Atlantic Union Bankshares Corporation

Good day, and thank you for standing by, and welcome to the Atlantic Union Bank Sheriff's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 zero. I would now like to hand the conference over to Bill Cimino. Thank you. Please go ahead.

Bill Cimino Thanks, Felicia, and good morning, everyone. I have Atlantic Union Bankers President and CBO John Manifesto and Executive Vice President and CFO Rob Foreman with me today. We also have other members of our executive management team with us virtually 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 website, investors.AtlanticUnionBank.com. The slide presentation is also available to those on the webcast today. 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 is included, including reconciliations to comparable gains That measure is included in our earnings release for the first quarter of 2021 and in the appendix of our slide presentation. Before I turn the call over to John, I would like to remind everyone that on today's call, we'll 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 first quarter of 2021 and our other SEC filings for further discussion of the company's risk factors and 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 today on this 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 Asprey.

John Asprey Thank you, Bill. Thanks to all for joining us today, and I do hope everyone listening is safe and well. For those who follow us closely, you'll know that for the last year we've been consistent in our commentary that we are managing through two significant and distinct challenges. First, the continuing COVID-19 pandemic, which we certainly hope is in its latter stages, And second, a near-zero short-term rate environment that we believe still has years to run with all of its implications for the company's profitability. 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 we remain keenly focused on reaching the full potential of this powerful franchise despite the present challenges. 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 in the current economic environment. Our loan modifications have helped our clients weather the storm, having peaked at about 17% of the non-PPP loan portfolio in May of 2020 and remained at a minimal one-half of 1% as of April 15th. Our capital position has been strengthened, and we have ample liquidity. Our second priority is profitability, and despite the noise in the Q1 expense line, you can see the impact of our actions to align our expense run rate to the new revenue reality of the lower rate environment. We closed five branches in the quarter, bringing down the total number of branches by 20, or 13%, since this time last year. Rob will walk you through the expense details and his comments, but we continue to guide through a quarterly core expense run rate of about $92 million a quarter. While we could further reduce this expense run rate, we are choosing to invest over the short and medium term to make our company more competitive, more efficient, more scalable for growth over the long term. Some of the spending is for projects that we did push out during our initial expense reduction actions early last year, and we feel now is the right time to get them done. ahead of what we believe is going to be quite a strong economy. A number of these initiatives have front-end loaded expenses, such as third-party consultants, but they will result in lower annual expense growth rates and operating leverage improvements over time after they've completed, as they will make our operations more efficient and more scalable. All must pass our internal business case hurdles in order to obtain approval. As for growth, we are bullish in our economic outlook and believe we have a long runway ahead of us to grow both organically and through takeaway from our larger competitors that dominate market share in our home state of Virginia, supplemented by our operations in Maryland, North Carolina, and our specialized lending capabilities in government contract finance and equipment finance. We remain focused on and believe we are 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're well positioned for this, and we will thoughtfully evaluate opportunities to complement our organic growth through disciplined M&A, consistent with the strategy we have previously articulated. Let me provide a quick review of our pandemic response. About 90% of our non-branch personnel continue to work from home. All branch lobbies have been open to customer walk-in traffic since last fall. Corporate offices remain closed to all but essential personnel and will remain that way through at least the first half of the year. Work from home continues to go well, and we're certainly not going to rush bringing people back in given continued safety and social distancing challenges. The short-term COVID-19 trends in our footprint have been good recently, and the vaccination programs are gaining speed, but we want to be prudent in ensuring the safety of our teammates and our customers. We are hopeful these positive trends will hold over the coming months as vaccination levels continue to rise. 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 is 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 to us seeking help. We took our successful round one PPP plan, and we improved round two. We started taking applications for Round 2 as soon as the Small Business Administration opened to banks our size on January 19th, and we have received SBA approvals for approximately 5,500 loans, totaling around $542 million so far. We estimate this will ultimately represent about $25 million of additional net fee income for us. It's difficult to predict how much continued demand there will be for Round 2, but the application flow has certainly slowed. Round two PPP first and second draw loans are important in that they will help businesses through the end 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 revenue opportunity for us. The SBA paused round one PPP loan forgiveness during the quarter for about two months before reopening at the end of the period. Approximately 5,600 clients received forgiveness, totaling approximately $600 million through the first quarter of this year. We do expect that to increase significantly in the second quarter. For example, since the first quarter ended, we've now had approximately 2,300 clients having received forgiveness for $222 million. As I've said before, our customers have learned to bank differently. We've seen usage of our digital channels increase substantially from the prior year. For example, Digital logins are up 50% since this time last year and up 21% since the beginning of the year. Mobile check deposit utilization is up 33% year over year. Zelle utilization is up 158% year over year. Card control users are up around 241% year over year. And commercial mobile deposit dollar volume is up 48% year over year. We continue to work on new projects and improve the omni-channel customer experience with quarterly releases and upgrades to our product offerings. During the first quarter of the year, we launched our On Demand, which provides new deposit account customers with pre-qualified credit and lending offers at the time they open their account. We announced a