Atlantic Union Bankshares Corporation
Q1 2024 Earnings Call Transcript

Published: 23 Apr 2024

[Operator:]

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares' First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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 of Investor Relations. Please go ahead.

[Bill Cimino:]

Thank you, Didi, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury, and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on the 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 first quarter of 2024. Since our acquisition of American National Bank closed after quarter-end, our discussion today will not include any American National results. We did provide a pro forma look at our assets, loans and deposits for quarter-end on Slide 4. We did provide financial outlook numbers for the full year that include the impact of American National. Speaking of which, we will make forward-looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement. Please refer to our earnings release 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. 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 Asbury.

[John Asbury:]

Thank you, Bill. Good morning, everyone, and thank you for joining us today. I'd like to offer a special welcome to our new shareholders and teammates who joined us now from American National Bank. Our merger closed on April 1, and we believe we're off to a great start. I'll share more on that later in my comments. For those new to our story, we operate our company under a mantra of soundness, profitability and growth in that order of priority. There's nothing new about it, and it's a simple operating philosophy that stood the test of time. The same is true for our traditional operating model. We make loans, we take deposits, and provide fee-based services, all to our customers under our brand. We're a traditional, diversified bank that provides financing and services that help people, help businesses and help our communities. We believe we're large enough and capable enough to be a challenger and an alternative to large banks, but are still small enough and responsive enough to compete against the smaller banks, too, that we often have more capabilities than they. The environment remains challenging for banks of all sizes, especially with persistent net interest margin pressures to which AUB is not immune. Thankfully, we expect the financial benefit of the American National Bank merger to be apparent during the second quarter and will provide a welcome boost to both net interest margin and bottom-line profitability. Rob will comment on what to expect during his section of our remarks. I'll now comment on the microeconomic conditions we are seeing and then move on to our first quarter results. Regarding the economic outlook, for forecasting purposes, we do remain cautious. Although it appears a soft landing is possible, inflation is still a factor and does not seem to be progressing toward the Fed's target levels as quickly as it had hoped, leading us to believe that we'll see fewer rate cuts this year or perhaps not at all. Nevertheless, 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, though we have seen a slowdown in capital investment activity among certain parts of our client base in response to higher interest rates and economic uncertainty. While our lending pipelines reflect that trend, they imply we should expect mid-single-digit loan growth in 2024, inclusive of American National Bank. Virginia's last reported unemployment rate was 2.9% in March, and as usual, remains below the national average, which was 3.8% during the same period. When speaking to investors and analysts, among the more frequent questions we receive is the credit outlook for non-owner occupied office exposure and to a lesser extent, multifamily commercial real estate. We've added some additional disclosures on these loan categories in our supplemental slides as of quarter-end, and here's our current perspective. Regarding non-owner occupied office, I'll start by saying that about 22% of the portfolio is medical and has not been impacted by concerns about work from home related office utilization trends. This is a granular portfolio with an average loan size of $1.9 million and a median size of $664,000. We do not finance large central business district office buildings. Additionally, at 4.9% of total loans outstanding, this is not an outsized exposure and the portfolio is well distributed geographically. In our region, office exposure in Greater Washington, D.C. receives attention. We have no exposure in the District of Columbia, no office exposure, and our total non-owner occupied office loans from northern Virginia throughout the state of Maryland is a modest $65 million. Non-recourse commercial real estate lending is uncommon for us and most office loans have some form of guarantee from the owner that seeks to insure the ongoing commitment. Given their size and location, the suburban office buildings we finance are generally leased to local and regional businesses that, on average, have been less supportive of remote work and hybrid work arrangements than larger companies, meaning the buildings we finance have tended to be better utilized than larger buildings. Overall, this portfolio is performing well, and while I expect we'll incur some problems and over time, we currently expect any such problems to be readily manageable. Regarding multifamily exposure, this is also a granular portfolio, and we believe it's reasonable in size at 6.8% of total loans. Our markets appear healthy and growing. They're not overbuilt and nearly all report scarcity of housing. We're generally still seeing stable rents. And there are currently no rent control laws in our markets. As is implied by our average loan size of $3.3 million and median size of $829,000, we do not finance high-rise luxury apartments. While there is concern about the impact of higher interest rates on debt service coverage and property values, it's important to understand that multifamily revenues have also increased due to rising rents. Additionally, as with nearly all of our commercial real estate lending, we generally require some form of personal guarantee to seek to insure the borrowers' ongoing commitment from a multifamily project. Normally, we finance multifamily construction with a mini-firm during the stabilization period and we underwrite for institutional lender takeout. Typically, the developer refinances the property into the institutional market or sells it, and then reinvest the proceeds in new