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

Good day. Thank you for standing by, and welcome to Atlantic Union Bankshares Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker host, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Olivia, and good morning, everyone. I have Atlantic Union Bankshares's President and CEO, John Asbury; and Executive Vice President and CFO, Alex Dodd, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix our slide presentation and in our earnings release for the second quarter of 2026. We will also make forward-looking statements, 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 expectation or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement, except as required by law. Please refer to our earnings release and slide presentation 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 the forward-looking statement. All comments made during 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. I'll now turn the call over to John.

Thank you, Bill. Good morning, everyone. Thank you so much for joining us today. Atlantic Union Bankshares reported strong second quarter financial results, reflecting disciplined execution and providing an encouraging indication of the earnings power of the franchise we have been building. For the first time in 2 years, we did not incur any merger-related costs. We were also pleased to realize a $32.3 million pretax gain from the sale of our equity interest in Bearing Insurance. Adjusted operating performance, excluding the gain from the equity interest sale was notable for solid loan growth, margin improvement on both a core and reported basis, disciplined expense management and solid credit performance, along with continued capital generation. Over the past 2 years, we have deployed capital intentionally to strengthen and expand our franchise. We believe our second quarter results are an encouraging early indication that those investments are beginning to translate into stronger earnings capacity, capital generation and long-term shareholder value. We remain focused on building on this progress through disciplined execution, organic growth and continued attention to soundness, profitability and growth in that order. Our commitment to creating shareholder value remains unwavering. We believe Atlantic Union is well positioned to deliver sustainable growth, top-tier financial performance and long-term value for our shareholders. We believe that our continued organic growth opportunities due to our robust presence in attractive markets, reinforce our status as the premier regional bank headquartered in the Lower Mid-Atlantic. I'll briefly cover our Q2 '26 highlights and share market insights before Alex presents the financial review. Before reviewing this quarter's results, I would note that the second quarter was marked by continued uncertainty, particularly around geopolitical developments and the conflict involving Iran. Despite that backdrop, customer confidence remained resilient and economic activity across our footprint held up well. We delivered record loan production during the quarter, exceeding our 2025 fourth quarter production level, which is traditionally our strongest quarter by roughly 8%, while the second quarter is typically one of our seasonally stronger periods, and we expect some moderation in the third quarter due to the normal summer slowdown, our pipelines remain healthy. Overall, we believe that our underlying credit activity and pipeline depth support our full year outlook, and we currently expect loan growth to finish toward the higher end of our mid-single-digit range. Importantly, this growth reflects strong client activity across our markets, the value of the customer relationships we have built and disciplined execution by our team. With that context here are the key highlights from the second quarter. Average loans were $28.2 billion and grew approximately 6% annualized during the second quarter, while period-end loans increased approximately 10.4% annualized from Q1 to Q2, ending the quarter at approximately $28.7 billion. Growth was well distributed across the franchise, led by strong client activity in commercial lending, construction lending, multifamily and select consumer categories. Atlantic credit utilization decreased slightly from the first quarter but was up slightly year-over-year. Year-to-date annualized loan growth was 6.4%. As I mentioned, loan pipelines are healthy and