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spk14: Good day and thank you for standing by. Welcome to the Atlantic Union Bankshare's first quarter 2023 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To answer a question, please press star 1-1 again. And please be advised that today's conference is being recorded. I would now like to handle the conference over to your speaker for today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.
spk07: Thank you and good morning, everyone. I have Atlantic Union Bank Chair's President and CEO, John Asbury, Executive Vice President and CFO of Foreman with me today. We also have other members of our Executive Management Team with us for the question and answer periods. 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 reconciliations to compare GAAP measures, is included in the Atlantic Store slide presentation and the earnings release for the first quarter of 2023. We will make forward-looking statements on today's call, which are not statements of historical fact and subject to risks and uncertainty. 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 statement. Please refer to our earnings release issue today 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 could cause actual results to differ from those expressed or implied in the 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 now I'll turn the call over to John.
spk05: Thank you, Bill. Good morning, everyone, and thank you for joining us today. It was an eventful start to the year across the industry. Early in the quarter, deposit rate competition hit a tipping point and rapidly intensified as idle funds went in search of higher-yielding alternatives. Late in the quarter, we witnessed the dramatic back-to-back failures of Silicon Valley Bank and Signature Bank, which initially shook confidence in an American banking system that is fundamentally built on confidence. We will go into our quarterly results and our financial performance in a few moments, but I'll begin by stating I'm pleased to report that our deposit base proved resilient. We avoided any material loss of deposits due to bank safety concerns, and we covered loan growth by growing customer deposits by 153 million, or approximately 4% annualized. Total deposits grew $524 million, or 13% annualized, as we elected to use some broker deposits to reduce wholesale borrowings that we took on in the fourth quarter of 2022. Our franchise remains strong, even in these uncertain times. We see the current environment as another confirmation of our long-term strategy of being a diversified, traditional, full-service bank with a strong brand and deep client relationships. Now more than ever, soundness, profitability, and growth in that order of priority remain our mantra and inform how we run our company. To that point, let me provide some detail on the granularity of our deposit base, which we think of as the crown jewel of the AUB franchise. At the end of the first quarter, 72% of deposits were either insured or collateralized. We had liquidity sources available to cover 140% of uninsured and non-collateralized deposits at quarter end, And you can see the details of this on page 18 of our supplemental presentation. Here are a few statistics as of March 31. Our average retail deposit account balance was approximately $19,000. Our average business deposit balance was approximately $99,000. The customer deposit portfolio is split at around 48% retail and 52% business deposits. We did make greater use of insured cash sweeps or ICS products toward the end of the quarter for certain larger deposit balance relationships. Given all of the attention on banks and bank liquidity, it was a good opportunity to talk to our clients individually, explain why SVB and Signature were neither representative of AUB nor the industry as a whole, discuss our clients' individual needs, and provide options for them where desired. This is a good example of the relationship approach and personalized service that continues to differentiate us from the larger banks. Reflecting on all that went on in the industry over the quarter, it was the remixing of deposits and the sharp acceleration of deposit rate competition, higher than we anticipated, that was more consequential for us than the bank failures and subsequent industry turmoil. As a result, over the quarter, we took further rate actions to remain competitive. Quarter-end non-interest-bearing deposits were 28% of total deposits, a decline of 3 percentage points linked quarter. Fully taxable net interest margin declined 20 basis points to 3.50% for Q1 as compared to 3.70% for Q4 2022, which now appears to have been the peak for this cycle. Half of the decline could be attributed to our increased use of wholesale borrowings following the late-year decline in deposits as we optimized for liquidity over the quarter. By comparison, our Q1 net interest margin of 3.50% was still up from 3.04% year-over-year. We do expect deposit betas to remain under competitive pressure through the rising rate cycle but remain manageable. Helping us with net interest margin management going forward is that approximately half of our loan balances are variable rate and that we liquidated some securities to reduce high-cost wholesale borrowings during the quarter. To that point, over the quarter and before the bank failures, we executed a balance sheet restructuring by selling $506 million of available for sale securities in order to reduce funding costs and bring our total securities holdings to 15.5% of total assets which approximates our historical level. We viewed this as an attractive trade with a short earn back that was more about reducing funding costs and raising liquidity. However, given subsequent industry events, we're pleased to have the additional liquidity. Rob will have more details on the restructuring in his comments. Now let's dig into the macroeconomic conditions and then our quarterly results. Despite rising expectations for a mild recession to set in later this year or perhaps early next year, As it stands today, the macroeconomic environment remains solid in our footprint and we do not expect this to change in the near term. Our markets appear to be healthy and our lending pipelines are strong and only modestly down from where they were at this time last year. Virginia's last reported unemployment rate of 3.2% in March was unchanged from February and below the national average of 3.5% during the same time period. We still don't anticipate any materially negative near-term shift away from these low unemployment trends and overall benign credit environment, but we will continue to closely monitor the health of our markets. Given investor focus on non owner-occupied commercial real estate and more specifically office exposure, I'll share some perspective on that. CRE finances historic strength of our company, and it's an asset class that has performed well in our markets, which have not traditionally been prone to boom and bust cycles. We stick to our knitting and generally deal with local and regional developers and operators that we know well and have track records with us. Non owner occupied office exposure totaled $729 million and comprised 5% of our total loan portfolio at quarter end. Of this, approximately 25% is medical office, which we consider among the highest quality office category. We don't finance particularly large high rise or major metropolitan central business district office buildings, The portfolio is performing well and geographically diverse. I described most of our office exposure as suburban, single-story, and mid-rise properties under long-term leases, generally to local tenants that are less likely to use remote or hybrid work options than large national firms. We've analyzed the rent rolls of every property we finance and reviewed each property with our borrowers with an eye toward any near-term lease expirations which we define as less than two years. We proactively monitor this portfolio, and we don't see any systemic concerns in the office book at this time. Should problems develop in this portfolio, we believe they would likely be distributed over years, and we expect any problems that may develop to be readily manageable. Turning to quarterly results. As usual, we remain focused on generating positive operating leverage, that is, growing our revenue faster than our expense. Our results were noisy during the first quarter due to the loss on sale of securities and a $5 million legal reserve associated with an ongoing regulatory matter. Setting aside the legal reserve expense, our adjusted operating expense run rate was in line with our expectations for the seasonally high first quarter. Last quarter, we got it to mid single digit percentage operating expense growth for 2023, but we do recognize that was based on a then higher NIM expectation than we now have. Consequently, we will take further expense actions to limit operating expense growth to a low single-digit percentage to ensure positive operating leverage for the year. Rob will detail the outlook in this section. With respect to the legal reserve, as we previously disclosed, the Consumer Financial Protection Bureau, or CFPB, is considering an enforcement action against us in connection with certain of our historical overdraft practices. During the quarter, the CFPB commenced settlement discussions to resolve the matter. We believe it is in our best interest to determine whether this matter can be resolved on terms acceptable to us, and we're actively engaged in discussions with CFPB to settle the matter. Consistent with CFPB practice, if the settlement discussions are not successful, CFPB may commence litigation against us. We do not know the timing of any such settlement or the final amount of any loss in connection with the matter. Any final loss could be materially different from our current estimate and accrued amount. We do believe that our overdraft opt-in rate is well below the industry average, and our current overdraft practices comply with applicable law. That's all I'm able to share on the matter at this time, given the ongoing discussions. Now, here are a few financial highlights for the first quarter, which Rob will detail later. On a year-over-year basis, we generated positive adjusted operating leverage of