Good day and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2023 Earnings Call. [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, Investor Relations.

Thank you, Josh, 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 accompanying slide presentation that we are going through on this webcast are available to download on our Investor website at 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 third 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 and 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 statements. All comments made during today's call are subject to that safe harbor statement. And, at the end of the call 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. The third quarter operating results were strong for Atlantic Union. There was noise in the quarter due to three meaningful and proactive measures we have taken this year to address the demanding environment in which our industry operates. We believe these measures are the proof point of our willingness and ability to take action to better position the bank for success, both now and in the future while building long-term shareholder value. These actions were, first, in our Q1 '23 quarterly earnings comments, we announced our intent to undertake structural expense reductions when deposit costs rose faster than expected in order to maintain positive operating leverage. We did what we said we would do, and announced an expense reduction program in June that is expected to reduce the annual expense run rate by approximately $17 million and had all measures implemented by July. Second, concurrent with Q2 '23 earnings, we announced our entry into a merger agreement to acquire Danville Virginia-based American National Bankshares in an all-stock transaction. We believe this transaction will improve AUB's financial performance, further build out our franchise in a way that keeps us dense and compact, open contiguous expansion markets in North Carolina and further drive the scarcity value of our franchise. The initial feedback from the community and American National clients has been strongly positive, and we believe we are on track to close the transaction in the first quarter of 2024. We remain excited about what we'll do together with the American National team once the merger is completed. Third, we've now acted twice this year to reposition our balance sheet for a higher for longer interest rate environment. We undertook the second action in the third quarter by pairing…

Thank you, John, and good morning everyone. Thanks for joining us today. Please note that for the most part, my commentary will focus on Atlantic Union's third-quarter financial results on a non-GAAP adjusted operating basis, which excludes the pre-tax costs of $8.7 million recorded in the third quarter and $3.9 million recorded in the second quarter related to our strategic cost-saving initiatives announced in the second quarter, as well as the $2 million in pre-tax costs related to our proposed merger with American National, which was incurred in the third quarter. In addition, the third quarter financial results on a non-GAAP adjusted operating basis, exclude the pre-tax gain of $27.7 million related to the sale-leaseback transaction and the pre-tax net loss on the sales of securities of $27.6 million. Our previously disclosed sale-leaseback transaction of 27 owned properties, including 25 branches generated cash proceeds of approximately $46 million and resulted in a pre-tax gain of approximately $27.7 million in the third quarter, with $22 million after-tax, net of transaction-related costs. Aggregate first year - first full year of rent expense under the lease agreements will be approximately $3.7 million or $2.9 million after tax, which will be partially offset by the elimination of the annual pre-tax, depreciation expense on the properties of approximately $969,000 and the estimated increase in annual pre-tax interest income of approximately $2.2 million generated by the investment of the transactions net cash proceeds. Concurrent with the sale-leaseback transaction the Company restructured a portion of its investment portfolio by selling approximately $228 million in available-for-sale securities, yielding approximately 2.3%, resulting in a pre-tax net loss of approximately $27.7 million, almost wholly offsetting the net gain recognized from the sale-leaseback transaction. The net proceeds from the securities sales and the sale-leaseback transaction have been reinvested into the available-for-sale…

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

[Operator Instructions] Our first question comes from Casey Whitman with Piper Sandler. You may proceed.

Good morning, Casey.

Hi, good morning. So Rob, just because your NIM guide for the year is still sort of a broad range, do you think margin compression in the fourth quarter should be less than what we saw in the third quarter to help us the securities restructuring? And then my follow-on question is just, when do you think the margin sort of bottoms for AUB, I guess excluding the impact of American National?

Yes. So in terms of the fourth quarter, we do look for further compression in the margin. We're modeling between 5 basis points and 10 basis points, inclusive of the impact of the restructuring. In terms of where we think it's going to trough if you will, we think that's in the first quarter, in the 3.25% range give or take a few basis points. And then kind of stabilized from that point forward. Of course, this all depends on our assumption - if our working assumption of the Fed funds rate staying at 5.50% and market rates kind of being where they are, that's our current outlook based on that.

Okay. And that was standalone, right, the margin?

Yes, standalone, yes. If you bring in - if it's a little complex in terms of the impacts of the American National merger impacts which obviously will bring in a lot of accretion income. So, again, I think we said on the call related - when we announced the acquisition, we'd be in the 3.60% to 3.70% range with accretion on a combined basis.

And then can you talk about just sort of where new loan production is getting put on now, and then maybe sort of pair that against where the incremental cost of the new deposit is? Just sort of to get an idea of the spread coming on?

