Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares First Quarter 2022 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. Please be advised that today's conference is being recorded. To ask a question during the session, . If you require any further assistance, . I would now like to hand the conference over to the speaker of today's call, Mr. Bill Cimino, Senior VP of Investor Relations. You may begin.

Thank you, Natalia. And good morning, everyone. Atlantic 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 remotely, and in-person for the question-and-answer period. Please note that today's earnings release and 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'll 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 our earnings release for the first quarter of 2022. I'd like to remind everyone that on today's call, we will make forward-looking statements which are not statements of historical facts 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 first 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 statements. All comments made today on 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. Finally, before we begin I would like to remind everyone of our upcoming Investor Day on May 9th, where you'll hear members of our management team go into greater detail on what we've accomplished and what we -- what the next three years should look like for Atlantic Union Bankshares. Registration and further details can be found on the advisory posted this past Monday on our investor website. I'll now turn the call over to John Asbury.

Thank you, Bill. And thanks to all for joining us today. Atlantic Union Bankshares is off to a strong start in 2022. On the last quarterly earnings call, I noted that we were set up to start the year better than at any point in my 5-plus years at the company and that we did, tipping into low double-digit annualized loan growth, excluding PPP and what has traditionally been a slow growth quarter for us. This point shows we have momentum and points for the organic growth potential of our franchise. As I've consistently stated, our operating philosophy of soundness, profitability, and growth in that order of priority serves us well as we navigate the challenges of operating not just through a pandemic, but now through generationally high inflation, rising interest rates, and geopolitical uncertainty. While we recognize the pandemic is not yet over, restrictions at our markets have eased and we're all becoming accustomed to the new normal of living with COVID-19. Our corporate office face teams have returned to our buildings, and while some roles are now completely virtual, most work at a hybrid arrangement. Our team succeeded and arguably excelled over the course of this disruption, we're even better when we're physically together, what we do and how we do it is really all about our culture and our people, and we're committed to workplace flexibility as an opportunity to attract and retain talent. We'll continue to take a progressive view toward the changing nature of workplace expectations, and we'll adjust based on our actual experiences. In scanning the horizon, we're incrementally more cautious about the implications of surprisingly high inflation, rapidly rising interest rates, and geopolitical uncertainties such as the tragedy in Ukraine. While this will likely mute economic growth to some extent, as seen in…

Thanks, John. And good morning, everyone. Thank you all 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 will focus on Atlantic Union's first-quarter results on a non-GAAP adjusted operating basis, which excludes pre -tax restructuring costs of $5.5 million or $4.4 million after-tax expenses in the first quarter. In the prior quarter's pre -tax restructuring cost of $16.5 million or $13.1 million in after-tax expenses, which was related to the closure of 16 branches and the company's operations center during March of this year. As a reminder, the company expects to lower its annual expense run rate by $8 million or $2 million on a quarterly basis beginning in the second quarter as a result of these strategic actions. In addition, fourth quarter non-GAAP adjusted operating earnings excludes the pre -tax gain of $5.1 million or $4.1 million on an after-tax basis related to the sale of Visa Inc. class b common stock in December 2021. In the first quarter, reported net income available to common shareholders was $40.7 million, and earnings per common share were $0.54, which was down approximately $4.1 million or $0.05 per common share from the fourth-quarter. Non-GAAP adjusted operating earnings available to common shareholders in the first quarter were $45.1 million and adjusted operating earnings per common share were $0.60, which is down approximately $8.7 million or $0.11 per common share from the prior quarter. Non-GAAP adjusted operating return on tangible common equity was 12.69% in the first quarter. The non-GAAP adjusted operating return on assets was 0.98% and the non-GAAP adjusted operating efficiency ratio reported in the first quarter is 58.86%. Turning to credit loss reserves as of the end of the first quarter, the total allowance…

Thanks Bob and with that we're ready for our first caller please

As a reminder to ask a question, please press star one on your telephone and to withdraw your question, please press the pound key. Please stand by. Our first question comes from Casey Whitman of Piper Sandler. Your line is open.

Good morning, Casey.

Good morning, how are you? Maybe I'll start with capital. Just with the TC ratio down to around 7%, can you continue to be as aggressive with buybacks here or is there a level that you're comfortable running that ad or can you go lower, just give us a sense for how you're thinking about capital here with AOCI Investor this quarter.

