Atlantic Union Bankshares Corporation

question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and good morning, everyone. I have Atlantic Union Bank shares president and CEO John Astor and executive vice president and CFO Rob Gorman with me today. We also have other members of our executive management team with us for the question and answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and in our earnings release for the fourth quarter and full year of 2024. We will also make forward-looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement. And please refer to our earnings release and our slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements including factors that could cause actual results to differ from those expressed or implied in the forward-looking statement. All comments made during today's call are subject to that safe harbor statement. And 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. 2024 was a good year and a consequential year for Atlantic Union. We were excited to close our acquisition of American National Bank shares on April 1st, And we continue to be impressed with our new and expanded markets and how well the two companies came together as one since closing. And on October 21st, we added to the excitement by announcing our proposed acquisition of Olney, Maryland-based Sandy Spring Bank Corp. Let me begin with some perspective and a status report on the proposed acquisition since last quarter. The acquisition of Sandy Spring will join the number one regional depository market share bank in Maryland with the number one regional depository market share bank in Virginia. In our view, not only has there never been such a regional bank franchise headquartered in the lower Mid-Atlantic, but there may also never be another, as we believe our combined franchise will not be able to be replicated in our footprint. We believe the proposed acquisition will benefit our customers and markets with an expanded and even more convenient branch network, enhanced product offerings, a robust community benefit plan, and access to more capitals. We also believe it will benefit our teammates with expanded career opportunities, resources, and capabilities. And finally, we believe it will benefit our shareholders by positioning us well to deliver differentiated financial performance. As for the status of the merger, we were pleased to receive our merger approvals from the Federal Reserve Bank of Richmond on January 13th, seven weeks after filing applications. We are awaiting approval from the Virginia Bureau of Financial Institutions and the Maryland Office of Financial Regulation. Assuming receipt of remaining regulatory approvals, each company's respective shareholder and stockholder approvals as applicable, at the special meetings to be held on February 5th, and the satisfaction of other closing conditions, we expect to close the transaction on April 1st of this year. Our merger integration planning process is well underway with the Sandy Spring team, and from the meetings I've attended, I remain highly confident in our cultural compatibility, the strategic logic of the merger, and its potential. We've been delighted by both teams' enthusiasm over what we believe our combined franchise will offer to our customers and our communities. I'll now comment on the macroeconomic conditions in our markets and then share a few thoughts on the fourth quarter. The macroeconomic environment remains favorable in our footprint, and we do not expect that to change in the near term. Our markets continue to appear healthy, and our lending pipelines imply we should expect mid-single-digit annualized loan growth in 2025 within the current AUB franchise. We believe that a good indicator of economic health is employment, and the three states where we operate continue to have unemployment rates better than the last reported national average unemployment rate of 4.1%. In our case, unemployment rates by state for the last reported period of November are 3.0% for Virginia, 3.1% for Maryland, and 3.7% for North Carolina. Virginia is our largest market, and our governor summed up the state economy well recently by saying, the economy is strong, very strong. And we agree. We're confident in the economy in all our markets, and with our increased presence in North Carolina and our planned expansion in Maryland with the Sandy Spring merger, we believe we do and will operate in some of the most attractive and stable markets in the country. Turning now to quarterly results, here are a few financial highlights for the fourth quarter and the full year 2024. we continue to be on a moderate growth path for both deposits and loans. Point-to-point loan growth for the fourth quarter was approximately 3% annualized. As you can see by comparing point-to-point growth to the average for the quarter, loan growth skewed to the back half of the quarter and accelerated following the elections and the Fed rate cut in December. Deposit growth in the