approximately 5%, as adjusted revenue growth was up 9.6%, while adjusted operating non-interest expenses increased 4.4% year over year. I'd also like to point out that pre-tax, pre-provision, adjusted operating earnings increased 19.5% year over year. We posted annualized loan growth of approximately 3.8% point to point in the seasonally slow first quarter following the seasonally high fourth quarter. Lending production was down in the quarter, which is not surprising to us given that it followed a year record high Q4 and a rising level of uncertainty Construction lending production was especially slow, the lowest in over two years, as some developers chose to delay or pause certain projects. Our pipelines are holding up pretty well, down 9% from a year ago, mostly due to a reduction in commercial real estate, but remain healthy and balanced. At this time, we expect loan growth of 4% to 6% during 2023. While our pipeline levels imply we may do better, We suspect opportunities may take longer to pull through in the current environment. We do recognize that the economic outlook and our footprint could change as persistent inflation, higher interest rates, and the threat of a recession loom. But at least for now, we expect to remain in a moderate growth mode in 2023. CNI line utilization this quarter was relatively flat to the fourth quarter at 33%. It's still below our pre-pandemic levels of more than 40%, but better than at this point last year, which was then approximately 30%. About 47% of loan production in the first quarter came from new to bank clients. Our largest production came from CNI, followed by existing construction and land development loans funding up. While we've seen some new construction projects slow, delay, or cancel, we anticipate modest growth in this area driven by multifamily and industrial properties. Commercial real estate payoffs declined both year-over-year and link quarter. As I've said for the last year, rising term rates have suppressed both refinance activity into the long-term institutional markets and too-good-to-refuse offers to sell CRE properties. Turning to credit, we recorded annualized net charge-offs of 13 basis points for the first quarter, our first material net charge-off quarter in over three years. The majority of this was a memory care facility that was originated by our predecessor, Zenith Bank. We are in process of selling the note and currently expect to complete the sale during the second quarter. This is one of two standalone memory care facilities that we finance, with this one having experienced problems and the other performing well. Additionally, we received a full payoff of a $2.6 million CNI non-performing asset shortly after quarter end, meaning that current non-performing assets are now slightly below year-end levels One-off credit losses do happen, as we saw in Q1, though admittedly it's been years since we last saw one. Despite this, we have yet to see any sign of a systemic inflection point in our asset quality metrics, which remain benign. We continue to expect a normalization in asset quality at some point following a long run of minimal net charge-offs. We remain confident in and are pleased with our asset quality. In sum, It was a challenging environment to begin the year and a noisy quarter with respect to the legal reserve and securities portfolio loss. Having said that, we remain confident in our positioning for the remainder of the year and our ability to navigate challenges, both expected and unexpected. As usual, with uncertainty comes opportunity, and we do see opportunity in this environment. Atlantic Union is a diversified, traditional, full-service bank with a strong brand and deep client relationships in stable and attractive markets. We're on a solid footing, resilient, and looking forward to a good year, but not as good as what we would have thought one quarter ago. I'll now turn the call over to Rob to cover the financial results for the quarter.
spk02: Rob? Thank you, John, and good morning, everyone. Thanks for joining us today. Now let's turn to the company's financial results for the first quarter. Please note that for the most part, my commentary will focus on Atlantic Union's first quarter results on a non-GAAP adjusted operating basis which excludes the pre-tax loss on the sale of securities of $13.4 million and the pre-tax $5 million legal reserve recorded in the first quarter. Regarding the sale of securities during the first quarter, as John noted, we executed a deleveraged strategy selling securities with a total book value of $506 million yielding approximately 3.4% at a pre-tax loss of $13.4 million and used net proceeds to reduce FHLB borrowings costing 4.75%. The strategy was structured to provide the company with improved liquidity, tangible common equity, and run rate earnings with a short earn back period of approximately two years. On an annualized basis, we expect the transactions to be approximately 1.8% accreted to EPS, 13 basis points accreted to NIM, six basis points accreted to ROA, approximately 36 basis points accreted to return on tangible common equity, and 20 basis points accretive to tangible common equity to assets ratio. In the first quarter, reported net income available to common shareholders was $32.7 million, and earnings per common share were 44 cents. Adjusted operating earnings available to common shareholders were $47.2 million, or 63 cents per common share for the first quarter, which is up approximately 5% from the first quarter of 2022. The adjusted operating return on tangible common equity was 15.2% in the first quarter, which is up from 12.7% in the prior year's first quarter. Adjusted operating return on assets came in at 1% in the first quarter, which is up slightly from last year's level in first quarter 2022 of 98 basis points. On adjusted operating basis, the efficiency ratio was seasonally elevated at 56% in the first quarter, but down from 58.9% in the same quarter of last year. Also during the first quarter, as John mentioned, on a year-over-year quarter basis, the company generated positive adjusted operating leverage of approximately 5% as total adjusted revenue grew approximately 9.6% and adjusted operating expenses were up 4.4%. Turning to credit loss reserves as of the end of the first quarter, the total allowance for credit losses was $131.7 million which is an increase of approximately $7.3 million from the fourth quarter, primarily due to increasing uncertainty in the economic outlook and loan growth during the quarter. The total allowance for credit losses as a percentage of total loans increased four basis points to 90 basis points at the end of March. The provision for credit losses of $11.9 million in the first quarter was up from the prior quarter's $6.3 million provision for credit losses, primarily driven by higher net charge-offs and the bill will be allowance for credit losses as a percentage of loans to 90 basis points as noted. Net charge-offs increased to $4.6 million with 13 basis points on an annualized basis, up from $810,000 or two basis points annualized in the fourth quarter. Now turning to pre-tax, pre-provision components of the income statement for the first quarter, tax equivalent net interest income was $157.2 million, which was down approximately $10.7 million or 6.4% from the fourth quarter, driven by the lower day count in the quarter, higher deposit and borrowing costs due to increases in market interest rates, as well as changes in the deposit mix as depositors migrated to higher costing deposit accounts. These decreases were partially offset by an increase in loan yields on the company's variable rate loan portfolio due to increases in short-term interest rates during the quarter, as well as by the impact of average loan growth. First quarter's tax equivalent net interest margin was 3.5%, a net decrease of 20 basis points from the previous quarter due to an increase of 38 basis points in the yield on earning assets more than offset by a 58 basis point increase in the cost of funds. The increase in the first quarter's earning asset yield was primarily due to the 45 basis points increase in the loan portfolio loan yield which had a 41 basis point positive impact on the first quarter's net interest margin. Also, a mixed shift in the investment securities portfolio as a percentage of earning assets during the first quarter drove a three basis point decline in the quarter's net interest margin. Loan portfolio yield increased to 5.35% in the first quarter, up from 4.9% in the fourth quarter, primarily due to the impact of increases in short-term market interest rates on variable late variable rate loan yields. The 58 basis point increase in the first quarter's cost of funds to 1.42% is due primarily to the 56 basis points increase in the cost of deposits to 1.28%, which had a 48 basis point negative impact on the first quarter's net interest margin. The total cost increase was driven by changes in the deposit mix as depositors migrated to higher costing interest-bearing deposit accounts during the quarter, increased levels of higher-cost broker deposits, as well as increases in interest-bearing deposit rates driven by rising market interest rates. In addition, elevated high-cost short-term borrowing levels resulting from the bias for liquidity as a result of the banking turmoil during the quarter increased the cost of funds by approximately 10 basis points from the prior quarter. Non-interest income decreased $14.9 million to $9.6 million for the first quarter, primarily due to the $13.4 million pre-tax loss on the securities previously noted. Excluding the loss on the sale of securities, adjusted non-interest income decreased $1.5 million to $23 million, primarily due to $2.2 million decline in loan-related interest rates swapped income from the prior quarter due to lower transaction volumes. This decline was partially offset by increases in several noninterest income categories, including certain service charges, fiduciary and asset management fees, mortgage banking income, and bank-owned life insurance income. Noninterest expense increased $8.5 million to $108.3 million for the first quarter, up from $99.8 million in the prior quarter primarily due to the $7 million increase in other expenses comprised of the $5 million legal reserve