Good day and thank you for standing by. Welcome to the Atlantic Union Bankshares First Quarter 2023 Earnings 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 over the conference over to your speaker for today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.

Thank you and good morning everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury, the 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 first quarter of 2023. 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 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 any forward-looking statement. And all comments made during today's call are subject to that Safe Harbor statement. At the end of the call, we will take questions from the research analyst community. And now I'll turn the call over to John.

Thank you, Bill. Good morning everyone and thank you for joining us today. It was an eventful start to the year across the industry. Early in the quarter deposit rate competition hit a tipping point and rapidly intensified as idle funds went in search of higher yielding alternatives. Late in the quarter, we witnessed the dramatic back-to-back failures of Silicon Valley Bank and Signature Bank, which initially shook confidence in an American banking system that is fundamentally built on confidence. We will go into our quarterly results and our financial performance in a few moments, but I'll begin by stating I'm pleased to report that our deposit base proved resilient. We avoided any material loss of deposits due to bank safety concerns and we covered loan growth by growing customer deposits by $153 million or approximately 4% annualized. Total deposits grew $524 million or 13% annualized as we elected to use some broker deposits to reduce wholesale borrowings that we took on in the fourth quarter of 2022. Our franchise remains strong, even in these uncertain times. We see the current environment as another confirmation of our long-term strategy of being a diversified, traditional, full service bank with a strong brand and deep client relationships. Now more than ever soundness, profitability and growth, in that order of priority, remain our mantra and inform how we run our company. To that point, let me provide some detail on the granularity of our deposit base, which we think of as the crown jewel of the AUB franchise. At the end of the first quarter, 72% of deposits were either insured or collateralized. We had liquidity sources available to cover 140% of uninsured and non-collateralized deposits at quarter end and you can see the details of this on Page 18 of our supplemental…

Additionally, we received a full payoff of a $2.6 million C&I nonperforming asset shortly after quarter end, meaning that current non-performing assets are now slightly below year end levels. One-off credit losses do happen as we saw in Q1 though admittedly it's been years since we last saw one. Despite this, we have yet to see any sign of a systemic inflection point in our asset quality metrics which remain benign. We continue to expect a normalization in asset quality at some point following a long run of minimal net charge-offs. We remain confident in and are pleased with our asset quality. In sum, it was a challenging environment to begin the year and a noisy quarter with respect to the legal reserve and securities portfolio loss. Having said that, we remain confident in our positioning for the remainder of the year, and our ability to navigate challenges, both expected and unexpected as usual with uncertainty comes opportunity and we do see opportunity in this environment. Atlantic Union is a diversified, traditional, full service bank with a strong brand and deep client relationships and stable and attractive markets. We're on a solid footing, resilient and looking forward to a good year, but not as good as what we would have thought one quarter ago. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?

Well thank you John and good morning everyone. Thanks for joining us today. Now let's turn to the company's financial results for the first quarter. Please note that for the most part my commentary I will focus on Atlantic Union's first quarter results on a non-GAAP adjusted operating basis, which excludes the pretax loss on the sale of securities of $13.4 million and a pretax $5 million legal reserve recorded in the first quarter. Regarding the sale of securities during the first quarter, as John noted, we executed a deleveraged strategy selling securities with a total book value of $506 million yielding approximately 3.4% at a pretax loss of $13.4 million and used net proceeds to reduce FHLB borrowings costing 4.75%. The strategy was structured to provide the company with improved liquidity, tangible common equity, and run rate earnings with a short earn-back period of approximately two years. On an annualized basis, we expect the transactions to be approximately 1.8% accretive to EPS, 13 basis points accretive to NIM, 6 basis points accretive to ROA, approximately 36 basis points accretive to return on tangible common equity, and 20 basis points accretive to tangible common equity-to-assets ratio. In the first quarter, reported net income available to common shareholders was $32.7 million and earnings per common share were $0.44. Adjusted operating earnings available to common shareholders were $47.2 million or $0.63 per common share for the first quarter, which is up approximately 5% from the first quarter of 2022. The adjusted operating return on tangible common equity was 15.2% in the first quarter, which is up from 12.7% in the prior year's first quarter. Adjusted operating return on assets came in at 1% in the first quarter, which is up slightly from last year's level in first quarter of 2022 of 98…

Thanks, Rob. We are now ready for our first caller, please.

All right, well thank you so much, presenters. [Operator Instructions] And our first question comes from the line of Casey Whitman of Piper Sandler & Co. Your line is now open.

Good morning, Casey.

Good morning. Good morning. Maybe I'll just start on the fee income guide you guys gave. What kind of assumption should we be making for the loan swap fees, it seems like that could move, move that outlook a lot?

