Ladies and gentlemen, thank you for standing by, and welcome to the Atlantic Union Bankshares' Second Quarter 2021 Earnings Call. Please note that today's call is being recorded. I would now like to hand the conference over to your speaker for today, Bill Cimino. Please go ahead.

Thank you, Jay, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President, CFO, Rob Gorman; and Atlantic Union Bank President, Maria Tedesco, with me today. We also have other members of our executive management team with us remotely for the question-and-answer period.

Thank you, Bill, and thanks to all for joining us today. As those of you who follow us closely know, for the last year or the quarter, we've been consistent in our commentary that we are managing through 2 significant and distinct challenges: first, the COVID-19 pandemic; and second, a near 0 short-term rate environment that we expect still has years to run, pressuring the company's profitability. While we can and do hope that interest rates will rise sooner than forecast, which would be a great benefit to us, for purposes of planning and running the company, we expect near 0 short-term rates through at least next year. We are watchful of the different COVID variants in monitoring the trends, but nonetheless, continue to believe based on information from state officials, the pandemic's major impacts are behind us, at least in our primary markets. Despite the human tragedy of the pandemic, Atlantic Union has emerged from it stronger, more capable, more agile and resilient.

Thank you, John, and good morning, everyone. Thanks for joining us today. Before I get into the details of Atlantic Union's financial results for the second quarter of 2021, I think it's important to once again reinforce John's comments on Atlantic Union's governing philosophy of soundness, profitability and growth in that order of priority. This core philosophy has served us well as we manage the company through the COVID-19 pandemic crisis while preparing us for what comes next. Atlantic Union continues to be in a strong financial position with a well fortified balance sheet, ample liquidity and a strong capital base, which has allowed us to weather the economic impact of COVID-19 and come out stronger as the pandemic subsides. Now let's turn to the company's financial results for the second quarter. Please note that for the most part, my commentary will focus on Atlantic Union's second quarter financial results, which will be compared on a non-GAAP operating basis to the first quarter's results, which excludes the first quarter's after-tax debt extinguishment loss of $11.6 million resulting from the prepayment of long-term Federal Home Loan Bank advances. For clarity, I will specify which financial metrics are on a reported versus non-GAAP operating basis. In the second quarter, reported net income available to common shareholders was $82.4 million, and earnings per share per common share were $1.05, up approximately $29.2 million or $0.38 per common share from the first quarter. The reported return on equity for the second quarter was 12.5%, up from 8.4% in the first quarter. Reported non-GAAP return on tangible common equity in the second quarter was 21.4%, which was up from 14.6% in the first quarter. Reported second quarter return on assets was 1.72%, up from 1.16% in the first quarter. And the reported second quarter efficiency…

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

Our first question comes from the line of Brody Preston from Stephens Inc.

I just wanted to start on the buybacks. Given the average price and the timing of the authorization, I'm assuming the purchases came some point in June. So with the stock below where you were previously buying, should we expect you to be similarly aggressive here in the third quarter?

Yes. Brody, that would be the case as the stock price has declined fairly significantly since the first quarter and since the authorization was put in place. We will be -- we will continue to be aggressive on that. As I mentioned, we bought 1.1 million shares as of June 30, and we bought another 900,000 as from June 30 to yesterday. So we continue to be aggressive there.

Okay. Good. And then the core C&I strength that you saw, I think it was about 8% annualized backing out PPP. John, is some of that from the pipeline last quarter and then you mentioned that pipelines are still at record levels. Do you -- would you expect that core C&I strength to kind of accelerate from what you saw this quarter and the third quarter?

We hope so, Brody, a couple of things. If you look at our total commitment production for Q2 '21, it actually exceeded all quarters of 2019, except for Q4, which is traditionally the strongest quarter of the year. By the way, the same is true for Q1. The reason why you're not seeing more on the balance sheet growth side is twofold. One is depressed line utilization. And then 2 is the elevated paydowns that we've been fighting off, and that's really more of a commercial real estate issue. Dave Ring, Head of Wholesale Banking or Commercial Banking is on. Dave, do you have any comments in terms of your expectations? My view is at some point, we're going to get more traction on the actual outstandings.

Yes, John, just to tag on to your comments, our -- and Brody, your question was about core C&I growth. So right now, our pipeline is overweighted towards C&I. So about 44% of our pipeline is real estate and 55%, 56% of our pipeline is C&I. So we do expect C&I to continue to grow.

Okay. Great. And then I'll just ask one more and then hop back because I know you have a long line. Just wanted to -- you gave good disclosures on the portfolio pricing mix on Slide 13. Just the 15% of the portfolio that has floors, Rob, what percentage of that is currently at or below -- at floor levels or below?

