Good day. Thank you for standing by. Welcome to the Atlantic Union Bankshares Fourth 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 the conference over to your speaker today, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Victor, 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 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 fiscal year 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 a forward-looking statement. All comments made during today's call are subject to that Safe Harbor statement. And at the end of the prepared remarks, we will take questions from the research analyst community. And now I'll turn the call over to John Asbury.

Thank you, Bill. Good morning, everyone. Thank you for joining us today. Looking back at 2023, it was a wild ride across the industry. Right out of the gate, we reached a tipping point in depositor behavior set off by the Fed's aggressive series of rate increases in 2022. This resulted in a surge of deposit movement from non-interest-bearing deposits into interest-bearing alternatives, and in turn ignited a deposit rate rumpus that compressed net interest margins. As you know four other 25 basis point rate increases eventually followed before the Fed paused. The high-profile non-traditional bank failures in March initially shift depositor confidence in the American banking system and further intensified margin pressure. Thankfully, our deposit base remains sturdy and we responded to the changing environment with actions that we believe will better position us to deliver long-term sustainable shareholder value. Despite the year's disruptions, in the end 2023 was a successful year for AUB both financially and strategically, and we entered the New Year with positive momentum. As a reminder, during 2023 we took three significant and proactive actions to respond to the ever-changing environment. First, we quickly realized the need to adjust our structural expense base when deposit costs rose in Q1. Just nine months ago during our Q1 '23 earnings call, we said we would take meaningful expense actions and then did what we said we would do in the second quarter. We took out $17 million in structural expenses with nearly all expense savings complete by the end of Q2. Second, on July 25th we announced our entry into a merger agreement with American National Bankshares Inc., which has been well received across our markets. We have been hard at work on integration planning. And we remain confident that we can achieve our estimated expense savings…

Thank you, John, and good morning, everyone. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter financial results on a non-GAAP adjusted operating basis which excludes the following pre-tax items. Gains of $1.9 million in the fourth quarter and $27.7 million in the third quarter related to sale-leaseback transactions. The net loss on sales of securities of $27.6 million recorded in the third quarter. The $3.4 million FDIC special assessment expense recognized in the fourth quarter. The $3.3 million legal reserve related to our previously disclosed settlement with the CFPB in the fourth quarter. Merger related costs of $1 million in the fourth quarter and $2 million in the third quarter associated with our pending merger with American National. And expenses of $8.7 million associated with our strategic cost savings initiatives recorded in the third quarter. In the fourth quarter, reported net income available to common shareholders was $53.9 million and earnings per common share was $0.72. For the full year 2023 reported net income available to common shareholders was $190 million and earnings per common share was $2.53. Adjusted operating earnings available to common shareholders was $58.9 million or $0.78 per common share for the fourth quarter and were $221 million or $2.95 per common share for the full year '23. The adjusted operating return on tangible common equity was 18.2% in the fourth quarter and 17.2% for the full year. The adjusted operating return on assets was 1.18% in the fourth quarter and 1.14% for the full year. And on adjusted operating basis, the efficiency ratio was 52.9% in the fourth quarter and 54.2% for the full year of 2023. Turning to credit loss reserves as of the end of the fourth quarter, the total allowance for credit losses was $148.5…

Thanks, Rob. And Victor, we're ready for our first caller, please.

Yeah. And at this time, we will conduct the question-and-answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Casey Whitman from Piper Sandler. Your line is open.

Good morning, Casey.

Hey, good morning.

Good morning.

Hi.

So, appreciate the stand-alone margin guide for next year and the assumptions that go into it. Can you maybe walk us through sort of the trajectory, more specifically quarterly and sort of around what each cut does to the margin? Do you think you can still hold it in that 330-340 range even if we do get more than three cuts or how should we think about it?

