Atlantic Union Bankshares Corporation (AUB) Earnings Call Transcript & Summary

Welcome, and good morning, everyone, to the annual meeting of shareholders of Atlantic Union Bankshares Corporation. Please note that today's meeting is being recorded. I'm Bill Cimino, Director of Investor Relations for Atlantic Union Bankshares. It's my pleasure today to turn the meeting over to Ron Tillett, Chairman of the Board of Atlantic Union Bankshares Corporation. Chairman Tillett, the floor is yours.

Well, thank you, Bill, and good morning, ladies and gentlemen. I'm Ron Tillett, as Bill just indicated, and I'm Chairman of the Board of Directors of Atlantic Union Bankshares Corporation. I would like to call to order and welcome each of you to the company's annual meeting of shareholders. As you know, today, we are holding this virtual meeting online due to the public health concerns regarding the coronavirus pandemic. We hope that you and your families are well and staying safe during this challenging time. Thank you very much to those who are participating in our virtual meeting online today. I hope that you will find this to be an informative meeting. In accordance with the company's bylaws, as Chairman of the Board, I will act as Chairman of the meeting. The General Counsel and Corporate Secretary, Rachael Lape, will act as Secretary of the meeting. First, we have a few housekeeping matters. Each of you should have access to the meeting agenda, which is located on the left side of the meeting center screen. In order to efficiently move through today's program, we will move from item to item without introduction. We will conduct the formal business of the meeting and announce voting results first. Then we will hear a report from management on operating results. As a shareholder, if you entered your control number when you log into the meeting, you may submit questions online by clicking on the dialogue icon in the upper right corner of the meeting center screen. We will answer appropriate questions on the formal items of business in a few minutes before voting is closed. Following management's report, management will address appropriate questions from shareholders regarding the company. I call your attention to the rules of conduct for this meeting, which are available on the left side of the meeting center screen. Thank you for your cooperation. The Board of Directors fixed March 11, 2020, as the record date for determining shareholders entitled to vote at this meeting. The notice of annual meeting, proxy statement and the company's 2019 annual report were furnished electronically with the mailing of the notice of Internet availability, which was mailed on March 20, 2020, to all shareholders of record as of the record date. Copies of these documents will be filed with the minutes of this meeting, together with a certificate of the Corporate Secretary regarding this distribution. If you need a copy of the proxy statement or annual report, a link is provided under Meeting Materials on the left side of the meeting center screen. In accordance with Virginia law, a list of shareholders of record as of the record date is available on the meeting center under Shareholder List and may be inspected during the meeting by any shareholder. The minutes of the May 2, 2019, annual meeting are available on the meeting center for inspection by any shareholder who would like to see them. I will dispense with the reading of the minutes of the 2019 Annual Meeting. The Corporate Secretary will file the minutes of the 2019 Annual Meeting as presented. Alisa Zagare has been appointed inspector of election for this meeting and any adjournment of this meeting. She is assisted by Kevin Laurita. Ms. Zagare is a representative of the transfer agent, Computershare, Inc. Ms. Zagare has signed an oath of office that will be filed with the minutes of the meeting. The inspector is here to determine whether a quorum is present, to ascertain the validity of proxies, to tabulate the votes and to certify the count of all proxies. The inspector of elections has advised me that in excess of 88.7% of our shares are present in person, in other words attending this meeting online or by proxy, accordingly. And as such, I declare that a quorum is present, and we may proceed with the meeting. Online voting is currently open. If you have not voted or wish to change your vote, you may do so now by clicking on the link provided online. Any shareholder who has already voted and does not want to change their vote need not take any further action. Online voting will remain open while I introduce the company's Directors and outside auditors. It will remain open while I describe the formal list of items on the business area of the agenda. Then after I finished describing the formal items of business on the agenda, online voting will close. I would like to now introduce the company's Directors. I've already introduced myself. All of the company's other Directors are in attendance online today as well. Our other Directors include John Asbury, the company's CEO; Mike Clarke; Pat Corbin; Beverley Dalton; Frank Ellett; Greg Fisher; Dan Hansen; Jan Hoover; Pat McCann, our Vice Chairman of the Board; Tayloe Murphy; Alan Myers; Tom Rohman; Linda Schreiner; Tom Snead; Keith Wampler; and Blair Wimbush. You may now all sit. Thank you. I would like to thank these Directors for their dedication and service to the company. Representatives from Ernst & Young, the company's registered public accounting firm for 2019 are also in attendance online today. They are Matthew Streadbeck, Jeffrey Edwards (sic) [ Jeff Edwards ] and Mike Williams. Thank you for attending our annual meeting today, gentlemen. There are 5 formal items of business to come before the shareholders today. The first item is the election of 5 Class III Directors, each Director to serve as stated in the proxy statement. The nominees for these positions are: Frank Russell Ellett; Gregory L. Fisher; Patrick J. McCann, Alan W. Myers; and Linda V. Schreiner. The second item is to approve an amendment to the company's articles of incorporation to eliminate the classified structure of the Board of Directors and provide for the annual election of Directors. The third item is to approve an amendment to the company's articles of incorporation to update provisions regarding indemnification of Directors and Officers of the company. The fourth item is to ratify the appointment of Ernst & Young as the company's independent registered public accounting firm for 2020, as described in the proxy statement. The fifth item is to hold an advisory nonbinding vote on executive compensation. This proposal asks that the shareholders approve the following resolution: resolved, that the shareholders of Atlantic Union Bankshares Corporation approved on an advisory basis the compensation of the company's named executive officers as disclosed in the compensation discussion and analysis, the tabular disclosure regarding named executive officer compensation and the accompanying narrative disclosure in the proxy statement. As there have been no nominations or proposals made by shareholders pursuant to our bylaws, I hereby declare the nominations closed. If you have a question on any of the proposals before the shareholders today, you may now submit your question online at this time by clicking on the dialogue icon in the upper right corner of the meeting center screen. We'll pause for just a moment to be sure that we've captured any. At this time, having received none, I would like to ask Bill Cimino, the company's Director of Investor Relations, who is serving as moderator for this meeting, to present any shareholder questions regarding the formal items of business.