projects. As demonstrated by the credit metrics on Slide 18 of our supplemental presentation, asset quality for multifamily is among the best in the bank. We currently do not anticipate any material problems to develop in this asset class and we expect that, should any arise, it would be readily manageable. We understand concerns about bank's office and multifamily exposure and hope this recap provides more clarity and context around what this looks like at AUB. Moving on now to quarterly results. Here are a few financial highlights for the first quarter, and Rob will provide more detail later. Total deposits increased 5% year-over-year and 11% annualized quarter-over-quarter. As we have seen before, we did have a seasonal dip in deposits at the end of 2023 and then saw better-than-expected deposit inflows in the first quarter. We had a modest increase in broker deposits, which are a relatively low 3.9% of total deposits. Importantly, we grew customer deposits 8.4% annualized, which allowed us to more than fund our quarterly loan growth. The loan-to-deposit ratio declined to 91.7% at quarter-end, down from 93% in the prior quarter. Our total range for the loan-to-deposit ratio remains -- pardon me, our target range for the loan-to-deposit ratio remains 90% to 95%. Deposit mix shift continued in higher rate environment, with customer deposit growth coming from primarily money market and CDs, while we also saw some continuation of noninterest-bearing deposit migration to interest-bearing deposits, though at a declining pace. Noninterest-bearing deposits are approximately 22% of total deposits and we believe that percentage is approaching bottom. We posted annualized loan growth of 5.6% during the first quarter, which was led by growth in commercial loans. The increase in construction line balances came from existing commitments on projects underway funding up toward completion. As I mentioned earlier, we expect to be in the mid-single-digit growth range for loans held for investment in 2024, inclusive of American National Bank. Commercial and industrial line utilization this quarter was consistent with the prior quarter, but up from the prior year's first quarter. Loan production in the first quarter was weighted more heavily to existing clients than new-to-bank clients with about 75% existing. It also favored C&I over commercial real estate, with about 63% of the production coming from commercial and industrial. Commercial real estate payoffs decreased slightly from the fourth quarter and increased slightly from the same period in the prior year, which we interpret as a sign that commercial real estate markets where we operate are still healthy. Credit remains stable. Net charge-offs at 13 basis points annualized during Q1 were driven by two credits that we reserved for last quarter. As a reminder, we also reported 13 basis points of annualized net charge-offs during the first quarter of 2023, yet for the full year of 2023, the net charge-off ratio was only 5 basis points. Credit remains a good story at AUB, though we do not consider the negligible losses we have seen over the past few years to be sustainable. We anticipate that asset quality should eventually normalize following the long run of minimal net charge-offs, though we still see no evidence of an inflection point coming or having occurred. For forecasting purposes, we continue to expect 10 basis points to 15 basis points of net charge-offs during 2024, so we do not have visibility to enough potential charge-offs to reach that level currently. Having said that, idiosyncratic credit losses do happen, as was the case with the two credits I mentioned earlier. That's normal and to be expected. Regardless, we remain confident in and pleased with our asset quality. Turning now to our merger with American National, as mentioned, the transaction closed on April 1, and we're excited to have our new teammates and shareholders on board. After the deal was announced, we spent a great deal of time with the American National team to get ready for legal day one and for the all-important core systems conversion, which remains on track for late May. We've already completed the first mock systems conversion, which went well. This is our third acquisition of $3 billion asset bank during my time here, and we've refined our integration playbook after each one based on lessons learned. We're experienced at this and are expecting a smooth integration and conversion. More so than anything else, it's the people of American National and our cultural compatibility that excites us. The more time we spent with them and in their markets, the more enthusiastic we've become about the potential opportunities we have together. Additionally, we continue to be bullish on the long-term opportunity to leverage our new North Carolina markets as a grid platform, and you can look for us to invest in them to drive organic growth over time. We've already begun to add experienced bankers to the team there and intend to further build out our C&I capabilities in North Carolina. We believe American National's markets and people, coupled with our additional capabilities and larger balance sheet, make for a formidable combination. In sum, we believe we're well positioned for 2024 and the strategic actions we took last year to prepare for this challenging environment, coupled with financial benefits that the American National merger should differentiate AUB's performance going forward. We continue to believe we're on a reasonable growth footing, and we will not hesitate to take the strategic actions we deem necessary to strategically navigate the challenges we face in this uncertain economic environment. As has been the case for some time, we expect uncertainty to continue, especially given geopolitical events, but for the time being, we remain cautiously optimistic in our outlook. As usual, with uncertainty comes opportunity, which we believe we are well positioned to capitalize on. Last, I'd like to thank our teammates at Atlantic Union Bank, whose responses to the annual Top Workplaces USA survey landed us a second consecutive National Top Workplace USA award. This highly engaged team, they are the ones who make it happen. And no matter the issue, challenge or opportunity, in the end, the answer always lies with our people. Now more than ever, Atlantic Union is a uniquely valuable franchise with its diversified, traditional, full-service bank with a strong brand and deep client relationships in stable and attractive markets. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?