newly hired dedicated leader of business banking as a part of our increased focus on this opportunity. We rebranded Middleburg Financial to Atlantic Union Bank Wealth Management to better leverage our bank brand and continued to make progress on the rollout of the enhanced wealth platform using Black Diamond technology. And we enhanced the call center technology to reduce time needed to authenticate our callers. We also have a number of additional customer experience improvements that we expect to implement later in 2021, including the use of Zoom and DocuSign for lending applications and closings, as well as having a completely digital client experience from application to closing in our mortgage business. As I've said before, we're not standing by waiting to return to the office, but we're making steady progress against our strategic plan. Now, turning to credit, we remain pleasantly surprised that the COVID-19 credit impact has not materialized as we initially forecast and feared. While the outlook is still in flux, we are more confident on credit than we have been since the pandemic began, even more so than at the end of the fourth quarter, and we don't expect credit issues to be problematic, barring some unexpected negative development with the COVID-19 outlook It's clear to us that the resiliency and diverse nature of our markets, coupled with additional government stimulus and an accommodated Federal Reserve, have had a positive impact, and we have seen the unemployment rating on markets improve faster than expected. Here in our home state of Virginia, March unemployment came in at 5.1 percent. That's down from 5.6 percent in December, and it's also 90 basis points better than the national average. Our loan book also helps our credit performance 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. As we continue to climb out of the systemic downturn, our credit losses have been minimal so far. Charge-offs in Q1 remained at very low levels of only three basis points annualized, or, if you exclude PPP loans, at four basis points annualized. At some point, credit losses are expected to normalize, but given all of the stimulus, the PPP Round 2 and a strengthened economy, it's very hard to point to a specific time when that may be. Looking ahead, we do expect normalized levels of credit losses after the impact of the pandemic works its way through the economy. Rob will talk you through the provision for credit losses and our CECL modeling, but by all indications and metrics, credit remains solid. Our total modification balances as of Thursday, April 15th, were approximately 185 loans under modification with balances totaling approximately $64 million, and that's 0.4% of our total portfolio. This is down from $1.9 billion in 4,000 loans as of April 24th, 2020, which was then approximately 15% of the portfolio. As I mentioned earlier, modifications peaked in May of 2020 at around 17%. Of the remaining loan modifications, approximately 70% or $44 million are accounted for by seven hotel loans. Our exposures to the most in focus COVID sensitive industries are limited and are outlined on slide six and seven of our accompanying presentation. The amount of loans under a modification in these segments decreased from 16 loans for $83 million on January 18th to 11 loans for 48 million as of April 15th the majority of which do pertain to hotels. As you may recall, our third-party consumer portfolio has been winding down for some time. The quarter in balance for our Lending Club exposure was about $40 million and continues to run off. Payment deferrals in the Lending Club portfolio declined to approximately $363,000 during the quarter as accounts went off modification and became current. The remaining portfolio for Lending Club is performing well, and it's in line or better than our expectations. Overall, we continue to proactively work through this pandemic event with our clients while mitigating credit risk wherever we can. 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 the disruption in our markets, but we believe we're in the late innings of this now. We continue to face near-term uncertainty, but as I mentioned before, the economic outlook has improved, and we're optimistic. While there may be some dips along the way to a full recovery, we believe the overall trend will remain upward and accelerate in the back half of 2021. The data continues to demonstrate better economic performance in our footprint than what is seen overall in the national economic model projections, and this gives us confidence in our outlook. We will again point out that the Virginia economy is fairly unique, with a broadly diverse set of regional economies, and about 20% of it is anchored in some fashion by the federal government. Additional stimulus should be a net positive for the federal government's contribution to the Virginia economy. While overall loans declined by 2.6% annualized, excluding PPP, our Q1 commercial loan growth was relatively flat, excluding PPP loans, as we expected. Our commercial loan categories of all types on a combined basis declined about 0.6% annualized. Commercial line utilization dropped one percentage point over the quarter to 25%, and that's well below our normal line utilization of about 40%. This evidences the ample liquidity among our business borrowers. Looking ahead, we are optimistic about the leading indicators for loan growth. Currently, our loan pipelines are back to pre-pandemic levels, and our Q1 commercial production was strong. In fact, it was better than what we experienced in either Q1 2020 or Q1 2019. We do believe we are now on an improving growth trend line, and we expect that loan growth in the second half of the year will be better than the first half, and that we could hit 4 to 5 percent loan growth for the full year, excluding our third-party consumer runoff and PPP loan activity. We see no reason at this time why we've not returned to high single-digit loan growth in 2022. Our franchise, our market dynamics, and our economic outlook certainly support that opportunity. Our goal remains creating a company that's able to consistently deliver differentiated performance. As I mentioned before, we are working on ways to make the company more efficient, more scalable, while improving the customer experience and should see operating leverage improvements as a result. Once we get through all of the noise of PPP, we would expect to publicly reestablish our top tier financial targets. So 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. I am convinced we'll emerge from this crisis stronger, better, more efficient than before, and that will give us opportunity, both organic and potentially, through a high We are 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've weathered the storm better than I could have hoped by taking care of our teammates and our customers and protecting this bank. 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, our communities, our teammates, and our shareholders. And I'll end with my usual comment. You know what? Well, I know. Atlantic Union Bank Shares remains a uniquely valuable franchise. It's 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 trying of times. I'll now turn the call over to Rob to cover the financial results for the quarter.