associated with the ongoing regulatory matter, the $3.2 million related to the gain recorded in the prior quarter related to the sale and leaseback of an office building, partially offset by lower teammate and travel costs. We also had a $2 million quarter-to-quarter increase in FDIC assessment fees due to the increase in the FDIC assessment rate effective January 1st, and the impact of the prior period's FDIC assessment fee refunds reflected in the prior quarter. Salaries and benefits expense increased $1.8 million due to the seasonal increases in payroll-related taxes and 401 contribution expenses in the first quarter, partially offset by reductions in performance-based variable incentive compensation and profit-sharing expenses. These increases in non-interest expense were partially offset by a $1.3 million decline in technology and data processing expenses, primarily due to the write-down of obsolete software in the prior quarter, as well as a $1 million decrease in professional services expenses related to strategic projects that occurred in the prior quarter. The effective tax rate for the first quarter decreased to 17%, from 17.5% in the first quarter of 2022, due to higher a higher proportion of tax-exempt income to pre-tax income. In 2023, we expect the full-year effective tax rate to be in the 16% to 17% range. This range is sensitive to the actual annual pre-tax earnings and the proportionality of non-taxable income to pre-tax earnings, primarily in securities and loans and other discrete tax items. Assuring that the balance sheet total assets were 20% $1.1 billion in March 31st, which was a decrease of $358 million, or approximately 7% annualized from December 31st levels. The decrease was primarily due to the decline in investment securities portfolio related to the sale of securities during the first quarter, partially offset by loan growth in the current quarter. At period end, loans held for investment were $14.6 billion, an increase of approximately $135 million, or 3.8% annualized from the prior quarter, driven by increases in commercial loan balances of approximately $96 million, or 3.2% linked quarter annualized, and consumer loan balance growth of $39 million, or 7% annualized. At the end of March, total deposits stood at $16.5 billion, which was an increase of $524 million, or approximately 13.3% annualized growth from the prior quarter, driven by increases of $53 million in customer deposits, and $371 million in broker deposits. At March 31st, non-interest-bearing deposits comprised 28% of total deposit balances, which is down three basis points, or 3% from the fourth quarter level, or 31%, as deposits migrated to higher-costing interest-bearing deposit accounts in the quarter. From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. Regarding the company's capital management strategy, capital ratio targets are set to seek to maintain the company's designation as a well-capitalized financial institution and to ensure that capital levels are commensurate with the company's risk profile, capital stress test projections, and strategic plan growth objectives. At the end of the first quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital ratios were well above well-capitalized levels. In addition, on a pro forma basis, we remain well-capitalized if you include the negative impact of ALCI and health and maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the first quarter, the company paid a stock dividend of 30 cents per share, consistent with the prior quarter, and also paid a quarterly dividend of $171.88 on each outstanding share of its Series A preferred stock. The company did not purchase any shares during the quarter in order to preserve capital for organic loan growth and to position the company for potential adverse developments arising from uncertainty in the macroeconomic environment. We have updated our full year 2023 financial outlook to the following as a result of the changing banking environment. We now expect to generate loan growth of 4% to 6% in 2023. We are currently projecting that the full year net interest margin will fall in a range between 3.35% to 3.45%, driven by the assumption that the Federal Reserve Bank will increase the Fed funds rate to 5.25% in May and maintain it at that level throughout 2023. In addition, we are now projecting that our through the cycle deposit data will approximately 40% which will be partially offset by increasing loan yields. As a result of loan growth and lower net interest margin, we now expect fully taxable equivalent net interest income to grow by mid-single digits in 2023 from full year 2022 levels. We also expect that the company will generate positive operating leverage in 2023 due to the expected mid-single digit operating revenue growth, up-pacing expected low single digit expense growth in 2023 from full year 2022 levels. Due to elevated net charges of 13 basis points in the first quarter, any expectations for a mild recession to begin sometime in 2023, we expect to see an uptick in the full-year net charge-off ratio to 10 basis points in 2023 and to two basis points in 2022. The allowance for credit loss at the loan balance is projected to remain at 90 basis points throughout 2023. In summary, Atlantic Union delivered solid financial results in the first quarter of 2023, despite the challenging banking environment we find ourselves in. As noted in prior earnings calls, we expect to consistently generate financial results that place us in the top quartile among our proxy peer group, regardless of the operating environment. That said, we are reevaluating our previously published financial targets to determine whether they need to be adjusted to ensure they are reflective of the financial metrics required to achieve top-tier financial performance versus peers in the prevailing economic environment. However, we continue to believe we are well-positioned to generate sustainable, profitable growth and to build long-term value for our shareholders in 2023 and beyond. And with that, I'll turn it back over to Bill Cimino to open it up for questions from our analysts.
spk08: Thanks, Rob. We're ready for our first call.
spk14: All right. Well, thank you so much, presenters. As a reminder, to ask a question, please press star 1 1 on your telephone keypad. Again, that's star 1 1 on your telephone keypad. And wait for your name to be announced. To answer our question, please press star 1 1 again.
spk13: Please stand by while we compile the Q&A roster.
spk14: And our first question comes from the line of Casey Whitman of Piper Sander & Co.
spk03: Good morning, Casey.
spk10: Good morning. Maybe I'll just start on the fee income guide you guys gave. What kind of assumption should we be making for the loan swap fees? Seems like that could move that outlook a lot.
spk02: Yeah, we're looking for that to bounce back as we go through, if not the second quarter, in the back half of the year, Casey. So, you know, we had elevated levels in the fourth quarter of last year. of last year kind of dropped off some of that seasonal production, overproduction in the first quarter. But we expect to see that in the, call it the $10 to $12 million range for the full year as we go forward here. But we'll have to see how that plays through.
spk10: Okay. Okay, and sticking with, I guess, non-interest items, so you touched on this a bit, John, in your opening remarks, but sort of what are some of the expense levers that you're able to pull here with the low revenue outlook? And are there other ones you'd be considering, you know, if the revenue outlook continues to go down or credit costs prove to be much higher? Just sort of walk us through how you're thinking about the expense base here.
spk05: Yeah, Casey, what we're looking at is reducing the rate of expense growth We've been pretty aggressive through the years in terms of management of the bank's expenses. I would generally describe it as pretty much across the board, and I would not say that there should be one individually large item, but we do think that we'll have line of sight in order to achieve a low single-digit growth target.
spk02: Yeah, I think, Casey, just to add to that, there are levers we can pull, incentive expenses depending on where we come up versus our targets that we set for the year. That could be down. We're also looking at perhaps delaying some things that we had previously thought we would be able to fund with the revenue growth we thought we would see as we started the year. So things like that and then, you know, various hiring delays in adding staff, et cetera. And so they're always very... But as John said, it's really across the... It is.
spk05: Yeah, everyone will participate, all leaders, and we are pretty much continuously working on what I would call efficiency and process improvement measures. So we're not talking about a really large number here, and we'll be able to deliver on it.
spk02: Yeah, but the point is that we do want to show positive operating leverage, so revenue... Outlook is lower. We need to adjust accordingly.
spk05: Yeah, I think that's a really important point Rod makes. We're committed to positive operating leverage. You know, bear in mind as we did the planning, you know, given where the NEM was a quarter ago and what our expectations were prior to the developments of quarter one, we were looking at materially higher revenue growth, which gave us the ability to plan for some additional investment and expense spend, and now we adjust those plans as a result.
spk10: Okay. I'll just ask one more, let someone else jump on. But just given your loan growth assumption, what are you sort of assuming on the deposit side in terms of growth in 2020?
spk02: Yeah, so excluding the broker deposits that we noted in the first quarter, we're looking at about 2% is our working assumption for this year. on an organic deposit growth basis. So as we said, 4% to 6% on the loan side, call it about 2% on the deposit side, picking up the difference with some perhaps brokered deposits or other funding, wholesale funding needs or sources. Or as well, we have cash flow coming out of the securities portfolio, so we could bring down our securities as presented total assets. We're at 15.5%. We typically want to run in the 15-ish range, so there's some opportunity there.