[Rob Gorman:]

Thank you, John, and good morning, everyone. Thanks for joining us today. I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the first quarter. As Bill mentioned, my comments today relate to Atlantic Union's financial results and do not include financial results of American National, since the transaction closed on April 1. Also, please note that, for the most part, my commentary will focus on Atlantic Union's first quarter financial results on a non-GAAP adjusted operating basis, which excludes the following pre-tax items

[Bill Cimino:]

Thank you, Rob. And, Didi, we're ready for our first caller, please.

[Operator:]

Okay. Thank you. One moment for our first question. And our first question comes from Catherine Mealor from KBW.

[John Asbury:]

Good morning, Catherine.

[Rob Gorman:]

Hey, Catherine.

[Catherine Mealor:]

Hey, good morning. I wanted to see, Rob, if you could just, in the NIM guidance that you lay out, is there any way just to put a range on where you're thinking the accretable yield will go? And then maybe even outside of that, where you think the core NIM will go within that guidance?

[Rob Gorman:]

Yeah. So, if you kind of -- our projection from a core perspective is for 2024, is to fall within a 3.20% to 3.30% range. On top of that, if you look at what we've projected for the reported numbers, you can add 20 basis points to 25 basis points to that, which would primarily be the American National impact, including accretion income.

[Catherine Mealor:]

Okay, great. And so then you still then -- and that core 3.20% to 3.30%, that assumes two rate cuts. So, it seems like you still -- with two rate cuts, you feel like you're going to get some expansion from this quarter's level. What does that look like, if we don't get any rate cuts? How much sensitivity is...

[Rob Gorman:]

Yeah. If we don't get any rate cuts, Catherine, the impact is actually 2 basis points or 3 basis points to the good, primarily because we won't see the rate cuts if they don't happen. We wouldn't see our variable rate loan yields decline by whatever the Fed cuts. So, it's actually a benefit of 2 basis points to 3 basis points...

[Catherine Mealor:]

Okay. Great.

[Rob Gorman:]

...for 2024.