Yes. So, new production this quarter came on of around 7%. Combination of both variable rate loans coming on, production and fixed rate. I think the variable rate loans are probably about 50-50 in terms of rounded in terms of fixed versus variable. The variable was coming on closer to 8%. Fixed was coming on a little over 6%. So blended, we're talking about 7%. So that continues to churn as fixed rate loans - a portfolio of fixed rate loans reprice or we add new loans, that's going to help the loan yields continue to go up. But again, we expect deposit rates to continue to go up primarily from the continuing remix that we're seeing. We think that's slowing down, but will continue to impact the margin a bit more than loan yields. So little negative continuing there.

Okay, I'll just switch gears just to ask, obviously, there's more questions in the industry around shared national credit. So can you maybe walk us through the size of that book for you and any color around it you might want to add?

Yes, Casey, this is John. This is not a primary focus for us. We do have some shared national credits. Historically, what we've done, most of it would be Virginia-based corporations, where we know them. This is a single-digit percentage of the loan portfolio. It's more important to talk about what we do not do. We do not maintain what some banks will call a secure pay syndication platform, also known in the industry as a Buy Desk. We are not buying secondary issuances in the open market. What we would do would be to deal with companies that we know, where we have relationships with management that we physically call on, and anything we would take on would almost certainly be a primary syndication. You will see subsets of this, some of the larger government contractors, we have some of that asset-based lending, we have some of that, although as we've expanded asset-based lending and really built out our infrastructure. The primary focus there is more individual bank deals. This is not a big effort for us.

Okay, appreciate it. Thank you for taking my questions. I'll let someone else, and I'll step back.

Thanks, Casey. And Josh, we're ready for our next caller, please.

Thank you. One moment for our next question. Our next question comes from Catherine Mealor with KBW. You may proceed.

Hi, Catherine.

Thanks, good morning. Hey, good morning. Seeing that you really a nice quarter. You saw some nice growth in service charges and trust fees. Just kind of curious how you're thinking about fee growth into the next quarter and really how do you think you're going into '24?

Yes. So in terms of those categories, it really is being impacted by net client growth, the number of accounts. We see about 2% top 3% in new client growth. So we'd expect to be in the 2% to 3%, 2% to 4% growth rate as we go forward. Also included there is debit card interchange. So we continue to see more growth there as well, with the number of new accounts coming in as well. And then there's seasonal impacts in the fourth quarter. So you'd expect to see some of that Q3 to Q4 increase with the holiday season and more transactions coming through. But in the end, we're talking about 2% growth in those categories as we go forward on a standalone basis.

Thanks. Great. And then on loans. John, you made a comment that you're still in growth mode, going into the fourth quarter. How do you - how do you think about growth into next year and just where you're comfortable adding new loans where you are kind of pulling back and really what this kind of client appetite is today with higher rates?

Yes. I'm going to add, We have Doug Woolley, Chief Credit Officer; and David Ring, Head of Commercial Banking here, too. And since most of the production comes out of the commercial side, I'll ask Dave to comment. My few sense on this is that, the environment, it is opaque. I do think that, in general, our economy, as I indicated in my prepared comments is in good shape. We are in the budgeting process for next year. And at this point, what we are discussing would be something in the mid-single-digit loan growth range. I think we will continue to be able to grow at a medium pace. We'll see what happens. Dave, as you think about it, what is your take on this?

Yes, our pipeline going into the year would support that, John, in the mid-single-digit growth. It's probably going to come more from the C&I and Equipment Finance and the regular businesses that operating businesses versus real estate. We just saw our production for this quarter be two-thirds C&I, and one-third real estate. So we're seeing that start to happen today, and we think it'll continue into the next quarter, into the next year.

I think that's a good assessment. It really points back to the merit of our 7-year-long effort to diversify the bank's capabilities. If we were just a commercial real estate lender, I would be giving you a different answer. But I think that diversification of the things that we do, the brand that we've built for small and mid-sized businesses, and the overall strength of our markets, all of this makes us bullish. The wild card will be American National Bank. I don't want to get too far into that right now, but as we said when we announced the merger, we bring a bigger balance sheet. We bring infrastructure and capabilities, particularly on the C&I side. You marry that with the great team that they have, the reputation that they have, the physical presence, the things we can do and kind of the industrial markets of the South Side of Virginia, or Southern Virginia, as I should call it, and then the entry into Piedmont Triad, all of these things give us confidence that we should be able to achieve, let's just call it mid-single-digit growth, and then we'll see what happens from there.

Great. Very helpful. Thank you.

Thanks, Catherine.

Thanks, Catherine.

Josh, we're ready for our next caller, please.

Thank you. One moment for our next question. Our next question comes from Russell Gunther with Stephens. You may proceed.

Hi, Russell.