spk10: Okay. I'll let someone else unpack that a bit. Thank you, guys.
spk18: Thank you. And we're ready for our next caller, please.
spk14: All right. Thank you so much. And your next question comes from the line of Catherine Miller of KBW. Your line is now open.
spk03: Good morning, Catherine. Thank you.
spk14: Hey, good morning.
spk09: Can y'all hear me?
spk17: Yes, we can.
spk09: Great. Okay, thanks. Good morning. I was on mute. Let's go back to the fees. And can you help us just think about how you're seeing the trend in service charges for the back half of the year and if, you know, this legal issue with the CFPB drives any changes in your outlook for that number or some of that already kind of taken place? into a counseling previous guide. Thanks.
spk02: Yeah, Kathleen, on service charges on deposits, there's no real impact at all from what John mentioned on the CFPB matter impacting that. We're pretty much looking at seasonal ups and downs for the remainder of the year, but I would say it's kind of flattish. The outlook is kind of flattish to what first quarter came in on the various service charge categories. which will be up, which won't actually be up year over year, because as you recall, mid-year in 2022, we changed some of our overdraft policies and that led to approximately a million and a half or so estimated decline in the overdraft revenue in that service charge line. But if you look at the first quarter's run rate, we think that's a pretty good run rate for the balance of the year.
spk09: Okay, so that million and a half, though, hasn't reflected in this run rate yet, correct?
spk02: Say that again, Kathleen, sorry.
spk09: Is that million and a half, is that fully in today's run rate?
spk02: Yeah, that's fully baked in, yes, already.
spk09: Okay, so that's already in.
spk20: If you just take the first quarter's service charge line out for the full year, that's a good run rate.
spk09: Okay, great, that's helpful. And then, if you just answer this, I apologize. I was kind of jumping back and forth. If you, can you walk us through where deposit costs were towards the end of the quarter and how you're thinking about, you know, deposit costs in just the next couple of months?
spk02: Yeah, as we mentioned, Catherine, we are expecting that betas will be increasing. Just to put that out there in terms of the, through the cycle, by year end, we expect that the betas that you saw through the cycle so far is 28%. We think that's going to start to tip towards 40% when it's all said and done on the total deposit and pushing 50% on interest-bearing deposits through the cycle. We do expect the Fed will go one more and then hold. So it's based on that assumption. In terms of the If you look at what March cost of deposits was, it's actually up to 1.43%. So if you look at it versus the quarter's average, it has uptick, and that's the expectation we have for the balance of the year that will continue to increase.
spk09: Great. And as you think about that 40% total, 50% interest-bearing beta, I mean, you think you'll get there as soon as the next quarter or two. How do you kind of think about the lag in this?
spk02: Yeah, I would say Fed will move in a couple weeks in May, and then we think they will top out in the third quarter, going into the fourth quarter to be stable.
spk09: Okay. And then one last one is on the deposits. There's been a lot of big shifts across the industry out of non-interest bearing into interest bearing and CDs. How are you thinking about what that big shift looks like for you? towards the end of the year?
spk02: Yeah, we're seeing it kind of normalized towards the pre-pandemic levels. On non-express bearing deposits, we're about 28% of total deposits March 31st. We expect that to tick down a bit, you know, probably to about 25% is what our projection would say at this point in time, but it could be plus or minus that level by year end. which is kind of a normalizing impact there.
spk09: Yeah, and about where you were pre-pandemic.
spk02: Yeah, we were probably in the 23, 24 range, I think.
spk14: Great. All right. Thank you. All right.
spk12: Well, thank you so much.
spk14: And your next question comes from the line of Steve Moss. Freeman James, please go ahead.
spk06: Hi, Steve. Hey, good morning. Maybe just, you know, starting on the margin here in terms of, you know, where is loan pricing these days, you know, in terms of the new production that you're putting on and just kind of curious also on the, you know, pace of, you know, fixed rate loan repricing over the next 12 to 24 months.
spk02: Yeah, so in terms of the the originations, new production in the quarter, you're going on about, you know, call it 675 to 7%. And that's kind of the mix that's come on during the quarter was about 63% was a variable tied to LIBRAR slash SOFR or PRIME. So if you blend that with fixed rate, deposits coming on, which is at a lower rate because term rates are a bit lower with the inverted curve. We're probably averaging out about 675 for new commercial loan yields coming on. Okay. Oh, sorry. Go ahead, Steve. Sorry.
spk06: No, I was just going to add that in terms of, you know, fixed rate loans repriced. I'm just kind of curious as to kind of how we think about that pace and how much you guys can pick up on the asset side as the year goes on.
spk02: In terms of fixed rate yields? Yeah, we were up about 30 basis points quarter to quarter. It really depends on what happens to the yield curve, but we aren't calling for the belly of the curve to change too much from where it is today. So probably see that kind of stable at that level, unless we see some uptick in, you know, the two to five year rates, which would, you know, obviously be a benefit to us from a new fixed rate loan production.
spk06: Okay. And then in terms of just, you know, with regard to you know, the securities portfolio with the, you know, sale of securities. Any thoughts on additional restructuring or additional sales going forward here?
spk02: We're not planning on that, Steve, but I wouldn't take it off the table depending on, you know, what happens with the balance of the year here. But I would think that you should expect that we're going to take any, you know, material realized loss or realize any material losses from the sale of securities. We're kind of set, you know, they said 15% of total assets. We're a little over that now, so I wouldn't expect to see any material sales. We might, you know, around the margins.
spk06: Okay. And then in terms of loan growth guidance here, you guys, you know, said the pipeline here is still strong, only modestly lower versus before. but the guide is a step down. Just kind of curious, you know, are you thinking about just a deceleration in growth as the year goes on, or, you know, maybe you expect more commercial real estate projects to cancel? Just kind of curious as to, you know, how you're thinking about that dynamic.
spk05: Yeah, Steve, you're correct. So, when we look at the loan pipeline, it definitely implies, based on our experience, higher growth rates than what we're forecasting. Now, we just know from experience that when uncertainty rises, commercial borrowers, commercial real estate developers can become more hesitant and it takes longer for things to pull through the pipeline. So from our standpoint, we just wanted to make sure that we were from a planning standpoint and setting expectations, you know, being pretty realistic. We'll see how things go out there. David Ring, who's head of our commercial businesses is here. David, what is your intuition in terms of one growth from here, Would you agree that things will likely be slower than before?
spk19: I do. I think our pipeline is good enough to do better than we're forecasting, but we take the approach that, you know, call it 30% of our production is, or 40% of our production ends up in the fourth quarter booking. So, you know, that could fall into January. So, you know, we like to take the approach that if things might be delayed, we'll take a more conservative approach towards our loan growth projection. But our pipeline remains, you know, more than robust to cover it.
spk06: Okay, that's helpful. And just maybe just one last one for me. CNI growth here was strong. Just kind of curious, did he give any incremental colors to, you know, the drivers there and what you're seeing?
spk19: Yeah, I mean, we've developed our CNI practice really over the last five years. And every year, you know, we get better and better at it. And every quarter, we're seeing CNI growth come in. And what you'll see is our commitments are growing in the CNI side, which is a good, you know, for the future. It's a good predictor for the future that our commitments keep growing. at the rate they're currently growing. So our utilization is still steady, but our commitments continue to grow.
spk06: All right, great. Well, appreciate all the callers. Thank you very much. Thank you, Steve.
spk14: Thank you so much. And we don't have any more questions. I would now like to turn the conference back to Bill for closing remarks.
spk07: Thanks, Liwei, and thanks, everyone, for joining us today. As a reminder, we'll have our annual meeting next week on Tuesday, May 2nd, and we'll look forward to talking with you then. Have a good day.
spk14: Thank you so much, presenters, and thanks to all our attendees. This concludes today's conference call.
spk13: Thank you for participating, and you may now disconnect. you Thank you.