[Catherine Mealor:]

Got it. Okay. And then, within that margin guide, if we look at deposit costs, deposit cost increased a little bit more than I had expected this quarter. Are you seeing stabilization towards the end of the quarter? And just any kind of comments on maybe spot rates on deposit costs towards March or April? And then maybe even what that looks like with American National?

[Rob Gorman:]

Yeah. So, in terms of where we ended the quarter, if you look at March, we were up a little bit from the reported full quarter average, where 2.43% was total cost of deposit. So, up about 3 basis points or 4 basis points from the average for the first quarter. We are projecting that those deposit costs will increase through second quarter and kind of stabilize in the third quarter, and hopefully, see a bit of a decline in the fourth quarter, if we see those rate cuts that we're calling for. I would say that we think we'll stabilize and call it give or take approximately 2.5% range in terms of total deposit cost, again, assuming that the Fed cuts in the back half of the year.

[Catherine Mealor:]

Okay. Great. And then maybe one last margin-related question. Does this forecast in the margin assume that you liquidate American National's bond portfolio and then reinvest that? How do we think about that?

[Rob Gorman:]

Yes, that's true. We do expect that. We've actually done some restructuring where we've -- right after close where about two-thirds of the portfolio we restructured. And you'll see that coming out as -- obviously, when we report second quarter earnings. But that is where we think we'll end up, is we've kind of completed that restructuring early in April, and you'll see the benefits of that as we go forward. That accretion income doesn't include the benefits of that because that will come through a core net interest margin going forward.

[Catherine Mealor:]

Okay. Perfect. All right. Thanks for all the clarity. Appreciate it.

[John Asbury:]

Thanks. Catherine. And, Didi, we're ready for our next caller, please.

[Operator:]

Thank you. One moment. And our next question comes from Casey Whitman of Piper Sandler.

[John Asbury:]

Hi, Casey.

[Casey Whitman:]

Hey, good morning. Hi. John, I think you mentioned that you think we're nearing the bottom for the mix shift out of noninterest-bearing. Can you just -- I mean, what gives you confidence there, or what can you point to for us? Thanks.

[John Asbury:]

Sure. Well, if you look at the pace of decline, it's becoming more shallow. So, it's inflected. So, we've seen it go down at a declining pace. The other thing is, historically speaking, we're starting to get closer to what we saw, say, pre-pandemic. Now, bear in mind, we have a larger base of commercial and industrial clients who have operating accounts that are normally noninterest-bearing. And as we look at the pace over the last couple of months, up to now, it's simply been on a declining trend, Casey. It's unlikely that businesses are suddenly waking up realizing they have large dollars sitting in their noninterest-bearing account that they forgot about. It is more likely that what's happening is that they're becoming more efficient in terms of their cash management activities because it's now to their advantage to do that. And to some extent, we see companies using their cash as well because it's more expensive to borrow. So, they will pay cash for things they might have financed in the past. But what we see is a declining trend, and it's impossible to predict with precision. But it certainly looks like it's on a -- the slope of the line leads us to believe we're nearing the bottom.

[Rob Gorman:]

Yeah. Casey, I'd also add that American National is helpful from that point of view because they're about 31% noninterest-bearing to total deposits. So, we'll be blending them together. We're probably getting back to about a 24% give or take. But to John's point, we think we're at the bottom here around 22% on a standalone basis. Yeah, we'll see what happens.

[John Asbury:]

Correct.

[Casey Whitman:]

Perfect. Thank you. And then piggybacking on some of Catherine's questions, just, I guess, Rob, can you walk us through what the size of the overall balance sheet then might be with American National?

[Rob Gorman:]

Yeah. So, it's about $3 billion in terms of their total assets at closing. So, we expect we'll continue to grow. I think we're at $24.5 billion, pro forma 3/31 number. So, we expect to grow the loan book about 5% on a combined basis, on a full-year basis we reported. So, you'll see those assets grow accordingly.