Yes. So the 15%, Brody, about 7% is below floors and to bring them up looking at about a 50 to 75 basis point on average for rates to go up to – to go back above the floors, so about 7%.

Next question comes from the line of Eugene Koysman from Barclays.

Can you help us unpack the specific drivers behind the decline in mortgage revenue this quarter? It looks like the refi volume has come down significantly, and I assume sale margin has declined too. But how are you thinking about the mortgage dynamics for the third quarter? And what does your pipeline look like today?

Yes. Eugene, as you noted, we're down from a high point in the first quarter in terms of gain on sale from mortgages and it was down in the second quarter, as volumes declined primarily as a result of lower refi origination volume that came through. We're also seeing -- as rates went up, we're seeing a lot of competition in the mortgage business. So also our gain on -- net gain on sale also came down a bit in the second quarter. We think going forward here, depending on what the inventory of homes from a purchase perspective comes back online, that's also had some effect on our originations. We do expect that mortgage will probably be down a bit in the next 2 quarters, although we think gain on sale will probably stabilize at the levels we saw in the second quarter. I would expect that you'll see some further decline in the mortgage revenue line in the third and fourth quarters.

I will say that the drop in treasury yield helps because that means lower mortgage rates, which potentially will drive some pickup in refinance activity, believe it or not, there's still a refinance opportunity up there. Rob is right, one of the big issues in our markets is scarcity of homes for sale, that plus the number of cash offers that are being made. But nevertheless, lower rates help, and we'll work our way through it.

That's actually very helpful. If I can get another question, and I wanted to zero in on your expense trajectory. It looks like the core expenses came in closer to $93 million this quarter when adjusting out the gain on sale of branches. And that also includes the $0.5 million decline in professional costs that was effectively offset by higher market, right? How do we think about the expenses going forward? And is there a chance that when the roughly $0.5 million of COVID and PPP costs decline, that will result in lower overall expenses? Or will that just be reinvested back as you continue to build out the bank?

Yes, Eugene, in terms of the expenses, our reported number was, call it, $92 million, which is pretty much in line with what we had projected for the quarter. There were some positives in there, as you mentioned, some gain on sales. That $92 million didn't include what we said we were kind of carving out the COVID-related expenses and then forgiveness related expenses. So those will subside, although I don't think they will over the next 2 quarters as we get back to the office, there's going to be expenses incurred related to that. We'll consider those kind of the COVID back-to-work expenses. And we have about -- as we mentioned, about $850 million or so of PPP loans that's still around the balance sheet that will continue to work to be forgiven, and we'll continue to incur those expenses. But if you take those out, we're hovering around that $92 million level, give or take. There's -- it can be a little lumpy. We've got a number of projects going on, as we mentioned early in the first quarter in terms of having some external third parties helping us out on projects that should help us as we go forward from an efficiency productivity perspective, going to be a little bit lumpiness around that $92 million. We're also seeing -- as you probably heard from other banks, we're starting to see some pressure on the wage pressure, and we've got to look at that as well, which could impact our expenses going forward. Although I don't think that's going to be a big number, big driver here.

And to Rob's point, there are always some pluses and minuses and that will likely continue that we keep targeting $92 million.

Yes. I should also mention, of course, incentives is a variable cost. So we continue to accrue to our targeted levels of incentives during the past 2 quarters, and we'll see where we go based on what projections look like and that's a lever we could pull as well if that is...

That’s correct. That lever is available if needed.

Next question comes from the line of Casey Whitman from Piper Sandler.

Just a bigger picture question for you, John. We've seen M&A start to pick up in your markets. Can you just give us an update to how you're viewing M&A opportunities across your footprint and just how you're weighing that against the organic growth opportunities?

Yes. Sure, Casey. Nothing has really changed from the commentary last quarter in terms of our overall view. First of all, we are principally focused on organic performance. And whenever you hear us talk about our projects, and we call them out for a reason. We just want to demonstrate the projects that are underway. There are strategically important activities going on in this company that have us very busy. And so as we think about M&A, we have to balance the implications of taking something on versus things we need to do anyway. We can always – we’ve organically, I think, driven excellent results and proven we can start new businesses, most notably equipment finance, expanding government contractor finance. We feel good about our pipeline. We can always buy back shares. And those are all pretty safe propositions for us. And so we think about that compared to the M&A options that are out there. We’re less likely to look at what I’ll call small M&A because even though it could be smaller, it would have an opportunity cost. And we have been watching with great interest and fascination, these competitive bids that have gone on in our markets, none of which we have participated in, by the way. While I will never say never, it is not our style to engage in bid wars for banks. Our style is to build relationships and partner with people who have a similar vision for the future and who take the long view, not simply sell to the highest bidder because there are downsides, and you can see cost take out and all the consequences of that. So again, nothing is impossible. That doesn’t mean we would never ever do that. We just don’t see anything, haven’t seen anything yet that would be so important to us that would cause us to feel the need to do it. And then we also think we’d rather keep powder dry, take the long view, think about something that could potentially be more impactful, create more value, create more scarcity, shareholder value and scarcity value. So fundamentally, we’re patient. We’re not feeling pressured. We’re not feeling pushed. We have lots of friends. We have lots of conversations. Many of these conversations go on for years at a time. This follow out, I’ve been here for 5 years. So I have some 5-year-old friends, too. So we may or may not do something. We’ll see. You can ask again next quarter.