spk16: Thank you. Thank you.
spk14: Good day and thank you for standing by. Welcome to the Atlantic Union Bank Share's first quarter 2023 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw a question, please press star 1-1 again. And please be advised that today's conference is being recorded. I would now like to handle the conference over to your speaker for today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.
spk07: Thank you and good morning, everyone. I have Atlantic Union Bank Chair's President and CEO, John Asbury, Executive Vice President and CFO of Foreman with me today. We also have other members of our Executive Management Team with us for the question and answer periods. 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 reconciliations to comparable GAAP measures, is included in the Atlantic Store slide presentation and the earnings release for the first quarter of 2023. We will make forward-looking statements on today's call, which are not statements of historical fact and subject to risks and uncertainty. 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 statement. Please refer to our earnings release issue today 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 could cause actual results to differ from those expressed or implied in the forward-looking statement. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we'll take questions from the research analyst community, and now I'll turn the call over to John.
spk05: Thank you, Bill. Good morning, everyone, and thank you for joining us today. It was an eventful start to the year across the industry. Early in the quarter, deposit rate competition hit a tipping point and rapidly intensified as idle funds went in search of higher-yielding alternatives. Late in the quarter, we witnessed the dramatic back-to-back failures of Silicon Valley Bank and Signature Bank, which initially shipped confidence in an American banking system that is fundamentally built on confidence. We will go into our quarterly results and our financial performance in a few moments, but I'll begin by stating I'm pleased to report that our deposit base proved resilient. We avoided any material loss of deposits due to bank safety concerns, and we covered loan growth by growing customer deposits by 153 million, or approximately 4% annualized. Total deposits grew 524 million, or 13% annualized, as we elected to use some broker deposits to reduce wholesale borrowings that we took on in the fourth quarter of 2022. Our franchise remains strong, even in these uncertain times. We see the current environment as another confirmation of our long-term strategy of being a diversified, traditional, full-service bank with a strong brand and deep client relationships. Now more than ever, soundness, profitability, and growth in that order of priority remain our mantra and inform how we run our company. To that point, let me provide some detail on the granularity of our deposit base, which we think of as the crown jewel of the AUB franchise. At the end of the first quarter, 72% of deposits were either insured or collateralized. We have liquidity sources available to cover 140% of uninsured and noncollateralized deposits at quarter end. And you can see the details of this on page 18 of our supplemental presentation. Here are a few statistics as of March 31. Our average retail deposit account balance was approximately $19,000. Our average business deposit balance was approximately $99,000. The customer deposit portfolio is split at around 48% retail and 52% business deposits. We did make greater use of insured cash sweeps or ICS products toward the end of the quarter for certain larger deposit balance relationships. Given all of the attention on banks and bank liquidity, it was a good opportunity to talk to our clients individually, explain why SVB and Signature were neither representative of AUB nor the industry as a whole, discuss our clients' individual needs and provide options for them where desired. This is a good example of the relationship approach and personalized service that continues to differentiate us from the larger banks. Reflecting on all that went on in the industry over the quarter, it was the remixing of deposits and the sharp acceleration of deposit rate competition, higher than we anticipated, that was more consequential for us than the bank failures and subsequent industry turmoil. As a result, over the quarter, we took further rate actions to remain competitive. Quarter-end non-interest-bearing deposits were 28% of total deposits, a decline of 3 percentage points linked quarter. Fully taxable net interest margin declined 20 basis points to 3.50% for Q1 as compared to 3.70% for Q4 2022, which now appears to have been the peak for this cycle. Half of the decline could be attributed to our increased use of wholesale borrowings following the late-year decline in deposits as we optimized for liquidity over the quarter. By comparison, our Q1 net interest margin of 3.50% was still up from 3.04% year-over-year. We do expect deposit betas to remain under competitive pressure through the rising rate cycle but remain manageable. Helping us with net interest margin management going forward is that approximately half of our loan balances are variable rate and that we liquidated some securities to reduce high-cost wholesale borrowings during the quarter. To that point, over the quarter and before the bank failures, we executed a balance sheet restructuring by selling $506 million of available for sale securities in order to reduce funding costs and bring our total securities holdings to 15.5% of total assets which approximates our historical level. We viewed this as an attractive trade with a short earn back that was more about reducing funding costs and raising liquidity. However, given subsequent industry events, we're pleased to have the additional liquidity. Rob will have more details on the restructuring in his comments. Now let's dig into the macroeconomic conditions and then our quarterly results. Despite rising expectations for a mild recession to set in later this year or perhaps early next year, As it stands today, the macroeconomic environment remains solid in our footprint and we do not expect this to change in the near term. Our markets appear to be healthy and our lending pipelines are strong and only modestly down from where they were at this time last year. Virginia's last reported unemployment rate of 3.2% in March was unchanged from February and below the national average of 3.5% during the same time period. We still don't anticipate any materially negative near-term shift away from these low unemployment trends and overall benign credit environment, but we will continue to closely monitor the health of our markets. Given investor focus on non-owner-occupied commercial real estate, and more specifically office exposure, I'll share some perspective on that. CRE finances historic strength of our company, and it's an asset class that has performed well in our markets, which have not traditionally been prone to boom and bust cycles. We stick to our knitting and generally deal with local and regional developers and operators that we know well and have track records with us. Non owner occupied office exposure totaled $729 million and comprised 5% of our total loan portfolio at quarter end. Of this, approximately 25% is medical office, which we consider among the highest quality office category. We don't finance particularly large high rise or major metropolitan central business district office buildings, The portfolio is performing well and geographically diverse. I described most of our office exposure as suburban, single-story, and mid-rise properties under long-term leases, generally to local tenants that are less likely to use remote or hybrid work options than large national firms. We've analyzed the rent rolls of every property we finance and reviewed each property with our borrowers with an eye toward any near-term lease expirations which we define as less than two years. We proactively monitor this portfolio, and we don't see any systemic concerns in the office book at this time. Should problems develop in this portfolio, we believe they would likely be distributed over years, and we expect any problems that may develop to be readily manageable. Turning to quarterly results. As usual, we remain focused on generating positive operating leverage, that is, growing our revenue faster than our expense. Our results were noisy during the first quarter due to the loss on sale of securities and a $5 million legal reserve associated with an ongoing regulatory matter. Setting aside the legal reserve expense, our adjusted operating expense run rate was in line with our expectations for the seasonally high first quarter. Last quarter, we got it to mid single digit percentage operating expense growth for 2023, but we do recognize that was based on a then higher NIM expectation than we now have. Consequently, we will take further expense actions to limit operating expense growth to a low single-digit percentage to ensure positive operating leverage for the year. Rob will detail the outlook in this section. With respect to the legal reserve, as we previously disclosed, the Consumer Financial Protection Bureau, or CFPB, is considering an enforcement action against us in connection with certain of our historical overdraft practices. During the quarter, the CFPB commenced settlement discussions to resolve the matter. We believe it is in our best interest to determine whether this matter can be resolved on terms acceptable to us, and we're actively engaged in discussions with CFPB to settle the matter. Consistent with CFPB practice, if the settlement discussions are not successful, CFPB may commence litigation against us. We do not know the timing of any such settlement or the final amount of any loss in connection with the matter. Any final loss could be materially different from our current estimate in accrued amounts. We do believe that our overdraft opt-in rate is well below the industry average, and our current overdraft practices comply with applicable law. That's all I'm able to share on the matter at this time, given the ongoing discussions. Now, here are a few financial highlights for the first quarter, which Rob will detail later. On a year-over-year