Yeah, Casey, that's a good question. As I mentioned, we are assuming three cuts, we kind of taken the Fed that they were related to the dot plot reductions that they noted in the last meeting. So with that basically what we think we'll be doing, what we'll be seeing is kind of a first and second quarter kind of seeing the low point on the margin, maybe getting down to 325 range give or take. And then start to see that build up as our fixed-rate loan portfolio starts to reprice higher, which will offset the variable rate note potential compression due to the Fed funds moving down starting in the second quarter. So additionally, we also see deposit rates kind of stabilizing, as well coming out of the first quarter. And we'll be fairly aggressive on taking deposit rates down over the balance of the year, assuming the Fed does cut. We have about $2.2 billion of high cost CDs are coming off the books over the first seven months of the year. We also have about $1.8 billion of deposits that are indexed to the Fed funds rate. So that will come down quickly alongside a variable-rate loan portfolio. So that's how we see it happenings kind of coming down to kind of gradually increasing through the balance of the year. And that's how we get to the 330 to 340 range that we're suggesting for the full year of 2024. Now if there is more than three cuts that will be negative towards our expectations from a net interest margin perspective. So if you believe the futures -- Fed fund futures which says there is six cuts, starting in March, our estimates are that we would see six basis points to eight basis points further compression from what -- from that 330 to 340 range. So maybe more in the 320 to 330 range would be our guidance, if that were to happen. But again, our baseline assumption is three cuts for the year.

Okay. Sorry, and I don't know I misheard or not, but did you say -- you said 325 or 335 for first quarter, all else equal here.

We see it drop down, you know, within -- between 325 and 330 is what I suggest our projections are.

Okay. And the six basis point to eight basis point potential further compression, if there's cuts, that's per cut or if there's all three?

Say that again.

Sorry, the six basis points to eight basis points of potential further compression that --

Yeah, that's -- yeah, that's on a full year basis. So --

Okay.

Instead of the 330 to 340 range you could -- you think of six basis points to eight basis points of that range.

Okay. And are we prepared to give an update as to what American National like sort of add to that margin or --

Well, you know, it's going to be, well, obviously we don't know exactly, because obviously deal hasn't closed, we haven't finished our loan marks and other purchase accounting adjustments. But it will be favorable to that just based on the, yeah, with the higher loan marks and the accretion that comes off of that, which is -- you should see that on a combined basis including the accretion income to be much higher than that range I just mentioned.

Yeah [indiscernible]

At this point we don't have, you know, we have some projections there but I'd hate not knowing what -- where rates are going, I don't want to put a fine point on that.

Make sense. Thanks for taking my questions.

Thank you, Casey.

And Victor, we're ready for our next caller, please.

Thank you. One moment for our next question. And our next question comes from the line of Catherine Mealor from KBW. Your line is open.

Good morning, Catherine.

Thanks. Good morning. Rob, you mentioned the back book of your fixed-rate loan repricing this year. Can you just give us a little bit of color of maybe you know the number of loans, the amount of loans that you expect to reprice over the next year. And then can you also -- I know that's a big positive for American National too, to layer that, that end, any kind of color you can give on that as well. Thanks.

Yeah, I don't have specific numbers of loans and how that's repricing. But our fixed rate portfolio is about a three-year give or take duration. So you've seen that re-price every day with renewing loans, and of course, new loans coming on are being priced higher. But in terms of the -- I think the fixed rate portfolio at least on a commercial side is in the 5, 5.25 range from a portfolio perspective. And that's repricing higher in this yield of 6.5% to 7% range at the moment based on where term rates are currently in the market. So that's part of our expectation is that even though Fed may reduce rates in the short -- and short-term rates will come down, we'll have some that will drive down the variable rate yields. But we'll be repricing these fixed-rate loans and that should help offset at least some of that down -- that drag on the short rates coming down. As for American National, yes, you know about 80% of their loan growth is fixed rate. It has an average duration of about three years. So we're seeing -- we fully expect to see that repricing happen fairly quickly, which would, you know, we're going to have accretion income because we're marking that book, but that accretion income should flow back into core margin or core yields as repricing happens over that period of time.