fourth quarter was approximately 2% annualized after reducing broker deposits by more than $200 million. Non-interest-bearing deposit average balances were about even, quarter to quarter, and point to point decreased modestly to approximately 21% of total deposits. It's a typical pattern to see a seasonal drop in non-interest-bearing transaction accounts at year-end. With the Federal Reserve rate cuts, we've been fairly aggressive in moving deposit rates lower, as you can see from the decline in the cost of deposits. For some of our larger negotiated rate depositors, we were able to reduce deposit rates by more than the latest Fed cut, which we believe will have additional benefits to the net interest margin in the first quarter of 2025. In past quarters, we've been able to pay down overnight FHLB borrowings with surplus funds from some of the larger accounts that have significant fluctuations in the normal course of the cash operating cycles. We can no longer do that since we significantly reduced our overnight FHLB borrowings during the quarter. This funding mix dynamic contributed to some of the quarter's NIM compression. And speaking of net interest margin, because we're still mildly asset sensitive, the expectation that the Fed may have fewer rate cuts than previously expected, or perhaps none, bodes well for us and should be a net positive for AUB's margin. Our loan growth was on top of the highest quarterly runoff we've seen since before the pandemic. We saw elevated payoffs or paydowns among both our C&I client base, especially in government contracting and larger businesses, and in commercial real estate. We view the elevated commercial real estate payoffs, which we predicted last quarter, as demonstrating that CRE markets in our footprint and that there's ample liquidity and demand for commercial real estate sales and refinances into permanent markets. That's very encouraging to see. The good news is that total loan production increased 29% quarter over quarter, enough to overcome the spike in payoffs and allow for modest loan growth. CNI utilization this quarter increased slightly from the last quarter and the prior year's fourth quarter. Loan production in the fourth quarter was weighted nearly two-thirds from existing clients and about a third from new clients, demonstrating we continue to grow our client base. Production continued to favor CNI over commercial real estate, with about 60% of production coming from CNI. We were pleased to see an increase in production and construction and land development for the third consecutive quarter, which we view as another sign of relatively healthy commercial real estate markets in our footprint. Rob will provide the details around quarterly results, but I will note that the fourth quarter earnings were negatively impacted by a higher provision for loan losses driven by a $13.1 million specific reserve on a $27.7 million asset-based CNI loan involving an apparent misrepresentation of its borrowing base, which was identified at year end. This individual credit primarily accounted for the increase in non-performing assets over the quarter. Their NPAs remained low at approximately 0.32% of loans held for investment. Aside from this atypical event, credit remained solid with only three basis points of net charge-offs this quarter and five basis points for the year. As I mentioned, every quarter, and have for about eight years. We do not consider the negligible losses we have seen over the past few years to be sustainable. We do expect to have occasional one-off losses, but generally not of the type or size we saw this quarter. We remain confident in our asset quality that we believe some normalization of our long run of historically low losses is inevitable. In sum, we're building out our unique franchise and realizing the financial benefits of the American national combination, which were unfortunately clouded this quarter by the specific credit reserve. As has been the case for some time, we expect economic uncertainty to continue, but we're optimistic in our outlook. I do believe we are well positioned for a successful 2025 and beyond. Atlantic Union is a story of transformation from a Virginia community bank to the largest regional bank headquartered in Virginia to what will be the largest regional bank headquartered in lower mid-Atlantic upon closing our proposed acquisition of Sandy Spring. Meanwhile, we remain more excited than ever about the growth opportunity in our North Carolina markets, and we're investing in them. We now have and are continuing to build the franchise we have alongside using our announced strategic plan as our guidepost. Now, more than ever, Atlantic Union is a uniquely valuable franchise that is dense, diversified, traditional, full-service bank with a strong brand and deep client relationships in stable and attractive markets. We also believe we have unmatched scarcity value in this region. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?