basis, we generated positive adjusted operating leverage of approximately 5%, as adjusted revenue growth was up 9.6%, while adjusted operating non-interest expenses increased 4.4% year-over-year. I'd also like to point out that pre-tax, pre-provision, adjusted operating earnings increased 19.5% year-over-year. We posted annualized loan growth of approximately 3.8% point-to-point in the seasonally slow first quarter following the seasonally high fourth quarter. Lending production was down in the quarter, which is not surprising to us given that it followed a year-record high Q4 and a rising level of uncertainty Construction lending production was especially slow, the lowest in over two years, as some developers chose to delay or pause certain projects. Our pipelines are holding up pretty well, down 9% from a year ago, mostly due to a reduction in commercial real estate, but remain healthy and balanced. At this time, we expect loan growth of 4% to 6% during 2023. While our pipeline levels imply we may do better, we suspect opportunities may take longer to pull through in the current environment. We do recognize that the economic outlook and our footprint could change as persistent inflation, higher interest rates, and the threat of a recession loom, but at least for now, we expect to remain in a moderate growth mode in 2023. CNI line utilization this quarter was relatively flat to the fourth quarter at 33%. It's still below our pre-pandemic levels of more than 40%, but better than at this point last year, which was then approximately 30%. About 47% of loan production in the first quarter came from new-to-bank clients. Our largest production came from CNI, followed by existing construction and land development loans funding up. While we've seen some new construction projects slow, delay, or cancel, we anticipate modest growth in this area driven by multifamily and industrial properties. Commercial real estate payoffs declined both year-over-year and link quarter. As I've said for the last year, rising term rates have suppressed both refinance activity into the long-term institutional markets and too good to refuse offers to sell CRE properties. Turning to credit, we recorded annualized net charge-offs of 13 basis points for the first quarter, our first material net charge-off quarter in over three years. The majority of this was a memory care facility that was originated by our predecessor, Zenith Bank. We are in process of selling the note and currently expect to complete the sale during the second quarter. This is one of two standalone memory care facilities that we finance, with this one having experienced problems and the other performing well. Additionally, we received a full payoff of a $2.6 million CNI non-performing asset shortly after quarter end, meaning that current non-performing assets are now slightly below year-end levels One-off credit losses do happen as we saw in Q1, though admittedly it's been years since we last saw one. Despite this, we have yet to see any sign of a systemic inflection point in our asset quality metrics, which remain benign. We continue to expect a normalization in asset quality at some point following a long run of minimal net charge-offs. We remain confident in and are pleased with our asset quality. In sum, It was a challenging environment to begin the year and a noisy quarter with respect to the legal reserve and securities portfolio loss. Having said that, we remain confident in our positioning for the remainder of the year and our ability to navigate challenges, both expected and unexpected. As usual, with uncertainty comes opportunity, and we do see opportunity in this environment. Atlantic Union is a diversified, traditional, full-service bank with a strong brand and deep client relationships in stable and attractive markets. We're on a solid footing, resilient, and looking forward to a good year, but not as good as what we would have thought one quarter ago. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?
spk02: Thank you, John, and good morning, everyone. Thanks for joining us today. Now let's turn to the company's financial results for the first quarter. Please note that for the most part, my commentary will focus on Atlantic Union's first quarter results on a non-GAAP adjusted operating basis which excludes the pre-tax loss on the sale of securities of $13.4 million and the pre-tax $5 million legal reserve recorded in the first quarter. Regarding the sale of securities during the first quarter, as John noted, we executed a deleveraged strategy selling securities with a total book value of $506 million yielding approximately 3.4% at a pre-tax loss of $13.4 million and used net proceeds to reduce FHLB borrowings costing 4.75%. The strategy was structured to provide the company with improved liquidity, tangible common equity, and run rate earnings with a short earn back period of approximately two years. On an annualized basis, we expect the transactions to be approximately 1.8% accreted to EPS, 13 basis points accreted to NIM, six basis points accreted to ROA, approximately 36 basis points accreted to return on tangible common equity, and 20 basis points accretive to tangible common equity to assets ratio. In the first quarter, reported net income available to common shareholders was $32.7 million, and earnings per common share were 44 cents. Adjusted operating earnings available to common shareholders were $47.2 million, or 63 cents per common share for the first quarter, which is up approximately 5% from the first quarter of 2022. The adjusted operating return on tangible common equity was 15.2% in the first quarter, which is up from 12.7% in the prior year's first quarter. Adjusted operating return on assets came in at 1% in the first quarter, which is up slightly from last year's level in first quarter 2022 of 98 basis points. On adjusted operating basis, the efficiency ratio was seasonally elevated at 56% in the first quarter, but down from 58.9% in the same quarter of last year. Also during the first quarter, as John mentioned, on a year-over-year quarter basis, the company generated positive adjusted operating leverage of approximately 5% as total adjusted revenue grew approximately 9.6% and adjusted operating expenses were up 4.4%. Turning to credit loss reserves as of the end of the first quarter, the total allowance for credit losses was $131.7 million which is an increase of approximately $7.3 million from the fourth quarter, primarily due to increasing uncertainty in the economic outlook and loan growth during the quarter. The total allowance for credit losses as a percentage of total loans increased four basis points to 90 basis points at the end of March. The provision for credit losses of $11.9 million in the first quarter was up from the prior quarter's $6.3 million provision for credit losses, primarily driven by higher net charge offsets and the bill will be allowance for credit losses as a percentage of loans to 90 basis points as noted. Net charge-offs increased to $4.6 million with 13 basis points on an annualized basis, up from $810,000 or two basis points annualized in the fourth quarter. Now turning to pre-tax pre-provision components of the income statement for the first quarter, tax equivalent net interest income was $157.2 million which was down approximately $10.7 million or 6.4% from the fourth quarter, driven by the lower day count in the quarter, higher deposit and borrowing costs due to increases in market interest rates, as well as changes in the deposit mix as depositors migrated to higher costing deposit accounts. These decreases were partially offset by an increase in loan yields on the company's variable rate loan portfolio due to increases in short-term interest rates during the quarter as well as by the impact of average loan growth. First quarter's tax equivalent net interest margin was 3.5 percent, a net decrease of 20 basis points from the previous quarter due to an increase of 38 basis points in the yield on earning assets more than offset by a 58 basis point increase in the cost of funds. The increase in the first quarter's earning asset yield was primarily due to the 45 basis points increase in the loan portfolio loan yield which had a 41 basis point positive impact on the first quarter's net interest margin. Also, a mixed shift in the investment securities portfolio as a percentage of earning assets during the first quarter drove a three basis point decline in the quarter's net interest margin. Loan portfolio yield increased to 5.35% in the first quarter, up from 4.9% in the fourth quarter, primarily due to the impact of increases in short-term market interest rates on variable late variable rate loan yields. The 58 basis point increase in the first quarter's cost of funds to 1.42% is due primarily to the 56 basis points increase in the cost of deposits to 1.28%, which had a 48 basis point negative impact on the first quarter's net interest margin. The total cost increase was driven by changes in the deposit mix as depositors migrated to higher costing interest-bearing deposit accounts during the quarter, increased levels of higher-cost broker deposits, as well as increases in interest-bearing deposit rates driven by rising market interest rates. In addition, elevated high-cost short-term borrowing levels resulting from the bias for liquidity as a result of the banking turmoil during the quarter increased the cost of funds by approximately 10 basis points from the prior quarter. Non-interest income decreased $14.9 million to $9.6 million for the first quarter, primarily due to the $13.4 million pre-tax loss on the securities previously noted. Excluding the loss on the sale of securities, adjusted non-interest income decreased $1.5 million to $23 million, primarily due to $2.2 million decline in loan-related interest rates swapped income from the prior quarter due to lower transaction volumes. This decline was partially offset by increases in several noninterest income categories, including certain service charges, fiduciary and asset management fees, mortgage banking income, and bank-owned life insurance income. Noninterest expense increased $8.5 million to $108.3 million for the first quarter, up from $99.8 million in the prior quarter primarily due to the $7 million increase in other expenses comprised of