Casey, this is Rob, I'll handle that question. As you do recall, as we've noted here that the AOCI impact didn't fairly materially impact on our tangible common equity ratio. Obviously that does not affect any of our regulatory capital ratios. So we are evaluating our capital management actions beyond ensuring that we have capital for loan growth in a sustainable dividend going forward. We are evaluating that. We do expect that the negative impact will earn that back over the next several quarters. Obviously, we're very asset sensitive, as noted. We don't view that as any economic issue for us, it's more of an accounting entry in terms of the fair market value, we have no intention of liquidating our available-for-sale portfolio. So with that, we do expect to start earning that back, but we will be evaluating primarily the level of share buybacks going forward. Not necessarily taking in share buybacks off the table at this point, but we'll evaluate that as we go forward here.

And Rob maybe sticking with you, can you just walk us through what each rate hike does to your margin and then what kind of deposit betas you're assuming in that analysis and how quickly you need to move deposit rates assuming you haven't had to move them yet?

Yes. Casey, as I mentioned, remodeling that the Fed funds rate will be increased throughout the year, and at the end of the year we're modeling that it will be at above a 250 level from the current 50. So several hikes. Those hikes will become faster, as I mentioned, we expect May and June to see 50 basis point hikes followed by the remainder of the meetings at 25 basis points. Just to give you an estimate of what that means to us. So for every 25 basis points, the Fed fund moves and LIBOR follows, Sulfa follows and Prime follows. That's about five basis points on our core margin, approximately about $8 million and net interest income. So we're projecting that the core net interest margin, which if you do the calculation for the first quarter taking PPP and purchase accounting out of the equation, we came in at 295, which was up 15 basis points from the prior quarter due to redeploying that excess liquidity I mentioned. But we have a fairly significant increase in the margin, we're projecting that 295 will end up, if the Fed moves the way, we're suggesting or we're thinking that we could be in the 345 to 350 by the end of the year. So fairly material. In terms of the deposit betas implied in that, we do expect that deposit betas will move really probably after the May 50 basis points we've been thinking that we'd have to see the Fed funds rate move to about 100 basis points, and then you start to see deposit rates, maybe the competition moving on deposit rates. So we're projecting that that will start in May, June. Overall, through the cycle, we're suggesting in modeling that we'll have like a 25% deposit beta on total deposits that'll be more in the 30 -- over 30% on interest-bearing deposits as we go through the cycle to ramp up throughout the year. That's the way we think about it.

Okay. . Thanks.

Thanks, Casey. We're ready for our next caller, please.

Your next question comes from Catherine Mealor of KBW. Your line is open.

Hi, Catherine.

Hi. Good morning. Maybe just one follow-up on the NIM guidance. How should we think about size of the balance sheet is your margin expand those significantly in a lot of that excess cash was deployed this quarter. Is there anything it feel like that's as much of a lever, but just help us think through maybe how much you're expecting to grow the securities book throughout the next year. Thanks.

Catherine, in terms of securities, we will most likely not be adding to the book. We've increased it over the -- during the pandemic with the excess liquidity we had throughout the pandemic. We've been investing, putting that cash to work throughout the -- since the third quarter 2020. Typically, we've run about 50% of total assets in the securities book pre -pandemic, we're now about 20% to 21%. So we are expecting that we won't be adding to that, the securities book we ought to be using, the cash flows that come off of that kind of bring it down over a period of time more to the 15 -- back to the 15%, that will take a bit of time, but using the cash flows that are coming off the portfolio to fund loan growth going forward. So that will be a liquidity source for us as we expect, as John mentioned, high single-digit loan growth going forward.

Great. That helps. And then on the expenses, I remember last quarter, you gave a range of $385 million to $390 million, and this quarter's expenses is a little bit higher than that kind of run rate. So is that $385 million to $390 million expense range for the full year still a target or are we a little bit above that now?

Yes. We're going to confirm that guidance 385 -- the initial guidance we had 385 to 390. You have to remember in the first quarter, you really can't pick them, take that and extrapolate that run rate throughout the year. There are seasonal increases there related to payroll taxes 401(k) contributions that related to we pay incentives during the quarter. So they get ratcheted it up and then versus a reset of payroll taxes for higher salary teammates. So if you look at the numbers, so just give you thought calculation that we're looking at, normally the after you take out the one-times this quarter, we had about $99.8 million expense space. To that you've got a backout this seasonal payroll tax in foreign that's about $3 million or so. Offsetting that is we do increase merits in March, so we have one month of 4% merit increase for teammates. So you that a million to offset that. And then don't forget $2 million is coming out starting really April 1st on a quarterly basis due to the branch closures in the op center. So again, if you look forward, we're probably looking at $96, $97 million in the out-quarters, combined that with the first quarter we're still at $385 to $390 on a full-year basis. So that number is going to come down quite a bit, Catherine, in the second quarter.