Thank you, John. Good morning, everyone. I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the fourth quarter and full year 2024. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter in 2024 financial results on a non-GAAP adjusted operating basis, which in the fourth quarter excludes $7 million in pre-tax merger-related costs, and for the full year excludes the additional FDIC special assessment of $840,000 in the first quarter, the pre-tax loss on the sale of American national securities of $6.5 million in the second quarter, The effect of the $4.8 million valuation allowance for deferred taxes that was charged the income tax expense in the second quarter and the pre-tax merger related cost of $40 million incurred in 2024 associated with our merger with American National in our proposed merger with Sandy Spring. As a reminder, the full year 2024 non-GAAP adjusted operating results have not been adjusted to exclude the $13.2 million negative pre-tax impact of the CECL initial provision for credit loss expense on purchase non-credit deteriorated or non-PCD loans acquired from American National, which represents the CECL double count of the non-PCD credit mark. Does not also include the $1.4 million negative pre-tax impact of unfunded commitments acquired from American National. It should also be noted that the weighted average diluted common shares outstanding increased during the fourth quarter, driven by the dilutive accounting impact of the forward sale of our common stock in October under the Treasury stock method of accounting, which requires the diluted potential common shares related to the forward sale to be included in the diluted weighted average shares, even though the underlying common stock has not been issued to date. This impact is calculated by taking the difference between the average market price of AUB stock in the quarter and the forward stock price multiplied by the number of shares underlying the forward sale and dividing that result by AUB's average market price for the quarter. That said, in the fourth quarter, reported net income available to common shareholders was $54.8 million, and diluted earnings per common share was 60 cents. For the full year 2024, reported net income available to common shareholders was $197.3 million, and diluted earnings per common share were $2.24. Adjusted operating earnings available to common shareholders were $61.4 million, were $0.67 for diluted common share for the fourth quarter, which resulted in an adjusted operating return on tangible common equity of 15.3%, an adjusted operating return on assets of 103 basis points, and an adjusted operating efficiency ratio of 52.7% in the fourth quarter. For the full year, adjusted operating earnings available to common shareholders were $241.3 million, or $2.74 per common share, which resulted in an adjusted operating return on common equity of 16.12%, an adjusted operating return on assets of 106 basis points, and an adjusted operating efficiency ratio of 53.3% in 2024. Turning to credit loss reserves, at the end of the fourth quarter, the total allowance of credit losses was $193.7 million, which was an increase of approximately $16.1 million from the third quarter primarily due to the specific reserve John mentioned earlier, continued uncertainty in the economic outlook on certain loan portfolios and organic loan growth in the fourth quarter. The total allowance for credit losses as a percentage of total loans held for investment increased to 105 basis points at the end of the fourth quarter. The provision for credit losses of $17.5 million in the fourth quarter was up from $2.6 million in the prior quarter, primarily driven by the specific reserve and slightly higher net charge-offs during the quarter. Net charge-offs increased to 1.4 million, or only three basis points annualized in the fourth quarter, but that was up from $666,000, or one basis point annualized in the third quarter. Now turning to pre-tax, pre-provision components of the income statement for the fourth quarter. Tax equivalent net interest income was $187 million, which was an increase of $208,000 from the third quarter. The increase in net interest income from the prior quarter reflects the net impact of a $5.6 million decline in interest expense on interest-bearing liabilities and a $5.4 million decrease in interest income on earning assets. The decrease in interest expense is primarily due to a $4.7 million decrease in borrowings expense as a result of $312 million in lower average short-term borrowings and the impact of lower deposit rates in the quarter. The decrease in interest income on earning assets is due primarily to a $9 million decline in income on loans held for investment, driven by lower loan yields on our variable rate loans resulting from the impact of the Federal Reserve interest rate cuts at the end of the third quarter and during the fourth quarter. The decline in loan interest income was partially offset by a $4.6 million increase in interest income from other earning assets as a result of a $402 million increase in average cash and other earning asset balances. The fourth quarter's tax equivalent net interest margin was 3.3% at a decline of five basis points from the previous quarter, primarily due to lower core loan yields driven by decreases in variable rate loan yields, partially offset by lower cost of funds and an increase in yields on cash and other earning assets. Additionally, the reversal of accrued interest on the specific reserve loan negatively impacted margin by approximately one basis point in the quarter. Earning asset yields for