Thank you, Mr. Chairman. As requested, I have scanned, and we have received no questions.

Thank you, Bill. Again, if you have not voted or you wish to change your vote, you may do so now by clicking on the link provided online. [Voting]

There being no further business to come before the meeting, the online voting is now closed. The inspector of elections will now finish tabulating votes and provide me with the vote tabulation when it is ready. At this time, I would like to say a few words about Brad Armstrong. Brad is retiring from service on the Board of Directors as of today, and he is online to this call as well. Brad, welcome. Brad joined our Board in November 2010, following the acquisition of First Market Bank earlier that year. The merger of Union Bankshares Corporation at the time, a $2.6 billion community bank with First Market, a $1.3 billion community bank with 39 branches located in Ukrop's grocery stores formed the largest Virginia based community banking organization, with 97 branch and $3.9 billion in assets. In addition to be affiliated with another great Virginia bank, we also had the advice of one of its founders, Jim Ukrop, who strongly suggested that the Board consider electing Brad Armstrong to the Board, as he had a strong marketing and corporate governance background that could serve us all well. Jim was right. Brad's service has far exceeded all expectations for the last 10 years. Brad has served on nearly every committee of the Board and has been and will, hopefully, in the future, continue to provide guidance on the future and direction of Atlantic Union. Brad has been a part of the substantial growth in the journey for our company to become the largest and best managed diversified bank holding corporation domiciled in Virginia. Brad, you will be greatly missed on our Board. Thank you for all you have done for this company, and we wish you the best in your future endeavors. I understand now that all votes have been counted. And based on the preliminary review of the votes cast, the inspector of elections has informed me that all nominees for Director of Class III have been elected. The amendment to the company's articles of incorporation to eliminate the classified structure of the Board of Directors and provide for annual election of Directors has also been approved. The amendment to the company's articles of incorporation to update the provisions regarding indemnification of Directors and officers of the company has been approved. The appointment of Ernst & Young as the independent auditor for 2020 has been ratified, and the resolution regarding executive compensation has been approved. The final tabulation report will be available online in the next few days. The final inspector's report will also be filed with the minutes of this meeting. On behalf of all of the company's Directors, I thank you, our shareholders, for your support and for the opportunity to serve in this capacity. We take very seriously our accountability to you. Ladies and gentlemen, that concludes our formal business. Now I invite John Asbury, Atlantic Union's CEO; and Rob Gorman, Atlantic Union's CFO, to provide their report on operating results. John, Rob?

