more details on the financial performance in this section, but for operating metrics for the fourth quarter, Our operating return on tangible common equity was 16.01%, which is a 37 basis point increase from the third quarter. For the full year, our operating ROTCE was 16.14%. Operating return on assets was 1.30%, up one basis point from the prior quarter. For the full year, operating ROA was 1.31%. Operating efficiency ratio was 52.65%, which is a 247 basis point decrease from the prior quarter. In late 2018, we communicated that we had updated our top-tier financial targets to the following, operating ROTCE between 16% and 18%, operating ROA between 1.4% and 1.6%, and an operating efficiency ratio at 50% or below. We made those updates then expecting to operate in a rising rate environment and stepped up our top-tier financial metrics accordingly. As the economic and geopolitical environment materially changed over the course of 2019, we shifted expectations for the Federal Reserve to cut rates. Even then, the rate environment was below our expectations, and there was a sustained inversion of the yield curve that negatively impacted our net interest margin and revenue throughout the year. Despite the adverse changes in the rate environment, we did perform well against our original 2018 targets. Given the challenging current and expected operating environment for banks, Rob will comment on our revised financial targets for 2020 and 2021 in his remarks, which reflect our continuing focus on maintaining top-tier financial performance regardless of the operating environment. Loan growth was 10% annualized for the quarter, point to point, while average loans grew 3%. Q4 is predictably a stronger seasonally in loan growth, and we saw significant growth materialize late in the quarter. Headwinds to growth in Q4 with persistent trend of commercial real estate paydowns remaining at elevated levels and our decision to run off the third-party consumer loan portfolio. CNI line utilization at approximately 40%, and total commitments both picked up from the third quarter. As a reminder, the access acquisition closed on February 1st, 2019. On a pro forma basis, the access balances were included for the full year. Our year-end loan growth was approximately 6%, which is consistent with the expectations we communicated during our third quarter earnings call. Our loan pipelines are well balanced and slightly ahead of where we were this time last year, giving us confidence in our 2020 forecast. Based on everything we know at this time, we expect full year 2022 loan growth to be in the 6% to 8% range, including the impact of further runoff of our third-party consumer loan portfolio. We expect to take advantage of the disruption caused by the Truist merger, but we do expect headwinds from the continuation of elevated paydowns in the CRE portfolio, as rate expectations for the year suggest the institutional, non-recourse, long-term fixed-rate market will remain an attractive substitute product for CRE clients. Our deposit growth was about 8% annualized for the quarter, point to point, and average growth was approximately 15%. For the full year 2019, deposit growth was approximately 9%, point to point, which was at the higher end of our upper single-digit growth guidance. Given the current strength, we believe we'll be able to match deposit growth with loan growth for 2020 in the 6% to 8% range and maintain our loan-to-deposit ratio at our target of 95%. Credit quality remained solid in the fourth quarter, The economy and our footprint is steady. Unemployment in Virginia ticked down to 2.6% among the lowest in the nation, and we still do not see any evidence of systemic credit deterioration in our loan portfolio. Quarterly charge-offs were 15 basis points annualized down to 10 basis points in the prior quarter. The full-year net charge-off ratio was 17 basis points. As we've seen in prior quarters, a big part of charge-offs at Atlantic Union Bank, about 60% for the quarter, came from our third-party consumer loan portfolios mentioned continues to run off. Barring some unexpected change in the macroeconomic environment, we aren't expecting a change in credit quality in 2020. As I've consistently said over the past three years, I do believe problem asset levels at Atlantic Union and across the industry remain below the long-term trend line, and I still believe that to be true. Eventually, we will see a return to more normalized credit losses, but we can't tell you when to expect as we're not yet seeing any evidence of a systemic downturn. Moving away from the quarter's financial highlights and looking ahead, we rolled out our new three-year strategic plan to our teammates in the second half of the year. Our plan stays true to 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. For those who know us and our story, the strategic plan continues a logical progression of what we've been working on for some time. Our roadmap to achieving the objectives of the strategic plan are our priorities, which I've outlined before. I'll provide an update to those priorities. Diversify loan portfolio and revenue streams. We made solid progress on our commercial banking effort, and the commercial loan categories of C&I and owner-occupied real estate now make up one-third of our total loan portfolio. We stood up an equipment finance team in the fourth quarter to close a competitive gap in our commercial offerings, and the team hit the ground running, closing about $12 million in loans during the month of December. The new capability has been very well received by our commercial banking teams, and we're excited about the potential for this group over time. Complementing our CNI strategy is a growing Treasury Managed Services annuity fee income stream. Treasury management transformed beginning in 2018 with a new product development team, a segmentation of TM support by line of business, and an ambitious undertaking to enhance our service offerings. We now have a robust TM platform comprised of inside and external sales teams, a product management team, and a sales