Atlantic Union Bankshares Corporation

Good day and thank you for standing by. Welcome to the Atlantic Union Bank Shares Second Quarter 2022 Earnings Conference 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and good morning, everyone. I have Atlantic Union Bank chairs, 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 in the room and remotely for the question and answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this 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 reconciliation to comparable GAAP measures, is included in the appendix for a slide presentation in our earnings release for the second quarter of 2022. We will make forward-looking statements on today's call, 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 expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements. Please refer to our earnings release for the second quarter of 2022 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 from those expressed or implied in the order of the 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. I'll now turn the call over to John Hasberry.

Thank you, Bill, and thanks to all for joining us today. Atlanta Community Bank Shares maintained its strong start to 2022 with a solid second quarter. We recorded upper single-digit loans Asset quality remained pristine, and we made a strategic investment in wealth manager Cary Street Partners by transferring our RIA business to them in exchange for a minority interest in Cary Street Partners. I have consistently stated that our operating philosophy of soundness, profitability, and growth, and that order of priority, serve us well as we navigate the challenges of the ever-changing operating environment. Further, as I said on our recent investor day, the Atlantic Union has been, is, and will continue to be a story of transformation guided by a consistent but evolving strategy and remains committed to delivering on our strategic objectives. As compared to our comments during the last quarter, we have grown more cautious in our economic outlook given the implications of surprisingly high inflation, rapidly rising short-term interest rates, and geopolitical uncertainties. It's clear to us that a fog of uncertainty is rolling in. Business leaders and consumers are growing more hesitant, and we're in for slowing economic growth, if not an actual recession. Having said that, our markets remain strong, and we still don't see any near-term shift away from the positive trends of low unemployment and a benign credit environment. We believe that the Federal Reserve will continue to raise short-term rates, doing whatever it takes to battle stubborn inflationary pressures. Since we remain fairly asset sensitive, multiple short-term rate hikes over the course of 2022 are a positive for our operating results, and our net interest margins should continue to expand. Inflation remains a drag on the economy. Supply chain disruption has improved, but it's still a factor, and business clients remain challenged to fill open positions. Despite all of this, we do think American businesses have proven their resiliency and that all of this will be quite manageable, particularly in our footprint. While the macroeconomic outlook is less favorable than it was during the last quarter, we feel better about Virginia's economic outlook than that of the nation overall. We think that is for good reason. May unemployment for Virginia came in at 3%, approaching pre-pandemic levels, and we await June data, which will be released tomorrow. As is usual, the most recently reported unemployment rate here is better than the 3.6% current national average. Most of our credit exposure is in Virginia, which has a long track record of better than national performance during economic downturns. This is in part because Virginia is a set of diversified regional economies and in part due to the stabilizing influence of the U.S. government, which is generally viewed as contributing in some fashion to about 20% of our home state's GDP. This tends to serve as an economic shock absorber. Over the past two weeks, I've traveled extensively across our franchise, meeting with clients, business leaders, and our teams. I can report that anecdotally, Business leaders state their companies are doing well, but they are guarded in their outlook. Their major challenges are the same as what we've been hearing for some time, and that's the inability to fill open jobs, some degree of supply chain disruption, and managing wage and price inflation. Most report some degree of pricing power to offset increased expenses in part or in whole. It's a mixed bag of how they think about making investment at this time. It's a way to need for investment against economic uncertainty. My takeaway? is that overall I see economic activity decelerating but not stopping. While it's hard to read tone to a transcript for those reading these comments at a later date, I would describe our thoughts on the economic outlook as cautious in light of the mixed signals we're seeing. In the end, the tight labor market coupled with strong demand and consumption, still ample liquidity, and the nature of our markets and clients leave us thinking we're facing more of an economic rough patch than an economic cliff. To paint a clearer picture, I used to fly. And I was told that any landing you can walk away from is a good landing. I don't know if we're in for a soft landing or a hard landing, but I do believe it will be one that we'll all be walking away from. Take off for more fun than landings, though, and Atlantic Union posted upper single-digit loan growth at just over 7% point-to-point-to-point annualized basis and finished the second quarter at approximately 9% annualized point-to-point loan growth year-to-date, excluding PPP. Our loan pipeline entering the third quarter is now the highest we've seen since before the pandemic, and well balanced between CNI and commercial real estate. Despite the uncertain environment, we continue to expect high single-digit loan growth for the year, given the strength of our current pipeline, our competitive positioning, market dynamics, and fundamentals in the markets we serve. We recognize that all of this could change, but as we start Q3, loan growth momentum is strong, and at this time, we believe we have line of sight to high single-digit loan growth for the year. We were encouraged to see CNI line utilization pick up at the end of the quarter to 33%, which, while still well below our pre-pandemic levels, continued on this improving trend, topping the first quarter's 30%. It's good to see this build and our commitment levels grow. We have upside here as working capital needs increase among our clients. We also have a number of positive growth factors to report for the quarter. For example, this was our second best loan production quarter over the 2019 to 2022 timeframe, eclipsed only by Q4 21. About 40% of production came from new to then clients and 60% from growth at our existing clients. This is a proof point that we are steadily chipping