support our expectation that full year loan growth is tracking toward the higher end of our mid-single-digit outlook. Average deposits increased 2.4% annualized during the quarter, and total deposits increased approximately 1% annualized from the end of Q1 to the end of Q2, all consistent with our low single-digit 2026 outlook. Growth was concentrated in interest-bearing deposits. We also reduced brokered deposits by approximately $53 million during the quarter and roughly $571 million year-to-date. Broker deposits represented only 2% of total deposits at quarter end, giving us flexibility to use them selectively going forward if needed. Our core customer deposit base remains a defining strength to the franchise, and our focus remains on relationship-based deposit growth, expanding share of wallet and maintaining funding discipline. Core net interest margin, which excludes the purchase accounting adjustments, improved by 1 basis point quarter-over-quarter. Reported FTE net interest margin increased 9 basis points to 3.94% driven primarily by higher accretion income compared with the first quarter. Alex will provide more detail on the factors influencing NIM performance in his section. Before turning to credit, I do want to highlight the progress we are making in bringing our capital markets capabilities to our expanded footprint. In the second quarter, former Sandy Spring Bank teams generated approximately 27% of our interest rate swap transactions and 32% of our foreign exchange revenue. We believe these fee products should continue to provide opportunities for additional revenue synergies over time. Credit quality remained strong in the quarter with annualized net charge-offs of just 3 basis points for both the second quarter and year-to-date. Based on our first half performance, current loss expectations and favorable asset quality trends, we are lowering our full year net charge-off guidance, which Alex will discuss later in the call. Key asset quality indicators remained encouraging. Nonperforming assets increased modestly from the prior quarter but remained low at 39 basis points of loans held for investment, while past dues declined considerably and criticized and classified assets improved to 4.4% of total loans, down from 4.5% in the prior quarter. With Bureau of Labor statistics scheduled to release June unemployment data shortly, this chart will soon be updated. For now, I'll simply note that Virginia and North Carolina is made unemployment rates remain below the national average, while Maryland was just slightly above it. We continue to expect unemployment levels in Virginia, Maryland and North Carolina to remain manageable and generally comparable to or below the national average, consistent with Moody's current state level forecast. We remain confident in the resilience and long-term attractiveness of our markets. As I approach my 10th anniversary with Atlantic Union at the end of this quarter, what is clear to me is how far we've come as an organization. We've stayed focused, adapted as conditions changed and consistently executed the strategy we set out and clearly communicated while remaining grounded in the community bank values and local relationships that have always defined Atlantic Union. This quarter's results reflect our continued momentum and most importantly, the dedication of our teammates whose hard work makes it all possible. With that foundation in place and no additional acquisitions currently planned during this phase of our strategic plan, our focus is squarely on continuing to demonstrate the sustained performance and capital generation capability of the company we have built. Performance that enables us to better serve our customers and communities, invest in our teammates and create long-term value for our shareholders. With that, I'll turn the call over to our CFO, Alex Dodd, for a detailed review of our quarterly financial results. Before I do, I'd like to note that Alex has now been with the company for nearly 4 months following a deliberate and smooth transition with former CFO, Rob Gorman, who will retire at the end of September. Since this is our last earnings call before Rob's retirement, I want to again thank him for all he's contributed over his 14 years with Atlantic Union. Rob leaves behind a strong legacy and will be missed, but he is able succeeded by Alex. With that, I'll turn the call over to Alex for his inaugural quarterly earnings comments. Alex?