You mentioned that fixed rate loan book is going from 5.25% to 6.5% to 7% on new production. What does that look like for the whole portfolio just including some of the C&I higher rate variable loans?

Yeah, so as you saw our portfolios reporting is a 5.97 loan yield total portfolio. We're seeing that. If you look at repricing we're more in the 7.5 -- 7.5 range. 7.25, 7.5 range. The variable rate book is repricing in the high 7s and even the 8s at this point.

Okay. Great. And then talking about your guide for loan growth is a little bit higher than your deposit growth. Can you just talk about just general, I guess kind of strategies in deposit growth for this year. And what you envision in terms of mix change if we look through the year, feels like that's getting better and kind of moderating. But I assume a lot of the growth is still going to come and you kind of have CDs and higher priced deposit book. So just kind of curious how you think about remix happens as we get closer to kind of the end of --

Yeah, so Catherine on that front, we're really not projecting a big -- we've seen -- we've seen pretty large change in the mix this year primarily what is coming out of non-interest bearing going into money market and CDs. We've seen a lot of growth in the CD book as well as the money market side. We're not projecting that there's going to be a major shift in the current mix we're seeing. We think non-interest bearing, which we were at 24% this quarter. We're kind of projecting that's in the 22% to 24% range as we go forward this year. We also think from a deposit beta perspective as rates come down we'll be repricing that money market book and then CDs are maturing, as I mentioned, the majority of our CD book is repricing or maturing over the first seven months of this year, $2.2 billion. So depending on where rates go, we should be able to see some decline there. So, with that, I think, again, not looking for major shifts in deposit mix. But you're right, I think, that growth will come into more of the interest bearing deposits.

Yeah, and I would add that over the long haul we do think of deposit growth as being a limiting factor for loan growth, but we're not contemplating excessive loan growth. One thing I am proud of at Atlantic Union Bank is we pretty consistently grow net consumer households which is good, not by very rapid amount, but we tend to end up every quarter with more consumer households than we did the month before. And we are focused on, as always, expanding our business depository and treasury management offerings, we've seen good growth there. Don't forget American National Bank would have a lower loan-to-deposit ratio than we do. We bring a lot of things to the table that are going to augment their efforts to go after commercial and industrial clients including deposit and treasury management intensive clients because we have some things that they don't currently offer. And I guess fundamentally, Catherine, we feel pretty good about it. We are off to a good start. Remember, look at the difference between average deposit growth in Q4 and point-to-point, it's pretty notable because we have consistently seen this big drop at year end. It wasn't as dramatic as we saw last year, but we're off to a very good start in Q1. So I think it's all pretty achievable. A point we've made before as well, as we actually don't -- while we would like to, we don't have to fund loan growth 100% by deposit growth because we do have cash being thrown off the securities portfolio, we're liquidating the indirect auto portfolio. But to be clear, we would like to match loan growth with deposit growth. So, I think we'll be okay there.

Great. Very helpful. Thank you.

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

Thank you. One moment for our next question. Our next question will come from the line of Steve Moss from Raymond James. Your line is open.

Hi, Steve.

Hi. Good morning. Just following up on loan growth here. Just curious where you're seeing the drivers of underlying C&I growth here and the multifamily growth that we saw this quarter?

Where it's coming from?

Yeah.

I'm going to ask David Ring, who leads our commercial banking efforts is with us. So Dave, what's your perspective on drivers of I guess CRE in commercial loan growth?

Yes. So you asked specifically about multifamily, you know, that is one of the categories that we continue to grow. We've shrunk the categories, the asset classes we do want to grow in, in real estate. So it's kind of, as we grow, we're growing real estate and C&I at similar loan growth numbers. So on the C&I side, we're seeing growth in every region except we're slowing down in the Western side of Virginia. And that's why we're very excited about the addition of the American National team there because we had a much smaller team on the West side.

Yeah, we were under-resourced there.