implementation team. New TM revenue in various stages of implementation totals $1.9 million in annual run rate, plus a record $1.3 million in the pipeline revenue. Next, grow core funding. As I mentioned earlier, our loan-to-deposit ratio is currently at our target of about 95%. We continue to believe we have opportunities to grow our deposit base and deepen our market share. For example, we piloted a Bank at Work program in our coastal region in the fourth quarter, which targets the consumer banking needs of our commercial client employees. We've taken the learnings from that pilot and are now in the process of launching this effort across our footprint. The Bank at Work program is an important product to grow consumer accounts and low-cost deposits and helps to strengthen our commercial client relationships. Next, manage the higher levels of performance. As we mentioned earlier, we aim to stay in the top quartile of our peers as measured by ROTCE, ROA, and efficiency ratio metrics. We believe we have a number of opportunities to improve the efficiency of the bank by reengineering our end-to-end processes. For example, We are focused on taking out laborious manual processes and reducing rework wherever we can with a company-wide robotic process automation initiative. Improving efficiency and scalability is an important focus for us in 2020. Next, strengthen our digital capabilities. As I mentioned before, during 2019, we implemented table stakes technology improvements like Zelle in the consumer bank and Encino in the commercial bank. Middleburg Financial will have a comprehensive wealth management platform in the first half of 2020. It will improve the client and teammate experience and close an important competitive gap. We're piloting a new digital accountability solution that simplifies the enrollment process, and that should launch in February. We're adding debit card controls and enhanced notifications and alerts for real-time updates to customers in the first quarter. We have installed or upgraded Wi-Fi in all branches so customers can more easily receive assistance to set up online and mobile banking, which is important for new and existing customers. Some of the new digital capabilities address gaps with our larger competitors, bringing us closer to parity with the most frequently used functionality. While we don't intend to lead the market in digital innovation, we must be competitive and current with our digital offerings to remain in the consideration set for new customers, especially those considering leaving a larger bank. Next is make banking easier. We launched a product called Transition Checking that enables customers who might not otherwise qualify for a traditional checking product to establish or re-establish themselves in the banking system by offering a fee-based account that has no overdraft privileges. We successfully piloted a project to issue temporary instant debit cards at our branches, and we'll roll that out across the system starting this month. Debit card issuance time has been a pain point for our customers, and this will resolve the issue. We're also rolling out contactless debit cards to customers in the first quarter. We installed electronic signature capture pads in all branches to eliminate paper, streamline process, improve quality, and create a more consistent experience for applications and forms. We revamped the consumer lending team and their approval processes to speed up home equity line of credit approvals and have already seen a 25% reduction in average cycle time. We streamlined our treasury management services onboarding process and set aside documentation by developing a master services agreement that allows clients to easily add new services. We further expanded our project set with new offerings, such as integrated pay and a better purchasing card product. And finally, capitalized on strategic opportunity. Since we don't know what the future holds, we must be nimble and able to react to a changing marketplace. The greatest market opportunity we're likely to see over the next few years is the Truist merger. During 2019, we hired 39 people from the Truist companies in a variety of roles. We are expecting considerable Truist branch closures in our Virginia trade areas, which we expect to begin in late 2021, and we'll be ready for the coming disruption. As for other strategic opportunities, it should be clear from my comments, we're busy and focused on internal improvements at the moment and still have a number of projects to finish in the near term. Having said that, we still believe Atlantic Union Bank is in the best position to further consolidate Virginia and look to fill in our mid-Atlantic trade area. Our choice of Atlantic and the Atlantic Union Bank name was intentional, as we think we have the potential to become the premier mid-Atlantic regional bank. It's my preference to focus internally for as long as possible in 2020 to gain efficiencies inside the bank, to become more scalable, and to improve our competitive positionings. However, we have demonstrated we're able to leverage M&A as a shareholder value-creating secondary strategy, and that remains in our playbook. In summary, Atlantic Union had another solid quarter and a good 2019. We continue to make steady progress against our strategic priorities and delivered good financial performance despite headwinds from the adverse interest rate environment. I remain highly confident with future holds for us and the potential we have to deliver long-term sustainable financial performance for our customers, communities, teammates, and shareholders. I can think of no better way to finish my comments in the new year than by reiterating the Atlantic Union Bank shares is a uniquely valuable franchise. It's dense and compact and 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 growth opportunities in our North Carolina and Maryland operations and what we believe will be a multi-year disruption with one of our largest competitors. I'll now turn the call over to Rob to cover the financial results for the quarter and for 2019. Rob?