Hey, good morning, guys. Hi John, good morning. I have Just a couple of follow-ups. So on the loan growth, discussion, I appreciate your thoughts there, how does the North Carolina market fold into there? What's the opportunity set, particularly as American National folds in?

What do you think Dave, now don't be too bullish here.

Well, we've been in North Carolina in real estate.

Yes, we're there now -

Quite a while for six or seven years, and we've been pretty successful there. What American National brings is really good commercial industrial bankers in markets like the Triad and the Triangle areas of North Carolina. So we think there's going to be an opportunity there. We don't know what it is completely yet, but we think it's going to be an opportunity for growth.

This could be an incremental growth opportunity. And they sit there - if you look at the map on the I-40 corridor, starting in Winston, Salem over to Greensboro, Burlington, they have a small Raleigh office. And those are good industrial markets. So I agree with Dave. On the real estate side, we mostly bring a bigger balance sheet. On the commercial and industrial side, we bring robust treasury management services, equipment, finance, asset-based lending, and just the infrastructure to be able to better go after, I would say, mid-sized companies. And then Southern Virginia, which used to be called the South Side, where their home turf is Danville, Martinsville over into South Boston. And by the way, we do double down in Roanoke. These are good commercial and industrial markets and we've not had a presence in Southern Virginia. We are in Roanoke, so, we're bullish. I don't want to sound too bullish. I'm just saying that these are things that will be incrementally beneficial to us. And if you look at the backgrounds of the American National people, they absolutely do have people with commercial and industrial backgrounds too, in addition to good traditional commercial real estate community banking backgrounds. All of this is beneficial. I think there's a lot we can do together.

- will come in overtime.

Yes, just be clear, over time. So we'll see where it goes from here. But I think this is really an expansion platform. We're going to be able to do more things in Southern Virginia, and we're going to be able to definitely build for a very long time as far as the eye can see along that I-40 corridor and North Carolina, using exactly the same strategy we have here in Virginia. We're built to be the challenger bank to the large institutions. We're the alternative to the large institutions. We can do what they do for small and mid-sized businesses. And we think, we do it more responsibly - responsively. And at the same time, we recognize we compete against the small banks all day, every day. So we're kind of covering both bases. That's the hallmark of Atlantic Union Bank, authentic human experience plus digitally forward technology, that is our strategy.

That's good color, guys. I appreciate it. Just switching gears with a follow-up on the margin. So a lot of good detail in terms of expectations. One that I wanted to focus on was the deposit remix. Comments made that, that's slowing, but certainly remain impactful to the NIM. So as you think about where non-interest bearing ultimately shakes out as a percentage of total deposits, just give us some updated thoughts on that front. And is that a function of outflow? Is that a function of remix out of non-IB from current customers into higher-yielding products? Just some additional color would be helpful..

Yes, so Russell, we're projecting that we'll be in the 23% to 25% range, kind of where we were pre-pandemic close 22% to 25%. We've been holding fairly steady. We saw a big decline from the fourth quarter through the first two quarters and it's kind of slowed down. Most of that is not really outflow going out of the bank. It's really getting remixed into interest checking and some of our other higher-cost, higher-yielding rates categories. So we do expect to kind of stabilize around where we are. May drop a bit, but we'll have to see how that plays out. But really not much shift going on here. In the end, there's a stabilized level where people are using demand deposits for operating accounts and there's a certain level it's going to stabilize and that's where we think it will be.

Yes, Rob is right about that. And as we've really grown the commercial business base of clients, to small and mid-sized businesses, you pick up more operating accounts, they're using Treasury Management services. And I think if you look at our average balances, the average consumer balance this quarter was $19,000 going from memory. The average business client has about $100,000 in their account. This suggested me that many of them are probably at a kind of core operating level and non-interest bearing, we think. It's hard to say to - we can't predict with any precision where it's going to be. But I agree with Rob, I think we're sort of approaching the bottom. We'll see exactly where...

Yes, I think, Russell, on the remix, a lot of that is kind of remixing from what I would call deposits and standard rates kind of moving to these higher levels from an interest checking or money market account to a higher yielding CD is kind of really what we're talking about from remix and expect that will continue. But certainly will slow down from what it was in the first couple of quarters.

Okay, great. Thank you both. Just a clarification on the fee outlook. So I think I only half caught this. There was a certain merchant servicer signing bonus that was this quarter and about $1 million, and then just kind of where in the P&L that fell line item-wise?

Yes, that's in other fees, Russell. Service charges and other fees and service charges.

Okay. That's helpful. Thank you. And then just last...

Yes, other service charges, commissions, and fees.

Thank you. And then last one for me. Credit has been really strong for you guys. I hear the commentary about normalization. Understood. What does normalization look like for Atlantic Union, as you think out to '24? And what would the drivers of that normalization be?