[Casey Whitman:]

Okay. Understood. And then maybe just a bigger picture question on M&A. Obviously, you just closed American National. You've got the systems conversion, I think, going on in May. John, can you walk us through sort of your thoughts around future M&A and how we should think about that [indiscernible]?

[John Asbury:]

Sure. It's hard to think about anything but a successful conversion and integration of American National Bank right now. But I understand your question because we always do try to think a couple of steps ahead. Casey, nothing has changed in terms of our declared priorities. First, organic performance of this bank that now includes American National. Make the most of what we have right here, right now. That is by far the most important thing we have to do. Second, innovation and transformation activities. We have a lot of work underway there. We have a new mobile and online banking platform that's coming online this year as well. A lot went on in the technology space. And we see continued opportunity for automation, which will pull expense out, improve quality. Third, and it's a distant third, would be strategic investment to include a whole bank acquisition. So, we have had other conversations that have gone on for years, just like American National Bank went on for years. You never know what the timing would be. If all goes well with American National Bank and everything is in good order, would we consider something else consistent with what we described before? We might, if it made strategic and financial sense. But I hope we're being clear that first things come first.

[Casey Whitman:]

Great. Thank you for the call.

[John Asbury:]

Thanks, Casey. And, Didi, we're ready for our next caller, please.

[Operator:]

Thank you. One moment. And our next question comes from Steve Moss of Raymond James.

[John Asbury:]

Good morning, Steve. Have we lost Steve?

[Operator:]

He removed from queue. Let me promote the next person.

[John Asbury:]

Okay.

[Operator:]

Our next question comes from David Bishop of Hovde Group.

[John Asbury:]

Hi, David. Good morning.

[Operator:]

David, your line is open.

[David Bishop:]

Hey, sorry about that. Can you hear me?

[John Asbury:]

Yeah. You're making me nervous, David.

[David Bishop:]

Sorry, John.

[John Asbury:]

Congratulations on being promoted. Thank you for calling in.

[David Bishop:]

Hey, John, just curious, obviously, you mentioned at the beginning the resilience in the economy and the opportunities in the new markets in North Carolina. Just curious how to reconcile that with what appears to be maybe conservative guidance in terms of loan growth or are there some portfolios maybe you're going to run off post close that sort of maybe provides the lower end of the loan growth guidance? Just curious, maybe just reconcile maybe some of the guidance versus the economic reality.

[John Asbury:]

Yes. There are no runoff portfolios associated with American National Bank. The only runoff portfolio in our bank, I suppose you would say, would be the indirect auto finance. We have things like office that we certainly don't have any appetite for taking on new exposure as well. But, David, I think, perhaps David Ring, Head of Wholesale Banking of commercial-related businesses can comment here. We do think that clients are being cautious. We feel good about these economies. We feel good about credit. But there is less investment going on right now. So, I think the mid-single-digit loan growth guidance, where we stand today is a good expectation. Could it be better than that? I think it could. Dave, what is your view?

[David Ring:]

Well, there are -- we've seen fewer opportunities. The opportunities have started to shrink a little bit. Our pipelines are still good. But they're rebuilding and they're more early stage in the pipeline. So, we feel like, down the road, there's good growth. And in the new markets, we're exploring expansion opportunities to take advantage of those new markets. And we think they're going to provide more growth in the back half of the year as well. So, we feel like we've never been one of the banks that would operate around the fringe of the credit piece. And so, we haven't changed our standards, and we're simply more cautious around some of the real estate asset class.

[John Asbury:]

I would agree. So, I think that's a pretty conservative approach, David. And if things change as we gain more experience in the year, we'll obviously revisit our guidance. But I think that's a good reasonable assumption.

[David Bishop:]

Got it. And then, John, just in terms -- or, Rob, noted a little bit of growth in broker deposits. Just curious if there's any sort of cliff maturation or maturation and maybe what those average costs are?