Got it. That make a lot of sense. Great. Thanks. I'll pop out.

Thanks, Catherine and Latania, we're ready for our next caller, please.

And our next question comes from William Wallace of Raymond James, William your line is open.

Good morning. Let's go back to NIM. First, I believe in the text of the release, you said that the purchase accounting accretion was down due to lower prepayments. With rates rising, is it safe to assume that your prepayments will remain low and therefore, this kind of -- this amount that you guide in the second quarter is kind of a more likely run rate type level? Usually we take your table and add a little bit for account accelerated purchase accounting accretion.

Yeah, the purchase account accretion is going to be down this year, call it four or five basis points for the full year compared to higher levels we had last year, that's right. So in the quarter, Wally, I think purchase was about four basis points on the reported margin, PPP was about five basis points. Purchase accounting should remain in that range, three to four basis points going forward, PPP will basically go away pretty much this quarter or second quarter. And then, again as I mentioned, the core margin was 295 at PPP, that's 3% and then four basis points for purchase accounting. The way we're looking at it is if you look at the core margin, that was up 15 basis points due to the excess liquidity and growth in the portfolio, loan portfolio, and that's where you'll see some significant improvement or experience in the margin as the Fed moves going forward here based on our assumptions.

Okay. And from last quarter I wrote down that you said that you anticipated eight to nine basis points for every 25 basis point hike. I'm curious what you changed in the modeling. Did you get more aggressive with deposit betas or--?

Yes. Typically -- I guess a couple of things there, Wally. One is that we only get three rate hikes during the year. So basically we thought we wouldn't see any deposit moves for the balance here. So that was part of it. Now with the aggressive rate hikes we're seeing, we have ratcheted that up a bit and moved it earlier in the year. So two prone there.

Do you anticipate, and I know this is guess work to a degree, but do you anticipate that it will be kind of a linear move or do you think that you'd get a little bit more benefit upfront, and then, you'll start to see more noise from your deposit customers, asking for cost as the Fed continues to hike, and you'll start to see a little bit less of that expansion as we get further along with Fed tightening?

That's exactly how we're modeling it. So very limited moves, but moves nonetheless. Over the next 100 basis point move if you go through May, June, you'll start to see that ratchet up in terms of the betas implications as you get out in probably the second half late in the year. Coming out to that by that 25 basis -- 25% betas I mentioned for total deposits, but it would definitely move slowly to that level.

Okay.

But we'll see, competition is going to have something to say about it, right?

Yeah.

So we'll work through .

I would imagine on the loan pricing side as well?

Yes, that should.

Circling back to the question about the AOCI, it sounds like you said you thought you'd get it back in the next three or four quarters. I thought that your securities portfolio was maybe kind of a little bit longer, dated two to three years. Were you saying that you anticipate getting that capital back because you'll be earning it back, or are you saying you anticipate recovering the a $100 or so million dollar AOCI hit as securities mature over the next three or four quarters?

Yeah. What I meant to say there, Wally, was that we'll ratchet that up over the next several quarters to get closer to 775, closer to eight, but we will recapture that and in the next three or four quarters, but it will take some time now. We'll see where rates go from here, but that's our working assumption at this point. I think they will take 2 point to get back to the 820 will take a little longer than that.

Okay. Thanks. And then John, just last question on your prepared remarks. I'm not sure if I heard you correctly. Did you say a $4.5 to $6.5 million fee reduction due to the policy changes around overdraft in NSF or was it $4.5 to $5.5 million? And can you tell us when you anticipate we will start to see those and can you give us an update on any communications you've had with the CFPB?