Thank you, John, and good morning, everyone. Before I begin, I want to thank Rob as well for making this a smooth transition for me. I'll now take a few minutes to provide you with some details on the results. My commentary today will primarily address Atlantic Union's second quarter financial results presented on a non-GAAP adjusted operating basis, which for the second quarter principally excludes the $32.3 million pretax gain associated with the sale of our equity interest in Bearing Insurance. In the second quarter, reported net income available to common shareholders was $158 million and earnings per common share of $1.11. The adjusted operating earnings available to common shareholders were $134 million or $0.94 per common share for the second quarter, resulting in an adjusted operating return on tangible common equity of 20.1% and an adjusted operating return on assets of 1.47% and an adjusted operating efficiency ratio of 47.47%. Here's a look at the GAAP year-to-date metrics and trends over the last few years. Looking at the year-to-date adjusted operating numbers at the end of the second quarter, we have already reached the target for ROA and ROTCE medium-term financial targets. We remain confident that we will achieve all 3 of these targets over the medium term, which we define as this year and next. Turning to the credit loss reserves. At the end of the second quarter, the total allowance for credit losses was $331 million, an increase of $9.1 million, primarily driven by loan growth during the quarter. The total allowance for credit losses as a percentage of total loans held for investment remained flat at 115 basis points at the end of the second quarter. As John mentioned, net charge-offs were $2 million or 3 basis points annualized in the quarter. Now turning to the pretax pre-provision components of the income statement for the second quarter. Tax equivalent net interest income was $329.7 million, an increase of $12.8 million from the first quarter primarily driven by an increase in loan volumes, higher loan yields and increased loan accretion income. The increase in loan-related interest income was partially offset by an increase in deposit interest expense, primarily from growth in interest-bearing deposit balances and modestly higher deposit costs. As John noted, the second quarter's tax equivalent net interest margin increased 9 basis points from the prior quarter to 3.94%, primarily due to higher earning asset yields, partially offset by modestly higher cost of deposits. Earning asset yields increased 9 basis points from the prior quarter to 5.88%, primarily due to higher loan accretion income of $5 million and higher loan yields. Cost of funds was flat from the prior quarter as a 3 basis point increase in the cost of deposits was offset by lower borrowing amortization costs related to past acquisitions. Of note, excluding the impact of accretion income, our core net interest margin increased by 1 basis point to 3.46%. Noninterest income increased $35.5 million to $90.2 million during the second quarter, primarily driven by the gain on sale of our equity interest in Bearing Insurance. Excluding the onetime gain, adjusted operating noninterest income increased $3.1 million to $57.9 million, driven by higher loan-related interest rate swap fees associated with higher loan originations and increased fiduciary and asset management fees, which were partially offset by lower other income. Noninterest expense decreased $10.7 million to $199.1 million for the second quarter driven by a $9 million decline in merger-related costs. Adjusted operating noninterest expense, which excludes merger-related costs in the first quarter, and amortization of intangible assets in both quarters decreased $1.3 million to $184 million for the second quarter, primarily due to lower marketing costs, along with a decrease in salaries and benefits primarily related to seasonally higher payroll taxes and 401(k) contribution expenses in the prior quarter. At June 30, loans held for investment net of unearned income were $28.7 billion, an increase of $727 million or 10.4% annualized from the prior quarter. Our average loan growth for the quarter was approximately 6%. At June 30, total deposits were $30.5 billion, an increase of $77 million or approximately 1% annualized from the prior quarter, while average deposits decreased 2.4% for the quarter. Our loan-to-deposit ratio ended the quarter at 94.1% within our preferred range of 90% to 95%. At the end of the second quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, we remain well capitalized on an adjusted basis if you include the negative impact of AOCI and unrealized losses for held to maturity securities in the calculation of the regulatory capital ratios. On a linked quarter basis, tangible book value per common share increased $0.84 or 4.2% to $20.77 per share at the end of the second quarter. Since Q2 of 2025, tangible book value per share has grown $2.39 or 13% year-over-year. The CET1 ratio was 10.41% for the second quarter and within our preferred range of 10% to 10.5%. During the second quarter, the company repurchased approximately $10 million of its common shares at an average price of $37.76, leaving approximately $240 million remaining under our share repurchase authorization. Before turning to the financial outlook, I would emphasize that our second quarter results represented strong operating performance and an encouraging indication of the earnings capacity and capital generation capability of the franchise. At the same time, we believe our updated outlook reflects a disciplined and prudent view of second half funding competition and deposit mix. We expect -- we continue to expect loan balances to end the year between $29 billion and $30 billion, while year-end deposit balances continue to be projected between $31 billion and $32 billion. On the credit front, the allowance for credit losses is projected to remain in the 115 to 120 basis point range, and we are reducing the range for our projected net charge-off ratio to be between 5 and 10 basis points in 2026. Fully tax equivalent net interest income for the full year is now projected to come in between $1.32 billion and $1.33 billion, inclusive of accretion income. The updated range reflects our expectation of higher interest-bearing deposit mix as well as greater loan and deposit competition in the second half of the year. We are tightening the range for our 2026 fully tax equivalent net interest margin to between 3.90% and 3.95%. This outlook is supported by our baseline assumption that the Federal Reserve increases rates by 25 basis points in September and that term rates remain stable at current levels. On a full year basis, noninterest income is expected to be between $220 million and $230 million, while adjusted operating noninterest expense is estimated to fall in between the range of $742 million to $752 million, including the expense impact of our North Carolina investment and our other 2026 strategic initiatives. Based on these projections, including our expected stock repurchase activity, we expect to generate annual growth in tangible book value per share of approximately 12% in 2026 and produce financial returns that will place us within the top quartile of our proxy peer group. In summary, Atlantic Union delivered strong operating financial results in the second quarter and had a solid first half. We remain focused on generating sustainable, profitable growth and to build long-term value for our shareholders in 2026 and beyond. I'll now turn the call over to Bill.