Yes, we are looking to for that to bounce back as we go through, if not the second quarter in the back half of the year, Casey. So you know, we had elevated levels in the fourth quarter of last year, it kind of dropped off some of that seasonal production lower production in the first quarter. But we expect to see that in the, call it the $10 million to $12 million range for the full year as we go forward here, but we'll have to see how that plays through.

Okay. Okay. And sticking with, I guess, noninterest items, so you touched on this a bit, John, in your opening remarks, but sort of what are some of the expense levers that you're able to pull here with the low revenue outlook? And are there other ones you'd be considering if the revenue outlook continues to go down or credit cost proved to be much higher? Just sort of walk us through how you're thinking about the expense base here.

Yes Casey, what we're looking at is reducing the rate of expense growth. We've taken -- we've been pretty aggressive through the years in terms of management of the bank's expenses. I would generally describe it as pretty much across the board, and I would not say that to be one individually large item, but we do think that we'll have line of sight in order to achieve a low single digit growth target.

Yes, I think Casey just to add to that, there are levers we can pull, incentive expenses depending on where we come up versus our targets that we set for the year that could be down. We're also looking at perhaps delaying some things that we had previously thought we would be able to fund with the revenue growth we thought we would see as we started the year. So things like that. And then various hiring delays and adding staff, et cetera. And, and they're always very, but as John says it's really across the -- yes everyone will participate. All leaders and we are pretty much continuously working on what I would call efficiency and process improvement measures. So we're not talking about a really large number here and we'll be able to deliver on it. Yes but the point is that we do want to show a positive operating leverage, so revenue outlook is lower. We need to adjust accordingly.

Yes, I think that's a really important point Rod makes. We will -- we are committed to positive operating leverage. Bear in mind as we did the planning, given whether NIM was a quarter ago and what our expectations were prior to the developments of quarter one, we were looking at materially higher revenue growth, which gave us the ability to plan for some additional investment and expense spend and now we adjusted the plans as a result.

Okay. I'll just ask one more and let someone else jump on, but just given your loan growth assumption, what are you sort of assuming on the deposit side in terms of growth in 2023?

Yes, so excluding the broker deposits that we noted in the first quarter, we're looking at about 2% is our working assumption for this year on an organic deposit growth basis. So as we said, 4% to 6% on the loan side, call it about 2% on the deposit side picking up the difference with some perhaps brokered deposits or other funding, co-sale funding needs or sources or as well, we have cash flow coming out of the securities portfolio, so we could bring down our securities as presented. Total assets we're at 15.5%. We typically want to run in the 15-ish range, so there's some opportunity there.

Okay. I'll let someone else unpack that a bit. Thank you, guys.

Thank you, Casey. And we're ready for our next caller, please.

All right, thank you so much. And your next question comes from the line of Catherine Mealor of KBW. Your line is now open.

Good morning Catherine.

Hey, good morning. Can you all hear me?

Yes, we can.

That's great. Okay, thanks. Good morning. I was on mute. If we just go back to the fees and can you help us just think about how you're seeing the trend in service charges for the back half of the year and if this legal issue with the CFPB drives any changes in your outlook for that number or some of that already kind of taken into account from previous guides? Thanks.

Yes Catherine on service charges on deposits, we don't -- there's no real impact at all from what John mentioned on the CFPB matter impacting that. But pretty much looking at seasonal ups and downs for the remaining of the year, but I would say it's kind of flattish, the outlook is kind of flattish to what first quarter came in and the various service charge categories which will be up, which won't actually be up year-over-year because as you recall, midyear in 2022, we changed some -- our overdraft policies and that led to approximately $1.5 million or so estimated decline in the overdraft revenue in that service charge line. But if you look at the first quarter's run rate, we think that's a pretty good run rate for the balance of the year.

Okay. So we -- so is that, that $1.5 million hasn't reflected in this run rate yet, correct?

Say that again, Catherine, sorry?

Is that $1.5 million, is that fully in today's run rate?

Yes, that's fully baked in, yes, already.

Okay, so that's all that's already in.

Yes. If you just take the first quarter's service charge line out for the full year, that's a good run rate.

Okay, great. That's helpful. And then if you just answered this, I apologize, I was kind of jumping back and forth. Can you walk us through where deposit costs were towards the end of the quarter and how you're thinking about deposit costs in just the next couple of months?

Yes, as we mentioned, Catherine, we are expecting that betas will be increasing just to put that out there in terms of the -- through the cycle by year end, we expect that the betas that you saw through the cycle so far is 28%. We think that's going to start to tip towards 40%. When it's all said and done on the total deposit and pushing 50% on interest bearing deposits through the cycle. We do expect the Fed will go one more and then hold. So it's based on that assumption. In terms of the -- if you look at what March cost of deposits was it's actually up to 1.43%. So if you look at it versus the quarter's average, it has uptick and that's the expectation we have for the balance of the year that will continue to increase.

