Atlantic Union Bankshares Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Atlantic Union Bank Shares Fourth Quarter Fiscal Year 2020 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bill Cimino, Investor Relations. Thank you. Please go ahead, sir.

Thank you, Gigi, and good morning, everyone. I have Atlantic Union Bankers 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 remotely for the question and answer period. Please note that today's earnings release and accompanying slide presentation we are going through on the webcast are available to download on our investor website, investors.AtlanticUnionBank.com. During today's call, 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 fourth quarter and full year of 2020. Before I turn the call over to John, I would like to remind everyone that on today's calls, 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 or update any forward-looking statement. Please refer to our earnings release for the fourth quarter and full year 2020 and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that cause actual results to differ from those expressed or implied in any forward-looking statement. 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 with that, I'll turn the call over to John Asbury.

Thank you, Bill. Thanks to all for joining us today, and I hope everyone listening is safe and well in this new year. We think consistent in our commentary that we are managing through two significant and distinct challenges. First, the continuing COVID-19 pandemic and everything associated with it. And second, a much lower than expected interest rate environment for years to come, with all of its implications for the company's profitability. Our results for the quarter and for the full year of 2020 show that the actions we've taken so far to address these two distinct challenges are having a positive impact in positioning Atlantic Union for future success. We continue to believe that our strategic plan with our long-term goal to become the premier mid-Atlantic bank is the right one and that 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 reaching the full potential of this powerful franchise despite the present challenges. Now more than ever, our mantra of soundness, profitability, and growth in that order of priority informs how we run our company. A sound bank is and will remain our highest priority. A prudent and conservative credit culture served our company well during the Great Recession, and it's serving us well through the economic shock of the pandemic. Our loan modifications have helped our clients weather the storm, having peaked at about 17% of the non-PPP loan portfolio in May and dropped to a minimal 1% at year end. During the second quarter of 2020, we fortified our capital position with a preferred equity issuance. Our second priority is profitability. And while Q4 was a noisy quarter, you can see the impact of our actions to align our expense run rate to the new revenue reality of the lower rate environment. At year end, we closed one further branch that was primarily a commercial branch in our Herndon, Virginia location. That was a part of our consolidation of the former Herndon commercial office into our Reston, Virginia offices. Rob will walk you through the noisy fourth quarter expenses in his comments, but I will note we had approximately $7.4 million in incremental performance-based variable incentive compensation and profit-sharing expenses, which included a $1.2 million contribution to the company's ESOP during the fourth quarter. Incentive compensation plans are a variable cost, and the pool is funded based on achievement of corporate targets that align with our shareholders. The metrics are net income, return on assets, efficiency ratio, and return on tangible common equity. Our team's hard work and agile response to the numerous challenges of 2020 were outstanding and delivered on our 2020 targeted results, so we accrued per the quantitative formula in order to reward their accomplishments. Setting aside the incentive and profit-sharing accruals and the federal home loan bank advance prepayment cost, our expense run rate for Q4 was otherwise in line with prior guidance. As for growth, On the other side of the current economic challenges, we do believe we have a long runway ahead of us to grow organically and through takeaway from our larger competitors that dominate market share in our home state of Virginia, supplemented by our operations in Maryland and North Carolina. We're especially focused on and benefiting from the disruption occurring at two of our largest competitors. We do believe the pressures of a long-term near-zero rate environment coupled with the rising tide of customer expectations for digital product offerings is going to motivate further bank consolidation. We believe we are well-positioned for this, and we'll continue to evaluate opportunities to complement our organic growth strategy through M&A. Let me provide a quick review of our pandemic response. About 90% of our non-branch personnel continue to work from home. We reopened branch lobbies to customer walk-in traffic on October 14th. Corporate offices remain closed to all but essential personnel and will remain that way through at least the first half of the year, possibly longer. Work from home continues to go well, and we're not going to rush to bring people back, given the safety and social distancing challenges involved. As we're seeing across the nation, the short-term COVID-19 trends in our markets have not been good recently, and we want to be prudent in ensuring the safety of our teammates and customers. We are hopeful this trend will improve in the coming months as vaccination rates rise with better distribution. I'll now turn to PPP forgiveness in round two of the program. The first round of the Paycheck Protection Program was a brand builder for Atlantic Union, and our results support that statement. We remain focused on converting as many as possible of the more than 3,000 new-to-bank PPP clients from the first round to full relationships. It's clear to us that there's a great opportunity here from the negative experiences many of them had with larger banks that caused them to come our way, seeking help. We've taken our successful Round 1 PPP plan and improved it for Round 2. We