the $5 million legal reserve associated with the ongoing regulatory matter, the $3.2 million related to the gain recorded in the prior quarter related to the sale and leaseback of an office building, partially offset by lower teammate and travel costs. We also had a $2 million quarter-to-quarter increase in FDIC assessment fees due to the increase in the FDIC assessment rate effective January 1st, and the impact of the prior period's FDIC assessment fee refunds reflected in the prior quarter. Salaries and benefits expense increased $1.8 million due to the seasonal increases in payroll-related taxes and 401 contribution expenses in the first quarter, partially offset by reductions in performance-based variable incentive compensation and profit-sharing expenses. These increases in non-interest expense were partially offset by a $1.3 million decline in technology and data processing expenses, primarily due to the write-down of obsolete software in the prior quarter, as well as a $1 million decrease in professional services expenses related to strategic projects that occurred in the prior quarter. The effective tax rate for the first quarter decreased to 17% from 17.5% in the first quarter of 2022 due to higher a higher proportion of tax-exempt income to pre-tax income. In 2023, we expect the full-year effective tax rate to be in the 16 to 17 percent range. This range is sensitive to the actual annual pre-tax earnings and the proportionality of non-taxable income to pre-tax earnings, primarily in securities and loans and other discrete tax items. Turning to the balance sheet, total assets were $1.1 billion at March 31st, which was a decrease of $358 million, or approximately 7% annualized from December 31st levels. The decrease was primarily due to the decline in investment securities portfolio related to the sale of securities during the first quarter, partially offset by loan growth in the current quarter. At period end, loans held for investment were $14.6 billion, an increase of approximately $135 million, or 3.8% annualized from the prior quarter, driven by increases in commercial loan balances of approximately $96 million, or 3.2% linked quarter annualized, and consumer loan balance growth of $39 million, or 7% annualized. At the end of March, total deposits stood at $16.5 billion, which was an increase of $524 million, or approximately 13.3% annualized growth from the prior quarter, driven by increases of $53 million in customer deposits, and $371 million in broker deposits. At March 31st, non-interest-bearing deposits comprised 28% of total deposit balances, which is down three basis points, or 3% from the fourth quarter level, or 31%, as deposits migrated to higher-costing interest-bearing deposit accounts in the quarter. From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. Regarding the company's capital management strategy, capital ratio targets are set to seek to maintain the company's designation as a well-capitalized financial institution and to ensure that capital levels are commensurate with the company's risk profile, capital stress test projections, and strategic plan growth objectives. At the end of the first quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital ratios were well above well-capitalized levels. In addition, on a pro forma basis, we remain well-capitalized if you include the negative impact of ALCI and health and maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the first quarter, the company paid a stock dividend of $0.30 per share, consistent with the prior quarter, and also paid a quarterly dividend of $171.88. on each outstanding share of its Series A preferred stock. The company did not purchase any shares during the quarter in order to preserve capital for organic loan growth and to position the company for potential adverse developments arising from uncertainty in the macroeconomic environment. We have updated our full-year 2023 financial outlook to the following as a result of the changing banking environment. We now expect to generate loan growth of 4% to 6% in 2023, We are currently projecting that the full-year net interest margin will fall in the range between 3.35% to 3.45%, driven by the assumption that the Federal Reserve Bank will increase the Fed funds rate to 5.25% in May and maintain it at that level throughout 2023. In addition, we are now projecting that our through-the-cycle deposit data will approximate 40%, which will be partially offset by increasing loan yields. As a result of loan growth and lower net interest margin, we now expect fully taxable equivalent net interest income to grow by mid-single digits in 2023 from full year 2022 levels. We also expect that the company will generate positive operating leverage in 2023 due to the expected mid-single digit operating revenue growth, uptasting expected low single digit expense growth in 2023 from full year 2022 levels. Due to elevated net charges of 13 basis points in the first quarter, Any expectations for a mild recession to begin sometime in 2023, we expect to see an uptick in the full-year net charge-off ratio to 10 basis points in 2023 and to two basis points in 2022. The allowance for credit losses to loan balances is projected to remain at 90 basis points throughout 2023. In summary, Atlantic Union delivered solid financial results in the first quarter of 2023, despite the challenging banking environment we find ourselves in. As noted in prior earnings calls, we expect to consistently generate financial results that place us in the top quartile among our proxy peer group, regardless of the operating environment. That said, we are reevaluating our previously published financial targets to determine whether they need to be adjusted to ensure they are reflective of the financial metrics required to achieve top-tier financial performance versus peers in the prevailing economic environment. However, we continue to believe we are well-positioned to generate sustainable, profitable growth, and to build long-term value for our shareholders in 2023 and beyond. And with that, I'll turn it back over to Bill Smino to open it up for questions from our panelists.
spk08: Bill Smino Thanks, Rob. All right.
spk14: Well, thank you so much, presenters. As a reminder, to ask a question, please press star 1-1. on your telephone keypad. Again, that's star 11 on your telephone keypad, and wait for your name to be announced. To answer our question, please press star 11 again.
spk13: Please stand by while we compile the Q&A roster.
spk14: And our first question comes from the line of Casey Whitman of Piper Sandler & Co. Your line is now open.
spk03: Good morning, Casey.
spk10: Good morning. Good morning. Maybe I'll just start on the fee income guide you guys gave. What kind of assumption should we be making for the loan swap fees? Seems like that could move that outlook a lot.
spk02: Yeah, we're looking for that to bounce back as we go through, if not the second quarter, in the back half of the year, Casey. So, you know, we had elevated levels in the fourth quarter of last year, kind of dropped off. Some of that seasonal production, lower production in the first quarter. But we expect to see that in the $10 to $12 million range for the full year as we go forward here. But we'll have to see how that plays through.
spk10: Okay. Okay, and sticking with, I guess, non-interest items, so you touched on this a bit, John, in your opening remarks, but sort of what are some of the expense levers that you're able to pull here with the lower revenue outlook? And are there other ones you'd be considering, you know, if the revenue outlook continues to go down or credit costs prove to be much higher? Just sort of walk us through how you're thinking about the expense base here.
spk05: Yeah, Casey, what we're looking at is reducing the rate of expense growth We've been pretty aggressive through the years in terms of management of the bank's expenses. I would generally describe it as pretty much across the board, and I would not say that there should be one individually large item, but we do think that we'll have line of sight in order to achieve a low single-digit growth target.
spk02: Yeah, I think, Casey, just to add to that, there are levers we can pull, incentive for Expenses, depending on where we come up versus our targets that we set for the year. That could be down. We're also looking at perhaps delaying some things that we had previously thought we would be able to fund. With the revenue growth, we thought we would see as we started the year. So things like that, and then, you know, various hiring. delays in adding staff, et cetera. And so they're always very... But as John said, it's really across... It is.
spk05: Yeah, everyone will participate, all leaders, and we are pretty much continuously working on what I would call efficiency and process improvement measures. So we're not talking about a really large number here, and we'll be able to deliver on it.
spk02: Yeah, but the point is that we do want to show positive operating leverage, so revenue outlook... is lower, we need to adjust accordingly.
spk05: I think that's a really important point Rod makes. We're committed to positive operating leverage. Bear in mind as we did the planning, given whether NEM was a quarter ago and what our expectations were prior to the developments of quarter one, we were looking at materially higher revenue growth, which gave us the ability to plan for some additional investment and expense spend. And now we adjust those plans as a result.
spk10: Okay. I'll just ask one more. Let someone else jump on. But just given your loan growth assumption, what are you sort of assuming on the deposit side in terms of growth in 2023? Yeah.
spk02: So excluding the broker deposits that we noted in the first quarter, we're looking at about 2% is our working assumption for this year. on an organic deposit growth basis. So as we said, 4% to 6% on the loan side, call it about 2% on the deposit side, picking up the difference with some perhaps brokered deposits or other funding, wholesale funding needs or sources. Or as well, we have cash flow coming out of the securities portfolio, so we could bring down our securities as presented total assets. We're at 15.5%. We typically want to run in the 15-ish range, so there's some opportunity there.