[Rob Gorman:]

Yeah. So, the average cost is a little over 5%, I think, 5.25%. We've got two tranches -- two or three tranches, I guess three, about $150 million. We went a little extended duration of it to take advantage of the inverted curve. Those costs are about approximately [4.50%] (ph) blended. And then, we've got some one-month broker that's maturing over the next few months here. And that's paying about a 5.25% for those. So, those numbers move up and down depending on what the funding requirements are at any particular point in time. So, as John said, we're just a bit under 4% of total deposits in brokered. And we've run anywhere from 2% to 4% in the past.

[David Bishop:]

Do you think that it stays around that range?

[Rob Gorman:]

Yes. Yeah, I do.

[David Bishop:]

Got it. And then maybe on the loan side, just curious what fixed rate loans that might be repricing at average rate versus what they repriced into. Thanks.

[Rob Gorman:]

Yes. So, the repricing of the fixed rate loans, I think, we're putting on about 7.5%. So, up considerably from where the fixed rate loan yield is on the portfolio today. So, it's been inching up over the last several quarters. The most current quarter was about 7.5% on the fixed side.

[David Bishop:]

Great. Thank you.

[John Asbury:]

Thanks, Dave. And, Didi, we're ready for our next caller, please.

[Operator:]

Okay, thank you. One moment. And our next question comes from Russell Guenther of Stephens.

[John Asbury:]

Hi, Russell. Good morning.

[Russell Guenther:]

Good morning. I appreciate all the color on the margin. I just had a follow-up. So, as we think about the roughly 20 basis point to 25 basis point of purchase accounting contribution, how does that cadence look for next year? Is that a decent kind of run rate into '25 or just trying to get a sense as to when that earnings contribution could begin to taper?

[Rob Gorman:]

Yeah. So, through '25, yeah, that's a good estimate. We're talking about 25 basis points in 2025. It starts to taper a bit as we get into '26 and '27. Of course, as you know, [indiscernible] income can be volatile depending on prepays, et cetera, but that's our current estimate. We're doing essentially four to five years, [indiscernible] on our loan interest rate mark is what we're talking about.

[Russell Guenther:]

Okay. That's really helpful. Thank you. And then just a quick one on the loan growth outlook. So, could you give us a sense for how you're going about investing in the Carolina markets? I think you mentioned adding some bankers there. If there's a number you could share or general background? What the opportunity set to continue to add commercial lenders in that footprint is? And then, just lastly, is the pickup in that market ultimately enough to move you back to your mid-to-high single digit pace, or is that a general pickup in sort of the macro economy that gets you there? Thank you.

[John Asbury:]

How about if I start, and I'll ask David Ring to follow. First of all, we're not talking about massive lift outs and that sort of thing. It'll be highly selective. I do think that the North Carolina market is going to be additive to our overall growth expectations. So, in other words, I think that it gives us confidence in our guidance and probably gives us more likelihood of upside. Dave, I know we are not quite yet ready to get into too much detail, but what are your thoughts on where we'd expect to expand? I would actually before I should comment, we feel very, very good about the American National team and the bankers that we have down there. So, we think we're going to take that and build from it.

[David Ring:]

Yeah. We have a very talented team that we inherited from American National, but we also have a very strong commercial real estate presence in North Carolina already because of our [Charlotte] (ph) group that's been in business for about eight years there now. And so, what we're looking to do in North Carolina is move into the faster-growing markets and where the capital is moving. And so, we have plans and we're executing them now. We're just not ready to disclose what the final results are.

[Russell Guenther:]

Understood. Well, guys, that's it for me. Thank you for taking my question.

[John Asbury:]

Thank you, Russell.

[Bill Cimino:]

Thanks, Russell. And thanks, everybody, for joining us today. We look forward to talking with you in July. And, everybody, have a good quarter.

[Operator:]

This concludes today's conference call. Thank you for participating. And you may now disconnect.