Atlantic Union Bankshares Corporation

and welcome to Atlantic Union Bank Shares' third quarter 2024 earnings call and Sandy Spring Bank acquisition announcement. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and good morning, everyone. I have Atlantic Union Bank Shares President and CEO John Asbury and Executive Vice President and CFO Rob Gorman with me today. We also have Sandy Spring Bank Corp Chairman, President, and CEO Dan Schreider on the call, who will join us in discussing our merger announced earlier today. Other members of our executive management team will be here for the question and answer period. Please note that today's releases and the accompanying slide presentations 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 appendix to our slide presentation and in our earnings release for the third quarter of 2024. We will make forward looking statements on today's call which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that any 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 and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in a 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. Today we're excited to announce the merger of Atlantic Union Bank shares with Olney, Maryland-based Sandy Spring Bank Corp. Sandy Spring is a $14.4 billion asset bank with an exceptional 156-year history and an impeccable asset quality track record in attractive, contiguous markets. This is a highly respected Maryland bank and, in our view, a historic franchise. Among the oldest in America, it has grown from a Maryland community bank to the largest independent bank in Maryland. This is exactly what Atlantic Union Bank has done in Virginia. We believe it's a hand-in-glove fit for two great neighboring franchises that have been on similar paths with similar cultures and a similar customer and community focus. We are eager to share our thoughts on this announcement and why we believe it improves each company's shareholder value proposition and ability to serve our customers and communities. I will do so after Rob and I provide abbreviated comments on Q3 results for Atlantic Union. It was a good quarter for Atlantic Union with less noise than the prior quarter, which makes for an easier and shorter conversation about our results. So let's begin. As you recall, during the second quarter, we closed our acquisition of Danville, Virginia-based American National Bank and completed our systems conversion over Memorial Day weekend. We did not have the second quarter's merger-related items impacting our results during the third quarter, and we believe our post-merger core earnings power is now on full display. On a linked quarter annualized basis, our deposit base grew 6.1% and averaged up 2.8%. Linked quarter annualized loan growth in the seasonally slow third quarter was relatively flat, ending down 0.2%, though averaged up 3.6%. Loan growth was impacted by clients waiting for the well-telegraphed Federal Reserve rate cuts to begin in September, and we also experienced a pickup in commercial real estate payoffs. We had lower line utilization during the quarter as some larger commercial clients paid down. Overall, we were pleased to stay relatively flat in loan balances at quarter end despite these headwinds. Increased commercial real estate payoffs were something we expected following the dip in treasury bond yields during the quarter and were a combination of institutional non-recourse refinances and property sales. This indicates there's liquidity in the commercial real estate markets, which is encouraging. Also, as a reminder, we're continuing to wind down our indirect auto portfolio, which reduced our loan balances by approximately $42 million during the quarter. Our commercial banking pipelines are healthy, leading us to believe that we will be in a moderate growth mode for the rest of 2024. Having said that, we believe there is a backlog of commercial real estate payoffs coming, and that may mute what might otherwise be even stronger loan growth. Credit was again a good story as we recorded annualized net charge-offs of one basis point for the third quarter, down from four basis points in the second quarter. This is now my eighth year anniversary at the company, and for eight years each quarter, I have said we have yet to see any sign of a systemic inflection point in our asset quality metrics, which remain benign. And I'll say that again today. While 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. As always, we are focused on delivering top-tier financial performance, and you can see improvements in our adjusted return on tangible common equity, return on assets, and efficiency ratio. The quarter-over-quarter improvements show the earnings power we envisioned when we announced the acquisition of American National. We had good expense management, modest core net interest margin compression, and continued impressive asset quality trends. We believe all of this serves as proof points. that our franchise remains strong and focused on generating positive operating leverage. We continue to see our performance as confirmation of our long-term strategy of being a diversified, traditional, full-service bank that makes a positive difference in our markets with a strong brand and deep client relationships. We provide economically beneficial services and financing to help people and help businesses and help our communities. It's a straightforward business model. It works and has withstood the test of time over our 122-year history. This is why soundness, profitability, and growth in that order of priority remain our mantra and informs how we run the company. In sum, it was a good quarter for Atlantic Union. We have completed the integration of American National and are excited about our increased presence in Central, Western, and Southern Virginia and our promising new North Carolina markets, which offer long-term growth and expansion potential. We reiterate that we believe we will achieve our planned cost savings from the American National acquisition and are positioned well to deliver top quartile results in the fourth quarter on an adjusted operating basis. I'll now turn the call over to Chief Financial Officer Rob Gorman to cover the financial results for the quarter before we get into the details of the transaction. Rob?