Thank you, Alex. And Olivia, we're ready for our first caller, please.

[Operator Instructions] Now first question coming from the line of Russell Gunther with Stephens.

First question for me, I wanted to kind of start on the margin and really trying to get a sense directionally for loan yields where they're headed. So if you could level set us for where new production came on in 2Q, kind of perhaps where that pipeline yield sits today? And then just remind us of what the fixed rate opportunity -- repricing opportunity is for you guys, kind of relative to what you are putting on new commercial at today?

Sure. Russell. So for the second quarter, our fixed rate loans are coming on, new loan spreads are around 200 basis points, and our variable rate loans are also around 200 basis points. We saw a little bit of lower spreads in the quarter due to larger loans that we completed, and that was more just a function of the size of the loan but around 200 basis points for both variable and fixed. In terms of the fixed rate opportunity, we have about $800 million to $900 million per quarter of variable rate loans that are maturing with rates around 5%. And we expect to put those back on around 610 basis points. So it's about 100 to 110 basis point benefit for the low maturities each quarter.

Okay. Great. And then maybe just a follow-up with the revised NII guide, including a Fed hike in September, can you quantify for us what, if any, benefit is factored into your kind of revised NIM and NII outlook? And perhaps just kind of package where you would expect kind of the core NIM overall to trend within that guide?

Yes. So we do have in our guidance 125 basis point increase in September. We will see a small benefit in the fourth quarter for the deposit pricing lag. It's about -- it's under 1 basis point for the full year. It's about 3 basis points in the fourth quarter. In terms of core margin, we do expect that to grind higher over time from the benefit of the fixed rate loan repricing. But because of higher funding costs and deposit mix, it's not going to be as high as expected. As we look forward to the next few quarters, we'll see core margin increased modestly because of those dynamics.

Our next question coming from the line of Janet Lee with TD Cowen Securities.

Could you give us a little more color around the deposit competition and the mix shift, what you're expecting in your NII guide and what maybe what pace of deposit cost increase assumed in your 390 to 395 NIM guide?

So we did update our guidance for net interest income, and it's solely coming from the funding side of the balance sheet. What we saw in the quarter was customer migration to our higher-yielding, interest-bearing deposit accounts. And that's informed our guidance. So we're encouraged by the loan growth that we saw in the quarter. But the cost of funding that is getting work is going up higher than we expected. What we saw through the quarter, to give you a perspective on just the month of June, we saw a 2 basis point increase in our cost of deposits. So it was 3 basis points for the full quarter and 2 basis points in the month of June, and that really informed the outlook for the rest of the year. So I'll guess we'll stop there, Janet and see if you have further questions.

Got it. So 2 basis point increase in the month of June. So that is sort of at this point, the pace at which you would expect for the rest of the year, ballpark?

Not necessarily. We're going to be a little bit under that, if you just play that out for the rest of the year. And that's going to come from the mix that we'll see in CD growth and money market growth as well as some DDA growth that we have in our outlook. So it's PAUSE underneath that pace, but that's what informed our outlook for the rest of the year.

Yes. Alex, is it fair to say what we saw -- what we're seeing is relatively stable deposit rates from a competitive standpoint? Is this more of a mix issue in terms of where is the growth coming?

