Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Second Quarter 2022 Earnings Conference Call. Please be advised 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. 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 with us in the room on remotely 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 our earnings release for the second quarter of 2022. 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 statements. Please refer to our earnings release for the second quarter of 2022, 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. I'll now turn the call over to John Asbury.

Thank you, Bill, and thanks to all for joining us today. Atlantic Union Bankshares maintained its strong start to 2022 with a solid second quarter. We recorded upper single-digit loan growth, asset quality remained pristine, and we made a strategic investment in wealth manager Cary Street Partners by transferring our RIA business to them in exchange for a minority interest in Cary Street Partners. I have consistently stated that our operating philosophy of soundness, profitability and growth in that order of priority serve us well as we navigate the challenges of the ever-changing operating environment. Further, as I said at our recent Investor Day, Atlantic Union has been, is and will continue to be a story of transformation, guided by a consistent but evolving strategy, and remains committed to delivering on our strategic objectives. As compared to our comments during the last quarter, we have grown more cautious in our economic outlook given the implications of surprisingly high inflation, rapidly rising short-term interest rates and geopolitical uncertainties. It's clear to us that a fog of uncertainty is rolling in. Business leaders and consumers are growing more hesitant, and we're in for slowing economic growth, if not an actual recession. Having said that, our markets remain strong, and we still don't see any near-term shift away from the positive trends of low unemployment and a benign credit environment. We believe that the Federal Reserve will continue to raise short-term rates doing whatever it takes to battle stubborn inflationary pressures. Since we remain fairly asset sensitive, multiple short-term rate hikes over the course of 2022 are a positive for our operating results, and our net interest margin should continue to expand. Inflation remains a drag on the economy. Supply chain disruption has improved, but it's still a factor and business clients remain…

Thanks, John, and good morning, everyone. Thank you for joining us today. 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 results on a non-GAAP adjusted operating basis, which excludes the $9.1 million pretax gain or $8 million after tax from the sale of RIA business to Cary Street Partners in the quarter, and also pretax restructuring cost of $5.5 million or $4.4 million after tax in the first quarter related to the closure of 16 branches in the company's operations center in March. In the second quarter, reported net income available to common shareholders was $59.3 million, and earnings per share -- per common share was $0.79, up approximately $18.5 million or $0.25 per common share from the first quarter. Non-GAAP adjusted operating earnings available to common shareholders in the second quarter were $51.3 million, and adjusted operating earnings per common share was $0.69, which is up approximately $6.2 million or $0.09 per common share from the first quarter. The non-GAAP adjusted operating return on tangible common equity was 16.5% in the second quarter, which was up from 12.7% in the first quarter. The non-GAAP adjusted operating return on assets was 1.1% in the second quarter, and that was versus 98 basis points reported in the prior quarter. And the non-GAAP adjusted operating efficiency ratio was 55.9% in the second quarter, an improvement from the 58.9% in the first quarter. Turning to credit loss reserves. As of the end of the second quarter, the total allowance for credit losses was $113.2 million, which was comprised of the allowance for loan and lease losses of $104 million and a reserve for unfunded commitments of $9 million. In the second quarter, the…

Thank you, Bob. And Michelle, we're ready for our first caller, please.

And our first question is going to come from the line of Catherine Mealor with KBW. Your line is open. Please go ahead.

Hi Catherine.

Hi, good morning. I want to start with the sale of Dixon, Hubard. Rob, could you just help us walk through what the impact to the balance -- or excuse me, to the income statement will be with fees and then expenses? I think in your guidance, the lower fees, I'm assuming it's coming from that sale, but I would have expected a little bit of a decline in the expenses as well, which look like we're seeing. So just any kind of help us the moving parts there would be great.

Yes. Yes. There's a number of moving parts, Catherine, in the guidance that we published today in noninterest income and noninterest expense. But let me just talk about the RIA impact for a second. In terms of noninterest income, they are generating about -- they were generating about $2.3 million in noninterest income on a quarterly basis, which will be going away on a gross basis. On the expense side, they had $1.8 million on a quarterly basis, which will also go away in the expense line rate. So in a net positive for a -- net pretax revenue, the RIAs were generated was about $0.5 million. So replacing the $1.8 million decline expense on a quarterly run rate basis, declined noninterest income of $2.3 million, but add back $0.5 million in noninterest income because we'll be recording $0.5 million, presumably based on earnings of Cary Street Partners. We'll be getting our share of their earnings, which we currently over the next few quarters, I think it will be a push about $0.5 million. So net-net, bottom line pretax, we don't see any issue, but the line items will be adjusted more materially. So again, take out $1.8 million of expenses and then take out a net $1.8 million on the noninterest income line. And that's really the adjustment, at least on a quarterly basis. In terms of --

Okay. That's -- yes, go ahead.

So yes, so beyond that, you saw we did publish noninterest income in the $105 million to $110 million range for this year. And again, that's the impact of the RIAs. So we've been running about $30 million a quarter, call it, $120 million annually. RIAs in the second half of the year, as I mentioned, with the gross $2.3 million, add back the earnings, the equity investment earnings that we're going to have back out $3.6 million for the second half of the year on the noninterest income run rate for the full year. In addition, we're seeing headwinds on the assets under management and wealth management. So we're projecting that we will see a softening of fiduciary wealth management fees of about $1.5 million for the balance of this year, second half. Remember, we're also -- just implemented our new goal draft policies, put those in place, and that's about $3 million of negative on the second half of the year. It's about $1.5 million a quarter. But if you look at it on a full year's -- 2022 basis, about half a year, that would be $3 million. In addition, you see mortgage income coming down due to lower gain on sale margins, but also projections for lower originations. And so we're adjusting downward approximately $1.5 million or about 700 a quarter for the next two quarters. So that gets you into the $105 million, $110 million range, probably on the higher end of that range. So like I said, there's a lot of moving parts there, Catherine. But those are the main assumptions. And then on the expansion side --

Okay. Yes, go ahead. Go ahead.