We're under-resourced there. So, on the C&I side, we're seeing the C&I pipelines grow faster than the real estate pipelines, we're seeing it growing in every region. Then when we look at our specialty businesses, they're really adding to the equation because government contractor, asset-based lending, those are C&I growth engines for us and they're doing quite well.

So it's pretty well diversified.

Okay. That's helpful. And then just on the NPLs that occurred this quarter, two of them were commercial real estate. Just curious, did they hit maturity walls, what type of properties they are, any incremental color you guys can give?

Yeah, one was commercial real estate. One was commercial industrial. Doug Woolley is here. Doug, I know we have some unique circumstances, do you want to speak to that?

Yeah. Steve, thanks for the question. One of them was, I'll call it fascinating situation, partner dispute, it is non-owner occupied, but it does have owner occupied tenants, owned by the partners. And they got the dispute, they put the borrower in bankruptcy. One of the two declared bankruptcy and we're just kind of working through that mess. So we took a specific reserve to buy time. We had an appraisal, we're trying to assess the actual value of it and whatnot. The other one was a distributor to retailers, seasonal, and I guess it's safe to say they had difficulty adjusting to the post-COVID world where their business accelerated because of everyone being at home. And now sales and whatnot have dropped, expenses up. So anyway, we're working through that with them.

I think that, if you're looking to define what does an idiosyncratic credit issue look like. These are two good examples. They're not reflective of anything else that we're seeing.

Okay. That's helpful. And then in terms of just American National here. John, you're waiting on the Fed. Just curious, you know, it seems like with the state approval should be more a formality, but how are you thinking about a timeline to close here? And are you having to have more active discussions with the Fed or just kind of any color you can give there?

Yeah, I would say, as I indicated in my comments, when we announced the merger on July 25th, we said we expected to close in Q1 '24, that remains our expectation. Everything is proceeding normally. And I have no reason to think we will not hit the expected timeline. It just simply takes longer. We've been looking at lots of data and it's frankly averaging five and sometimes six months. This is about as clean and straight up a deal as you can imagine. So it is a -- it's a straight up combination. We respect that the Fed needs to do their work, they're going through their process, everything is functioning normally. It just takes longer than it used to, and that's where we are.

Okay, great. I appreciate all the color. Thank you very much.

Thank you, Steve.

And Victor, we're ready for our next caller, please.

Thank you. One moment for our next question. Our next question comes from the line of Russell Gunther from Stephens. Your line is open.

Hi, Russell.

Good morning.

Hey, John. Good morning, everybody. Just a couple of follow-ups on the margin to start, please. First being you guys gave us the deposit beta peaks on the way up, just hoping to get some guidance around what you think the peak cumulative beta will be on the way down. What's embedded in those three cuts that you guys are guiding to?

Yeah, Russell on that front, looking at the three cuts, we're looking at it by year end with these cuts come in about a 20% beta on the downside for this year, because that would continue into the next year assuming rates continue to go down. But that's our working assumption right now, 20%.

Okay. That's great. And then the range of 330 to 340. Could you just talk through what would get you towards the high end?

Yeah, from that, to answer that question is basically going to be how quickly can we bring down deposit rates. We think there will be -- the Fed will cut, it will be a bit of a lag in terms of the ability to reduce deposit rates. So more of let's see the second cut and the third cut is primarily when we think we can really start reducing those towards the second half of the year, but it's all going to be dependent on the competition for deposits and client response, if you will. And we'll ratchet -- we'll ratchet them down, we won't go from here to the endpoint very quickly. So that's probably the biggest driver there.

Okay. Yeah, it makes sense. And then just switching gears for a second. On the expense side of things, so, appreciate the full year core guide, how does the fourth quarter shape up from a run rate perspective, is there anything in there, plus or minus that stands out that normalizes or is this a decent run rate to think about?

Are you talking about this, the current, fourth quarter '23.

Yeah, there were a couple of items, but I probably would -- probably say it might be in, call it the $1 million range in the fourth quarter that we kind of let's say unlikely to continue to recur. So that's what the number that I've been up to.