Next question comes from the line of Laurie Hunsicker from Compass Point.

I was hoping we could go back to expenses because I too am sitting netting back that -- and the OREO line item expense is a credit. Is that correct? Because I didn't see that breaking out in the income statement. I'm just taking your -- the adjustments that you know.

Yes, that's right, Laurie. It's about $900,000 positive impact on the OREO line there.

And you normally have...

It's in other -- it's all in other...

It's -- right, it's in other, right. And then normally, you guys do have tax payments. So I guess I'm looking at that and adjusting that, I'm over $93 million for the quarter. Can you -- sorry, can you just share with us, I know, Rob, you mentioned probably $92 million run rate, but just any sort of other branch rationalization that you're thinking about, again, also dovetailing off the fact that mortgage banking is going to be very, very challenged. How you're thinking about what are your variable costs? Can you pull anything out of there? Just maybe as we look even beyond '21, if we're looking into '22, how we should be thinking about expenses?

Yes, I'll let John take leaving the branch rationalization question and comment beyond that.

Sure. We continue to look at -- we look at branches formally on an annual basis. But as a practical matter, we're always thinking about it. Something we've recently done here in Richmond is we went 2 for 1. And so the old way of thinking about this was close branch A and consolidate into branch B. Something we've done recently that we're looking to replicate is close branch A and branch or build branch C, better located, smaller, exactly the way we want it designed, exactly where we want it in a better location. That's a metropolitan market strategy, obviously, and we're looking for more opportunities. And we have a couple of ideas around that. We also have an opportunity that we will likely undertake where we do have one branch that will likely be sold and repositioned and I don't want to talk too much about that, but that is one of the ways that we think about it, Laurie. And we're always looking at the change in consumer behavior. Maria Tedesco is here, our bank president. Do you have anything to add to that, Maria?

I would just add that we have much data to understand our customers' behavior, their banking pattern. And that I don't -- that doesn't just mean consumer. We also talk about business and commercial and how they're leveraging the branches. And that plays into this whole modeling that we're doing in our branches. I would also say we've recently opened 2 new locations, which you alluded to in the consolidation. But that was based off of where we saw the market, good market opportunity and customer demand for a brand space.

Yes. So I don't envision we're going to have another round of a big bang of branch consolidations. It will be announced as an event anytime soon, but we'll continue to pare it down. And I think back to your underlying question, Laurie, every quarter, there's always some degree of put and take. And if we have a -- we call them blue birds. If we have a gain, we're looking at, is there anything else we need to do. But we keep our eye on the target of $92 million. We always have incentive compensation as a variable cost that we can draw down if we need to, we'd rather not, but we'll do it if we have to. And everything is a trade-off. We're constantly managing trade-offs.

Yes. I would also add, we are making investments in some productivity plays, efficiency plays. Robotic process automation continues to be worked on. And these are things that you won't necessarily see a decline in the expense base, but you should see a lower level of expense increases as we go forward. So we don't have to add hefty technology.

Excellent. That's operating leverage.

Yes. So that's what we're really working towards, Laurie, is try to produce positive operating leverage where expenses aren't growing nearly as fast as the revenue growth.

Okay. Perfect. That's helpful. And then just last question. Rob, on margin, hoping you can just give us a little bit of help understanding this going forward. Just point number one, if you can remind me how much is left unamortized fees on your $859 million of PPP loans? And then any thoughts about pace of loan forgiveness? And then I guess sort of dovetailing on to that because you had certainly outsized PPP fees this time and then outsized accretion. Just looking at your accretion tables, the $4 million this quarter looks like on Page 2, it will probably run closer to $1.5 million. Just how we should be thinking about net interest income and net interest margin? Any guidance you can give us would be really helpful.