started taking applications for Round 2 as soon as the Small Business Administration opened to banks our size on January 19th, and we received applications for approximately 2,500 loans, totaling around $475 million so far. It's difficult to project demand for Round 2, but the application flow certainly seems more spread out than what we saw last year when it was more of a panic for us to apply. Round 2 PPP first and second draw loans are important in that they'll help businesses through this phase of the pandemic. This is both a boost for our clients, which should help mitigate credit losses from the pandemic, and it's also an unplanned fee income opportunity for us. We began to submit applications for Round 1 PPP loan forgiveness to the SBA during the fourth quarter and 3,100 clients received forgiveness totaling $429 million during the fourth quarter. We're pleased that the Congress passed a bipartisan proposal to streamline forgiveness of PPP loans under $150,000, as they represent about 85% of our Round 1 PPP loans by count. This greatly simplifies the forgiveness process both for our clients and for us, and we're about to start processing under these streamlined requirements. Since year end through January 21, clients have received a further amount of forgiveness, totaling $82 million, serving 999 loans. As I've said before, our customers have learned to bank differently. While branch lobbies are now reopened, we rolled out a digital appointment scheduling option to customers, and we've had more than 33,000 appointments set since June 1. We've seen usage of our digital channels increase substantially from the prior year. For example, digital logins are up 38% since the start of the year. Mobile check deposit utilization was up 37% over the course of 2020. Zelle utilization up 162% year over year. And card control users are up about 180% since April when that was launched. Our call center volume has decreased from its peak, and the fourth quarter was about 10% lower than the first quarter. We continued to work on new projects and improve the omni-channel customer experience with quarterly releases and upgrades to our product offerings. During the fourth quarter of the year, we rolled out a Zoom video chat option to our current branch appointment options. We launched the ability for our trust in private banking businesses to digitally sign new account origination documentation to onboard new customers, began to pilot an enhanced client relationship management platform using Black Diamond technology within the wealth group, completed the integration of the mortgage digital lending platform with Blend software that will enable an end-to-end digital closing experience in Q1, and we implemented DocuSign for Treasury Management Services documents, greatly simplifying the onboarding process for Treasury Management products. Using these new solutions, such as the appointment scheduler, Zoom, DocuSign, and branch access together with the bank's online account opening platform, we opened more than 1,100 personal checking accounts in the fourth quarter, through our Solutions Banking Group. That's our bank-at-work program we launched in the first quarter of 2020. We also had a number of additional customer experience improvements coming in the first quarter of 2021. As I've said before, we're not standing by waiting to return to the office, but we are making steady progress against our strategic plan. Our pivot to work from home has been smooth, and it is one of the great success stories of 2020 for us. Turning to credit, surprisingly, the COVID-19 credit storm has not materialized as we initially forecast. While the outlook is still murky, we are more confident on credit than we have been since the pandemic began, and we don't expect credit issues to be nearly as severe as what we initially feared. Having said that, we are expecting a tough winter of COVID-19 infection, and if there's one thing we learned last year, it's that anything could still happen. I will say that the resiliency and diverse nature of our markets, coupled with additional government stimulus and accommodative Federal Reserve, these are all having a positive impact as we've seen the unemployment rate in our markets improve much faster than expected. Here in our home state of Virginia, November unemployment came in at 4.9%, which was nearly 200 basis points better than the national average. And by the way, that's typical for Virginia. The December numbers will be released at the top of the hour today. Our loan book also helps as we don't have outsized exposure to the industries most directly impacted by the social distancing measures put in place, such as hotels, restaurants, and retail. Rob will talk you through the provision for credit losses in our CECL modeling, but by all indications and metrics, credit remains solid. Charge-offs in Q4 remained at very low levels, and excluding PPP loans, they were six basis points annualized versus four basis points annualized in Q3. Our total modification balances as of Monday, January 18th, were approximately 430 loans under mods, with balances totaling $132 million, or nine-tenths of 1% of our total portfolio. If you exclude the PPP loans, it would be approximately 1% of our total portfolio. This is down from $1.9 billion in 4,000 loans as of April 24th, which was approximately 15% of the portfolio at that time. As I've mentioned earlier, modifications peaked in May at around 17%. Of the remaining loan modifications, 60% of them, or $79 million, are accounted for by 11 hotel loans. The remaining modifications are tailored for each borrower, and about 63% of them are currently interest-only. We work through these modifications on a client-by-client basis to address their specific circumstances. Our exposures to the most in-focus COVID-sensitive industries are limited in our outline on slides 6 and 7 of our accompanying presentation. The amount of loans under a modification in these segments decreased from 111 loans for $199 million on October 16th to 16 loans for $83 million as of January 18th, the majority of which, of course, pertain to hotels. As you may recall, our third-party consumer portfolio has been winding down for some time. The quarter end balance for our lending club exposure was about $52 million and continues to run off. Payment