the fourth quarter decreased 20 basis points to 5.74% compared to the third quarter of 2024, and the cost of funds decreased by 15 basis points to 2.41% compared to the prior quarter. The 20 basis point decline in earning asset yield is due primarily to the decrease in the loan portfolio yield, which was lowered by 21 basis points from 6.35% to 6.14% during the fourth quarter, driven by lower yields on our variable rate loans and a decrease in the securities portfolio yield from 3.92% to 3.87%. These declines were partially offset by an increase in yield on cash and other earning assets, which increased from 3.48% to 4.27% during the fourth quarter. A 15 basis point decrease in the fourth quarter's cost of funds to 2.41% was due primarily to a 42 basis point decline in the cost of borrowings to 4.87%. A ninth basis point decline of the cost of deposits to 2.48%, and a favorable shift in the deposit and short-term borrowing funding mix. Non-interest income increased $941,000 to $35.2 million for the fourth quarter, primarily driven by a $3.6 million increase in loan-related interest rate swap fees due to an increase in transaction volumes, which was partially offset by a $1.5 million decrease in bank-owned life insurance income driven by debt benefits received in the prior quarter, and a $770,000 decrease in other operating income, primarily due to a decline in equity method investment income. Reported non-interest expense increased $7.1 million to $129.7 million for the fourth quarter, primarily driven by a $5.6 million increase in pre-tax merger-related costs associated with the pending Sandy Spring acquisitions. Adjusted operating non-interest expense, which excludes merger-related costs and amortization of intangible assets in both quarters, increased $1.6 million to $117 million for the fourth quarter, driven by a $1.8 million increase in salaries and benefits expense, primarily due to increases in variable incentive compensation expense and self-insured related group insurance costs. as well as a $1.4 million increase in professional service fees related to strategic projects that occurred during the fourth quarter. These increases were partially offset by a $1.7 million decrease in franchise and other taxes. At December 31st, 2024, loans held for investment netted deferred fees and costs were $18.5 billion, which was an increase of $133 million or 2.9% on an annualized basis from September 30th, 2024. They're primarily driven by increases in construction and land development and commercial industrial loan portfolios, partially offset by declines in the multi-family real estate loan portfolio. On a pro forma basis, as if the American national balances were acquired on December 31, 2023, loans held for investment increased $661 million, or approximately 3.7% for the full year, excluding the impact of the acquisition's fair value loan marks. At December 31, 2024, total deposits stood at $20.4 billion, which was an increase of $92 million, or 1.8% annualized from the prior quarter, due to increases in interest-bearing customer deposits partially offset by decreases in demand deposits and broker deposits. On a pro forma basis, as if the American asset balances were required on December 31, 2023, deposits increased $974 million, or approximately 5% for the full year. At the end of the fourth quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well-capitalized as of the end of the fourth quarter if you include the negative impact of AOCI and health and maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the fourth quarter, the company paid a common stock dividend of $0.34 per share common share, which was an increase of 6.3% for both the third quarter of 24 and fourth quarter of 23 dividend amounts. As noted on slide 13, our full year of 2025 financial outlook for AUB on a standalone basis excluding the financial impact of attending Sandy Spring acquisition is as follows. We expect mid-single-digit loan and deposit growth for the full year. Fully taxable equivalent net interest income for the full year is projected to come in between $775 million and $800 million. We are projecting that the full year fully taxed equivalent net interest margin will be in a range between 3.45% and 3.6%, driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points twice in 2025, and the yield curve will steepen throughout 2025. The projected expansion of the net interest margin from current levels is expected to be primarily driven by the impact of increasing yields on our fixed rate loan portfolio as the back book continues to reprice higher, as well as by the impact of lower time deposit rates as approximately $3.3 billion and a current average interest rate of approximately 4.4% will mature over the next six months. These favorable impacts will be partially offset by lower variable rate loan yields driven by the Fed Fund's rate cuts anticipated. On a full year basis, adjusted operating non-interest income is expected to be between $125 and $135 million. Adjusted operating non-interest expenses, which excludes the amortization of intangible assets expense of approximately $20 million for the full year, are estimated to be in the range of $4 $175 million to $490 million. In summary, Atlantic Union delivered solid operating plan to results in the fourth quarter despite challenging banking and operating environment we are effectively managing through. 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 2025 and beyond. Let me now turn the call back over to Bill Cimino for questions from our analyst community. Thanks, Rob. And Michelle, our first caller, please.