Great. And as you think about that 40% total, 50% interest bearing beta, I mean do you think you'll get there as soon as the next quarter or two? How do you kind of think about the lag and…

Yes, yes, I would say when that, Fed will move in a couple of weeks in May, and then we think it will top out it in the third quarter going into the fourth quarter will be stable.

Okay. And then one last one just on the deposits. There's been a lot of mixed shift across the industry out of noninterest bearing into interest bearing and CDs. How are you thinking about what that mixed shift looks like for you towards the end of the year?

Yes, we're seeing it kind of normalize towards the pre-pandemic levels. On noninterest bearing deposits we're about 28% of total deposits at March 31st. We expect that to tick down a bit, probably to about 25% is what our projection would say at this point in time. But it could be plus or minus that level by year end.

Okay. Very helpful.

Which is kind of a normalizing impact there.

Yes. And about where you were pre-pandemic?

Yes, we were probably in 23, 24 range, I think.

Great. All right, thank you.

All right. Thank you so much. And your next question comes from the line of Steve Moss of Raymond James. Please go ahead.

Hi Steve. Good morning.

Hey, good morning. Maybe just starting on the margin here in terms of where is loan pricing these days in terms of the new production that you're putting on, and just kind of curious also on the pace of fixed rate loan rate repricing over the next 12 to 24 months?

Yes, so in terms of the originations new production in the quarter, going on about, just call it 6.75% to 7%. And that's kind of the mix that's come on during the quarter was about 63% was a variable tied to LIBOR/ [indiscernible] or Prime. So if you blend that with fixed rate deposits coming on, which is at a lower rate because term rates are bit lower, would be inverted curve. We're probably averaging out about 6.75 for new commercial loan yields coming on.

Okay.

And that should, oh, sorry, go ahead Steve. Sorry.

Oh no, I was just goning to then say, in terms of fixed rate loans rate price, I'm just kind of curious as to kind of how we think about that pace and how much you guys can pick up on the asset side as the year goes on?

In terms of fixed rate yields, yes we were up above, yes call it about 30 basis points, quarter-to-quarter. It really depends on what happens to the yield curve, but we're not -- we aren't calling for the belly of the curve to change too much from where it is today. So probably see that kind of stable at that level unless we see some uptick in the 2 to 5-year rates which would obviously be a benefit to us from a new fixed rate loan production.

Okay. And, and then in terms of just with regard to the securities portfolio with the sale of securities, any thoughts on additional restructuring or additional sales going forward here?

We're not planning on that, Steve, but I wouldn't take it off the table depending on what happens with the balance of the year here. But I don't think that you should expect that we're going to take any material realized loss or realize any material losses from the sale of securities. We're kind of set. They set 15% of total assets. Were a little over that now, so I wouldn't expect to see any material sales around the margins.

Okay. And then in terms of loan growth guidance here, you guys said the pipeline here is still strong, only modestly lower versus before. But the guide is a step down. Just kind of curious, are you thinking about just a deceleration and growth as the year goes on or maybe you expect more commercial estate projects to cancel? Just kind of curious as to how you're thinking about that dynamic.

Yes, Steve, you're correct. So when we look at the loan pipeline, it definitely implies based on our experience, higher growth rates than what we're forecasting now. We just know from experience that when uncertainty rises, commercial borrowers, commercial real estate developers can become more hesitant and it takes longer for things to pull through the pipeline. So from our standpoint, we just wanted to make sure that we were, from a planning standpoint and setting expectations being pretty realistic. We'll see how things go out there. David Ring, who is Head of our Commercial Businesses is here. David, what is your intuition in terms of loan growth from here? Would you agree that things will likely be slower than before?

I do. I think our pipeline is good enough to do better than we're forecasting, but we take the approach that, call it 30% of our production is, or 40% of our production ends up in the fourth quarter booking. So that could fall into January. So we like to take the approach that if things might be delayed, we'll take a more conservative approach towards our loan growth projection, but our pipeline remains more than robust to cover it.

Okay. That's helpful. And just may be just one last one from me. C&I growth here was strong. Just kind of curious, have you given incremental color as to the drivers there and what you're seeing?

Yes, I mean, we've developed our C&I practice really over the last five years and every year you know we get better and better at it and every quarter we're seeing C&I growth come in. And what you'll see is our commitments are growing in the C&I side, which is a good for the future. It's a good predictor for the future that our commitments keep growing at the rate they're currently growing. So our utilization is still steady, but our commitments continue to grow.

All right, great. Well, I appreciate all the color. Thank you very much.

Thank you, Steve.

Thank you so much. And we don't have any more questions. I would now like to turn the conference back to Bill for closing remarks.

Thanks [indiscernible] and thanks everyone for joining us today. As a reminder, we'll have our annual meeting next week on Tuesday, May 2nd, and we'll look forward to talking with you then. Have a good day.

Thank you so much presenters and thanks to all our attendees. This concludes today's conference call. Thank you for participating and you may now disconnect.