I don't have anything to add on in terms of any regulatory communications related to overdraft practices. To answer your question, yes, $4.5 to $6.5 is the band. This is an estimate in terms of the income loss from these customer-friendly changes. We expect them to begin in Q3 of this year, of course. It doesn't mean we're not sure where we'll be within the span because it's such a variable. It depends upon what's going on with balances and customer behaviors. But I think that's a good conservative band in terms where we're going to be. From our standpoint while it seems clear to us where the pack is headed. And we don't want to wait and we don't want to be a late adopter. We've been -- the hallmark of this company is the client experience, and we have been making consumer-friendly changes. We would rather go ahead and be among the leading pack. We've never been a big overdrafts shop. Not that reliant on it. And we feel like from a value proposition offering, this is a good thing to do. So it's actually I think will be a good message and well received by the customer base. I think what's implied is that someone compelled us to do this. We heard the first question about it. This is our choosing and we've recognized that we're in the earlier pack, at least among the mid-sized banks. But mark my words, this is where it's going. So let's just deal with it now.

John, I thought you disclosed in your K that you received a notice from the CFPB around a potential lawsuit regarding your --

No.

Am I my totally mistaken?

Your referencing what's called NORA, which is a Notice and Opportunity to Respond and Advise, which is a mechanism the CFPB uses to make inquiries of banks. The CFPB is broadly making inquiries across the industry around overdraft practices. And I'm not -- obviously we -- there's really -- that's basically a set of questions and issues that they outlined. We then respond to them in writing. We choose -- we chose to disclose that because we are transparent, and we thought it was the right thing to do. That had nothing to do with pricing issues, and I'll just leave it at that. And this overdraft related and the timing of that was also after the first quarter call -- the last quarter call as well when we received that NORA.

Right. So you're saying that the changes and policies that you are implementing around NSF and overdraft were underway because you did mention it during the fourth quarter call in January before you got this notification and the notification doesn't have anything to do with whatever policies that you're -- and changes that you're making. It's something else.

I would say this is simply an acceleration of a series of consumer friendly moves that we've been making for quite a while. We did not want to jump the gun. We've been interested to watch what's happening. You can look up on the stream of us and see changes that are happening. And you can see some of the mid-sized banks having made changes as well. But from our standpoint, we think about this as really part of the value proposition of the bank. We think this is where it's going and this is not any new idea.

I agree. Okay, thank you for that clarification. I appreciate it.

Sure. Thanks, Wally. And Latania, we're ready for our next caller, please.

our next question comes from Laurie Hunsicker of Conference. Point. Your line is open, Laurie.

Thanks. Good morning. Just to stay with where Wally was on the on the NSF and I just want to sort of further dive down. So, I think that was running at about 17 million or so a year, how much was in this quarter?

Now, let's be clear what we're talking about. You're looking at the sum total of NSF and overdraft charges in Africa. Yeah and so we're talking about the elimination of non-sufficient funds, which is when we returned an item without paying it. That's what's being eliminated. We're not eliminating overdraft fees when we actually create an overdraft for a customer.

I'm sorry, I thought I heard you say in your remarks, free overdrafts with, what did I miss there?

What you missed is I said free. I said no charges for non-sufficient funds. That's the proverbial bounced check. So if we returned an item without sufficient funds, we will not charge for that item. That is different from paying an item, which creates an overdraft.

But you had made comments around overdraft. What were those? Just for ?

We have a series of changes that we're making across all of these categories, Laurie. So examples of things that we're doing on overdrafts would be reducing the caps, not charging fees whenever drafts are covered by transfers, either from overdraft lines of credit or accounts which are linked, such as a savings account, which is drawn on to cover an overdraft. And we have some other things going on as well. The two-day advance credit for an ACH payroll deposit has nothing to do with overdraft per se, but that's simply an additional service that we have and the technology is there. We have the capability to give people two-day early access to their direct deposit of payroll, so we decided to do that because we can, and we think that's part of our customer-friendly value proposition. So the 4.5 million to 6.5 million estimate speaks to a basket of various changes, most of which are related to either the NSF fee waiver or other overdraft-related practices.

Got it. And then Rob, maybe you can just help put this together. So as we look in the back half of 2022, we look obviously to a drop in NSF, a drop in mortgage banking, how should we be thinking about that quarterly run rate on net interest income, obviously you've got some other lines there that are moving higher. How should we be thinking about that?