Yes, so we would project that 15 basis points to 20 basis points of annualized charge-offs is probably a normal level for us. Of course, we haven't come near that to date in this period, but that's kind of what we're looking for. Things like higher interest rates and other recessionary factors could play into that. We're not projecting that at this point, although our allowance for credit losses does skew towards a more recessionary environment. But that's about what we think. And Doug, I don't know if you have anything to add from the Chief Credit Officer's perspective, but that's the view we have as a company.

Yes, the weakening, if it comes, will be in smaller credits. We don't see anything. We've done a recent resizing of maturing commercial real estate loans and construction loans converting to their mini-perm, they're resizing on that and all of that looks perfectly fine to them. If something happens, it'll be in the smaller commercial credit base and as is always the case, the consumer portfolio.

And if you think about the drivers of the CECL modeling, what drives it underpinning it, the unemployment rate, what's happening with the gross domestic product, and it's just hard to see the economy falling off a cliff anytime soon, at least in the markets in which we operate. Having said that, I would caution, there's always the infamous one-off. Now, you can't have a four-off and a five-off, and a 10-off, but things do happen from time to time that could be idiosyncratic. We're always subjected to that. We saw one of those this year. But overall, Russell, we still feel pretty good. But I acknowledge Black Swan events happen all the time, but we feel pretty good about where we are right now.

Understood. Okay guys. Thank you very much for taking my question.

Thanks, Russel.

Thanks, Russel.

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

Thank you. One moment for our next question our next question. Our next question comes from Steve Moss, Raymond James. You may proceed.

Hi, Steve.

Good morning, guys.

Good morning.

Good morning, John. Based on - going back to loan pricing here, Rob mentioned loans coming in at 7% for the quarter. Just curious, should we expect a step up in loans being added - in loan rates for loans being added this quarter?

Sorry, do you mean production, Steve? Is your question, what is - what do we expect for production in Q4, or do you expect the rate?

The new expected rate. So what do you expect for the rate in the quarter?

Yes, I think you'll see probably kind of staying where we saw in the third quarter, averaging about 7%, maybe a little over 7%. I think with term rates being up, you might see the fixed-rate loans get priced a bit higher on the production. But I think if the Fed does stay steady, I don't think we'll see much movement in the - in the short-term rates. So variable new loans coming out will probably be in closer to 8%, which was what we saw in the third quarter. So not looking for a lot of shift there, but if it's going to happen, it's going to be in the fixed rate term loans, just because term rates have gone up since the end of the quarter.

Okay. And then on the deposit front curious with your margin guide here of - to the 3.25% range? What you guys are thinking for - what that implies for deposit beta? And just - maybe just a little talk around the competition for deposits your understanding on your markets?

Yes, so in terms of the deposit betas, we're now saying that total deposit beta through the cycle is going to be around the mid-40s. That's up from, I think, last quarter we were guiding to about 40%. Interest-bearing deposits guide now is 55% betas through the cycle offsetting. That would be our loan yield beta, which is about 50% through the cycle. So we will continue to project that unless there's movement in the short-term rates from the Fed's perspective. But in terms of the total deposit rates, if you look at it, on average this quarter, we were at 1.97% cost of deposits. If you look at it from September levels, just the month of September, it's at 2.07%. So we're seeing that continue to move up. Now the [indiscernible] has also moved up, but we'll continue to see that through the first quarter, maybe into the second quarter, that we'll continue to see deposit rates ratchet up somewhat offset by loan yields ratcheting up, but we'll see how it plays out. In terms of market rates or competitive rates, we haven't really seen much movement at all in the last two quarters, maybe since, I guess, maybe, late April-May, it's been pretty steady. We haven't really raised our rates at all in terms of our published deposit rates or specials, CD specials or money market promos. So we're not looking that, to see a lot more market rates unless we see or deposit rates increase from the Fed point of view, unless we see market rates rise, which we're not projecting at the moment.

Okay, that's helpful. And then, John, I apologize, I dialed in at the end of your credit comments here, but just - on the 30 to 89-day past due bucket picking up here, it was crossed, owner occupied, non-owner occupied, and C&I. Kind of curious, any color or maybe any underlying trends there?

Yes, that was largely driven by a couple of administrative past dues. We literally had one credit that was a third of that increase and for various reasons, it was not renewed on time. It's subsequently been renewed. We are not concerned about that. We've seen no material change in past dues from our perspective. Doug, do you have anything to add to that?

John, well said, a few smaller - few smaller loans, but administrative past dues drove that.

Yes, which are cleared.

Okay, great. No, I appreciate all the color there. Thank you very much, guys.

Thank you.

Thanks, Steve.

Thanks, Steve. And thanks everyone for joining us today. We look forward to talking with you in three months' time. Everybody have a good fourth quarter.

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