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

Thank you. I wanted to pivot from credit to another topic that's very much of interest to investors, and that specifically is loan growth. We've seen significant inflow of PPP loans. But can you talk to what you're seeing in terms of organic loan growth and client risk appetite? Is there any interest? And are there also pockets of strength anywhere geographically and across the industries?

Yes. I would -- there are. So overall, because of what we're seeing going on, businesses have been quite conservative and are generally arresting their investment and they're also flush with cash for the same reason that we're seeing cash build in their business operating accounts, and we've seen them pay down lines. We are seeing -- we would expect to see what I would think would be low single-digit growth in the commercial loan categories for the full year. We're certainly seeing that right now. Revolving credits are up and down. Sometimes they're up. Sometimes they're down. It's just a function of what their working capital needs are. And by the way, we saw some borrowers apply PPP funding to outstanding revolving lines of credit. It's the first thing you would do. If you had a revolver and you took on a PPP loan, first thing you should have done would have been to pay down your existing bank line because the PPP loan is less expensive. And so that suppressed our revolving credit outstandings. We are seeing a little bit of growth in pretty much all of the other commercial banking and commercial real estate categories, not much, but a little. Areas of strength would be the -- any -- really all of the government-contractor business in which we operate, they are quite busy. And so we've seen them perform very well. The Equipment Finance Division, which we started over a year ago, has performed very well. And it's playing exactly out as we had hoped it would, whether leveraging our franchise and/or finding opportunity. So we're seeing better-than-expected growth there. And on the consumer side, the only category that's showing any growth would be indirect lending, which is all done in our footprint. It's not much in the whole scheme of things, but we are seeing some growth there. Everything else consumer is in paydown mode. So we're seeing home equity lines of credit come down because consumers have built cash and they're paying down HELOCs. Mortgages are coming down on the balance sheet. We don't have a lot, but there's a heavy refinance rate going on for those that we do have. You mentioned third-party lending earlier. We would expect the lending club balance, which is the one that we've been most focused on that's in liquidation, to drop below the $70 million figure by the end of Q3. And frankly, it's performing quite well. So the modest growth that we're seeing in commercial will likely be largely offset by a decline in balances in the consumer categories. And you'll see a very low loan growth amount for the full year, excluding PPP, of course. Next year, as we get into perhaps the second half of next year, we have no reason to believe that the franchise is not capable of producing organically mid-single-digit growth. Rob, do you have anything to add to that?

No, I would agree with that. That's what our outlook looks like at the moment. You've shared on the indirect lending. What John was referring to is we have an indirect auto portfolio of a little over $300 million. That's grown quite nicely. A lot of second -- or used-car lending going on there. And that market's actually had an uptick in valuations. So -- but otherwise, yes, it's basically a commercial kind of low to mid-single-digit growth offset by the runoff in consumer net runoff in this amount.

And Eugene, one thing I'll add, strategically speaking, something that encourages us is the performance that we had on the Paycheck Protection Program. If you look at the state of Virginia, the #1 lender for PPP was Truist, which is really 2 banks, isn't it? It's SunTrust plus BB&T. They did 6 more by count than we did in the state of Virginia. They're 25% depository market share. We're 7%. This was a huge brand builder for us. We had about 3,000 new-to-bank clients come in through PPP. And they were almost -- well, I would say the vast majority of them were coming out of the larger institutions, many of which were being turned away or gave up on SunTrust and BB&T, and of course, Wells Fargo, particularly. And so that -- we feel good about that. We're obviously working those businesses. Many of those don't borrow, which is fine, but we'll take those deposits. It certainly helped us in terms of the bank's reputation. It has damaged the reputation of the larger institutions. Truist is a disruption that's going to play out for a couple of years. It's been very slow to happen on the consumer side. It will probably be early 2022 before we see them put up the Truist brand and consolidate branches fully, but that is already underway on the commercial side. So we are chipping away at Truist. Watch Wells Fargo with their $10 billion expense-reduction initiative. We are having lots of feedback coming out of our contacts at Wells Fargo about job eliminations, the movement of many clients into more of a centralized 1-800 management group out of Charlotte. That is not going to play well in a market like Virginia. And I'll tell you, Wells Fargo, to their credit, has done a good job of holding on to their commercial bankers, holding on to their commercial clients. But if they begin job eliminations, which are starting, and as they move very large segments of their commercial book into a centralized management, that will be a perfect setup for us, remembering our whole strategy is one that is built to take market share from the large institutions. Truist is #1 in Virginia, 25% depository market share. Wells Fargo is #2, 16% depository market share. Then comes BofA. Then comes us. So this is a perfect setup for us to really execute the strategy.