Yes. Go ahead.

No. No, you're going to keep going on expenses, and I got one follow-up.

Go ahead, Catherine. Do you have a question on noninterest income side?

On the -- my follow-up to that. That is super helpful for the '22 guidance, but then for '23, it looks like you're guiding to mid-single-digit growth. So where is most of that growth coming from that we look into next year?

Yes. So -- yes. So if you look at the, yes, mid-single digits or so growth, noninterest income, that's basically coming across all the various elements of the various noninterest income categories, service charges, excluding overdrafts, we're going to have a headwind there on the full year basis. But we also -- growing interchange transactions, growing checking accounts, there will be additional service charge on deposits, treasury management fees are growing nicely. So we're growing that off a lower base, but all elements of the noninterest income categories are expected to grow.

Rob, I would add, if I may so interrupt capital markets fees coming out of wholesale banking, which are a number of different categories foreign exchange, which is up and running. We expect to be originating SBA 7(a) selling some of our four basis. We are seeing syndication income now from our origination in Asia team. We have smaller club deal syndications a competency that we've now organized and treasury management fees. I believe you indicated, and Dave Ring, I'm not sure what I'm missing there, but we do have a number of discrete initiatives, particularly on the wholesale capital market side.

Yes. I don't think you're missing anything, John. We might -- we have a long history of working with clients and generating interest rate related fee income, and that seems to be doing much better than last year as well. This is good.

So Catherine, as we indicated at Investor Day, we've done, I think, a pretty good job of diversifying our set of value-added, fee-based opportunities. Many renewables, of course, around the wholesale banking space, and we'll see how that goes. But we're pretty encouraged based on where we are right now.

Yes. And I should say, Catherine, that growth rate is really based on the new base when -- you got to take out the full year impact of the RIAs and a bit more on the overdraft fees. So that growth -- in the end, it's kind of a push, if you look at 2022 this year versus next year, but next year's base is coming down further, and then we're growing from there.

Yes.

But basically, you pretty much flat growth on a point-to-point, year-to-year basis.

We've also avoided what would have otherwise been additional investment in expense coming in the RIA space. So this we think was an elegant solution.

Yes. Right. We should see an uptick in our earnings contribution from Cary Street Partners as they continue to grow next year. They continue to acquire RIAs, not only what we just did, but others, and we expect to see some decent growth coming out of that investment.

Okay. Great. That was all super helpful. And then moving over to the balance sheet and the margin. We saw a deposit -- you remember, is awesome as expected, the positive decline. And I know you mentioned in the slides that, that was really just from one public fund client. But can you just talk about your outlook for deposit growth? And then how that translates also into just kind of the size of the balance sheet with how you might manage your securities, but looks like we're kind of through the cash deployment, but really trying to figure out where you think the size of the securities book goes depending on how deposits flows as well. Thanks.

Yes. So yes -- so as we mentioned, quarter-to-quarter deposits were down due to that one fairly large outflow from a public funds depositor. So we're pretty much flat if you take that out of the equation. We're not looking for significant growth, maybe in the 2% to 3% in deposit growth. We still think there's some surplus deposits in both the consumer and commercial depositors, which you could see start to outflow. We've seen some of that in -- a bit of that on the consumer side, less on the lower moderate income balance clients. So probably talking about 2% to 3%. We'll see where that goes. And with loan growth, we expect, as we said, upper single digits for the remainder of this year. We'll fund it with hopefully some of that deposit growth. The other side of that is, as you know, we did build up our investment securities portfolio through the pandemic. We're typically would be running about 15% securities portfolio of total assets. We're now about 20%. We're actually using monthly cash flows that are coming out of that portfolio to fund loan growth. And that's about $40 million a month or so. So that's being used as well. And then we do have other, obviously, wholesale liquidity sources, funding sources that we will use to shore up any need for funding from loan growth. So that's how we kind of think about it. We expect that the securities portfolio, we will continue to run that down to bring us back to more of a normalized 15% of assets over a period of time, which we're thinking that would be over the next six quarters or so.

And Catherine, as you know, the deposit outlook is somewhat difficult to forecast. It actually is holding up better than we expected, setting aside, again, the one public funds entity, which, as you know, is collateralized. So when that deposit went away that freed up securities collateral. So from a liquidity standpoint, it's not the same as losing a regular deposit. We had to deal with the always seasonal impact of -- April tax payments seem to have overcome that. Interestingly, net consumer households have grown over the course of the quarter despite the fact that we've closed the quarter the retail branch network since the beginning of the pandemic, relending new commercial clients. So we'll see where it goes. But I think that on the whole, deposits will likely hold up better than we would have thought.

Very helpful. Thanks.

Yes. I'd say we're actually tracking a bit better than we thought since June. So we'll see if that holds that could be seasonal as well.

Yes. This surprising to me, just given the bite that inflation is having.

Yes.

Great. That's all I got. Thanks so much for all the help.

Thanks Catherine.

Thank you.

And thanks to everyone for joining us today. We wanted to take a minute to wish the -- our research analysts to transition to new roles, the best of luck in their new positions, and we will look forward to speaking with you all next quarter. Thanks, and have a great summer. Bye-bye.

This concludes today's conference call. Thank you for participating. You may disconnect. Everyone, have a great day.