That's a good point, John. Yes. It really is our deposit mix. It's informing the guide here. The deposit competition is elevated but stable. And so what we're seeing is just the inflow into our deposit portfolio is coming from the higher yielding products.

Got it. And just quick follow-up. PAA for the second quarter came in maybe just slightly above what you guided before, is 145 PAA for 2026 is still a good assumption?

We had said on the last call, the range is 140 to 150 million, and we're still tracking to that. So $145 million being the midpoint is fine.

Our next question coming from David Bishop from Hovde Group.

Curious, John, Alex, it sounds like the loan pipeline continues to be pretty robust. Just curious what you're seeing on the commercial pipeline out of sort of the legacy Sandy Spring Maryland markets, how much that's contributing to the pipeline and maybe the growth we saw this quarter.

Yes, we are growing the former Sandy Spring portfolio, and we're happy to see that. Dave Ring, do you want to just sort of speak directionally?

Sure. I mean we're seeing double-digit growth in the pipeline with -- in the Greater Washington market, Washington, Maryland. Production is up double digits as well. And all the markets in all the markets, all the teams in those markets are also. So we're seeing very balanced stable growth, and we're not seeing any hangover from the acquisition.

The way I think about this, Dave, is that the former Sandy is in round numbers, maybe 1/3 of the overall portfolio. And so you would expect all things being equal for them to be about 1/3 of the pipeline. And they've come a long way closer to that. So we've been very pleased with it. And the teams, to be clear.

Got it. Appreciate that color. And then, John, just maybe an update in progress in terms of the Carolina build-out that you're seeing on those ones.

Yes, there's really 2 -- I think of this -- it's a holistic strategy comprised of both the retail banking effort as well as the investments that we're making in expanding our commercial banking teams, along with some additional investment for mortgage and wealth management, et cetera. It's something I've been saying recently, I want to be clear in terms of the investment. While we do refer to it as a North Carla strategy, you could more specifically refer to it as our densification strategy in Raleigh and the Wilmington because that's where the thrust of the investment and certainly the physical branch network build-out is going on. So Shawn O'Brien, who's had a consumer business banking. Can you update us on where are we in terms of the branch effort? And then I'll ask Dave Ring to chime in with some perspective on the commercial side?

Yes. So we announced that we were going to open 10 branches, 10 new branches operate to John's point, in Raleigh and Wilmington. And the first of those branches open here this month. So we are very excited.

That's Raleigh.

We have a branch opening. And then we have 2 more opening in Raleigh in October, November of this year. our 3 new Raleigh branches this year, and then we will start to open benches in Wellington as well. If you remember, 7 and now in Wilmington. And we hope to get all 10 done in 2027, a couple may get into 2028, but we are very happy with our site selection. We've hired the first 3 teams. They're completely staffed for Raleigh. So we have all of those teams hired. We're very happy for the talent we found. So we're very excited about it. We have a lot of plans underway for how to grow new customers in those 2 primary markets.

And then, Dave, your perspective on what we call wholesale banking, which are the various commercial businesses?

And we're working really closely with consumer. And so we're seeing double-digit growth again in loan balances in North Carolina plus, we're waiting on announcements of some new hires that are started or recently started that we're very excited about. So overall, we're meeting our talent acquisition plan, and we're meeting our loan growth expectations.

So Dave, more to come on that.

Our next question coming from the line of Catherine Mealor with KBW.

Just one more on the NII. Broking back on this kind of size of the bond book. How should we think about the securities portfolio growth in the back half of the year? Or is it you are to keep that fairly stable?

Yes. I guess I'll start with. In the second quarter, we did bring it down over $200 million to fund lending growth. and we're now at about 13% of total assets, and we plan to keep keeping it stable in the rest of the year.

Okay. So that's shrunk the past 2 quarters. So maybe we can expect as deposit growth improves in the back half of the year. Your loan growth is funded by deposit growth, not the securities book just flat.