So this is actually a pretty good segue to a strategy question. I recall earlier this year, you seem to have pivoted away from aggressively going after Truist in an effort to chip away at their market share. And is now the right time to get back? And is that a change in your view from earlier?

Well, I wouldn't say we ever stopped. The single -- we had what we often referred to as Project Sundown, which was our focused area to take advantage of the Truist disruption. What did change is we expected this would have been the year when -- or next year would be the year when they would really begin to consolidate their consumer branches. They have 270 branches within 2 miles of each other in Virginia. What we learned is that Virginia was at the back of the queue. They'll consolidate Virginia last. Why? Because they have the most overlap of any state in their system here, and they wanted to get it right. And for various reasons, including COVID, they have slowed down their conversion schedule. So some of the planned strategies on the consumer side, we have held back on. If you're a client or a consumer customer of BB&T and SunTrust, there's a good chance you have no idea that they've merged and it's already happened because they're acting independently. We do -- we are hearing that they are likely to begin branch consolidations early in the new year. So maybe we'll see more disruption pick up on the consumer side. On the commercial side though, we never slowed down. And so we continued a very targeted effort there. And again, I would say that the best thing that ever happened for Project Sundown is the PPP because there are many, many clients who receive letters from BB&T and SunTrust, telling them that they weren't going to be able to get to them or they need to look elsewhere. And those letters came late in the first round of funding. Clients were furious. I have hundreds of letters from new clients of our company coming out of those institutions talking about their stories. So again, I'm not -- don't mean to disparage that fine company, but I'm simply pointing out that there's going to be opportunity here. Our whole business model is one of really taking away market share from these large institutions over time. Never say it would happen overnight, but we have some pretty darn good new clients in this institution today as a result of those efforts and even more so due to the PPP, which is good.

Another strategy question. Can you share how has the pandemic changed your view of the bank and banking? What strategic changes are you anticipating making once we're on the other side of the pandemic?

Yes, it's a great question. We've said from March internally, externally, there are 2 things happening here that are very different and very significant. First is obviously the pandemic, the incident response and all of the implications, including ultimate credit impacts. And our strategy is take care of our customers, take care of our people, our teammates and batten down the hatches to prepare for what we expect to be an eventual credit storm. Having said that, COVID-19, tough as it is, is transitory. It doesn't feel like it, but this will eventually pass. And when it passes, we're going to be left with the next great challenge, which is the near-zero interest rate environment for 3 to 5 years. And that has lots of implications long after COVID. And so what that means is we had to align the expense structure of the bank to the new revenue reality. We began to take action on that in the first quarter, in fact, and you could see evidence of it in Q2, for sure. We, this week, are closing just under 10% of our branch network. And you saw expenses come down over the course of Q2. By the end of this month versus the end of March, we will have reduced our employee headcount by 6.2%. So we've been pretty aggressive in taking action, not waiting on a new environment to come but trying to get ahead of it, understanding that lower for longer is here for many, many years and we have to align the expense structure to the new reality. We are not saying we're done with those actions but we have taken aggressive actions. And then digital, we've seen a change in consumer behavior. I actually think COVID is going to accelerate it. It's made things that were going to happen, happen faster. And from our standpoint, we have continued the investment in digital. I think we demonstrated it in stage with PPP when we stood up the online application portal and the automated workflow system in 5 days. I don't think we could have done that in this company a year ago. We have a quarterly release schedule where we're updating our digital applications. And I think that we will need to continue the investment in digital, and part of the way that we pay for it is by continuing the rationalization of the branch network, and you align resources with opportunity. And so I don't see that changing. I think that, that is a secular or permanent shift that's gone on in terms of consumer behavior.

Thank you. I actually wanted to go to the audience question that just came in. Would you share your thoughts on the consolidation opportunities in Virginia? Are there smaller banks thinking of sale? And is there an incentive to get deals completed before any potential change in political or regulatory environment in November?