Laurie, the way we're looking at it is when we came into the year, of course, not knowing rates would spike as much and impact the mortgage business as much as it is, or will be as we go forward here, we had said we'd be growing non-interest income of about 8% or 9%, we're backing off on that, obviously, we didn't necessarily project the overdraft issue as well. So we're really looking at about a 2% to 3% growth rate over 2021 full year. Last year was about a $120 million and we're looking at maybe a couple of million more than that this year, give or take. So flattish. So we're dialing that back to the mortgage pullback, which we had said would pull back probably about 40% and that would pick up maybe more in the 50 -- 60% range. So that's down back from last year. Overdrafts has come down a bit. We are looking at additional resources or sources of income, some of which as you saw in the first quarter, loan swap fees were up materially on a quarterly basis versus last year's quarter run rate. So we expect that some of that will continue, and we've also got new sources of revenue that could make up for some of the other reductions I'm talking about here, FX, foreign exchange, for example, SBA 7a gains, those sorts of things. So we're sticking with that at this point.

Great. That's helpful. And then just wanted to clarify the PPP forgiveness income, I backed into this number, just wanted an actual -- backed into it at $2.8 million, is that a right number for the quarter?

Say that again, PPP.

The PPP income.

Yeah. The absolute income, yeah, it's about $3 million. That's right.

That leaves you with round numbers about a million and a half or do you have a better number?

There's only $1.6 million left there to come into the income stream. So we expect the second quarter that that should be done by the end of the second quarter.

Great. Thanks. I'll leave it there.

Thanks, Laurie. And Latania, we're ready for our last caller, please.

Certainly and our last question comes from Brody Preston of Stephens Incorporated. Your line is open, Brody.

Hi, Brody.

Hey. Good morning, everyone. How are you?

Good. Thank you.

Rob, so I wanted to circle back to some of the margin comment you made real quick. I think you said 345 to 350 by the back end of the year with the updated rate hikes and data assumptions. I just wanted to ask, was that core or was that headline?

That was core, Brody. So added another three to four basis points with the purchase accounting in their PPP, as you know, goes away by then.

Because I was maybe on that headline there just what I had treat models today so I was wondering what the other leverage points where to get. You said you expect to be for the full year at the high end of those ranges and so I just wanted to make sure I was sticking with that margin correctly. And then I did want to ask just on the loan portfolio pricing, I think it's 4%. You said our app therefore is 12% of the 16 or above floor so that 12% should reprice if we get this May hike and the 4%. How many rate hikes do we need to get those off the floors?

The next 50 basis points which you presumably see in May will bring at about 75% of that. So we'd be down to 1% would still be at floor and another 25 basis points or so would bring it all into the variable rate bucket.

And within your modeling of NI and I know this is fluid, but are you assuming you get the full re-pricing benefit from the floating rate loans going forward on a static basis or is there any assumption of floating rate becoming fixed rate over time or just any degradation in that floating rate and mix?

We don't have any degradation going back on the four levels. These rates rise will be fall in money, if you will. If you go out further into '24, we do think rates -- you may see those rates coming down and that could impact the out years there. But at this point in time, we're thinking it's a hike all the way through '23 and then you might see some pull back from the Fed.

Got it. And what new origination yields coming on currently?

I think it's, on a blended basis, about 320 or so I think. On the commercial side, that includes floating and fixed rate weighted.

Got it. And then my last one would just be, I thought the mortgage banking, although it was down, would held up a bit better than I expected, so could you just remind us what the portion or like the purchase versus refi mixes within that portfolio this quarter -- what it was this quarter, and what it typically is?

Yeah, so this quarter actually, it held up in the 35% to 36% range. That was down a bit from fourth-quarter, which is I think around 40%. We do think that that's going to come back down because late in the quarter we saw mortgage rate spike 5% -- up to 5% or a little higher so that's expected to come down, we think on a normal basis you see 20% to 25% of the origination book, regardless of the rates, we have a 75% purchase and a 25% -- 20% to 25% refi. So we think that's going to be coming down to that -- those lower levels.

And Brody as you know, this is really deal of access National Bank mortgage shop under the leadership -- the leadership at Dean hacker merger, it's never been a big refi shop. It also doesn't really do the accordion that you saw often see. Dean would tell you that we don't add a lot of people to mortgage when times are good, only to turn around and eliminate them when times are not so good. What that means is it somewhat limits the capacity during boom times, but at the same time, doesn't fall as much. So they do a really good job of managing that business for profitability, regardless of the environment which is a bit uncommon.

Got it. Thank you very much for taking my questions. I appreciate it.

Thank you.

Thanks, Brody.

Thanks, Brody. And thanks everyone for joining us today. We look forward to speaking with you in a few weeks up at NASDAQ. Have a good day.

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