Yes. So in terms of the PPP deferred fees, we have about $25 million left on that $850 million or so PPP loans left on the balance sheet. We’re anticipating that the bulk of those fees will be accreted through income over the balance of this year and probably some into the first quarter. We’re working on – and these are mostly related $550 million or $600 million that’s related to PPP-2, which is really just getting underway from a forgiveness perspective. But based on PPP-1, for given this, we think it will accelerate over the next, call it, 2 to 3 quarters. Which will add to net interest income on a dollar basis. In terms of going forward in the margin, if you probably noted – if you look at our reported margin, yes, we were up. But if you take out the PPP impact and the accretion income impact, which was of 9 basis points, our core margin came down a bit. We have been guiding to plus or minus 3.05. That has come down a bit, a couple of – 2, 3 basis points this quarter. We’re anticipating that we could see some near-term further compression in that range. And that’s all because of the excess liquidity we continue to see and we’re trying to put that to work as best as we can. You would have noted that we’ve increased our investment portfolio considerably over the last 6 to 9 months, up about $1 billion actually from about 15% of earning assets to closer to 20%. We feel like that’s – it’s margin – negative to the margin, but it’s a positive to net interest income. So it’s a dollar-margin question that we continue to evaluate. So our view is that we want to put that money to work and not let it sit in 5 to 10 basis point cash position. So that said, I think you’ll see on a core basis net interest income going up, but you may see some pressure on the core margin itself.

Next question comes from the line of Catherine Mealor from KBW.

Most of my questions were answered, but I just wanted to have one quick follow-up on the expense conversation, that could be worse. But you typically talk about the $92 million as your target that, that typically excludes the intangible amortization. Is that still how we're thinking about it, so it's kind of $92 million on a core ex amortization, but more like $95 million if we include that $3 million expense?

No. Yes. Yes, Catherine, I know you talked about this quarter, but the $92 million is inclusive of the amortization. So if you back that out, it's like $3.5 million to $4 million, you'll be closer to the $88 million nonamortization expense but we do include that in our guidance to the $92 million, again, give or take around that level.

That's in your guidance of -- your guidance of trying to keep it around $92 million is back out that amortization?

No. Yes. So the $92 million we reported this quarter includes about $4 million of the amortization, yes. So that $92 million target is inclusive of the amortization.

Otherwise, it's $88 million.

Yes.

Got it. Okay. But last quarter, you had guided to a $92 million expense number. So you're saying including the amortization of intangibles.

Yes, we did. Yes, it's right.

So you were kind of coming right on with that?

Yes, last quarter, we were around $95 million or so after picking out some of the noise, $96 million, and that included amortization. And then we're dialing that back to $92 million inclusive of the amortization.

Great. Okay. Perfect. Yes. So I just want to make sure that we were all on the same page. That's perfect. Got it. Okay. And then on the reserve, we've seen really big negative provisions in the past couple of quarters. I'm assuming that, that kind of moderates as we move forward, just given where the reserve ratio is? And any thoughts on kind of provisioning levels in the back half of the year?

Yes. As you noted, this is the third quarter in a row that we've released reserves, this one being the largest, about $28 million. And it's all about our quantitative CECL modeling and the outlook and the pristine credit metrics that we are seeing, I mean, as John mentioned, basically 0 charge-offs this quarter, past dues down. We're not seeing any migration -- negative migrations in the loan book in terms of loan ratings, actually we're seeing them improve. So all of that suggests that unless we see some sort of worsening situation on the economic front that we will continue to see releases as we go forward here. Where that bottoms out is a question. We've been suggesting that if you go back to our CECL day 1, it was about 75 basis points of the loan portfolio, balanced portfolio. We think that's probably a pretty good guide to be, again, all things being positive going forward here that we'll get there over a period of time. And maybe depending on what our mix of loans are actually could be a bit lower than that. But our bias is you can expect to see continued releases unless something material changes.

Now we're conservative by nature. We apply qualitative overlays uncertainty to the extent that we can justify it, which is our bias. But at the end of the day, you can't make it up. We can't simply say we choose not to release. We sometimes hear our counterparts make comments that sound to our ear like we choose not to release. They don't appear to have the same account as we do. You can't do that. So there is a point where it's principally driven by quantitative metrics. They are what they are. Yes, we apply qualitative overlay and we'd be as conservative so we can justify, but you can't make it up and say...

Yes, that's a good point, John. I should mention that of the -- of these allowance as of this quarter, what we've done over the last several quarters is about 35% of the allowance dollars is about -- is related to qualitative overlays that management is putting on.

Correct. So rest assured, we dial that needle up as high as we can justify and then we stop.

Thanks, everyone, for joining us today. We look forward to speaking with you over the next quarter and in 3 more months with our next results. Thank you, and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.