Well, thank you, John, and good morning, everyone. Please note that for the most part, my commentary will focus on Atlantic Union's third quarter financial results on a non-GAAP adjusted operating basis, which excludes $1.4 million in pre-tax merger-related costs recorded in the third quarter. And the third quarter reported net income available to common shareholders was $73.4 million, and earnings per common share were 82 cents. Adjusted operating earnings available to common shareholders were $74.5 million, or 83 cents per common share for the third quarter, which was an increase of 18.2 million, or 32.3% from the second quarter of 2024, and up $14.7 million, or 24.7% from the third quarter of 2023. The adjusted operating return on tangible common equity was 19.2% in the third quarter. The adjusted operating return on assets was 1.25% in third quarter. And on an adjusted operating basis, the efficiency ratio was relatively flat with the second quarter at 52.2%. As of the end of the third quarter, the total allowance for credit losses was $177.6 million, which represented 97 basis points as a percentage of total loans. The provision for credit losses of $2.6 million in the third quarter was down from the prior quarter's $21.8 million provision for credit losses, primarily driven by the prior quarter's inclusion of the initial provision for credit losses on non-PCD loans and unfunded commitments acquired from American National of $14.6 million, as well as by lower net charge-offs and lower loan growth in the third quarter. That charge-off decreased to approximately $700,000, or one basis point annualized in the third quarter from 1.7 million or four basis points annualized in the second quarter. The year-to-date net charge-off ratio was six basis points on an annualized basis. Now turning to pre-tax, pre-provision components of the income statement for the third quarter, tax equivalent net interest income was $186.8 million, which was down approximately $1.5 million or less than 1% from the second quarter, primarily due to the hike Higher interest expense on interest-bearing deposits partially offset by increased interest income on loans held for investment and lower borrowing costs. Interest expense on interest-bearing deposits increased as a result of $299 million in higher average balances through primarily the growth in customer time deposits. Interest income on loans held for investment increased as a result of $165.54 million in higher average loan balances during the quarter and increased loan yields partially offset by lower loan accretion income of $1.7 million. Borrowing costs were lower during the third quarter as a result of decreased wholesale funding usage due to customer deposit growth. The third quarter's tax equivalent net interest margin was 3.38%, a net decrease of eight basis points from the previous quarter, which was due to a four basis point impact from lower fair value accretion on acquired loans a two basis point net increase on the core earnings assets yield, and a six basis point increase in the cost of funds. The six basis point increase in third quarters cost of funds to 2.56% was due to the net impact of higher deposit costs and lower borrowing costs. Deposit costs increased as a result of growth and mixed shift into higher yielding deposit products, which had a negative 11 basis point impact on the cost of funds. The cost of funds was positively impacted by five basis points due to lower borrowing costs as a result of decreased wholesale funding usage. The two basis point decline in the third quarter earning asset yield was primarily due to lower yields on securities and loan increase in income partially offset by the positive impact of loan growth and an increase in core loan portfolio yields. There was a five basis point negative impact on the securities portfolio and earnings asset mix due to lower balances and the impact of lower unrealized losses on AFS securities yields from the decline in market rates during the third quarter. The loan portfolio yield increased to 6.35% in the third quarter from 6.34% in the second quarter, which is due to the net impact of new loans originated at higher than current portfolio rates, partially offset by the impacts of the decrease in average short-term interest rates during the quarter and the impact of lower fair value accretion on acquired loans, which had a four basis point negative impact on the loan yield. Non-interest income increased $10.5 million to $34.3 million for the third quarter of 2024, primarily due to the $6.5 million pre-tax loss on the sale of available for sale securities in the prior quarter. Adjusted operating non-interest income, which excludes losses and gains on a sale of securities, increased $4 million to $34.3 million for the third quarter from $30.3 million in the prior quarter, primarily driven by a $1.9 million increase in other operating income, due to an increase in equity method investment income, a $1.2 million increase in bank-owned life insurance income, primarily driven by death benefits received in the third quarter, and a $706,000 seasonal increase in service charges on deposits. Non-insurance expenses decreased $27.4 million to $122.6 million for the third quarter. Adjusted operating non-insurance expenses excludes merger-related costs of $1.4 million in the third quarter and $29.2 $8 million in the second quarter, and amortization of intangible assets of $5.8 million in the third quarter and $6 million in the second quarter increased $1.2 million to $115.4 million for the third quarter from $114.2 million from the prior quarter, primarily driven by a $923,000 increase in salaries and benefits due to increases in variable incentive compensation expenses and full-time equivalent employees. as well as a $607,000 increase in FDIC assessment premiums triggered by an increase in our assessment base as a result of the American National Acquisition. These increases were partially offset by a $537,000 decline in technology and data processing expenses. At period end, loans held for investments totaled $18.3 billion, which was a decrease of approximately $10 million or 20 basis points annualized from the prior quarter. Construction and land development loans increased $134 million as ongoing construction projects continued to fund up, but commercial industrial loans decreased by $145 million as a result of loan pay downs and lower revolving credit line usage. At the end of September, total loss deposits stood at $20.3 million And that's an increase of $304 million, or approximately 6.1% annualized from the prior quarter, which is primarily due to increases in interest-bearing customer deposits and broker deposits, partially offset by declines in demand deposits. At the end of the third quarter, non-interest-bearing demand deposits accounted for 22% of total deposits, down slightly from 23% in the prior quarter. At the end of the third quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capitals were well above well-capitalized levels. In addition, on a pro forma basis, we remain well-capitalized if you include the negative impact of AOCI and held to maturity securities unrealized losses in the calculation of the regulatory capital ratios. As noted on slide 13, we've updated our full year 2024 and fourth quarter financial outlook to the following. We expect loan balances to end the year between $18.5 billion and $19 billion, while year-end deposits balances are projected to be between $20 billion and $20.5 billion. Fully taxable equivalent net interest income for the full year is projected to come in between $720 million and $725 million. And we are targeting the fourth quarter fully taxed equivalent net interest income run rate to fall between $190 and $195 million. As a result, we are projecting that the full year fully taxable equivalent net interest margin will fall in the range between 3.35% 3.40 percent for the full year and we are targeting between 3.4 percent and 3.45 percent in the fourth quarter driven by our baseline assumption that the fed reserve bank will cut the fed funds rate by 25 basis points in november and december in addition the fully taxable equivalent net interest margin projection and target ranges include the impact of our estimate of net increasing income from american national which are volatile and subject to change the lower level of net interest income and net interest margin from the previous guidance provided during our second quarter earnings call is primarily due to the more aggressive 50 basis point decline in the Fed funds rate in September. We had assumed a reduction of 25 basis points. Also, significantly lower term rates, which impacts fixed rate new and renewed loan yields, as well as a reduction in the amount of accretion interest income projected in the fourth quarter. On a four-year basis, adjusted operating non-interest income expected to fall between $120 and $125 million, and we are targeting the fourth quarter adjusted operating non-interest income run rate to fall between $30 and $35 million. Adjusted operating non-interest expenses for the full year are estimated to fall in the range of $445 to $450 million, while the fourth quarter adjusted operating non-interest expense run rate we are targeting is expected to be between $115 and $120 million. In summary, Atlantic Union delivered strong financial results in the third quarter of 2024. As a result, we believe we are well positioned to continue to generate sustainable, profitable growth and to build long-term value for our shareholders in 2024 and beyond. We're now excited to turn our attention to provide you with the details of our merger announcement with Sandy Spring Bank Group. Thank you, Rob.