Thank you, Mr. Chairman. This is John Asbury. Good morning, everyone. I do regret that we're unable to conduct our annual shareholders meeting, and quite a tradition for the company, in person this year and look forward to doing so next year. I'd also like to join Chairman Tillett in expressing my gratitude to Director Brad Armstrong for his service over these many years. I very much enjoyed getting to know him. I benefited from his guidance. Brad, you will be missed. All right. Well, let me begin. I'll be referencing the slide presentation, which is on the screen, and I'll start with a few brief comments about 2019. Let's see if we can advance this slide. All right, so we have a few forward-looking statements, which you can refer to for yourself. Continuing on to the next slide. All right. 2019, only a few brief comments I'll make here. Given all that has gone on, 2019 feels like ancient history, but it was certainly a year of growth change and transformation for the company. Headline events were, of course, the acquisition of Access National Bank based in Reston. From my perspective, that completed the Virginia franchise. It was the last piece of the jigsaw puzzle, as I often say. Of course, we had the notable rebranding to Atlantic Union Bank, which, thankfully, was undramatic and was handled successfully. We're proud of the fact that we also rebranded our wealth management division as Middleburg Financial, honoring that very well-known and very well-regarded brand name for the wealth management division. We completed the leadership team, and so I'm very proud of the executive leadership team that we have assembled. The transformation among the leadership team is complete and also made great progress in terms of the investment in our digital strategy, which has been also important as we've dealt with our movement into this post COVID-19 environment. And on to the next slide, please. All right. As we move on to the next slide, I'd like to speak about where we are, what a difference a pandemic makes. And from our standpoint, we are managing the company under the mantra of soundness, profitability and growth, which is how we think about managing the company. This philosophy has never served us better or been more important than now. As the COVID-19 pandemic hit, our immediate priorities have been focusing on the safety of our teammates, the safety of our company -- pardon me, our customers and the soundness of the bank. So this has been an extraordinary effort. Obviously, there's no precedent for this in modern times. But I will say that, as we speak, we have 90% of our nonbranch associates working remotely, and the company is actually performing surprisingly well. I think that, as we manage through the pandemic, this is going to continue for some period of time, and so we're able to continue in this really for the duration. I am very proud of the work that has been done as it relates to the Paycheck Protection Program. We have now been able to obtain SBA approval for small and midsized businesses, over 10,000 SBA Paycheck Protection loans for over $1.7 billion. The funding is continuing, and we are remaining in that program. And we'll make that available to new and existing customers for as long as the funding runs out. Okay. And then moving on, this is our philosophy of the response. Again, I won't read all these points to you, but very much a focus on the safety of our teammates and just ensuring that they are well taken care of and ensuring that those who are in the work-from-home environment are able to do so. We have been extremely focused on our clients as well, working with our business customers, in particular and, really, anyone who's experiencing difficulty, we're in a good position to assist. And we'll maintain constant communication, and we are able to provide payment adjustments deferrals as needed for them. From a shareholder standpoint, again, we are focused on the safety and the soundness of the company, taking the long view and managing through this crisis. And then, of course, from a community standpoint, certainly, we have been very focused on what we can do to assist. We've realigned all charitable contribution giving to deal with COVID-19 relief. And I would again point out the fact that Atlantic Union Bank is responsible for having put over $1.7 billion of SBA Paycheck Protection funding into our markets is critically important. You can see this detailed on the following slide. There are companies that we have served. I have been extremely well diversified by industry and notice that the overwhelming majority of the number of businesses that we serve are, in fact, small businesses. We are proud of the fact that the companies that we have provided funding for under the Paycheck Protection Program are employing over 175,000 people that are getting paid as a result of this program. Since we are -- since the majority of the franchises in Virginia, about 90% of this funding has been provided to Virginia-based businesses. Almost all of the rest are in North Carolina and Maryland. So it's an extraordinary performance. This was the fifth weekend of work consecutively for so many of our teams. We've had 400 to 500 people working on this full time. We took it very seriously. And I'm highly confident, when all is said and done, on a relative basis, relative to our size, Atlantic Union Bank will have been among the best performers in the country in this program. The next slide outlines the composition of our loan portfolio and the segments of the loan portfolio on the right-hand side pie chart that are sensitive to the COVID-19 event. I won't read these through to you, but you can see that the types of industries that you would be most focused on in terms of impacts, such as hotel, retail, restaurant, et cetera, these are pretty modest exposures for the bank. We are working very closely with those borrowers. We're providing payment deferrals where necessary. We've done an outsized amount of Paycheck Protection Program lending into these segments. And we will work through this with them as we manage the crisis. So bottom line, the bank is safe and sound. We do not have outside exposure -- outsized exposure to any of the segments who have been significantly -- everyone's been impacted to some degree, some more so than others. So we feel very good about the credit composition. And I also point out, the bank has essentially no exposure to energy, airlines, cruise lines, the other industries that are in the press. With that, I'd like to now hand over to Chief Financial Officer, Rob Gorman, to speak to stock performance and financial results of the company. Rob?