away at market share and there is a long way to go there. CRE payoffs slowed and we're well off the peaks we saw in the second through fourth quarters of last year. Rising term rates have put a noticeable dent in refinance activity into the long-term institutional markets, and developers report this may also reduce the fraud. We have seen that institutional investors making knockout offers they cannot refuse on CRE properties. We think CRE is still in good shape and quite healthy, and the cooling of payoff activity is good for our outstandings and makes continuing bank financing an attractive option on stabilized properties. Meanwhile, our installed base of construction commitments is providing a tailwind on loan growth as construction lending balances fund up and climb back toward more normalized levels. As we mentioned at our investor day, we do want to expand our efforts in SBA 7A lending and asset-based lending. We stood up our dedicated 7A program in June, which will help close the product gap between our larger competitors and us. We're also continuing to work on standing up a complete asset-based lending, or ABL, program to close another key CNI product gap. We first mentioned interest in scaling our small ABL effort during a 2018 investor day, along with establishing an equipment finance division, which we have now successfully done. A scaled ABL effort would further differentiate us in the market from our local competitors. It would allow us to better compete against larger ones and open up new growth avenues. Russell Moore- wholesale banking executive David ring and I both have backgrounds and asset based London so we're especially focused on getting this right and we're quite excited about it. Russell Moore- Even with a more muted economic outlook, we continue to believe we have a long runway ahead of us to grow both organically and through takeaway. Russell Moore- From our larger competitors that dominate market share in our home state of Virginia supplemented by our operations in Maryland and North Carolina. and our specialized lending capabilities in government contract finance, equipment finance, and enhancements to capabilities like SBA 7A and hopefully soon ABL. Our asset quality continues to impress. And once again, the credit headline for the quarter was the absence of credit problems. Charge-offs net of recoveries for the quarter came in at approximately $939,000 or three basis points annualized, a modest increase from the effectively zero base that we've seen over the past few quarters. Quarter after quarter, these are levels I've never seen in my now 35-year career. At some point, credit losses will normalize, but given all the liquidity that remains in the system, low unemployment, and still solid fundamentals in our markets and client base, we have yet to see any sign of a systemic inflection point. To quote our chief credit officer, all is well for the meantime. This will have an end, we just don't know when. Having said that, we've always been and remain responsible underwriters, even in the face of stiff competition. Soundness is and will continue to remain a higher priority than growth. But given our market opportunity, strategy, and competitive position, we feel that soundness, profitability, and growth are all still achievable. Turning to expenses, we saw seasonal improvement quarter over quarter in salaries and benefits, as we said would be the case. Having said that, the war for talent continues to rage, and we are seeing larger competitors take significant actions regarding their minimum wages. This does impact us, particularly in our branch-based roles. The expense actions we have taken, combined with our asset sensitivity, provide room to respond from the competitive dynamics while still meeting our financial targets. We're currently evaluating our minimum wage in order to ensure we remain competitive. We do expect some incremental addition to the expense run rate as a result, but also will reaffirm our guidance for achieving our efficiency ratio target. For purposes of clarity, the combined effect of our expense management actions upper single-digit loan growth expectations, asset sensitivity and a rising rate environment, heavily transaction account-rated deposit base, and strong asset quality track record all give us confidence in our ability to generate positive operating leverage and differentiated financial performance while meeting our top-tier financial targets in the second half of 2022. With all the uncertainties and challenges acknowledged, we remain on an attractive top-line and bottom-line organic growth footing, Looking ahead, as I laid out in our Investor Day, our strategic priorities at a high level are, in order of priority, deliver organic growth, innovate and transform, and strategic investments. We want to innovate and transform the way we operate to free us from legacy system constraints and stay on top of potentially disruptive trends. As noted at Investor Day, we joined the USDF Consortium in May and continue to build out our technology transformation roadmap. Our goal is to build a frictionless experience for our customers by integrating human interactions with digital capabilities. Regarding strategic investments, we have commented before on our FinTech partnerships and FinTech fund investments. Strategic investment is not limited to FinTech, though. It's evidenced by our quarter-end investment in well-respected Richmond-based RIA Cary Street Partners. We accomplished this through the exchange of our RIA business for a minority stake in Cary Street Partners. Cary Street has made substantial investments in their back office capabilities, such as compliance and technology. They have a broad product set and are simply better positioned than we are to scale the business. Rather than continue to invest in our approximately $1.5 billion AUM RIA, we chose to join forces with the now $6 billion plus AUM RIA that we know, that we trust, and that we've enjoyed a great relationship with for a very long time. We see this as a quadruple win. It's good for our RAA clients. It's good for our RAA teams. Good for Cary Street and good for us. We believe that Cary Street will grow the business and valuation faster than we could. We'll avoid what would have been needed investment and expense, and we expect to be able to create some new relationships for our banking solutions to include trust services, private banking, and mortgage. Rob will have more details on the financial impacts of that transaction in his section, including our $9.1 million pre-tax gain on the sale. As we turn the page on the first half of 2022, our goal remains to achieve and maintain top-tier financial performance regardless of the operating environment. I remain 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. While our operating environment continues to change, what is not changing is that 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 and growing our capabilities, and we have 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.