That's out of, Doug, you're referencing operating expenses.

Yeah. Yeah, operating. Yeah, you know, just taken out of these, I see in the other items.

There's kind of some things that came through. There's one that [indiscernible]. We also frankly had a bit of a sprint underway in the company as we get ready, we're working on integration clearly, as we approach conversion, there's only so much other things you can get done. So there's been a premium on getting other things done under the wire, if that makes sense.

Yeah, so I'd say it's -- a lot of that's in the strategic investments that we talked about from the professional fees line and some other things.

Okay. I appreciate it. Thank you, guys. And then, I guess with -- you guys still expecting deal close this quarter, any change to timing of the conversion or that should be on track, assuming deal stays on track.

We are on track for conversion based on what we know right now. And we are working through it every day.

Got it. Perfect. And then just one last one, John, for you, you mentioned in prepared remarks the willingness to take strategic actions to navigate the current environment, certainly took a number of them in 2023 as you think about this year ahead. Any big picture thoughts?

Well, I think, obviously we have to deliver the organic performance and potential of the franchise as always, I think the big thing is, obviously, ensuring that we have a successful integration of American National Bank. And that's kind of the big sort of overarching thing. So those are the -- those are the two big things that are on our mind, which doesn't mean we don't think three steps ahead, we in fact do, but we'll talk about that later. Three big priorities, organic performance of the bank, transformation activities and technology and then strategic initiatives, which by definition this year means American National Bank being successfully integrated, so we can reach its full potential.

Understood. Okay, great. Thank you guys for taking my questions.

Thanks, Russ.

Thank you very much.

And Victor, we have time for one last caller, please.

Thank you. One moment for our last question. And our last question comes from the line of David Bishop from Hovde Group. Your line is open.

Hi, David.

Hey, David.

Hey. Quick question for you. Rob, I don't know if you have this handy, but did you have the end-of-period average interest-bearing deposit costs versus the average for the period? Just curious if there's much difference there.

Yeah, the interest bearing deposits, if you look at the month of December, it was 2.97% versus the fourth quarter, average which was 2.92%. So as I said, we continue to see some uptick in deposit costs, driven by the items that we mentioned in the call, in the script.

Did you see much movement in market rate by competition intra-quarter. Just curious what you saw from some of your bigger peers out there within the market if there was much movement up or down.

Yeah, it really hasn't been a lot of movement. I'd say from mid-year to now, we are seeing a bit, you know, folks going more towards a shorter, when you look at CD specials more of a shorter duration, six to seven, we've got seven month. So there's been a reduction of kind of longer duration CDs and coming back with specials on the shorter end. We have seen a bit of movement in money market rates as well some of the larger players like Truist have increased, their promotional money markets a bit during the quarter. But not materially anything to really concern ourselves with in terms of having to match that although we keep a close eye on it.

Yeah, and the big guys are all making pretty clear commentary that as rates come down, they intend to bring down deposit rates.

Yeah.

So we'll see if that plays out.

Right.

Got it. Then one follow-up. I think, Rob, you mentioned or John some seasonality on the deposit side this quarter, anyway to ring-fence that from a dollar perspective? Thanks.

Yeah, I want to say, I would say, you know, call it $200 million to $300 million is probably when you look at point-to-point, especially if you look at it from an average point of view, the average probably a better --

It's actually a pretty good way to think about it, I would agree with that. And you typically see it in the second half of December. And it comes out of government contractors for example, professional practices, anyone on cash basis accounting, they tend to pay bonuses to get ahead of year end. It's a very predictable pattern. And then just like we saw last year you start to get a pretty quick reversal of that trend as you get into the New Year. That's what we're seeing right now.

Great. Appreciate all the color.

Thank you, David.

Thanks, David. And thanks everyone for your time today. We look forward to talking with you all in April. Have a good day.

Thank you for your participation in today's conference. That does conclude the program. You may now disconnect. Everyone, have a great day.