Thank you, John, and good morning, everyone. Thanks for joining us today. I hope all of you are safe and staying healthy. Let me start off my comments by quickly reviewing 2019 strong financial results and operating metrics as well as better than peer bank returns for our shareholders in 2019. Excluding merger and rebranding costs, 2019 operating net earnings were $221 million or $2.75 per share, which was up $43 million from 2018 levels. Our operating return on tangible common equity ratio was 16.1% for the year. Our operating return on assets was strong at 1.31% for 2019. And the operating efficiency ratio came in just below 54%. On the balance sheet side, loan balances grew solidly at 6% for the year, while deposits grew approximately 9% in 2019. It was also a good year for AUB shareholders, as total shareholder return comprised of share price appreciation and dividends paid during the year was 37%, well above the KBW Regional Bank Index total return of 24% in 2019. In addition, during 2019, the company returned approximately $160 million to shareholders through dividends paid of $0.96 per share, which represents an increase of 9.1% over last year's -- or 2018's dividend level, and the repurchase of approximately 2 million shares for $80 million. Moving forward, obviously, the COVID-19 coronavirus pandemic has and will continue to have a dampening effect on the company's financial results in 2020. That said, I think it's important to reinforce John's comments on Atlantic Union's governing philosophy of soundness, profitability and growth in that order of priority. This core philosophy is serving us well, as we proactively manage the company through this crisis. We are currently facing an unprecedented crisis management event that requires us to be, and we are, laser focused on the safety, the soundness and profitability of the company. The good news is that Atlantic Union enters this time of uncertainty in a very strong financial position, as we deal with the impact of COVID-19 on the bank's financial results. We have a strong balance sheet, are well capitalized and have multiple sources of liquidity, which will allow us to weather the current storm and come out even stronger once this crisis has passed. As a matter of sound enterprise risk management practice, we periodically conduct capital credit and liquidity stress tests for scenarios, such as the operating environment we now find ourselves in. Results from these stress tests give us confidence that throughout the crisis, the company will remain well capitalized and has the necessary liquidity and access to multiple funding sources to meet the business challenges of COVID-19. By effectively managing through this crisis, we will become a stronger company that will be well positioned to take advantage of growth opportunities as economic activity eventually resumes, aided by unprecedented government support and stimulus. Now turning to the company's financial results for the first quarter of 2020. Net income was $7.1 million or $0.09 per share, which was down significantly from the prior quarter due to a $57 million increase in the provision for credit losses compared to the previous quarter. The provision increase was primarily due to projected credit weakness as a result of the deteriorating economic outlook related to COVID-19, which required the company to materially increase its allowance for credit losses during the quarter. Despite the business disruption from COVID-19 during the quarter, loans grew steadily at 5% on an annualized basis, while deposits stood at a 7.5% annualized clip from the prior quarter. Total shareholder returns for Atlantic Union and the banking industry are down significantly on a year-to-date basis due to the economic devastation of COVID-19, its unknown impact on the bank's loan losses and the uncertainty surrounding when the economy will recover. The company returned $70 million to shareholders during the first quarter through its dividend of $0.25 per share and have repurchased 1.5 million shares. Also during the quarter, the company suspended the share repurchase program, with $20 million remaining on its original $150 million authorization in order to preserve capital in these uncertain times. The company's adoption of the current expected credit loss accounting standard, which is better known as CECL, on January 1 and the subsequent impact of the worsening economic forecast related to COVID-19 resulted in a material increase in the allowance for credit losses and the company's quarterly provision for credit losses. Atlantic Union adopted the CECL standard on January 1. On the CECL accounting, lifetime expected credit losses are now estimated using macroeconomic forecast assumptions over a reasonable and supportable forecast period as well as overlaying management judgments applicable to and through the expected life of the company's loan portfolios. At the end of the first quarter, the allowance for credit loss was $150 million or 1.17% of total loans, inclusive of the allowance for loan and lease losses of $141 million and a reserve for unfunded loan commitments of $9 million. The allowance for credit losses increased by $107 million from the end of 2019. $52 million of this increase was due to the adoption of CECL on January 1. The remaining increase of $55 million in the allowance balance was driven by the significant increase in the company's estimated lifetime credit losses as a result of the deteriorating recessionary macroeconomic forecast related to COVID-19 that required the company to record a $60 million provision for credit losses during the quarter, significantly reducing the company's earnings for the quarter as noted earlier. On a final note, let me assure you that, while we are proactively managing through this unique and unpredictable pandemic crisis and are taking the proper steps to weather the economic downturn to ensure the safety, soundness and profitability of the company, we also remain focused on fully leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to building long-term value for our shareholders. Thank you for your continued support and your investment in Atlantic Union Bankshares. With that, I'll turn it back to Ron Tillett, our Chairman.