Yes. I think -- so those are all good questions. I think that this is the perfect setup for further consolidation of the industry. And I think it's mostly a function of the pressure that's going to be applied to the banks in terms of net interest margin. If you accept that we'll have a near-zero rate environment for 3 to 5 years, which is our view, if you believe that to be true, and you run the forecast and we're running it, you can see what that looks like, which is why you've seen us start early on expense reduction. Also, if you believe that we've seen a secular change in consumer behavior, and the expectations are greater than ever before for digital products, alternative delivery, you're going to have to be able to invest in that. And if you assume the economy is going to be more sluggish than it would have been otherwise, all of this, I think, is going to create a great -- a push towards more consolidation so that we can extract cost, and it's going to argue for more scale. Now I'm not too worried for a bank our size about the change in the regulatory environment and outlook. I actually think that's more of a problem for the largest of institutions. One can make a pretty good argument that that's what brought BB&T and SunTrust to the altar, when they came to the altar, trying to get ahead of a potential change in administration and potentially a different regulatory outlook. I think that's less of an issue for the smaller institutions in my opinion. So I don't think that's going to stop consolidation among smaller banks. I think it could create a problem if you try to put 2 more super regionals together in that sort of environment. I think the real constraint right now is that it seems reasonable to us, and we can only speak for our view, that you really need to see what is asset quality going to do. I know there are some smaller MOE types going on among smaller institutions right now. But from our standpoint, it feels too much like a bet-the-bank move to be thinking about M&A until we have more clarity on asset quality. We feel very good and confident about our asset quality, but we need to prove it. We need to prove that it is what we expect it to be. We need to demonstrate that. And at the same time, any potential target, they need to prove as well what their asset quality is and how well they will have fared through this. So I personally think, that may be proven wrong, but I personally think that we'll be pretty well into next year before you'll see any real uptick in some of the larger -- not true small community banks but midsized banks like us. And then I think that you could see that ball begin to get rolling because I think the environment is really going to argue for it. As we look across Virginia, yes, we see further consolidation opportunity. We have a strong brand here. We're #4 in depository market share. We have tremendous scarcity value. And so from our standpoint, there's nothing that's more attractive than continuing to be a consolidator in Virginia. The challenge given the size of the bank today as a nearly-$20-billion bank is that even the size of acquisitions that we've done more recently, which were in the $3 billion range, begin to look small and less impactful incrementally. And so that argues for us to think about is there something that could be larger, and there may or may not be those opportunities, but we still say Virginia is choice 1 as we think about potential consolidation. And we would never do anything that didn't make financial or strategic sense, as we've demonstrated.

So thank you. And we have just a few minutes left. I wanted to touch on some housekeeping items. Specifically, can you talk to your net interest margin outlook? I think you talked to core NIM stabilizing in the 3.15%, 3.20% range compared to 3.15% last quarter. Have you seen anything that changes that view, especially the rates staying low? And also, if you can talk to the impact of PPP on NII, if that's end of the year, even early next year impact in terms of forgiveness?

Yes. Eugene, in terms of the net interest margin on the core side, again, core being defined as not including the PPP impact, which we know hopefully, loans will be forgiven and we'll take in the deferred fees over, what we expect, over the fourth and first quarters. Basically, it's got delayed. We thought we'd see some this quarter, but that doesn't look likely. So we're looking at the fourth and first quarter for the majority of those fees to come through on an accelerated basis. We are accreting those into income over a 24-month period, but we'll be able to accelerate those fees once forgiveness comes through from the SBA. But in terms of the overall core NIM, excluding PPP, we do expect and are sticking to about the 3.15%, the 3.20% stabilization of that core margin. We do expect to see a bit of earning asset yield compression, but we feel comfortable that, that can be offset with further reductions in our cost of funds, primarily in the cost of deposits. We've been very aggressive in reducing our deposit rates. We do have some more room to reduce those. We have about $100 million of high-cost CDs running off per month over the next 8 to 10 months. And just to give you a feel for that, those high-cost CDs on the books today are in the 1.7%, 1.8% range. And those are repricing to 30 basis points, primarily. We have a 1-year no-penalty CD product out there that's seeing money come in as CDs roll off. So that's a nice tailwind for us in terms of continuing to reduce debt, cost of funds, cost of deposit side, which hopefully will offset some of the earning asset yield compression we expect to see in the..

In lower-for-longer interest rate?

Yes.

I think you also did some balance sheet funding actions that should help as well.

Right. Yes. That's exactly right, yes. Second quarter, we took some actions that is going to help, yes.

Thank you. Sorry. Can you give us an update maybe on the fee income trends? I think you've talked to strong mortgage still, but I suspect consumer fees, deposit fees are still sluggish.

Yes, that's exactly right. From a mortgage perspective, we have -- continue to have strong mortgage performance as the rates continue to be low. This quarter should be a record quarter for us as we look at the first 2 months of the quarter and into the third month. We expect that, that will also continue a bit, we think, into the fourth quarter. We've got a nice pipeline there. In terms of the deposit service charges, you're right, it's been very sluggish from an overdraft point of view. And other service charge incidences are down primarily because we've got -- we're flush with deposits and part of that's the government stimulus checks that we've seen, unemployment checks that John had mentioned, the elevated checks that came through. We do expect that, that will be -- it's a bit better than the low point of second quarter. We expect that will continue to -- not quite get that to pre-COVID levels but will continue to improve over the next few quarters.

Thank you. I think we're actually out of time at this point. So thank you very much for coming to the conference, and thank you for giving us the update.

And thanks for having us, Eugene. Be well.

All right. Take care.