spk10: Okay. I'll let someone else unpack that a bit. Thank you, guys.
spk18: Thank you. And we're ready for our next caller, please.
spk14: All right. Thank you so much. And your next question comes from the line of Catherine Miller of KBW. Your line is now open.
spk03: Good morning, Catherine.
spk14: Hey, good morning.
spk09: Can you all hear me?
spk17: Yes, we can.
spk09: Oh, great. Okay, thanks. Good morning. I was on mute. Let's go back to the fees. And can you help us just think about how you're seeing the trend in service charges for the back half of the year and if, you know, this, you know, legal issue with the CFPB drives any changes in your outlook for that number or some of that already kind of taken place? into a council previous guide. Thanks.
spk02: Yeah, Catherine, on service charges on deposits, there's no real impact at all from what John mentioned on the CFPB matter impacting that. We're pretty much looking at seasonal ups and downs for the remainder of the year, but I would say it's kind of flattish. The outlook is kind of flattish to what first quarter came in on the various service charge categories. which will be up, which won't actually be up year over year, because as you recall, mid-year in 2022, we changed some of our overdraft policies and that led to approximately a million and a half or so estimated decline in the overdraft revenue in that service charge line. But if you look at the first quarter's run rate, we think that's a pretty good run rate for the balance of the year.
spk09: Okay, so that million and a half, though, hasn't reflected in this run rate yet, correct?
spk02: Say that again, Catherine, sorry.
spk09: Is that million and a half, is that fully in today's run rate?
spk02: Yeah, that's fully baked in, yes, already.
spk09: Okay, so that's already in.
spk02: If you just take the first quarter's service charge line out for the full year, that's a good run rate.
spk09: Okay, great, that's helpful. And then, if you would just answer this, I apologize, I will kind of jump it back and forth. If you, can you walk us through where deposit costs were towards the end of the quarter and how you're thinking about, you know, deposit costs in just the next couple of months?
spk02: Yeah, as we mentioned, Catherine, we are expecting that betas will be increasing. Just to put that out there in terms of the, through the cycle, by year end, we expect that the betas that you saw through the cycle so far is 28%. We think that's going to start to tip towards 40% when it's all said and done on the total deposit and pushing 50% on interest-bearing deposits through the cycle. We do expect the Fed will go one more and then hold. So it's based on that assumption. In terms of the If you look at what March cost of deposits was, it's actually up to 1.43%. So if you look at it versus the quarters average, it has uptick, and that's the expectation we have for the balance of the year that will continue to increase.
spk09: Great. And as you think about that 40% total, 50% interest-bearing beta, I mean, you think you'll get there as soon as the next quarter or two. How do you kind of think about the lag?
spk02: Yeah, I would say Fed will move in a couple weeks in May. And then we think they will top out in the third quarter, going into the fourth quarter to be stable.
spk09: Okay. And then one last one is on the deposits. There's been a lot of big shifts across the industry out of non-interest bearing into interest bearing and CDs. How are you thinking about what that big shift looks like for you? towards the end of the year?
spk02: Yeah, we're seeing it kind of normalized towards the pre-pandemic levels. I'm not necessarily sparing deposits. We're about 28% of total deposits March 31st. We expect that to tick down a bit, you know, probably to about 25% is what our projection would say at this point in time, but it could be plus or minus that level by year end. which is kind of a normalizing impact there.
spk09: Yeah, and about where you were pre-pandemic.
spk02: Yeah, we were probably in the 23, 24 range, I think.
spk09: Great. All right.
spk14: Thank you. All right.
spk12: Well, thank you so much.
spk14: And your next question comes from the line of Steve Moss of Freeman James, please go ahead.
spk06: Hi, Steve. Hey, good morning. Maybe just, you know, starting on the margin here in terms of, you know, where is loan pricing these days, you know, in terms of the new production that you're putting on? And just kind of curious also on the, you know, pace of, you know, fixed rate loan repricing over the next 12 to 24 months.
spk02: Yeah, so in terms of the... origination is new production in the quarter, you're going on about, you know, call it 675 to 7%. And that's kind of the mix that's come on during the quarter, which about 63% was a variable tied to LIBOR slash SOFR or PRIME. So if you blend that with fixed rate deposits coming on, which is at a lower rate because term rates are a bit lower with the inverted curve. We're probably averaging out about 675 for new commercial loan yields coming on. Okay. Oh, sorry. Go ahead, Steve. Sorry.
spk06: No, I was just going to say in terms of fixed rate loans, rate pricing, just kind of curious as to kind of how we think about that pace and how much you guys can pick up on the asset side as the year goes on.
spk02: In terms of fixed rate yields? Yeah, we were up about 30 basis points quarter to quarter. It really depends on what happens to the yield curve. But we aren't calling for the belly of the curve to change too much from where it is today. So probably see that kind of stable at that level, unless we see some uptick in the two to five year rates. which would, you know, obviously be a benefit to us from a new fixed rate loan production. Okay.
spk06: And then in terms of just, you know, with regard to, you know, the securities portfolio with the, you know, sale of securities, any thoughts on additional restructuring or additional sales going forward here?
spk02: We're not planning on that. but I wouldn't take it off the table depending on, you know, what happens with the balance of the year here. But I would think that you should expect that we're going to take any material realized loss or realize any material losses from the sale of securities. We're kind of set, you know, they said 15% of total assets. We're a little over that now, so I wouldn't expect to see any. material sales, you know, around the margins.
spk06: Okay. And then in terms of loan growth guidance here, you guys said the pipeline here is still strong, only modestly lower versus before. But the guide is a step down. Just kind of curious, you know, are you thinking about just a deceleration in growth as the year goes on or, you know, maybe, You expect more commercial real estate projects to cancel. Just kind of curious as to how you're thinking about that dynamic.
spk05: Yeah, Steve, you're correct. So when we look at the loan pipeline, it definitely implies, based on our experience, higher growth rates than what we're forecasting. Now, we just know from experience that when uncertainty rises, commercial borrowers, commercial real estate developers can become more hesitant, and it takes longer for things to pull through the pipeline. So from our standpoint, we just wanted to make sure that we were, from a planning standpoint and setting expectations, you know, being pretty realistic. We'll see how things go out there. David Ring, who's head of our commercial businesses is here. David, what is your intuition in terms of one growth from here? Would you agree that things will likely be slower than before?
spk19: I do. I think our pipeline is, is good enough to do better than we're forecasting, but we take the approach that, you know, call it 30% of our production is, or 40% of our production ends up in the fourth quarter booking. So, you know, that could fall into January. So, you know, we like to take the approach that if things might be delayed, we'll take a more conservative approach towards our loan growth projection. But our pipeline remains, you know, more than robust to cover it.
spk06: Okay, that's helpful. And just maybe just one last one for me. CNI growth here was strong. Just kind of curious, did he give any incremental colors to, you know, the drivers there and what you're seeing?
spk19: Yeah, I mean, we've developed our CNI practice really over the last five years. And every year, you know, we get better and better at it. And every quarter, we're seeing CNI growth come in. And what you'll see is our commitments are growing in the CNI side, which is a good, you know, for the future. It's a good predictor for the future that our commitments keep growing at the rate they're currently growing. So our utilization is still steady, but our commitments continue to grow.
spk06: All right, great. Well, appreciate all the callers. Thank you very much. Thank you, Steve.
spk14: Thank you so much, and we don't have any more questions. I would now like to turn the conference back to Bill for closing remarks.
spk07: Thanks, Liwei, and thanks, everyone, for joining us today. As a reminder, we'll have our annual meeting next week on Tuesday, May 2nd, and we'll look forward to talking with you then. Have a good day.
spk14: Thank you so much, presenters, and thanks to all our attendees. This concludes today's conference call. Thank you for participating, and you may now disconnect.
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