deferrals in the lending club portfolio declined approximately $1 million during the quarter, or pardon me, declined to approximately $1 million during the quarter. His accounts went off modifications and became current. The remaining portfolio is performing in line with our expectations. Overall, we continue to proactively work through this event with our clients while mitigating credit risk wherever we can. Moving on to expense reduction actions, we developed our initiatives to reduce the company's expense run rate to match lower revenue expectations due to COVID-19 and the lower for longer interest rate environment back in March. We began to take action on them in the second quarter and into the third quarter. We took additional action in the fourth quarter with the decision to close an additional six branches, including the five that will be consolidated in February. After these branches close, we'll operate 129 branches across our footprint, That's a reduction of 20 from last year at this time, which is about a 13% reduction out of the branch network. Our goal remains to achieve and maintain top tier financial performance, regardless of the operating environment. Our financial outlook will ultimately depend in part on the continued success against additional flare-ups of COVID-19 in our main operating areas and the vaccine rollout. This will be one of the primary factors that determine the length of disruption in our markets. We continue to face near-term uncertainty, mostly the duration of COVID-19, but as I mentioned before, the economic outlook has improved and our optimism is rising. We still expect some dips along the way to a full recovery, but we believe the overall trend should be upward, and we think the improving trend should accelerate in the back half of 2021. We still don't know when we may return to pre-pandemic macroeconomic levels, but the data continues to demonstrate better economic performance in our footprint and would have seen overall and the national economic model projections. As we pointed out many times, the Virginia economy is fairly unique with a broadly diverse set of regional economies and with about 20% of it anchored in some fashion by the federal government. The changes underway in Washington should be a net positive for the federal government's contribution to the Virginia economy. Our full-year loan growth was about 1.8%, excluding PPP loans. Commercial loan categories of all types on a combined basis grew about 4%, offset by declines in consumer categories if you lock third-party lending and residential mortgages held on balance sheet. Although it increased by 1.8 percentage points in the fourth quarter, commercial line utilization remains very low at about 26%, well below our normal utilization of around 40%. While it's anyone's guess what exactly 2021 will bring at this point, we do believe that the second half of the year will be better than the first half and that we could see a return to high single-digit loan growth in 2022. Our franchise and our market dynamics certainly support that opportunity. As we continue to climb out of the systemic downturn, our credit losses were minimal in 2020, and the real impact remains to be seen. We still expect an eventual rise in credit losses, and we thought we would have already begun a transition toward that, but it simply hasn't yet happened. With the prospect of more stimulus, the second round of PPP underway, and the rollout of the vaccine, it's really hard to point to a specific time where the increase in credit losses will start to materialize. To what extent the additional stimulus, PPP round two, and the vaccine mitigate credit losses remains to be seen, but we believe these actions will have a positive impact on the ultimate level of credit losses we incur. Stepping back, we believe that we are well positioned and readily able to absorb any delayed credit losses from COVID-19. And looking ahead, we expect normalized levels of credit losses after the impact of a pandemic works its way through the economy. Moving beyond credit, our goal remains creating a company that's able to consistently deliver differentiated performance. We'll continue to work on ways to make the company more efficient and scalable while improving the customer experience, and we could see further improvements to our expense base as a result. As I've said before, we continue to push the organization forward and not simply wait for things to happen. We remain focused on credit risk mitigation and positioning for success while we busily work to improve our company, its efficiency and scalability, and provide a better customer experience. At the same time, we always try to think a few steps ahead, and we do see strategic opportunities on our horizon. As I said last quarter, I am convinced we will emerge from the crisis stronger, better, and more efficient than before, which will give us opportunities, both organic and inorganic. We're leveraging our learnings and ingraining our newfound capabilities, agility, and innovation into the company's culture so that we have the flexibility to adapt to the lower-for-longer rate environment and the coming next normal, whatever that may be, while delivering a differentiated customer experience. We continue to see opportunity in all of this chaos, and we're weathering the storm better than I could have hoped, taking care of our teammates and customers and protecting this bank. While 2020 was the most challenging year of my career, I've never been more proud of our teammates and all they accomplished while adjusting to a new way of working in the midst of all of this uncertainty. I remain confident in what the future holds for us and the potential we have to deliver long-term, sustainable financial performance for our customers, communities, teammates, and shareholders. Despite all that happened in 2020, or perhaps because of it, As we enter 2021, I feel stronger than ever that Atlantic Union Bank Shares remains a uniquely valuable franchise, dense and compact in great markets, with a story unlike any other in our region. We are scalable, with the right capabilities, the right markets, and the right team to deliver high performance, even in the most drying of times. I'll now turn the call over to Rob to cover the financial results for the quarter.