Thanks, Rob and John. I appreciate you offering those comments and outline a very solid performance by our company over this next year. We appreciate it. If you have any questions for John or Rob about the information you have heard here today, you may now submit your questions online by clicking on the dialogue icon in the upper right corner of the meeting center screen. Again, I would like to ask Bill Cimino, the company's Director of Investor Relations to present any additional shareholder questions regarding the company. I'll pause for a moment to give Bill an opportunity to review.

Thank you, Mr. Chairman. We do have one question. The question is from a shareholder asking if we are recommending to the Board to continue the dividend payout ratio at its most recent rate.

Yes. Thank you for that question. Currently, there is no intention to reduce the dividend. We expect that our payout ratio will remain in the 35% to 40% range based on normalized earnings going forward.

Thank you. I'll pause for an additional minute to see if there are any more questions that will come in. Mr. Chairman, I see no further questions.

Thank you, Bill. If you have any other questions that you thought about relative to the company not answered here today, please feel free to reach out to our Director of Investor Relations, Bill Cimino, using the Investor Relations contact information listed on the company's website. Thank you for taking the time to attend our virtual shareholder meeting. And on behalf of the company's Directors and employees, I thank you for your loyal support, your business and your attendance at today's meeting. That concludes our meeting, and the meeting is hereby adjourned.