Atlantic Union Bankshares Corporation

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.

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.

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.